Northern Powergrid ‘tilting at windmills’ with ED2 appeal

Northern Powergrid is “tilting at windmills” with its latest line of argument in its appeal against the RIIO ED2 price controls, an industry expert has suggested.

Maxine Frerk, former Ofgem partner and director of Grid Edge Policy, made the comments to Utility Week ahead of the Competition Market Authority’s (CMA) main hearings for the appeal taking place this month.

The primary ground of the appeal concerns Ofgem’s approach to adjusting companies business plans to bring them closer in line with a common decarbonisation scenario.

In its methodology for determining the price controls, the regulator did not set a common scenario to inform its demand forecasts, instead allowing distribution network operators (DNOs) to base their business plans on their own best view.

However, after the companies proposed large increases in load-related expenditure – on average requesting more than double their annual average allowances in ED1 – Ofgem decided to apply a “demand driven adjustment” to their allowances to bring them closer in line with a common scenario. The scenario it chose was the least ambitious of National Grid ESO’s net zero compliant Future Energy Scenarios, called System Transformation.

Following the adjustment, Ofgem reallocated the allowances to different activities, partly based on the submitted costs in DNOs’ business plans.

In its appeal notice, Northern Powergrid said the allowances should not have been reallocated on this basis as the submitted costs shares would have been materially different if DNOs had based their business plans on the System Transformation scenario.

The DNO said this approach had resulted in the over-allocation of costs to contingent allowances and the under-allocation of costs to fixed allowances. It claimed the costs incorrectly allocated to contingent allowances could not be unlocked through uncertainty mechanisms as these allowances are non-fungible.

Northern Powergrid, which has requested especially large increases in load-related expenditure during the ED2 period, said this approach to the reallocation of costs had resulted in the effective disallowance of £157 million of its requested expenditure.

Responding to the appeal last month, Ofgem disputed this figure, instead putting the reduction at £116 million. It said the System Transformation scenario data was only used in a “limited way” and that the adjustment “did not amount to a wholesale re-baselining of business plans.”

In its latest submission to the CMA, Northern Powergrid disputes this characterisation, saying Ofgem had sought to “recast” the adjustment as a response to alleged inefficiency in its business plan, rather than an effort to align the plan to a common scenario. It said the reduction is “now claimed to be almost all efficiency, not scenario, related.”

It said Ofgem had cited no example of it criticising Northern Powergrid’s proposed load-related expenditure within the context of the company’s business plan.

Speaking to Utility Week, Frerk said she remains confident in her prediction that the appeal will not succeed. She said Ofgem had made a “measured argument around there being no correct way to do the cost allocation and that it’s a case of them applying their expert regulatory discretion.”

She said Ofgem emphasised that its chosen approach was supported by all of the DNOs apart from Northern Powergrid and on this basis it’s “hard to see” the CMA finding it to be “wrong”.

Although the company is somewhat justified in feeling it has been penalised for basing its business plan around a more ambitious decarbonisation scenario, Frerk said its latest argument over the characterisation of the adjustment is unlikely to change the outcome: “They seem to be tilting at windmills here.”

“I don’t see this as a big part of Ofgem’s argument and indeed it really only seems to feature in Ofgem’s argument on the Business Plan Incentive where again they have discretion as to what exactly it is they are rewarding and how they judge efficiency in that context,” she added.

“As I anticipated, the other DNOs have not applied to intervene in this case, reflecting the very narrow issues at stake here.”

Frerk noted that Citizens Advice has been accepted as an intervener and have put in “quite a full response arguing essentially that this would push up costs for consumers”. She said the charity warned that putting more costs into baseline allowances would reward Northern Powergrid “even if they don’t do the work, which in my view is hard to envisage.”

She continued: “It’s not clear that their arguments add anything over what Ofgem are saying but presumably they felt that as the statutory consumer body they ought to play a role. It’s also worth noting that Andy Manning who is leading this at Citizens Advice previously led the Centrica appeal on ED1 so clearly has an appetite for them.”

The CMA is scheduled to issue its provision ruling to participating parties in late July to early August and release its final ruling in September.