Letter notifying interested parties of the publication of Western Power Distributions’ Competition Notices
Correspondence and other
- Publication date
- Industry sector
- Distribution Network
Dear stakeholder
The application
On 31 October 2013 Western Power Distribution (WPD) submitted to us a document containing Competition Notices in respect of four licensed distribution networks – Western Power Distribution (East Midlands) plc, Western Power Distribution (West Midlands) plc, Western Power Distribution (South Wales) plc and Western Power Distribution (South Wales) plc. The Competition Notices serve as applications by WPD to have price regulation lifted on competitive connection activities in the Relevant Market Segment: Distributed Generation HV and EHV work, as set out in Charge Restriction Condition 12 (CRC 12) of the Electricity Distribution Licence.1
Having received these applications, we must make separate decisions whether or not to lift price regulation on competitive connection activities, in respect of this Relevant Market Segment in each licensee area.
Background
We consider that, where it is possible, competition can deliver benefits to customers that are difficult to achieve through regulation, such as innovation in the type of services on offer and a focus from providers on meeting customer needs.
In Distribution Price Control Review 5 (DPCR5) we introduced a new approach to facilitating competition in connections to electricity distribution networks.2 Since 1 October 2010, Distribution Network Operators (DNOs) have been allowed to earn a regulated margin (fixed at 4 per cent above cost)3 on contestable connection activities in nine Relevant Market Segments where we consider competition to be viable. The purpose of the headroom created by this regulated margin is to attract new market entrants.
In addition, our DPCR5 proposals also made provision for DNOs to submit a Competition Notice to have price regulation lifted on competitive connection activities in the Relevant Market Segments. This opportunity to earn an unregulated margin was designed to encourage a change of mindset by DNOs with regard to competition and stimulate the removal of potential barriers to competition. We also set out that any DNO that failed to demonstrate competition, or put forward a case by December 2013, would be reviewed by us and could subsequently be referred to the Competition Commission.4
WPD’s previous Competition Notices
WPD previously, on 26 October 2012, submitted Competition Notices to us on behalf of its four licensees for all nine of the Relevant Market Segments. We made a determination on those Competition Notices on 25 February 2013.5 We considered that the following RMSs had satisfied both the Legal Requirements Test and the Competition Test in each of WPD’s four DSAs –
(i) Unmetered connections Local Authority (LA) work; and
(ii) Unmetered connections Private Finance Initiative (PFI) work.
Further, we considered that the following RMSs had satisfied both the Legal Requirements and the Competition Test in the Western Power Distribution (East Midlands) plc and Western Power Distribution (West Midlands) plc DSAs –
(i) Metered demand High Voltage (HV) and Extra High Voltage (EHV) work;
(ii) Metered demand EHV work and above.
In all other RMSs we determined that only the legal requirements test had been met.
Next steps – deciding whether to lift price regulation
The process for assessing a Competition Notice submitted by a DNO is set out in CRC 12 and the DPCR5 Final Proposals document.
Ultimately, in assessing a Competition Notice we will be looking at whether we can rely on real competition or the threat of competition to protect consumer interests rather than regulating prices charged by the DNO. We will conduct a separate analysis of the Relevant Market Segment for each of WPD’s licensed areas and we will only lift price regulation where we consider that effective competition exists.6
Before we make a decision on WPD’s Competition Notices we will consult with parties that we believe have an interest in the Notice. We intend to publish a consultation on WPD’s Competition Notice at the end of November 2013. Our consultation will highlight the particular issues on which we would welcome respondents’ views and evidence. In the meantime, we are publishing a copy of WPD’s Competition Notice on our website. This is intended to allow interested parties the opportunity to consider WPD’s application ahead of our formal consultation.
Interested parties should make their comments known to us through the formal consultation process in due course. However, if you have any questions about this letter or any other aspects of the Competition Notice process please contact connections@ofgem.gov.uk.
Yours sincerely
James Veaney
Head of Distribution Policy
- There are 9 RMSs: metered demand high voltage (HV) work; metered demand HV/Extra High Voltage (EHV) work; metered demand EHV and above work; distributed generation LV work; unmetered local authority (LA) work; and unmetered other work.
- Please refer to DPCR5 Final Proposals - Incentives and Obligations for further information: The detail of the obligations on DNOs are set out in CRC 12 of their licences.
- Previously under DNO approved connection charging methodologies their connection charges were limited to recovery of reasonable costs.
- Details of the Competition Notices made by the DNOs and our decisions on them can be found on our website.
- The decision can be found here
- Price regulation will be lifted where DNOs demonstrate that they have passed both a Legal Requirements Test and a Competition Test, both set out in CRC 12 and the DPCR5 Final Proposals document.