Are energy network price controls appealing for consumers?

Andy Manning, principal economic regulation specialist at Citizens Advice, responds to the Competition and Markets Authority’s final determination on the RIIO2 price control appeals by transmission and gas distribution networks, arguing the appeals process is “skewed” in favour of energy networks and needs to be reformed.

The Competition and Markets Authority (CMA) has now published its final decision on the appeals by energy network companies against the RIIO-2 price control.

This is good news for consumers, but is the process that got us here really working in their best interest?

Good news for consumers

 The CMA’s decision to confirm lower returns on investment is a significant step forward in tackling the excessive profits made by network companies at the expense of their customers. Our evidence showed that, if successful, the appeals by networks could cost consumers an additional £1.5 billion.

This is especially important now as regulators will need to be bold to ensure energy network costs are efficient. This will make the significant investment needed to deliver net zero go further.

But still skewed towards companies

Despite the lower returns for networks in RIIO-2, we believe the process of setting price controls is naturally skewed towards the interests of the network companies. Unfortunately, in energy, the design of the appeals process may be making the situation worse.

The network companies have a clear commercial incentive to earn more money for shareholders, for example by arguing for a higher rate of return on investment.

We, the consumer advocate for energy, argue for the correct rate of return. We have no incentive to argue for anything lower, as this could affect investment and harm consumers. Ofgem are in the same boat.

As is often the case, the price control settlement falls between the companies’ and Ofgem’s starting positions. This means returns are higher than necessary.

Price controls are complicated. The network companies will employ lots of people to work through all the complications and use consultants to support. Consumer representatives cannot match this, further skewing the process.

Cherry-picking

 The network companies are able to cherry-pick which issues they appeal to the CMA. But it is very difficult for anyone else to appeal elements that might have been too generous. SO the current system is always likely to be too generous to the networks overall. The system needs to be more balanced and allow the CMA to consider price control appeals ‘in the round’ and not just the bits the networks don’t like.

Appeals look a good bet for network companies

The rewards for a successful appeal can be huge for networks – we estimate up to £1.5billion in this case. This can justify the legal costs required to take an appeal. For us at Citizens Advice, it is much harder to justify the legal costs, including the potential award of costs against us.

The network companies don’t need to win every argument to make it worthwhile for them. We still expect them to earn millions extra through this appeal. This is due to the CMA rejecting Ofgem’s attempts to address the difficulty in setting challenging performance targets by adjusting returns if the targets prove too easy to meet. Appeals will likely become the default unless something changes.

Reform is clearly needed

Reform benefits everyone, because even if appeals look a good bet for network companies, they still present uncertainty and an unwelcome distraction. An effective appeals regime is needed to provide checks and balances, but reform is needed.

In the last year, the CMA has heard appeals in both the water and energy sectors looking at very similar issues – essentially how much return should be made on regulated assets like the energy or water system. If these issues are going to repeatedly land at the CMA’s door, then it needs to consider a better way to approach these parts of the process.

Where it’s dealing with the same issues in different sectors, like with the rate of return, the CMA could undertake regular reviews and set a consistent and binding approach. It needs careful coordination and wide consultation, but such an approach would lead to better, and more efficient outcomes and fairer prices for the essential bills that we all need to pay.

At a time when so many households are struggling financially this is more important than ever.