Paper prepared by Reckon LLP on the potential use of longer-term price controls in the regulation of Great Britain's gas and electricity networks (23 pages, PDF).

The paper was published as part of Ofgem's consultation on its emerging thinking from the RPI-X@20 review. Reckon is providing consultancy support to the review.

Ofgem's current price controls for energy networks have been set for five year periods. The paper identifies that a commitment to longer-term price controls would give network companies a clear financial stake in controlling their costs over a longer time horizon. This is likely to change the way that the companies plan their activities, anticipate customer needs and innovate. This, in turn, could help the companies to reduce and restrain their costs over the longer term and thereby improve value for money for consumers.

Longer-term price controls may also bring a number of drawbacks, such as a less adaptable regulatory regime and more uncertainty when price controls are set. The paper identifies options for "partial" longer-term price controls which might tackle the drawbacks, whilst still providing a longer-term commitment to the revenues that network companies are allowed to collect under their price controls.

Reckon LLP report (109 pages, PDF) of a study for DG Taxation and Customs Union of the European Commission on the VAT gap in 25 countries of the European Union.

The report:

• Sets out a method to estimate the VAT gap, defined as the difference between accrued VAT receipts and the theoretical net VAT liability for the economy as a whole which is estimated by identifying from national accounts data the categories of expenditure that give rise to irrecoverable VAT and combining these with appropriate VAT rates.

• Presents estimates of the VAT gap for each of the Member States in the EU-25, other than Cyprus, in the period 2000-2006.

• Reviews estimates of the VAT gap of Member States that have been published by the domestic national tax agency or statistics office.

Consultation (several PDF files and spreadsheet models) by the Energy Networks Association on behalf of the seven companies operating the 14 regional electricity distribution networks in Great Britain on preliminary proposals for a new common distribution charging methodology (CDCM) for users connected at the lower voltages of the network. Responses by Friday 10 July 2009.

Ofgem has also published a notice (13 pages, PDF) of changes made to the licences of these companies, which require them to present proposals for a common methodology by 1 September 2009.

Reckon LLP is assisting the Energy Networks Association and the electricity distribution companies with this work.

Reckon LLP report (136 pages, PDF), commissioned by the Cave Review and the Walker Review. The report:

• considers how theoretical new forms of competition may affect current price structures in the water industry;
• identifies what might then be done to preserve features of current price structures, if desired; and
• examines how the establishment of new forms of competition may affect the opportunity to introduce certain new types of tariffs which may enable water and sewerage charges to achieve policy purposes better.

The report identifies relevant features of current charging arrangements for water and sewerage services, and considers how these relate to public policy objectives. The report draws particular attention to the following:

• charges based on the rateable values of customers’ properties;
• water companies setting the same charges across the whole region they supply, regardless of any cost differences between locations;
• the WaterSure scheme, which provides capped water bills for qualifying households who have water meters; and
• the costs of late payment and bad debt being spread across all customers.

The report was published alongside the Cave review final report (144 pages, PDF). The final report to the Walker review is due later this year.

Ofgem consultation (36 pages, PDF) on various methods for setting interim tariffs for the use of the regional electricity distribution networks by embedded network operators. Reckon helped five of the seven distribution companies with the development of their proposals.

Responses by Thursday 21 May 2009.

Revised Ofgem proposals (48 pages, PDF) for future changes to the governance of the methods used to set the structure of electricity distribution charges in Great Britain. Ofgem proposes a licence obligation for the regional distribution network operators to continue developing a common charging method for HV and LV customers, to be implemented from April 2010, and a separate licence obligation requiring each operator to choose between a "LRIC" and a "FCP" method to apply at EHV levels from April 2011.

The method proposed by ENW does not appear to get any mention. According to Ofgem (which prohibited ENW's proposals in November 2008):

We have decided to restrict the DNOs choice at EHV level to either LRIC or FCP firstly because to date these are the only two EHV methodologies which we have had the opportunity fully assess, and secondly because we consider that having more than two methodologies will dilute the benefits of commonality and governance arrangements at EHV level.

The common charging method appears intended to apply to all HV and LV users, including embedded networks (IDNOs).

Reckon currently provides support to the regional distribution network operators on the development of a common charging method and model at HV and LV.

