Not-for-profit ownership model lined up for FSO 

The Future System Operator (FSO) will be set up under a not-for-profit ownership model, under proposals tabled by Ofgem.

The regulator also confirmed that its preference is for the FSO to be an operationally independent public corporation, owned by the government.

In a consultation document on the FSO’s regulatory framework, Ofgem states that being a not-for-profit organisation will ensure that consumers are protected from any financial losses.

In practice this would mean:

• Government, as the FSO’s shareholder, would not receive an enduring financial return or be exposed to downside losses (including from incentives, disallowance, enforcement penalties, or damages imposed by third parties).
• The FSO would be funded by consumers through a 100% fast money approach. This means the FSO could seek to recover its full forecast spend within the financial year, with true ups to account for differences between industry charges and actual spend by the FSO.
• The government would ensure the FSO is able to manage temporary cashflow issues, for when its expenditure is needed sooner than it can be recovered from consumers through industry charges.
• The FSO would not need or have access to borrowing from the private sector and therefore it would not be required to hold a credit rating.
• There would be no organisational-level financial incentives. Instead, regulation would focus on robust reputational incentives, with an appropriate link to FSO staff incentives.
• The financial regulation of the FSO, including its reporting, would be on an ‘actual’ basis, rather than the ‘notional’ company approach used for the ESO.

The Ofgem consultation document says that a not-for-profit model “is more likely to achieve Ofgem and government’s shared objectives for the FSO and maximise benefits for consumers”.

“This type of framework would allow the FSO to fully focus on delivering longer term consumer benefits, not profit, and will help establish the FSO as a trusted partner of us and government,” it states.

“By minimising the government’s exposure to financial risk, this will help support the FSO’s operational independence from government, which is one of our key objectives. It will also result in a simpler framework than the status quo for ESO, enabling us and the FSO to focus resources on maximising consumer benefits.”

It adds: “The move to public ownership means there is less rationale for, or benefit from, having a returns-based model that incentivises the FSO to attract private investment at the lowest possible cost…

“The absence of shareholder profit and loss means any organisational-level financial incentives we apply would end up being a circular payment from consumers to consumers. We consider that this would create unnecessary complexity, have limited net impacts, and that we can effectively drive high performance of the FSO through robust reputational levers with appropriate links to staff-level incentives.”

The FSO is slated to launch on 1 July next year.

An Ofgem spokesperson added: “The Future System Operator, or FSO, will be instrumental in driving forward net zero across both the electricity and gas systems, while maintaining energy security and minimising costs for consumers. It’s important that our regulation of the FSO sets it up for success.

“In this consultation we’re inviting views from across the energy industry, as well as from other stakeholders and the general public, on how the newly-created FSO should be financed and regulated. In particular, we’re seeking feedback on our proposed not-for-profit funding model and the tools we should use to drive high performance by the FSO.”