code governance review overview of consultation documents mark feather 11 february 2009

Code Governance Review

Overview of consultation documents

Mark Feather11 February 2009

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Process to date

• Scope of codes governance review decision document (June 2008)

• Codes governance review consultations– Major policy reform and self governance (closes 27 Feb 2009)– Role of code administrators and small participant/consumer

initiatives (closes 27 Feb 2009) – Code objectives and the environment (closed)– Charging methodologies (closed)

• Code Administrators Working Group (CAWG)– Six meetings since August 2008– improving code processes, with small participant emphasis– Good progress made– Final report due February 2009

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Objectives of code governance review

• Promote inclusive, accessible and effective consultation• Governance rules and processes transparent and easily

understood• Rules administered in independent and objective fashion• Provide rigorous and high quality analysis• Cost effective• Rules and processes flexible to allow effective change

management• Deliver in a manner that places a proportionate regulatory burden

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Focus of today….

• Major Policy Reviews and Self Governance

• Role of Code Administrators

• Small participant/consumer initiatives

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Major Policy Reviews and Self Governance

Ofgem initiates review

Third party raises mod proposal

Ofgem categorises

Merits appeal to Ofgem

Ofgem runs review

process –legally binding

conclusions

Standard merits

CC appeal

Ofgem decision –accept or

reject mod

Ofgem issues

decision

Panel develop mod

to comply with

conclusions

Ofgem decision

Panel decision –accept or

reject

Consultation and Panel

recommendation

Standard CC merits

appeal

PATH 2 – “REFORMED STATUS QUO”

PATH 3 – SELF GOVERNANCE

PATH 1 – OFGEM POLICY REVIEWProposed new framework

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Ofgem back-casting exercise

• Look back at all Ofgem mod decisions in 12 mths to Oct 2008

• Covered 122 decisions across all codes

Path Number of modifications

% of total modifications

Path 1 Ofgem policy review

3 2.5%

Path 2 Business as usual 57 47.0% Path 3 Self-governance 62 50.5% Total 122 100%

Based on experience to date, we would not expect to conduct more than 1-2 Major Policy Reviews each year if these proposals are implemented.

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Potential benefits

• Major Policy reviews - Key strategic issues considered in single joined up process:– Avoid multiple piecemeal modifications and assessments– Avoid duplication of assessments– Single process increases transparency and facilitates

engagement by all interests including smaller players/consumers.

– Single, holistic approach to assessing issues – improved analysis

– Help to avoid delays caused by divergent commercial interests• Self Governance

– Cost savings and efficiencies– Focus Ofgem resources on issues that bring value for money

for customers – proportionality.

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Electricity Cash-Out

Has been under review since at least August 2003

Marginal Cash-Out

• Aug 03 – P136/P137• March 04 – Informal Ofgem Review – 12 industry WG meetings +

consultation• Aug 05 – P194• Late 06 – P201, P202, P205 (approved Oct 06)

Cash-Out arrangements have fundamental impacts on security of supply and also underpin competition in the wholesale electricity sector.

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Electricity Cash-Out

‘Tagging Out’ of System Balancing

• March 2007 – Further Cash-Out Review• April 2007 – P211, P212• October 2007 – P217 (approved Oct 2008)• 2 Ofgem IA’s plus 2 Issues Groups• Further proposals expected over the coming year.

Impact Assessment Case Study - Electricity Cash Out

•Consumers could have saved £100m from earlier implementation of P217 type arrangements

•Industry and Ofgem could have saved £2m in progressing cash-out.

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Filtering process – key issues

• Filtering Option A– First Ofgem consider if a modification should proceed down

Path 1 (MPRs)– If not, by applying a further set of criteria to determine if it

should proceed along path 2 or 3.• Filtering Option B

– Industry allocates modification to Path 2 or 3 and filtering criteria, with Ofgem ability to veto.

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Possible filtering criteria Path 1

– Ofgem considers the proposal is likely to have significant impacts on competition or gas and electricity consumers

– Ofgem considers the proposal is likely to create significant cross code or code-licence issues

– Ofgem considers the proposal is likely to have significant impacts on the environment, sustainable development or security of supply

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Possible Filtering Criteria Path 2

– The modification is likely to have impacts on consumers;– The modification is likely to have impacts on competition;– The modification is likely to discriminate in its effects between

classes of users;– The modification is directly related to safety or security of

supply or relates to the management of market or network emergencies; or,

– The modification impacts on the code change process or proposed other material code governance changes.

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Path 1 – Major Policy Review Process

• How could one be initiated?– Either by Ofgem or– Triggered by an industry participant raising a mod in a key

strategic area

• Will Licence amendments be required?– We consider Licence changes would be required to recognise

formally when a Major Policy Review can be triggered

• Nature of Major Policy Review process and number of consultations would depend on the issue being considered.

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Path 1 – Major Policy Review – Outcome of review

• Option 1 – High Level Binding Conclusions• Panels/relevant licence holders would be required to deliver

the conclusions of the review (consult on code mods).• Option 2 – Detailed Binding Conclusions

• More detailed than Option 1 –panels/relevant licence holders required to develop and consult proposals based on Ofgem outline.

