Ring fence review: energy networks call for input
Introduction and objectives
Summary
This section outlines what the regulatory ring fence is and its objectives, the purpose of our review and what we are proposing.
Our responsibilities
The transmission and distribution networks which carry gas and electricity to domestic and commercial users are a vital part of our national infrastructure.
We are responsible for making sure that network companies which own and operate these have the financial and operational resources to meet their obligations. This means being able to carry out their regulated activities while restricting the improper use or diversion of those resources which have been funded by consumers.
Regulatory ring fence
Energy network licences contain regulatory ring fence conditions. These ring fence licence conditions are set up to protect network companies from activities of the group they are part of. They also protect regulated assets funded by consumers, reducing the likelihood of those assets being misused.
The term ‘ring fence’ in this context refers to the regulatory ring fence licence conditions. These are an important part of our regulatory approach to managing the risks of a network company getting into financial distress. It protects the regulated asset base and therefore seeks to prevent harm to consumers.
It is an essential component of our financial resilience measures. These measures more broadly aim to make sure that network companies have sufficient financial safeguards. With preventative measures in place, they can avoid or manage the risk of financial distress.
We now need to review these safeguards to make sure they are still effective for network companies.
Objectives
The ring fence licence conditions protect the regulated asset base by:
- minimising the likelihood of financial distress by imposing a range of regulatory requirements to back up existing corporate governance arrangements
- making sure network assets remain under the operational control of the network company where possible
- initiating the special administration process where needed
- limiting the severity and impact of financial distress factors whilst reducing the possibility of chain reactions and other negative financial events
- providing warning signals when signs of financial distress appear
Protecting consumers
Our role under the Gas Act 1986 and the Electricity Act 1989 is to protect the interests of existing and future consumers.
We have a legal duty to regulate a network company’s activities. However, the main responsibility for financial health lies with its management, directors, owners and shareholders.
Our purpose for reviewing the licence conditions is to reduce the risk of financial distress of network companies impacting consumers, rather than to remove the threat of financial failure.
We expect network companies to act responsibly. They should tell us as early as possible about any potential or existing financial distress that could harm consumers.
The earlier we are notified, it means we can provide more response options that may help lessen the potential impact for consumers.
Why we are reviewing the existing licence conditions
Financial and operational issues in the energy retail and regulated water sectors have surfaced recently.
While we have already introduced additional measures, it’s important to review the ring fence licence conditions to identify future areas for improvement.
We want to minimise any impact on network companies to organise and finance themselves efficiently and in a way which provides the best levels of service to their customers.
We expect companies to manage their own financial risks and for shareholders, not consumers, to bear the results of the outcome.
Our proposals
We want to:
- strengthen the ring fence by modifying the licence conditions to improve their effectiveness and clarity
- make sure our regulatory arrangements are fit for purpose
- develop new guidance to accompany the relevant licence conditions
- establish a more robust monitoring regime that promotes compliance with requirements from our guidance