Editor’s letter: Second time lucky for RIIO?

Ofgem says it can't be expected to get new regulatory regimes right first time. Ellen Bennett questions this rationale.

“Ofgem is seeking to make regulation ‘smarter’ by placing more emphasis on financial incentives to deliver efficient innovation and investment over a longer timescale.”

So said then-Ofgem chief executive Alistair Buchanan in 2010, when the new regulatory framework for networks, RIIO, was unveiled to great fanfare. Fast-forward seven years, and here’s what his successor, Dermot Nolan, said two weeks ago: “When you set up a new regulatory framework, you’re never going to get everything right.”

That’s an astonishing comment: Nolan is admitting that Ofgem got RIIO wrong, and saying such an outcome was inevitable. If the regulator thinks it’s okay to mess up, will he be extending that attitude to the companies he regulates?

In fairness, the blame for RIIO can’t be laid at Nolan’s door: he joined Ofgem in 2013, after the first cycle of RIIO began and long after it was designed. In fact, he’s to be applauded for his honesty, and bravery in saying, “hands up, we got it wrong, and we’ll change the process accordingly”. But to suggest such an error, which has grave ramifications, is inevitable is going too far.

The consensus is that RIIO has been successful in many ways – not least with the introduction of innovation funding, which has ushered in a culture change among networks and ensured knowledge-sharing that has put Britain at the forefront of network innovation globally.

Yet one of its main planks was the move from a five-year cycle to an eight-year one. This was supposed to encourage much-needed investment in new network infrastructure. There are good reasons to now retreat from an eight-year cycle. The industry is changing rapidly and electric vehicles, for example, will change the game so dramatically when the tipping point is reached that it makes little sense to plan too far ahead. But surely this would have been as obvious several years ago as it is today? This U-turn will have the opposite effect to that intended: it creates regulatory uncertainty, the death knell for investor confidence.

Perhaps in a nod to this, the midpoint reviews are looking to be light touch as promised (£185 million off National Grid’s settlement? Pocket change!). The next price review will undoubtedly be tougher, but following Northern Power Grid’s successful challenge of ED1, networks may have a different attitude to their settlements. The days of agreeing a figure in the round – you win some, you lose some – are gone. Whether for five years or eight, brace yourselves for some tough negotiations ahead.