Electricity distribution price control review - Second consultation

Publication date
18th December 2003
Policy area

The purpose of this paper is twofold: to set out the range of policy options under consideration on various issues, indicating where appropriate Ofgems views on these options and/or the evidence needed to select between them, with the intention of resolving as many policy issues as possible by March 2004; and to provide an update on work undertaken, a transparent and public record of the review in progress, and details of further work planned for the coming months.

Generally, the review remains on track to deliver proposals in line with the timetable originally set out in detail in March 2003 and updated periodically since then. The timetable remains challenging, particularly as the work required to produce consistent and comparable financial data from the companies submissions is more extensive than hoped.

Key points covered in this paper include: initial proposals for the incentive on distribution companies to connect distributed generation, meeting Ofgems commitment to set out the incentive framework by the end of 2003. The proposals provide substantial downside protection to distribution companies, with 70-80 percent pass-through, with an incentive rate of 2-3.5/kW/year, set at a level which will generally allow companies to earn a premium return based on the companies own submissions of costs.

Further evidence is required to enable Ofgem to decide whether to take forward the mechanisms for Registered Power Zones and an Innovation Funding Incentive; a range of suggested developments in quality of supply regulation, intended to refocus the framework towards those issues that matter most to consumers, proposing to remove some standards that are no longer needed and to reduce reliance on postevent judgements to assess whether performance was acceptable by developing clearer incentives in advance; detailed discussion of cost trends and efficiency improvements achieved to date at each distribution company, drawing on the companies submissions and the results of visits to each company; discussion of the approach to benchmarking, the treatment of mergers and the roll forward of the Regulatory Asset Value (RAV); and elaboration of the proposed methodology for assessing allowed pensions costs, with options set out prior to decisions on Ofgems intended approach which will be taken in March.

In addition, the paper explains options for resolving issues relating to the structure of the price control and incentives, and sets out further thoughts on separation of metering from the distribution price control and on financial issues such as the cost of capital, and financial ratios. Ofgem welcomes the constructive contribution made to the review so far by a wide range of stakeholders, including all the distribution companies, and hopes that this will continue into 2004. Formal responses to this consultation are invited by 10 February 2004 in addition Ofgem welcomes meetings and discussions with any parties interested in the review, particularly during this consultation period. In particular, Ofgem requests that respondents provide quantitative comments to inform the development of the Regulatory Impact Assessment on incentives relating to distributed generation, the Innovation Funding Incentive and Registered Power Zones.

Response documents