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The next price control review for electricity distribution network operators (RIIO-ED3) is fast approaching, and the window of opportunity for affected companies (“network companies”) to set themselves up for success is similarly fast reducing. In this article, we reflect on our experience working within Ofgem and advising 13 companies facing price reviews in the energy, water, and airport sectors over the last three years, and set out our top ten RIIO-ED3 recommendations for network companies.

1. Early, strategic approach is key to success

In our experience, priming the business for success starts at the earliest stages of the process, before its formal start by the regulator. Once the review process starts, the internal bandwidth for strategic thinking is greatly diminished. Network companies that take this early time to reflect on lessons learned from the past settlement, be honest about their current performance and scope for improvement, engage proactively internally and externally, and coalesce around a shared narrative stand the best chance of success with the regulator.

2. Own the narrative around your plan 

RIIO-ED3 comes at a tricky time for companies and their investors. It will take place amid increasing societal sensitivity to environmental sustainability, a renewed commitment to net zero targets by both UK main political parties, and an ongoing cost of living crisis. Network companies must navigate these complexities:

• On the one hand, the RIIO-ED3 business plans need a significant step up in the level and pace of investment, on a scale so far unseen in previous regulatory settlements. Ofgem itself has made clear that it expects companies to use RIIO-ED3 to support the efficient delivery of net zero targets.
• On the other, a large increase in allowed investments will inevitably lead to material bill increases with an uneven impact on different customer groups. It is worth noting that electricity distribution companies’ business plans already represent 16% of the energy bill (according to recent estimates by uswitch.com).

Presenting a clear narrative on how companies’ plans meet both immediate regulatory goals and wider societal/net zero objectives will be key for succeeding at RIIO-ED3. It would also help defuse criticism of utilities companies in the court of public opinion, and would mitigate the risk that the government issues a detailed, ‘interventionist’ and potentially unhelpful statement of strategic priorities to Ofgem.

3. Foster a collaborative dialogue with the regulator

A common obstacle to achieving a collaborative dialogue is the “demonisation” of the regulator that can sometimes occur at crunch points in the process, and can find its way to media headlines and political interference. This heavily pollutes the quality of discussions and makes it much harder to identify common ground.

Successful companies benefit from considering the regulator’s perspective as champion of their customers. This will serve to maintain a constructive, proactive engagement throughout the whole review. Companies that build better mutual understanding with the regulator, avoid nasty surprises, and secure better outcomes.

4. Develop an ambitious yet credible business plan

Ambitious business plans will be required to fully support net zero. However, over-promising unrealistic roll-out plans and/or performance improvements would create a significant delivery risk to the business, including penalties under the incentive schemes associated with the RIIO-ED3 settlement.

To be successful, companies need to take an honest look in the mirror at the very start of RIIO-ED3, showing Ofgem how their current performance and efficiency levels support their ambitions for RIIO-ED3. They have to learn from current difficulties so that they can set out a credible improvement plan for the future.

Companies that have been collecting data and monitoring performance throughout RIIO2 will be well-placed to present a compelling case to Ofgem. Those who have not should start doing so without delay.

5. Demonstrate consumer support for the business plan

The credibility of the business plan does not only depend on the internal evidence that companies submit, but also on the quality of engagement with customers and wider stakeholders throughout the regulatory process. Ofgem will want to see clear evidence of local/community-level decision making, with companies clearly demonstrating that they took onboard the feedback from stakeholders in their plans. And companies will need to demonstrate not just support by the “average customer”, they will need to reassure Ofgem that the most vulnerable groups are adequately supported and protected from the worst price increases.

As UK regulators tend to centralise more and more of the consumer engagement activity for the sake of comparability and consistency across geographical areas, network companies should focus in particular on those aspects that make their customers different and unique, which may not be captured by Ofgem’s wider engagement.

6. Embrace innovative approaches

Ambitious, large-scale business plans will be more acceptable to Ofgem if the companies can demonstrate a creative, innovative approach to operate, maintain and develop their networks. This is not just in terms of active vs. passive network management solutions, but also in terms of maximising the use of competitive mechanisms to ensure the most efficient delivery of the planned investments.

