Regulatory frameworks

1. Regulatory frameworks A UK perspective John Scott KEMA: Director, Network innovation formerly OFGEM: Technical Director and National Grid Company: Director of Engineering

2. High Level comments • An over-arching goal is ‘best value for customers’ • Looking to both the short and the long term • With stable regulatory processes that • encourage new investment, • reward companies for good decision making, and • minimise regulatory costs and risks. • Not an easy set of requirements and new approaches must be wise to the risks and alert to the demanding changes now appearing in the sector.

3. National Grid experience • National Grid’s UK network has similarities to NZ • It is heavily loaded with a growing investment need, both for asset renewal and to meet new demands • Transmission should plan to renew assets ahead of failure; this is more critical than at distribution level • the importance of good asset management and planning is clear, but plans are inevitably imperfect • the objective of the planner is to minimise the errors and maximise responsiveness and deliverability • changes will arise from both known unknowns eg weather, and unknown unknowns eg breakdowns.

4. Ofgem experience • Ofgem focuses on company outputs, not inputs • It strives to ensure companies take the decisions • this recognises that the companies have the best information for decision making • it avoids risks being passed off to the regulator • and encourages companies to be proactive. • However, Ofgem are realists! • Mechanisms are in place to oversee performance • The focus is ex-post using specialist consultants • Claw-back and course-correction are available

5. Recent UK observations • Very large projects are now arising that require greater scrutiny and consultation • Years of ‘incremental investment’ are now giving way to new scale challenges, needing fresh thinking • Incentives have been introduced to encourage innovation (company choices but with transparency) • The regulator needs to transfer responsibilities wherever possible to companies to free up its own resources to address the big emerging challenges. Low carbon economy / Electric Vehicles / Variable power sources / Off-shore regimes / Micro-generation / Home Automation / Smart Metering / Demand Management / Climate Mitigation ….

6. In Summary • Companies should be required to be: • Flexible and responsive • Take responsibility, manage risks, be accountable • Find new solutions for new challenges • Regulators in turn should: • Encourage good planning in the companies • Expect deviations from the plan, but • Probe the out-turns and apply any re-alignments • Prescriptive rules always result in unintended consequences: focus on outputs not inputs.

7. Specifics for consideration • UK experience shows more to be gained than lost for customers by empowering the companies and focusing on outputs rather than inputs: • Encourage accurate capex planning and re-optimisation where justifiable changes arise • Set thresholds high to place accountabilities squarely with the company Board • Probe outputs, require transparency, challenge inefficiency – and set an expectation for innovation in all areas of the business.

8. In a sentence Without company empowerment there will be poor response to new challenges and unintended consequences will abound; aligning decision making to the companies is the only strategy that can bring real benefit to customers in times of rising investment and change – but implemented of course with regulatory eyes open. ... and hold the Board members to account.

9. Thank you for your attention. john.scott@kema.com