How we are regulated
Our licences are established under the Gas Act 1986 and Electricity Act 1989. They require us to develop, maintain, and operate economic and efficient networks and to facilitate competition in the supply of gas and electricity in Great Britain (GB). They also give us statutory powers, including the right to bury our pipes or cables under public highways and the ability to use compulsory powers to purchase land so we can conduct our business.
Our networks are regulated by Ofgem, which has established price control mechanisms that set the amount of revenue our regulated businesses can earn. Price control regulation is designed to make sure our interests, as a monopoly, are balanced with those of our customers. Ofgem allows us to charge reasonable, but not excessive, prices. This gives us a future level of revenue that is sufficient to meet our statutory duties and licence obligations, and make a reasonable return on our investment.
The price control includes a number of mechanisms designed to help achieve its objectives. These include financial incentives that encourage us to:
efficiently deliver by investment and maintenance the network outputs that customers and stakeholders require, including reliable supplies, new connections and infrastructure capacity;
innovate in order to continuously improve the services we give our customers, stakeholders and communities; and
efficiently balance the transmission networks to support the wholesale markets.
The UK Electricity Transmission (UK ET) and the UK Gas Transmission (UK GT) businesses operate under separate price controls. These comprise two for our UK ET operations, one covering our role as transmission owner (TO) and the other for our role as system operator (SO); two for our UK GT operations, again one as TO and one as SO. While each of the price controls may have differing terms, they are based on a consistent regulatory framework.
In addition to the price controls, there is also a tariff cap price control applied to certain elements of domestic metering and daily meter reading activities carried out by National Grid Metering.
Interconnectors derive their revenues from sales of capacity to users who wish to move power between market areas with different prices. These sales revenues are called congestion revenues because market price differences result from the congestion on the finite interconnector capacity, which limits full price convergence. European legislation governs how congestion revenues may be used and how interconnection capacity is allocated. It requires all interconnection capacity to be allocated to the market through auctions.
There is a range of different regulatory models available for interconnector projects. These involve various levels of regulatory intervention ranging from fully merchant (the project is fully reliant on sales of interconnector capacity) to cap and floor (where sales revenues above the cap are returned to transmission system users and revenues below the floor are topped up by transmission system users, thus reducing the overall project risk).
The cap and floor regime is now the regulated route for interconnector investment in GB, which sits alongside the exemption route (whereby project developers apply for exemptions from aspects of European legislation).
RIIO price controls
Our regulatory framework is called RIIO (revenue = incentives + innovation + outputs) and lasts for eight years. The current period runs through April 2021. The building blocks of the RIIO price control are broadly similar to the historical price controls used in the UK, but with some significant differences in the mechanics of the calculations.