Code Governance Review Initial Proposals

1. Code Governance ReviewInitial Proposals Industry Codes and Licensing Ofgem

2. The Governance Review…context Codes have worked well to deliver incremental change, but.. Can the arrangements meet future challenges and deliver reform and benefits to consumers?

3. Process to date • Scope of codes governance review (June 2008) • Initial consultations • Major policy reviews and self governance (Dec 08) • Role of code administrators and small participant, etc. initiatives (Dec 08) • Code objectives and the environment (Nov 08) • Charging methodologies (Sept 08) • Code Administrators Working Group (CAWG) • Report published April 2009 • Initial Proposals consultations • Major policy reviews and self governance (July 09) • Code administrators and small participants etc (July 09) • Code objectives and environment (June 09) • Charging methodologies (coming soon)

4. 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

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

6. Major Policy Reviews and Self Governance DECEMBER 08 PROPOSALS

7. Major Policy Reviews – Respondents’ views • Mixed views from respondents • Some agreed that codes were not effective in delivering major strategic reform • Others preferred existing framework – e.g. wide number of alternatives can be raised, iterative process, Ofgem engagement • Concerns raised regarding level of consultation and accountability of Ofgem for MPR conclusions • Concern that MPR would limit ability of panels to vote freely • Support for self governance proposals

8. Major Policy Reviews – Key observations • MPRs form key part of Initial Proposals • Ofgem lead, single process, coordinated and transparent • Recognition that MPRs give Authority more control • Therefore checks and balances are important • Proposals are necessary and proportionate • Not expected to do more than 1 or 2 a year • Increased alignment with ACER

9. Major Policy Reviews – Checks and balances New powers with full accountability • Set out plans to conduct MPRs in Corporate Strategy • Consult on scope of MPR, issues and options for reform • We expect to carry out IAs • Publication of written conclusions • Consultation on modification proposals following any Ofgem direction • Ofgem will retain open mind throughout process • No restrictions on panel member voting • Proposals intended to promote debate through transparent, consultative framework. • Proposals do not affect rights of appeal to CC or conduct of appeal process

10. Major Policy Reviews – Key changes • Ofgem has listened to concerns raised by respondents • Several key changes proposed to improve MPR process • KEY CHANGES • Time window for industry participants to raise alternative modification proposals • Urgent modification proposal facility • Ability for Authority to change “directions” – e.g. if new information comes to light

11. Major Policy Review – Outcome of MPR December 2008 options • Option 1 – High Level Binding Conclusions • Option 2 – Detailed Binding Conclusions • Option 3 – Ofgem prepares modification proposal and legal text. • Initial Proposals • No options being ruled out – case by case assessment • Preference to use Options 1 or 2, and rely on industry expertise to prepare modification • Backstop power to draft code modifications

12. Filtering and self governance Determining the modification pathway • Filtering decisions taken by industry, subject to Ofgem veto • Modifications can therefore be redirected between self governance and Ofgem decision paths (Paths 2 and 3) • Changes to filtering criteria – “non-trivial” impacts • Self governance • Key elements including the decision maker, voting mechanisms – for industry to develop and submit to Ofgem for approval • Appeal mechanism • Ofgem to act as appeal body • Grounds of appeal – unfairly prejudice party’s interests/does not meet code objectives • Establish “forum” to help resolve disputes/reduce appeals

13. Ofgem consults on scope, issues and options (including an IA), publishes conclusions and directions Relevant licence holder/s develops modification to reflect MPR directions. Alternative mods possible within time window (and urgent mods at any time) PATH 1 – OFGEM POLICY REVIEW Consultation and Panel recommend-ation Ofgem decision Standard CC appeal Ofgem begins Major Policy Review PATH 2 – “ REFORMED STATUS QUO ” Industry filters mod proposal, subject to Ofgem redirection Third party raises mod proposal Standard CC appeal Consultation and Panel recommendation Ofgem decision PATH 3 – SELF GOVERNANCE Consultation and Panel decision Potential standard CC appeal* Appeal to Forum Appeal to Ofgem Ofgem decision Major Policy Reviews and Self Governance Proposed new framework

