1. Experience you can trust. Regulatory frameworks A UK perspective John Scott KEMA: Director, Network innovation formerly OFGEM: Technical Director and National Grid Company: Director of Engineering

2. High Level comments  An over-arching goal is ‘best value for customers’  Looking to both the short and the long term  With stable regulatory processes that – encourage new investment, – reward companies for good decision making, and – minimise regulatory costs and risks.  Not an easy set of requirements and new approaches must be wise to the risks and alert to the demanding changes now appearing in the sector.

3. National Grid experience  National Grid’s UK network has similarities to NZ  It is heavily loaded with a growing investment need, both for asset renewal and to meet new demands  Transmission should plan to renew assets ahead of failure; this is more critical than at distribution level – the importance of good asset management and planning is clear, but plans are inevitably imperfect – the objective of the planner is to minimise the errors and maximise responsiveness and deliverability – changes will arise from both known unknowns eg weather, and unknown unknowns eg breakdowns.

4. Ofgem experience  Ofgem focuses on company outputs, not inputs  It strives to ensure companies take the decisions – this recognises that the companies have the best information for decision making – it avoids risks being passed off to the regulator – and encourages companies to be proactive.  However, Ofgem are realists! – Mechanisms are in place to oversee performance – The focus is ex-post using specialist consultants – Claw-back and course-correction are available

5. Recent UK observations  Very large projects are now arising that require greater scrutiny and consultation  Years of ‘incremental investment’ are now giving way to new scale challenges, needing fresh thinking  Incentives have been introduced to encourage innovation (company choices but with transparency)  The regulator needs to transfer responsibilities wherever possible to companies to free up its own resources to address the big emerging challenges. Low carbon economy / Electric Vehicles / Variable power sources / Off-shore regimes / Micro-generation / Home Automation / Smart Metering / Demand Management / Climate Mitigation ….

6. In Summary  Companies should be required to be: – Flexible and responsive – Take responsibility, manage risks, be accountable – Find new solutions for new challenges  Regulators in turn should: – Encourage good planning in the companies – Expect deviations from the plan, but – Probe the out-turns and apply any re-alignments  Prescriptive rules always result in unintended consequences: focus on outputs not inputs.

7. Specifics for consideration  UK experience shows more to be gained than lost for customers by empowering the companies and focusing on outputs rather than inputs:  Encourage accurate capex planning and re- optimisation where justifiable changes arise  Set thresholds high to place accountabilities squarely with the company Board  Probe outputs, require transparency, challenge inefficiency – and set an expectation for innovation in all areas of the business.

8. In a sentence Without company empowerment there will be poor response to new challenges and unintended consequences will abound; aligning decision making to the companies is the only strategy that can bring real benefit to customers in times of rising investment and change – but implemented of course with regulatory eyes open.... and hold the Board members to account.

9. Thank you for your attention. john.scott@kema.com