Utility Regulation: delivering investment and promoting sustainability

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Utility Regulation delivering investment and
promoting sustainability

• Prepared for South East England Regional Assembly
  Infrastructure Summit
• Martin Brough, Director
• September 29th 2006

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Overview

• SEERAs role and interaction with water and
  energy
• large-scale infrastructure investment
• investment to support regional development
• demand-side management
• practical advice on engaging with key players

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SEERAs role

• SEERA
• Regional Spatial Strategy
• monitoring/implementation
• links to SEEDA and its Regional Economic Strategy
• key issues for SEERA relating to water and energy
• information requirements for long-term planning
• bottlenecks in the south-east overall water
  resources and issues surrounding timely
  investment to support regional growth

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Relationships between SEERA and key players
Regional development policy
Ofwat Ofgem
Environment Agency
National government
SEEDA
Equity investors
National policy and regulation
Water companies
SEERA
Providers of finance
Debt investors
and their competitors
Housing developers
Energy networks
consumers
Energy suppliers
Energy generators
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Interaction between SEERA and regulators

• Areas outside traditional regulatory remit
• potential differences in duties/objectives
  between regional assemblies and sector regulators
• difficulties in one-size-fits-all regulation at
  national versus regional level
• issue how can additional concerns of the
  south-east be accommodated over and above the
  national regulatory structure?

• Areas within Ofwat and Ofgems remit
• sustainability
• reasonable access to water/ energy supplies
• ensure investment is financeable
• issue is existing regulatory framework
  delivering the required outputs?

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What can SEERA offer? (I)

• strengths
• long-term planning capability
• awareness of regional issues
• cross-sector remit gives it insight into best
  practice
• weaknesses
• limited statutory powers over sectoral regulation
• limited resources to undertake detailed sectoral
  analysis

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What can SEERA offer? (II)

• opportunities
• non-adversarial engagement with other parties
• policies are still in discussion
• threats
• delivery mechanisms geared to national policies
• lack of information may make long-term planning
  less meaningful/useful
• SEERA may be held accountable for failures over
  which it has no control

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Overview

• SEERAs role and interaction with water and
  energy
• large-scale infrastructure investment
• investment to support regional development
• demand-side management
• practical advice on engaging with key players

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Large strategic projects water resources

• long-term planning
• long-term demand-side analysis
• regional coordination
• bulk supply agreements
• waterwater mergers
• alternative financing structures
• financing large scale capital projects

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Regional water planning
The South East Water Resource Group (or forum)
SEERA
Environment Agency
Water companies in the south-east
SEEDA
Ofwat
And numerous bodies such as local authorities,
universities, British Chambers of Commerce, BAA
Optimises water resource development for the
south-east region as a whole
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Bulk supplies in the south-east, 2005 (m3)
Three Valleys 313m
Thames 1 billion
3.5m
Sutton E. Surrey 60m
0.2m
0.02m
380
Southern 214m
South East Water 143m
2.2m
0.4m
Folkestone Dover 17m
Bournemouth W. Hampshire 59m
6.9m
0.3m
0.01m
Mid Kent Water 58m
Portsmouth 65m
Source Ofwat bulk supply register and water
companies June Returns.
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Large strategic projects energy

• national generation capacity
• supply/demand at the national level
• responsibilities of Ofgem, National Grid,
  government
• regional impacts information and planning
• information limitations National Grid Seven Year
  Statement, consent status
• power station location shift towards customers?
• stress-test regional capability to absorb new
  power station capacity
• influencing behaviour
• location-based transmission charges
• risk allocation between generator and National
  Grid on network investment
• planning consents relationship with impact on
  environment/local resources (eg, water resource
  implications, transmission lines)
• opportunities to improve planning and incentives

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The investment gap (electricity generation)
Sources National Grid Company (2005), GB Seven
Year Statement 2005, May and Oxera calculations.
.
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Overview

• SEERAs role and interaction with water and
  energy
• large-scale infrastructure investment
• investment to support regional development
• demand-side management
• practical advice on engaging with key players

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Regional development

• connections infrastructure
• regulatory role to increase competition
• complexity of relationships between local
  authorities, developers, utilities, regulators
• current consultation by Ofgem
• delivery rather than planning bottlenecks
• standards of performance for networks
• incentives versus penalties
• standardised contracts
• dispute resolution

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Introducing third-party connections provision
DNO and affiliate organisational boundary
DNO
UoS and connection charges
Asset adoption
Affiliated ICP
ICP
Capital contributions under vertical integration
Capital contributions under third-party provision
Developer
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Overview

• SEERAs role and interaction with water and
  energy
• large-scale infrastructure investment
• investment to support regional development
• demand-side management
• practical advice on engaging with key players

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Demand-side measures (I)

• metering to change consumer behaviour
• water meters and regional opportunities
• smart meters for energy application to new
  housing developments, retro-fitting to existing
  stock
• efficiency regulation
• economic tests versus regional objectives
• opportunities to go beyond national targets

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Demand side measures (II)

• companies have a statutory duty to promote the
  efficient use of water by their customers
• Ofwat promotes the efficient use of water by
• asking companies to view water efficiency as an
  option to meet the supplydemand balance deficit,
  claiming that there is an economic level of water
  efficiency similar to the ELL
• participating in discussions on sustainable
  communities and changes to building regulations
• requiring every company to publish a water
  efficiency plan

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Incentivising demand management (I)
Defra Define Water Scarcity Areas
Metering
Ofwat

• Modify revenue allowances to include investment
  on meters
• Overall performance assessments
• Monitor and encourage water-saving

Leakage targets
Water
Demand management
Other agencies Water Saving Group, Water UK,
Waterwise, Water Smart, MTP, Environment Agency
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Incentivising demand management (II)
Defra Set overall target
Energy Efficiency Commitment
Ofgem Set specific targets and monitor
Building regulations
Decent homes
Legislation
Energy
VAT reduction
Defra Policy design and promotion
Energy Saving Trust
Warm Front
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How should SEERA engage?

• south-east regional coordination of water
  resource plans
• efficiency standards for new developments

More critical

• new power plant location
• national efficiency schemes

• changing ownership
• financing structures

• exchange of information and comparison of demand
  forecasts

Non-critical
Able to be influenced
Unable to be influenced
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Conclusions

• SEERA has increasing role over time, particularly
  given focus on
• long-term planning
• removing bottlenecks to delivery in a
  resource-constrained world
• unique position allows constructive engagement
  with all parties
• structural issues remain regarding the limited
  flexibility in the system
• fitting regional policy goals into a national
  regulatory framework

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www.oxera.com

• Contact
• Martin Brough
• 44 (0) 1865 253 047
• martin.brough_at_oxera.com

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