14. Code administrators + consumer/small participant consultation KEY ISSUESIN DECEMBER DOCUMENT • Role of code administrators • Accountability and independence of code administrators and panels – cost and quality of service • Quality of analysis- modification reports difficult to understand / deficiencies in analysis • Engagement of new entrants /small participants/consumers • Opaque/complex modification reports • Difficulties engaging at workgroup level

15. Changing the roles and responsibilities of administrators? December document options Critical friend or active secretariat? • Respondents’ views • No issues with quality of analysis • More engagement from Ofgem • Active secretariat not independent Initial proposals Requirement on CAs to adopt “critical friend”

16. Critical friend What is the scope of the critical friend function? • Primary and secondary activities • Assess whether analysis on mod proposal is robust and comprehensive? • Are all arguments for and against a proposal discussed? • Are unsubstantiated assertions challenged? • Assess whether a proposal has particular impacts on small participants or consumers • Assist small participants and consumers (eg on drafting mods, clarification of code text, explaining impacts of code modifications) • Code administrators not performing these roles currently

17. Accountability and independence of administrators December document options • Status quo - integration • Management unbundling/operational separation • Independent company and board structure • Independent chairmen of administrators • Improvement objectives/targets/KPIs • Treatment of costs – service contracts/price controls etc • Respondents’ views • Little support for company structures • Some support for service contract approaches

18. Accountability and independence of code administrators Initial proposals • Board structures provide optimal framework for accountability and transparency • Merit in exploring service contract structures through industry work-streams/issues groups • BUT, at this stage NO proposals for structural reform • Ofgem remains open to considering change in this area • More scope for CAs to develop and publish KPIs • Independently appointed chairs – CUSC and UNC • Help to embed critical friend approach • Support self governance framework • Aligns CUSC and UNC with BSC

19. Other potential improvements December document options • 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”

20. Other potential improvements Respondents’ views • Little support for “send back” power, some support for “call in” – more engagement from Ofgem • Limited support for CA ability to raise mod proposals • Support for publication of panels reasons for decisions • Support for voluntary code of practice • Support for performance benchmarking

21. Other potential improvements Initial Proposals • “Call in” – enable Ofgem to issue directions on: • scope of analysis that needs to be undertaken on mod before it is submitted to Authority • timetabling of modification • “Send back” – address deficient analysis or where further work is required • Require panels to provide reasons for recommendations explained by reference to code objectives. • Performance scorecard reviews of code administrators • Voluntary Code of practice – develop through CAWG • Ability of panels to raise proposals on administration issues

22. Small participant, new entrant and consumer representation initiatives December options • Status quo ‘plus’ – voting rights on CUSC/UNC/BSC • Advocacy panel • Increased role for Ofgem consumer challenge group • Duty on code administrators to assist small participants/consumer representatives Respondents views • Difficulties/barriers for small participants • Some support for obligation on CAs • But little support for advocacy panel • Support for extending consumer rights across codes

23. Small participant, new entrant and consumer representation initiatives Initial proposals • Ofgem remains concerned about small participant/consumer engagement • Duty on CAs to assist small participants and consumer representatives • No proposals for dedicated voting seats for small participants • BUT Consumer Focus voting rights should be extended to UNC

24. Small participant, new entrant and consumer representation initiatives What is captured by a duty on CAs? • Contacting small participant/consumer reps on issues that may impact them • Assisting frame and develop proposals • Ensuring viewpoints are articulated and debated at workgroup and panel meetings • Ensuring views are reflected in workgroup and modification reports • Management of meetings, web forums, improved websites • A reasonable endeavours duty? • Definition of small participant

25. Next Steps • Responses due Friday 18 September • August consultation on licence drafting • Reconvene CAWG to develop Code of Practice • Publish Final proposals early 2010.