• Option 3 – Ofgem prepares modification proposal and legal text.• Panels/relevant licence holders required to implement the

proposals.

Appeal rights – Utilise existing appeal framework under Energy Act

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OfgemPolicy /

principles decision

Network / Panel

develops and raises

implementing mods

Option 1Ofgem

document contains policy principles only

Option 2Ofgem

document also outlines where

mods are needed

Option 3Ofgem

document also contains legal

drafting

Categorisation / filtering

Merits appeal to

Ofgem

Ofgemdecision

PATH 2 – IMPROVED STATUS QUO


Standard CC merits

appeal

Consultation and Panel decision


recommendation




Merits appeal to

Ofgem

Ofgemdecision



Standard CC merits

appeal



recommendation

Merits appeal to

Ofgem

Ofgemdecision



Standard CC merits

appeal



recommendation

Network / Panel further

develops implementing

mods

Note: over-riding code objective (and assessment criterion for mods): implement policy principles

Standard CC merits

appeal

Ofgemdecision


recommendation

Implementing the outcome of major policy reviews

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Self Governance – Key issues

• Who should be the decision maker for the modification?• Independent panels, representative panels, or voting by

constituency?• Consumer and small participant representation important

• What voting procedures should apply governing decisions?• Should there be mechanisms to send proposals to Path 2

(‘Improved status quo’)?• What appeal rights should exist?• Key protections for consumers and small participants.

Development of self governance framework led by industry participants

Harmonisation not necessary pre-requisite

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Code administrators + consumer/small participant consultation

• KEY ISSUES:– Quality of analysis- modification reports difficult to

understand / deficiencies in analysis

– Accountability of code administrators and panels – cost and quality of service (e.g mod reports, work group process)

– Independence – increasing TOs in electricity

– Engagement of new entrants /small participants/consumers• Opaque/complex modification reports• Difficulties engaging at workgroup level• Insufficient direct consumer participation

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Changing the roles and responsibilities of administrators?

Code administrators role – secretariat function

Report the analysis carried out by modification groups

Should role be enhanced to improve analysis?

1. Critical Friend – challenging reasoning and assessments

2. Active secretariat – responsibility for the assessment process

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Central systems management

• Should code administrator also have responsibility for central systems

• Different arrangements apply across different codes (e.g BSC, CUSC and UNC)

• Information and transparency benefits where administrator is also responsible for systems

• But potential for conflict of interest

• Changes to arrangements would require considerable industry involvement and support – alternative solutions?

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Accountability and independence of administrators - Options

• Integration between code administrator and code owner– May not suit increased self-governance approach

• Management unbundling– Operational separation but is there sufficient accountability?

• Independent company and board structure– Arm’s length approach/independence/ enhanced transparency– Optimal approach for UNC and CUSC??

• Independent chairmen of administrators

SUFFICIENTLY DEFINED OBJECTIVES ON PERFORMANCE Should JO, Elexon and NG have clearly set objectives and

measurable performance targets?

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Code Administrators Funding Arrangements

If Board structures created for UNC/CUSC administrators, then what funding arrangements should apply?

•Cost pass through•Limited incentives on cost efficiency

•Service contracts/commercial tenders•Greater control for industry and more accountability

•Price control approaches•Focus on efficiency but at expense of quality of service?

Should funding arrangements be revisited for Elexon?

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Potential light handed changes

• Power to “call in” and “send back” modifications

• Panel members provide reasons for decisions

• Code administrators raise modifications

• Code of practice for administrators

• Performance evaluation – “scorecard approach”

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Small participant, new entrant and consumer representation: issues

• Why small participants and consumers may not engage…

– ‘Resource constrained’ parties

– Changing market landscape affects wider stakeholders

– Inclusiveness and accessibility of code processes

• Who is a small participant?

– Ofgem has proposed definition covering generation, supply and distribution

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Small participant, new entrant and consumer representation initiatives (1)

• Option 1 Status quo ‘plus’– Improved Panel representation with voting rights on main

Panels (BSC/CUSC/UNC)– Working group engagement through ‘awareness raising’

• Option 2 Funded and administered Advocacy Panel– Advocacy Panel administers and distributes to eligible

advocates from central fund paid for by industry

• Option 2a Consumer Focus administers Advocacy Panel– More cost efficient than appointing Panel from scratch– Risk of Consumer Focus bias in scrutinising applications

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Small participant, new entrant and consumer representation initiatives (2)

• Option 3 Ofgem’s Consumer Challenge Group– Enhanced role for existing Consumer Challenge Group

• Option 4 Duty on code administrators to assist small participants, etc– Assist in more inclusive and accessible code processes – Solicit views from small participants/consumer groups

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Next Steps

• Deadline for consultation responses: Friday 27 February.

QUESTIONS / OBSERVATIONS….

code governance review overview of consultation documents mark feather 11 february 2009

Documents