1. Code Governance Review Overview of consultation documents Mark Feather 11 February 2009

2. 2 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

3. 3 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

4. 4 Focus of today…. Major Policy Reviews and Self Governance Role of Code Administrators Small participant/consumer initiatives

5. 5 Major Policy Reviews and Self Governance Proposed new framework

6. 6 Ofgem back-casting exercise Look back at all Ofgem mod decisions in 12 mths to Oct 2008 Covered 122 decisions across all codes 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.

7. 7 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.

8. 8 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.

9. 9 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.

10. 10 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.

11. 11 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

12. 12 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.

13. 13 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.

14. 14 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

15. 15 Implementing the outcome of major policy reviews

16. 16 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

17. 17 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

18. 18 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

19. 19 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?

20. 20 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?

21. 21 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?

22. 22 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”

23. 23 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

24. 24 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

25. 25 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

26. 26 Next Steps Deadline for consultation responses: Friday 27 February. QUESTIONS / OBSERVATIONS….