Reckon LLP report for Ofwat on the future scope for operating cost and capital cost efficiency in the England and Wales water and sewerage industry (190 pages, PDF). This work was commissioned as part of the 2009 price control review.

The report includes analysis of historical changes in:

• the operating expenditure of the regulated water and sewerage companies in England and Wales;
• measures of unit costs for other industries within the UK economy, based on data from the EU KLEMS productivity dataset;
• the cost base submissions that companies have made to Ofwat; and
• output price indices for the construction industry and for parts of the manufacturing industry.

The report also contains a qualitative bottom-up analysis of the sources of productivity growth affecting water and sewerage capital expenditure, based on input from Jacobs Engineering UK Ltd.

The report provides forecasts of the growth in water and sewerage industry operating expenditure and unit capital expenditure over the price control period from 2010 to 2015.

Ofwat plans to take account of the report, among other evidence, to inform the efficiency assumptions used to make its draft and final determinations in July and November this year.

The report builds on previous work that Reckon has carried out on the use of industry-level cost and productivity analysis as part of price control reviews for utilities.

Responses (14 PDF files) to Ofgem's consultation on SP Energy Networks' G3 proposals for the determination of electricity distribution use of system charges.

This includes a Reckon LLP response (22 pages, PDF), which argues that Ofgem is not in a position to make a reasoned decision that the proposal would not better achieve the relevant objectives. If so, Ofgem has no power under the relevant licence conditions to prohibit the proposal.

Several of the other responses decline to address the issues raised, referring instead to Ofgem's consultation to scrap the current process. For example, British Gas wishes that SP Energy Networks would withdraw its proposal, and RWEnpower finds it “inconceivable that Scottish Power could adopt a new methodology to be replaced rapidly by a methodology common across all DNOs”.

Update, later on Thursday: number of responses updated from 13 to 14 — a response from David Tolley and Furong Li was added to the list.

Reckon LLP report (81 pages, PDF) on productivity and unit cost trends in some industries in the Netherlands.

The report was commissioned and published by NMa Energiekamer, the gas and electricity regulatory authority in the Netherlands, as part of its work to set price controls for GTS, the operator of the Dutch gas transmission network.

For more information in Dutch, see the NMa proposals (70 pages in Dutch, PDF) and other documents linked from the press notice in Dutch.

Reckon LLP paper (8 pages, PDF) and presentation (8 slides, PDF) on the risks of exploitative abuse that might arise from different methods for setting the structure of electricity distribution use of system charges. This expands on the points raised in Reckon's review of the G3 forward cost pricing proposals.

Franck Latrémolière presented this work at the Distribution Charging Methodologies Forum (DCMF) held at Hoylake on 19 June 2008.

Reckon LLP report (16 pages, PDF) to the G3 group of electricity distribution network operators in Great Britain (comprising E.ON Central Networks, ScottishPower EnergyNetworks and SSE Power Distribution) on the structure of network access charges.

The paper considers the principles underpinning the "forward cost pricing" method proposed by the G3 companies to determine the structure of use of system charges to the EHV elements of their distribution networks, and compares it with the "long run incremental cost" approach adopted by WPD.

The main conclusions are:

• The G3 method provides an improvement over the current charging method in terms of aligning incentives for customers, and it is a possible base from which to develop better methods in the future.
• Both the WPD method and the G3 method may not fully meet Ofgem's objectives, and we cannot reach any view on whether the imperfections of the WPD method are more or less significant than those of the G3 method. Neither method addresses the risk of inefficient construction of private networks for loads that are locally supplied by distributed generation.
• The WPD method creates a risk of non-compliance with the Article 82 competition law prohibition on excessive pricing. Regulation does not protect distribution companies from such claims, and the G3 companies may legitimately take the view that these risks prevent them from putting forward a method similar to WPD's as an option for the structure of charges on their networks.

September 2007 response (24 pages, 10.9M scanned PDF) by Summerleaze AnDigestion to the Government's May 2007 consultation on the banding of the renewables obligation scheme. The response was published by the Government in January 2008 and includes a paper prepared by Reckon LLP on the competition assessment of the proposed grandfathering rules for biomass technologies other than co-firing.

