A perspective on the RIIO formula: Old wine in new bottles

Abstract

The model for setting monopoly prices for network energy industries announced by the British energy regulator in 2010, RIIO – Revenue, Innovation, Incentives and Output – has attracted international interest because of the apparent emphasis on making company income more dependent on their performance and because of the attempt to stimulate innovation in investment plans. In practice, the new method differs little from the prior one, being based on a form of ex-ante rate-of-return methodology with the elements of innovation and incentives having little impact on the income allowed to the companies by the regulatory settlement. The problems with the prior method, which effectively put the regulator in the position of making investment decisions and made it easy for the regulated companies to ‘game’ the system earning much higher profits than the regulator intended them to, remain unacknowledged. The history of regulating British network energy companies has many examples of new methods with theoretical attractions that were not realised in practice; RIIO appears to fall into this category. Regulatory policymakers in other countries should be wary of adopting this methodology and assess it based on actual performance, not promises. • New method, RIIO, introduced in 2013 for setting UK energy network prices. • Like the method it replaced it is primarily an ex ante rate of return methodology. • Initial results show it has resulted in excessive profits for regulated companies and targets that appear to be easily met. • Imbalance in information between the regulated companies and the regulator.