Earlier this year, Elexon had to withdraw its bid to become the Data and Communications Company (DCC) to manage the provision of smart metering services. Despite concerted efforts by Elexon over the previous two years, Ofgem was unable to approve the modification of the balancing and settlement code (BSC) which would have enabled the company to participate in the tendering process.
Ofgem cited concern that a workable and enduring solution could not be found in time for the DCC award process.
Elexon has considerable expertise to offer in relation to managing energy settlement processes. To date, however, industry players have tended to resist changes to Elexon governance because they believed that allowing the organisation to pursue new ventures would detract from their existing responsibilities and they do not wish to fund speculative business ventures.
Attempts to reconcile Elexon’s aspirations with industry concerns have been made more difficult to resolve with the split of responsibilities between the BSCCo board that oversees the Elexon business and the BSC panel that manages the changes to the market rules.
This has led to a difference of views, between a more supportive board and a sceptical panel, whose main remit is to ensure successful management of the existing market arrangements.
The Bill Knight independent review was commissioned by the BSCCo in April to consider how to reconcile the above. The challenge faced by the city lawyer and former Lloyds of London deputy chairman was to consider reforms that might allow Elexon to pursue new business opportunities, while ensuring it remains properly accountable to market participants.
So, does the report achieve this reconciliation and provide a solid basis for the incoming Chair of the BSC Panel to determine Elexon’s future direction?
The Knight report: key recommendations
The Knight report’s central theme is to replace the existing BSC Panel and BSCCo Board by a new single body (referred to as a ‘single board’).
This is a sensible proposal, which will provide the basis for consistent and unified decision-making going forward.
In addition, Knight has applied accepted best practices for company boards, but modified them to reflect the Elexon context where accountability is ultimately to funding parties, rather than the single National Grid shareholder.
He also recommends a development fund and 75% vote amongst funding parties to change the constitution of Elexon. These are sound recommendations.
However, two of Knight’s twenty recommendations are more problematic; namely how modifications and change management procedures should be managed and the membership of the new single board.
He has recommended the delegation of BSC modification business to an appointed sub-committee. This could imply that BSC modification is a less important ‘technical’ matter compared to current BSCCo board business. Yet code modifications can have a significant impact on market participants; indeed panel recommendations can even affect rights of appeal of Ofgem code modification decisions at the Competition Commission.
Knight has also recommended selection of industry board members by a nominations committee rather than through an election by BSC parties.
It is hard to see how this could improve accountability or legitimacy of the new unified board. This direct accountability is particularly important, as those that operate in the electricity market are obliged to become signatories to the BSC and fund its activities. In more conventional companies, shareholders are in principle free to sell their stake if they are not satisfied with those appointed to run the business.
With a few changes it should be possible to design a unified governing body in such a way as to ensure current BSC panel and BSCCo board activities can be combined as a ‘merger of equals’.
Genuine legitimacy could be assured through a single board made up of a majority of industry members; for example comprising the Elexon CEO, the Chair, two independent members and five elected industry members.
A new single board would also manage modification business directly rather than delegate this to a sub-committee. If the current modification procedures were to be streamlined (as suggested in the report) it might even be possible to schedule panel business and other board business in back-to-back meetings on the same day.
Whether there is there is an appetite for this from the industry, DECC or Ofgem is difficult to say, but the report is certainly food for thought for the new Chair of the BSC panel.
Peter Bolitho is an energy and regulation expert at PA Consulting Group. Peter has been a BSC panel member since October 2010