Reckon LLP report (36 pages, PDF) for Ofgem providing an updated analysis of productivity trends in various UK sectors. This was commissioned for Ofgem's updated proposals on the gas distribution price controls from 2008. The report includes a critique of a proposal put forward by the companies to base estimates of the rate of change of operating expenditure needs on an analysis of consumer price movements, instead of assumptions about input price and productivity trends.

The BBC Trust has started the process to apply a Public Value Test (PVT) to the BBC Executive's proposals for a new high definition (HD) television channel. The channel would be mixed-genre, drawing from content across the BBC's other channels. It would be available free-to-view. The intention is to make the HD channel available on digital satellite, digital cable and digital terrestrial television.

The BBC Trust has published a number of documents, including:

• a description of the proposed service (PDF, 9 pages)

• the BBC Management's PVT application (PDF, 82 pages)

• a preliminary market impact assessment (PDF, 45 pages)

The preliminary market impact assessment was prepared for BBC Management by Reckon LLP and Spectrum Strategy Consultants.

There is a consultation period for representations on the public value assessment and market impact assessment, which runs until Thursday 21 June 2007. The Trust plans to publish provisional conclusions on Tuesday 25 September 2007, and to make a final decision no later than Wednesday 21 November 2007.

Ofcom will produce a full market impact assessment by Tuesday 18 September 2007. As part of its market impact assessment, Ofcom has published a stakeholder questionnaire (7 pages, PDF); responses are due by Wednesday 19 June 2007.

Reckon report for UKWIR (available to non-members for £600 from the UKWIR Bookshop) on methods for relative efficiency modelling, expenditure trends studies, and the combination and reconciliation of these analyses in order to estimate the expenditure requirements to be incorporated in price controls for water and sewerage companies in England and Wales. The report reviews the approach in the Ofwat price control review 2004 and identifies possible improvements or developments for the Ofwat price control review 2009.

Brief paper (2 pages, PDF) commenting on the potential impact of reverse charging for VAT.

The paper is motivated by recent efforts by the UK, Germany and Austria to introduce reverse charging as a means to combat VAT fraud.

Reverse charging is aimed at reducing the opportunities for Missing Trader Intra-Community (MTIC) fraud. But it also affects the compliance burden to businesses.

The paper argues that while the UK's proposed changes are likely to eliminate carousel fraud within certain product categories, the effect on acquisition fraud and on black market fraud is uncertain.

Reckon report (369 pages, 3.1M PDF) for the Consultative Commission on Industrial Change (CCMI) of the European Economic and Social Committee on company relocations. The report supports a CCMI information report (10 pages, Microsoft Word) reviewing the empirical evidence on relocation in the European Union and in each of its member states, across 19 industrial sectors.

Brief paper (2 pages in Portuguese, PDF) commenting on the decision (14 pages in Portuguese, PDF) by the Portuguese Economics and Innovation Minister to allow the merger of the motorway operators Brisa and Auto-Estrada do Oeste (AEO) on the grounds of national interest. The two operators had appealed to the Minister after the Autoridade da Concorrência (AdC) had prohibited the merger on competition grounds (AdC press release, 4 pages in Portuguese, PDF). The Minister reversed AdC's decision as it found that the merger will stimulate Brisa's R&D efforts and improve Brisa's ability to compete internationally; both effects were regarded as being in the interest of the national economy and considered to outweigh any undesirable competition effects the merger might have.

In the paper, Pedro Fernandes argues that there are gaps in the reasoning put forward by the Minister. No evidence is put forward to back the link between the size of Brisa's operations within Portugal and its ability to innovate or its ability to compete internationally. Nor does the decision put forward an analysis to test whether allowing the merger is proportionate to the objective of improving Brisa's performance. The paper also notes some shortcomings in the decision's analysis of the effects of the merger on competition.

Second submission (9 pages, PDF) by the Driving Up Standards campaign to the Competition Commission in connection with the merger inquiry into the proposed award of the Greater Western passenger rail franchise to FirstGroup plc. The submission includes a Reckon paper which identifies ways in which existing overlaps between the Greater Western franchise and First's bus services may have given rise to some lessening of competition, which needs to be taken into account given the appropriate counterfactual for the inquiry. The paper also discusses risks that competition in local bus markets may be impeded by the merger even in the presence of inter-operator ticketing arrangements, and the possibility that the merger may lead to the loss of competitive constraints on off-peak rail fares as well as on bus services. The Competition Commission's provisional findings are now expected in "late January-early February" 2006.

