Regulatory advice on the RIIO price controls

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Client Centrica
Dates 2012
Service(s)Policy & Economics, Regulation & Competition

CEPA advised Centrica on the RIIO-T1, RIIO-GD1 and RIIO-ED1 price control reviews during Ofgem’s consultation and decision-making process. As part of this work, we have produced a range of papers, including internal notes to Centrica and published reports in support of consultation responses.

Outputs delivered include:

  • Tariff predictability: We published a paper that assessed the drivers of tariff volatility and unpredictability in energy network price controls and how this might be mitigated through the price control regime. The paper included an impact assessment to support our proposals.
  • Business plans: We provided Centrica with an assessment of the network companies’ business plans, which formed the basis of Centrica’s responses to Ofgem over the submissions and their Initial Proposals. One aspect from the business plans that was built upon, was the impact of Real Price Effects (RPEs) on the proposed allowed revenue.
  • Cost of debt indexation: This confidential paper (presented to Ofgem) considered the principles and criteria for the indexation mechanism. We also reviewed how the index might be established and how to approach revenue adjustments.
  • Cost of equity: Our project team developed a paper considering market evidence on the cost of equity for regulated networks that would be published, given Ofgem’s decision to index the cost of debt. This included an analysis of financeability and asset life issues, and the relationship between notional gearing and returns under the price control. We also provided an update to this paper to re-examine what the market evidence suggested for parameter values within the cost of equity.
  • Financeability: In response to the publication of Ofgem’s Initial Proposals, we created a financeability model to assess the impact of changes in regulatory policy and identify appropriate transition measures for the networks considering specified changes to capitalisation. This analysis was published as part of Centrica’s response.
  • Incentives: Our team provided summary notes on the role of the Information Quality Incentive (IQI) and incentive mechanisms to Centrica. This involved looking at their likely impact within a Rate of Return on Equity (RoRE) analysis and comparing how the proposed incentives compared to previous price controls.