The CMA recently published its final determinations in two appeals brought by British Gas and Northern Powergrid against Ofgem’s electricity price controls for the next 8 years (decisions here and here). The appeals were the first under section 11C of the Electricity Act 1989 and the CMA’s decisions will therefore be the first port of call for any practitioners considering appeals against not only price controls but also any modifications made by Ofgem to electricity distributors’ licences.
British Gas, a supplier, broadly appealed on the basis that Ofgem’s price control allowances were too generous to distributors by around £1.4bn. British Gas won a partial victory on only one of the six grounds of appeal it advanced. On this ground, the CMA found that Ofgem’s recalibration of one of its incentive mechanisms (the information quality incentive) had been, on the facts, excessive, but agreed with Ofgem that it had in principle been right to recalibrate.
Northern Powergrid, a distributor, conversely appealed on the basis that the allowances were not generous enough. The CMA found for Northern Powergrid on only one of the three grounds it advanced, holding that the savings that Ofgem anticipated distributors would make through the advent of smart technology were probably too great and, in any event, premised on an unsafe methodology. Accordingly, the CMA upped Northern Powergrid’s allowances by around £11m.
Prospective appellants will find some crumbs of comfort in the CMA’s decisions, but perhaps more to discourage them.
On the plus side, the CMA stated that the standard of review to be applied to Ofgem in such appeals was more intense than the judicial review standard; the CMA was required to look at the merits of the decision under appeal and determine whether it was wrong on one of the grounds prescribed by section 11E of the Electricity Act 1989. The CMA saw its function as that of an expert appellate body. There is a clear analogy (which the CMA expressly recognised) with the role of the CAT when considering telecoms appeals brought under section 192 of the Communications Act 2003.
Moreover, the CMA was unpersuaded by arguments that it should be slow in principle to alter a price control decision because such a decision is taken “in the round” and it was impermissible for appellants to “cherry-pick” individual errors in an appeal. While the CMA recognised in principle that altering one part of the price control could have knock-on effects for other parts, it saw nothing in the appeals before it to prevent it from adjusting the price control, if necessary.
At least three aspects of the CMA’s decision will dishearten future appellants, however. First, the CMA placed clear limits on the extent to which it would interfere with Ofgem’s decision. It stressed that (like the CAT when considering telecoms appeals) it would not substitute its views for Ofgem’s simply because it would have taken a different approach; rather, Ofgem’s decision had to be wrong. Moreover, the CMA rejected the submissions of one of the intervenors, Scottish and Southern Energy, that it was required to conduct a re-hearing and, if necessary, decide matters afresh. Consistently with the Supreme Court’s judgment in BT v Telefonica O2 UK [2014] UKSC 42, it stated that it was not a “fully equipped duplicate regulatory body waiting in the wings” – rather, it should confine its inquiry to the grounds advanced.
Second, the CMA did not appear to set much store by procedural grounds of appeal. British Gas made much of its point that Ofgem’s decision-making process had not been transparent enough to enable effective consultation. Perhaps most conspicuously, Ofgem had at the hearing of the appeals advanced justifications for one element of the price control (concerning transitional arrangements for a change in asset life policy), which had never been put before the parties. To an extent, the CMA agreed, and wrapped Ofgem’s knuckles for not giving consultees enough information. However, it refused to allow the appeal on that basis, considering that any failures in process were not enough to undermine the decision in question. The lesson for practitioners is not to rely on allegations of procedural unfairness unless these are backed up by substantive criticisms.
Third, the success rate of the appellants was low. Overall, it was hard to persuade the CMA that Ofgem had got it wrong. In the British Gas appeal, Ofgem emerged as the clear winner. And even though Northern Powergrid had some measure of success, the CMA sweetened the pill for Ofgem by making no order as to inter partes costs, thereby shielding the regulator from paying any of Northern Powergrid’s substantially higher bill.
Costs notwithstanding, the financial implications of the price controls for both distributors and suppliers are, of course, enormous. It remains to be seen whether any will take the next step of attempting a judicial review of the CMA’s decision.
Competition Bulletin 