CMA makes final decision on RIIO-2 appeals

Mixed results for electricity and gas companies as Competition and Markets Authority (CMA) confirms final ruling on appeals the Gas and Electricity Markets Authority (GEMA).  

The original appeals were brought to the CMA in March 2021 by nine energy companies from the electricity and gas sectors and focussed on a number of decisions made by Ofgem’s governing body GEMA relating to the RIIO-2 price control structure. Amongst the companies were National Grid, SSEN and SP Transmission and Wales and West Utilities.

The companies were concerned about calculations or imposition of several areas of the structure.  In particular, the ‘outperformance wedge’, a downward adjustment to the cost of equity estimate GEMA had made, on the basis that there would be operational outperformance over the RIIO-2 period. 

Other areas for appeal included imposition of an innovation uplift, the set level of cost of equity and GEMA acting beyond its remit (ultra vires) in modification of certain licence conditions.

In August 2021, the CMA announced a provisional ruling on the appeals. The rulings were confirmed at the end of October in a summary and detailed determination papers issued by the Authority.

The CMA found in favour of all the appellants with regard to the outperformance wedge, stating that GEMA was wrong to impose this.  While accepting there was clear evidence of outperformance during the RIIO-1 period and that it continued to be a risk, it also stated that introducing the wedge would not be the most appropriate means of overcoming GEMA’s outperformance concerns. 

The CMA also found in favour of Southern Gas Networks and partially in favour of SP Transmission and Wales & West Utilities (amongst others) relating to GEMA’s imposition of an innovation uplift.  It also decided partially in favour of SP and SSEN Transmission regarding GEMA acting ultra vires.

However, the appeal went the way of GEMA on all the other grounds and sub-grounds cited by the companies and were dismissed from the appeal by the CMA.

For the companies involved in the process, along with trade bodies such as the Energy Networks Association, there is now the task of reviewing the determination in full to establish the impact of the findings. Meanwhile, National Grid issued an immediate response, stating: “We are disappointed that the CMA has not found in favour on the cost of equity. We will review the detailed documents to understand the CMA’s rationale for this final determination, which we expect to be published next week.”

The statement continued: “We are pleased that, in line with its preliminary determination in August, the CMA has found in favour of the technical arguments on the outperformance wedge and that it has therefore directed Ofgem to remove the outperformance wedge from the price control.

“We anticipate that revenues will be increased from 2022/23 onwards to reflect the CMA’s decision to remove the outperformance wedge.”