code administrators working group introduction 28 august 2008
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• Welcome to the group
• Background and purpose of the group
• Today’s Agenda
Introduction and welcome
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• One of six Governance Review work-strands
• Strategic policy reform/self governance package• Charging methodologies• Code objectives• Performance of Code administrators• Small participant initiatives• Code administrators working group
• Purpose of group
The Code Administrators Working Group
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• 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
Scope of review
Major policy reform and self governance
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• Decisions largely follow panel recommendations
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
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Ofgem initiates review
Third party raises mod proposal
Ofgem categorises
Industry led
Merits appeal to
Ofgem
Ofgem runs review
process – legally binding
conclusions
Standard merits CC
appeal
“Most material – key public policy issue”
POSSIBLE PROCESS - THREE PATHS FOR CODE CHANGE
Ofgem decision – accept or reject mod
Ofgem issues
decision
Panel develop mod
to comply with
conclusions
Ofgem decision
Panel decision –accept or
reject
“Material but no major review
necessary”
Consultation and Panel
recommendation
Standard CC merits
appeal
PATH 2 - BUSINESS AS USUAL
Standard CC merits
appealPATH 3 – SELF GOVERNANCE
PATH 1 – OFGEM POLICY REVIEW
“Low customer impact”
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• Methodologies impact on:o infrastructure investmento operational behaviouro GHG emissionso distributional effects
• Allow market participants to propose changes?
• Benefits - more accessibility, accountability of networks
• Downsides - frequency of change, reduced certainty, revenue risk for networks
Scope of review
Charging methodologies
Possible options for consultation
1. Status quo – no change
2. Transfer into codes
3. Retain in licence but allow more accessibility
Consultation – August 2008
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• 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 Expand scope of existing objectiveso New code objective on environmento Requirement on panels to consult on environment
Scope of review
Code objectives
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• 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
Scope of review
Role of code administrators and panels
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• 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.
Scope of review
Addressing fragmentation and complexity
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• 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
Scope of review
Small participant initiatives
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• 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
The Brattle report - conclusions
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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
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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
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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
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