Price controls in the energy networks and water industries

2 Price controls in the energy networks and water industries

The pressures facing utilities companies are coming from all sides.

Through the determination process and into the next regulatory period, companies will need to develop their capabilities in a number of areas:

managing risk and uncertainty

delivering value under totex, and

performing in a new incentive environment.

plan receives enhanced treatment. We can also help companies to prepare alternate scenarios – these can ensure that their business plans stands up to varying degrees of challenge.

Our understanding of the potential variations in sector and company-specific factors enables us to assess our clients’ ability to maintain service levels to their customers and to manage choices in finalising their regulatory settlements.

Managing risk & uncertaintyNegotiating the regulatory settlement requires a robust and flexible approach. Our experience shows that well-prepared companies are able to provide immediate guidance to their Boards on determinations and their impact on the company and its customers.

We can help companies to prepare for the settlement process, aiming to maximise the likelihood that they are fast-tracked or that their business

The introduction of PR14 and RIIO means that regulated energy network and water companies are facing a period of substantial change. Decarbonisation, customer demand and climate change place pressure on them to maintain the resilience of their assets. And public affordability concerns, falling return on capital and regulatory reform are creating a need for innovative thinking to sustain levels of service to customers in a cost-effective way.

Price controls in the energy networks and water industries

3Price controls in the energy networks and water industries

How we’ve helpedWe worked collaboratively with a major water utility over a number of years to build their capability for future investment planning and price review programmes.

Our advice and support to the client over this period has included: development of a medium term planning capability, integrated with long term strategy

mobilisation of their price review programme, recruiting an in-house delivery team

forecasting long-term future scenarios to support financial planning and customer engagement

designing their retail business models and leading delivery of their retail business plan

development of their roadmap for innovation

supporting their response to licence modifications consultations

a review of their approach to risk and uncertainty management in investment planning.

Delivering value under totexThe experience of leading energy network companies indicates that investment in information, innovative ways of working and the harmonisation of operating models, performance measures and incentives will support success under totex.

Our work with investment strategy and asset management teams has emphasised how a trend toward lower whole-life cost operating solutions will require a cultural shift, including the review of maintenance policies and operational risk management processes.

We have supported our clients in adapting to totex, including re-alignment of operating models and the development of innovation roadmaps setting out their ambitions

for new thinking. Our work has supported the design of whole-life value decision processes, and the definition of requirements for asset performance and cost information across operating as well as capital delivery activities, helping to establish the link between interventions and risk mitigation. Our consultants help not only to define the requirements, but also to embed the significant cultural change that can be required.

Performing in a new incentive environment

The potential for outperforming the regulatory settlement is uppermost on companies’ agendas. Affordability and financeability pressures are creating an increasing emphasis on integrated efficiency programmes to reduce costs. Our expertise in designing efficiency programmes and delivering

early benefit through targeted tactical changes has enabled energy networks and water companies to drive outperformance through successive price control periods.

The interaction between new and established incentives will be a key feature of the next regulatory period. In addition to cost sharing incentives under totex, rewards and penalties associated with delivery of high-level outcomes or outputs will be governed by the impact on levels of service to customers.

Our experience in developing customer engagement programmes and implementing improvements in customer experience is allowing us to help companies review their hierarchies of performance measures and the reporting framework required to underpin them.

Baringa Partners LLP, 3rd Floor, Dominican Court, 17 Hatfields, London SE1 8DJT +44 (0)203 327 4220 F +44 (0)203 327 4221 E info@baringa.com W www.baringa.com© Copyright Baringa Partners LLP 2013. All rights reserved. This document is subject to contract and contains confidential and proprietary information.

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About Baringa PartnersBaringa Partners LLP is an award-winning management consultancy that specialises in the energy, financial services and utilities markets in the UK and continental Europe. It partners with organisations when they are developing and delivering key elements of their business strategy, as well as working extensively with government and regulators to provide policy and advisory services. Baringa works with its clients either to implement new or optimise existing business capabilities that relate to their people, processes and technology.

Baringa is recognised both in the UK and internationally for its unique culture, which has been acknowledged by a number of awards and accolades and continues to reaffirm Baringa’s status as a leading people-centred organisation.

Energy and water policy and regulationThe energy and water sectors are governed by a complex policy and regulatory environment.

In recent years, the UK Government and industry regulators have had to address a number of significant challenges, while maintaining an overall balance between the sometimes conflicting requirements to:

maintain security of supply

facilitate environmental sustainability, and

ensure affordability of bills for consumers.

Policymakers have developed a range of industry reforms, from reviewing how the competitive retail market is working for energy consumers and introducing retail competition in water for the first time, to reforming the investment incentives in the electricity market to promote decarbonisation.

Companies need a robust strategy to navigate the policy and regulation lifecycle so that they can move from the influencing and business impact assessments stage through to implementing business change.

We work with a variety of clients throughout the policy and regulatory lifecycle, including Government, regulators, regulated and non-regulated companies, investors, energy consumers and new market entrants. Our work in this area ranges from advising on the development of policy and regulation to assessing the impact of upcoming regulation on market participants, and to implementing business model changes and process transformation in energy and water companies as a result of new policy and regulation.