Governance Review –
Setting the scope
July 2008
Scope of Governance Review
•
Respondents’ views to November open letter
•
PED event
•
Independent critique of governance arrangements
•
Authority’s views
2
The Codes Governance
Review……why now?
3
Scope of the review – 6 key workstrands
• Strategic policy reform/self governance package
• Charging methodologies
• Code objectives
• Code administration
• Complexity and fragmentation workgroup
• Small participant initiatives
4
Scope of review
Major policy reform and self governance
• Ofgem initiated high level strategic policy reviews with
legally binding conclusions…plus
• Self governance for low customer impact modifications
• Self governance with protections (eg appeal route, panel
representation for customers)
• A combined package of proposals
• Consultation – autumn 2008
5
Does Ofgem need to be involved in all mods?
Year
No of
decisions
07/08
153
06/07
210
05/06
239
04/05
163
• Decisions largely follow panel recommendations
6
POSSIBLE PROCESS - THREE PATHS FOR CODE CHANGE
PATH 1 – OFGEM
POLICY REVIEW
“Most material
– key public
policy issue”
Ofgem initiates
review
Ofgem
categorises
“Low customer impact”
PATH 3 – SELF
GOVERNANCE
Panel
develop mod
to comply
with
conclusions
Ofgem
issues
decision
Standard
merits
CC
appeal
Ofgem
decision
Standard
CC merits
appeal
“Material but no
major review
necessary”
PATH 2 - BUSINESS AS
USUAL
Third party raises
mod proposal
Ofgem runs
review
process –
legally
binding
conclusions
Industry led
Consultation and
Panel
recommendation
Panel
decision –
accept or
reject
Merits
appeal to
Ofgem
Ofgem
decision –
accept or
reject mod
Standard
CC merits
appeal
7
Scope of review
Charging methodologies
•
Methodologies impact on:
o infrastructure investment
o operational behaviour
o GHG emissions
o distributional effects
•
Allow market participants to
propose changes?
•
Benefits - more accessibility,
accountability of networks
•
Possible options for consultation
1. Status quo – no change
2. Transfer into codes
3. Retain in licence but allow
more accessibility
Consultation – August 2008
Downsides - frequency of change,
reduced certainty, revenue risk for
networks
8
Scope of review
Code objectives
• Alignment of code objectives with Authority duties?
• Propose to issue open letter consultation in September 08
• Will consider environment, but not other statutory duties
• Final guidance on treatment of GHG costs/benefits under
existing code objectives – published June 08
• Possible options for consultation:
o
o
o
Expand scope of existing objectives
New code objective on environment
Requirement on panels to consult on environment
9
Scope of review
Role of code administrators and panels
•
Quality of analysis - concerns remain, significant issues for
smaller players and new entrants, and Ofgem!
•
Scope for Ofgem to engage and advise – prevent “blind alleys”
•
Proposals to enable Authority to “send back reports” and “call in
panels and administrators”
•
Governance of code administrators and panels:
• Sufficiently accountable – board structures and benchmarking?
• Independent panel chairs?
• Alignment of customer representation across codes?
•
Consultation Autumn 2008
10
Scope of review
Addressing fragmentation and complexity
• Complexity and fragmentation – barrier to new entrants
and smaller players
• Ofgem to set up working group to explore best practice and
convergence across codes.
• No proposals at this stage to pursue code mergers – but
open to industry to take initiative.
11
Scope of review
Small participant initiatives
• Explore requirements on code administrators or panels to
consider the needs of smaller participants
• Assistance or funding for smaller participants in engaging
in the codes modification process?
• Consultation autumn 2008
12
Our aspirations for code governance
Rigorous and high
quality analysis
Administered in an
independent &
objective fashion
Cost effective
Governed by
transparent &
easily understood
rules and
processes
Promote inclusive,
accessible and
effective
consultation
Sufficiently
flexible to
circumstances
An effective
governance
regime
Delivers a
proportionate
regulatory burden
13
The Brattle report - conclusions
• Governance ineffective in delivery strategic policy reform
• Effective in managing incremental change
• Administrator analysis - poor quality/lack of incentives
• Ofgem involvement disproportionate
• Code fragmentation/heavy layer of complexity
• Differences in code objectives lead to inefficiencies
• Sceptical over charging methodology changes
14
Quality of analysis – respondents’ views
•
Several market participants indicated that quality of analysis was
not problem or issue
•
Improvement requires more engagement from Ofgem
– earlier participation in process
– terms of Ofgem engagement should be clearly set out
•
Some smaller market participants took a different view
– reports incomprehensible or lack critical assessment
– participant views reported but not assessed/analysed
– …this hinders engagement
•
Some support for additional Ofgem power to :
– “call in” proposals that are not being properly assessed
– send modification reports back to panel
– call for more analysis
15
Moving charging methodologies into codes
• Mixed views received from market participants
– Some supportive – welcome consideration of the issue,
potential transparency benefits
– Some opposing views – potential for increased uncertainty
– Some support for independent administration of
methodologies
• Network businesses generally unsupportive of move
– Potential for proliferation of proposals / additional resource
requirements / greater uncertainty
– ENA agrees issue is within scope – but with caveats
16
Fragmentation, complexity and other issues
•
Concerns expressed that existing arrangements are complex
– harmonisation and convergence of mod rules necessary
– consider code/administrator convergence
•
Arrangements do not effectively address cross code & strategic issues
•
Prioritisation of mod proposals desirable – links to self governance
•
Mixed views for move to increased self governance
– impact on smaller players? Less inclusive/accessible regime? Costly process?
– Or, reduce Ofgem role where unanimous support for code mod
•
Several respondents argued that:
– no fundamental change is necessary – only incremental change is warranted
– Change should be accompanied by cost benefit analysis
•
Feedback received on other issues - e.g. transparency of Authority
decisions
17
Alignment of code objectives
•
Strong support from renewables sector
•
Support from other market participants for considering the issue although many signal a cautious approach:
– Important to consider interactions with statutory and licence
objectives of network business
– Clarity needed on interpretation of objectives and the need for
weightings if new objectives are added
– Risk of increased complexity
•
Energywatch agrees that it is timely to consider alignment issue
– Lack of alignment means Authority does not receive all necessary
information
18
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