DCC Price Control Consultation: Regulatory Year 2013/14

Publication date
26th November 2014
Closing date
21st January 2015
Policy areas
Status

DCC has an essential role to play in the energy market. Its performance is critical to the success of the smart meter rollout and enabling suppliers to provide a good service to their customers thereafter. The quality of DCC’s service is of paramount importance to the smart metering programme. However it is important that we ensure these services are provided in an economic and efficient manner.

This is the first review of DCC’s price control. DCC’s price control allows it to fund its economic and efficient costs during a period of uncertainty as it gears up to support the smart meter rollout. DCC is a monopoly provider of smart metering data and communications services to suppliers and networks. It is funded by gas and electricity consumers. We closely scrutinise DCC’s costs and revenues to ensure value for money.

This document sets out our proposals for DCC’s costs and revenues. Our proposals reflect a fair but challenging assessment of DCC’s costs, revenues and related activities during its first six months of operation. It also establishes some important principles about how we expect DCC to manage its costs in future.

DCC’s price control

DCC was licensed following a competitive licence application process run by DECC. This concluded in September 2013, when the licence was granted to DCC by the Secretary of State. The application process applied competitive pressure to DCC’s business plan and the costs it predicted. We assess DCC’s costs each year to make sure consumers continue to receive value for money. DCC’s business plan provides an important benchmark to help us judge the efficiency over time.

The price control we run for DCC is different to that of other companies that we regulate. DCC incurs costs and passes these on to users. We review these costs after the end of the regulatory year in which they were incurred – an approach we call ‘ex post’. If DCC’s costs differ materially from those predicted in its business plan, it must explain and justify the differences to show that it incurred the extra costs economically and efficiently. Our decisions can affect money that DCC has already spent and money that it intends to spend.

DECC chose this approach so that DCC would be funded to deliver its objectives in an uncertain period as the regulatory framework develops and DCC prepares to support the smart meter rollout. For other companies, such as the networks, allowances are agreed up front.

As DCC matures and its operating environment becomes more stable, we intend to move closer to the networks approach. This will give DCC more certainty and a stronger focus on efficiency.

DCC has an incentive to achieve key delivery milestones because it put a margin at risk to meeting these milestones as part of the licence competition. In each regulatory year, we will assess whether DCC has met the delivery milestones that were due in that period.

The risks and complexity of DCC’s work may vary over the course of the licence period. DCC can apply to us to adjust the margin values specified in the licence so that its margin will not be reduced by changes to its circumstances or the scope of its work. We will assess whether there are grounds for adjusting the baseline margin values in the licence.

Our approach

Our proposals are based on a detailed cost assessment following the submission of DCC's price control reporting in July 2014.

Our assessment considered the differences in DCC’s actual costs and forecast costs relative to its business plan. Where costs have not been fully justified, we may decide to disallow or, if they are predicted costs, we may decide to adjust the revised projections downwards.

As this is the first review, it is important that we establish some principles that will contain future escalations in costs. We know that the cost position reported by DCC in July does not reflect its current view of costs, given a number of developments in the technical specifications since the licence was awarded. There are likely to be further costs as a result of the revised delivery plan which DCC is currently consulting on.

Our objective is to take an appropriate view of the costs DCC incurred in 2013/14 in accordance with the terms of the licence and in doing so set clear boundaries for the future management of its costs.

Our proposals

DCC and its service providers have had to manage additional complexity and incur further costs during this review period. This is because of new activity that either wasn’t expected or activity that was not sufficiently clear  when DCC put forward its business plan in 2013.

We accept that some costs have had to increase because of this.

Over the licence term, DCC has projected a further £71 million costs (including the cost of their external service providers). This is mainly because of these changes and represents a 3.8% cost variance relative to the business plan.

In most cases DCC has put forward reasonable grounds and evidence for the additional costs it predicts for its new activity. There is also evidence that it has some controls in place to put downward pressure on costs.

However, we do not think DCC has fully explained or justified all of these additional costs or provided sufficient evidence to demonstrate value for money in every case. In particular we think that:

  • The level of detail in DCC’s evidence case must be improved in future years to demonstrate value for money.
  • The shared service charge that DCC pays to Capita for support services should not increase directly in proportion to DCC’s internal costs for new scope activities.
  • There is no direct link between changes in DCC’s cost and its entitlement to additional margin.

We propose to disallow a small amount of costs (£0.1 million) during 2014 where we do not think DCC has made a strong enough case for costs incurred. 

Also, we will not be allowing DCC to fully recover the costs submitted as part of the price control in future years, because they did not provide sufficient justification for these future increases. We propose that £4 million should be removed from future cost projections. We also require DCC establish more processes to demonstrate value for money on certain cost items.

We welcome your views, and will consider them when we take our decision. Please send responses to Tricia Quinn (tricia.quinn@ofgem.gov.uk) by 21 January 2015. We will publish our decision on DCC’s price control in February 2015.