Governance Review – Setting the scope

1. Governance Review – Setting the scope July 2008

2. Scope of Governance Review • Respondents’ views to November open letter • PED event • Independent critique of governance arrangements • Authority’s views

3. The Codes Governance Review……why now?

4. Scope of the review – 6 key workstrands • Strategic policy reform/self governance package • Charging methodologies • Code objectives • Code administration • Complexity and fragmentation workgroup • Small participant initiatives

5. Scope of review Major policy reform and self governance • 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

6. Does Ofgem need to be involved in all mods? • Decisions largely follow panel recommendations

7. POSSIBLE PROCESS - THREE PATHS FOR CODE CHANGE “Most material – key public policy issue” PATH 1 – OFGEM POLICY REVIEW Ofgem runs review process – legally binding conclusions Panel develop mod to comply with conclusions Ofgem issues decision Standard merits CC appeal Ofgem initiates review “Material but no major review necessary” PATH 2 - BUSINESS AS USUAL Ofgem categorises Consultation and Panel recommendation Ofgem decision Standard CC merits appeal Third party raises mod proposal “Low customer impact” Panel decision –accept or reject Merits appeal to Ofgem Ofgem decision – accept or reject mod Standard CC merits appeal PATH 3 – SELF GOVERNANCE Industry led

8. Scope of review Charging methodologies • Methodologies impact on: • infrastructure investment • operational behaviour • GHG emissions • distributional effects • Allow market participants to propose changes? • Benefits - more accessibility, accountability of networks • Downsides - frequency of change, reduced certainty, revenue risk for networks • Possible options for consultation • Status quo – no change • Transfer into codes • Retain in licence but allow more accessibility • Consultation – August 2008

9. Scope of review Code objectives • 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: • Expand scope of existing objectives • New code objective on environment • Requirement on panels to consult on environment

10. Scope of review Role of code administrators and panels • 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

11. Scope of review Addressing fragmentation and complexity • 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.

12. Scope of review Small participant initiatives • 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

13. Our aspirations for code governance

14. The Brattle report - conclusions • 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

15. 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

16. 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

17. 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

18. 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