Clear, tangible initiatives - all the better if already in train - are a must to demonstrate to the regulator the management’s credibility and proficiency. Poorly thought-through and badly presented initiatives, accompanied by woolly statements like “we will use innovation to achieve improved outcomes”, will not suffice and will likely backfire with the regulator.

7. Embed key regulatory trends in your plan’s

Themes Ofgem has already issued detailed guidance on how it expects to run RIIO-3. This includes its priorities for RIIO-ED3, the price control setting process and the overarching regulatory framework for each price control. While Ofgem’s thinking is hardly revolutionary relative to RIIO2, companies would be well advised to consider how best to respond to the underlying key regulatory trends that underpin Ofgem’s thinking.

We explore two examples of these trends below:

• Enhancing competition in the procurement and delivery of capital investment. Ofwat has developed the Direct Procurement for Customers (DPC) framework, and is expecting DPC to be the default option for investments above a certain threshold (£200m lifetime cost). Ofgem has developed the Competitively Appointed Transmission Owner (CATO) framework. There would be benefit (in terms of potential savings for consumers, and revenue opportunity for network developers) in extending a similar scheme to electricity distribution investments that are required to ensure a smooth transition to net zero. Furthermore, network companies keen on streamlining investments could advocate for an equivalent of Ofgem’s Accelerated Strategic Transmission Investments (ASTI) framework.
• Transitioning to a systemic approach. The National Energy System Operator (NESO) and Distribution System Operators (DSOs) will shape the industry’s structure and governance for the years to come. Ofgem already expects close cooperation across stakeholders, to ensure the best value solution for the system as a whole is chosen.

In this context, two opportunities arise: first, network companies will do well to future-proof their approach to investment and ensure their long-term strategy is consistent with national priorities and objectives. Second, network companies that are actively engaged and leading cross-industry discussions on future industry governance can gain credibility with the regulator.

8. A whole-business effort, with close board involvement 

All too often, the regulatory affairs team leads the development of the regulatory business plan in relative isolation from the rest of the business, which is busy executing the previous settlement.

For RIIO-ED3, and given the significant increase in investment required, coordination between the price review team, the wider regulatory affairs team and other parts of the business that are critical for input into the business plan process will be key for the business plan to withstand Ofgem’s scrutiny.

Having the wider business closely involved will also mitigate the delivery risks inherent in the big investment step-up required by the RIIO-ED3 settlement: senior leadership teams and boards that have subscribed to the narrative and the key elements of the business plan will be more aware of - and content with - the delivery and financeability challenges ahead.

With UK regulators increasingly focused on the role of the board in assuring and challenging the business plan, distribution companies need to carefully consider how best to get the right strategic steer from the board throughout the RIIO-ED3 process. Independent board directors can play an important role by providing a longer-term and more neutral viewpoint and are well placed to see sense when emotions are high around the board table. Companies must consider how to best enable them to provide a ‘critical friend’ perspective. Ofgem will be keen to see evidence of meaningful board engagement reflected in minutes and assurance statements.

9. Frame your business plan to facilitate decision-making

Gone are the days in which a single document sufficed to present a compelling business plan to the regulator. Business plans now require the development of a multitude of commercial and technical documents, all of which serve specific and important purposes.

Different stakeholder groups will want to engage with different elements of these plans. This is notably the case at the regulator, where key decision-makers at the authority will engage with the most important elements of the plan and rely on their teams to scrutinise the underpinning detail.

Recognising these dynamics is fundamental, and companies should curate the content, style, and key messages of the different elements of their business plan to their respective likely audiences.

10. Plan to appeal, so you do not have to

Regulatory appeals are notoriously difficult: resource intensive, time consuming and emotionally draining at all levels of the company. It is inherently difficult for the appellant to demonstrate that a forward-looking decision has a material adverse impact on consumers. Network companies should draft their plan as if they are going to appeal, with a rigorous approach to evidencing the claims (performance, costs, benefits, customer support) that underpin the key building blocks of their RIIO-ED3 plans. This approach will give them the best chance to secure a satisfactory settlement, and leave them well-placed for success with the CMA should an appeal become necessary.