In our final blog, we review fair returns and financeability.
RIIO-T1 and RIIO-GD1 price controls are due to end in March 2021 with RIIO-ED1 ending in March 2023. Ofgem launched the framework review for RIIO-2 earlier this year which marked the beginning of the consultation process for setting price controls for the network companies running the gas and electricity transmission and distribution networks in the UK. On the 30th June, Ofgem announced the results of the consultation which focussed on the following areas:
One of the core areas of focus in the framework decision and central to RIIO-2 is ‘Fair returns and financeability.' In this article we will explore what this means and the impact on the business planning process.
Fair returns and financeability – finding the balance
Fair returns and finaceability is one of the more complex areas of Ofgems framework decision. The chapter explores the mechanisms to ensure in the next round of price review, financial issues are reviewed.
So, what does fair returns and financeability really mean? In summary ‘The price control allows companies to recover the costs of running their networks, including the cost of financing their activities. Investors in a network company expect to receive a return on their investment. The baseline allowed return is our estimate of the return that equity and debt investors expect from an efficiently run company, i.e. a company that spends in accordance with its allowances, and performs in line with the baseline performance targets set in the price control.
A company’s actual return can be higher or lower than the baseline allowed return, depending on how well it performs against incentive mechanisms for delivering better services and/or lower costs. We want to ensure the overall returns earned are fair for both consumers and investors.’
Ofgem are clear that they will be consistent with past regulatory practices and will set the baseline to ensure that an efficient company is able to finance its regulated activities.
The framework decision confirmed that they we will use the principles set out in the March consultation. These were:
Unpicking the regulatory framework, why Explain?
Explain has worked within the utilities sector for two decades, working in contracted partnerships with several of the UK’s biggest and most respected suppliers and distributors. These relationships have allowed Explain to develop an in-depth understanding of the importance of consumer and stakeholder engagement, ensuring we engage with the end user to deliver insights that support and are aligned to business planning.
On 4th October 2018, experts from the Explain team are presenting their findings from the Northumbrian Water Innovation Festival at the MRS Utilities Conference. The findings focus on the future of customer engagement in the utilities sector and innovation in the market research sector to future proof and provide solutions to engage with customers.
Contact the team for further information on the services we can provide.