Price Controls Financial Model (PCFM)

Overview

The Price Control Financial Model (PCFM) for RIIO price controls is the financial model which derives the incremental changes to base revenue (MOD) during the RIIO price control period. It does this by recalculating base revenues based on a limited number of updated variables.

These variables fall into four broad categories: the annual cost of corporate debt, totex components sufficient to apply the totex incentive mechanism, new or amended allowances on uncertainty mechanisms and certain financial adjustments (such as pension variables, tax variables and legacy adjustments).

Caveat: The PCFM does not include details of all the incentives available to the licensee and for this reason does not represent the entire regulatory financial position of the licensee. It does contain the same underlying base revenues calculations as used in Final Proposals, subject only to the formal change control process used post Final Proposals and during the RIIO price control period.

Annual Iteration Process

The AIP is the formal process of the annually updating the variable values in the PCFM and for the calculation of the incremental change (MOD), positive or negative, on base revenues. Making these changes on an annual basis reduces the need to log-up financial adjustments during the price control period and simplifies the implementation of uncertainty mechanisms.

The Annual Iteration Process is formerly carried out on or before the 30 November in a regulatory year and determines the MOD value which adjusts the Base Revenue for the regulatory year commencing on the following 1 April.

Revisions to PCFM variable values are determined under the provisions of relevant licence special conditions and under financial methodologies that are contained within the relevant sector’s Price Control Financial Handbook. The AIP will calculate an incremental effect on the licensee’s base revenues compared to calculations performed during the previous year’s AIP or Final Proposals (in the case of the first AIP). The incremental effect as a result of these calculations is given the term MODt and is either added to or subtracted from the opening base revenue.

Governance of the PCFM and the AIP

Within each sector there are special licence conditions covering:

  • the governance of the PCFM and the Price Control Financial Handbook
  • the AIP for the PCFM
  • specific variable values to be used in the AIP