Working paper (6 pages, PDF) on exploitative excessive pricing abuses under Article 82. This paper was prepared by Pedro Fernandes for a seminar given on Monday 9 January 2006 at the Autoridade da Concorrência, Lisbon. A copy of the presentation (30 slides in Portuguese, PDF) is also available.

Reckon paper (9 pages, PDF) submitted by the Driving Up Standards campaign to the Competition Commission in connection with the merger inquiry into the proposed award of the Greater Western passenger rail franchise to FirstGroup plc. The paper argues that First's current operation of the Great Western and ex-Thames Trains parts of the Greater Western franchise should not be reflected in the counterfactual used by the Commission in its inquiry.

Brief paper (5 pages, PDF) prepared by Reckon LLP as part of the review of electricity transmission charges in Great Britain from 2007. The paper suggests a possible way of addressing uncertainty in investment requirements. The proposed scheme is designed to minimise the costs borne by consumers as a result of the need to reinforce transmission networks to connect new generators, particularly renewables. It seeks to limit the increased financial risks borne by companies, and the resulting financeability costs to consumers, whilst maintained the strong and consistent incentives for efficiency arising from an RPI-X price control coupled with a rolling pass through mechanism.

The Government's Green Paper on the renewal of the BBC's Royal Charter proposed reforms to the governance of the BBC.

In "State aid law and the BBC Charter review: contestable funding by the back door" (4 pages, PDF), Reckon partner Nicholas Francis examines the proposals in the light of the European Union's rules on State aid, and finds a conflict.

Despite the high degree of subsidiarity that is recognised in the application of State aid law to public service broadcasting, the halfway house reflected in the proposals is unlikely to be compatible with State aid law.

This could set the BBC on a collision course towards a contestable funding model — an outcome completely at odds with the Government's stated policy.

Unfair competition is a Reckon LLP guide to complaining about anti-competitive conduct or regulations in the UK.

It highlights the strengths of the existing competition laws and some potential weaknesses of the enforcement regime, and describes Reckon's attempt at addressing these weaknesses through a new affordable complaint handling service.

The guide is available online at http://www.reckon.co.uk/unfair or as a downloadable file (2 pages, PDF).

Reckoning "When assumptions go unquestioned" (24 pages, PDF) reviews the underlying assumptions of the standard DEA models, teasing out the implications and constraints that each of these bring. It is argued that the good practice of justifying the assumptions made does not appear to be adhered to in DEA studies applied to the UK water and electricity distribution sectors. Were they to be probed, some of the assumptions would not be likely to be met. At best, this suggests that a more thoughtful application of DEA is necessary; at worst, that the application of DEA in these sectors is fundamentally misplaced and should not be pursued.

The DCMS has published Professor Patrick Barwise's independent review of the BBC's digital TV services, together with Ofcom's assessment of the market impact of the BBC's new digital TV and radio services. Reckon LLP assisted Ofcom with its contribution to this review.

Reckoning "On Genzyme" (13 pages, PDF) discusses aspects of the Competition Appeal Tribunal's judgment in the Genzyme case (March 2004). Genzyme, a pharmaceuticals manufacturer, was found to have infringed Chapter II of the Competition Act by conducting a margin squeeze against a downstream supplier of homecare services. The paper explains that the likely competitive effects of Genzyme's conduct do not tally with the theory of abuse implied in the Tribunal's decision. It then argues that, because of this, the Tribunal missed an important opportunity to clarify a problematic area of the law on abuse of dominance.

This Reckon article argues that the Competition Commission's draft guidelines on water mergers risk focusing too much on the value of comparators to Ofwat

The paper (4 pages, PDF) argues that there are other effects which ought to be considered, including the potential lessening of competition in markets for corporate control; the risk that an unduly restrictive approach to merger control could itself impede competition in markets for corporate control; and the value of comparative information to the industry (and ultimately to consumers) over and above its value to Ofwat.

This Reckon article considers the scope for challenging Apple's apparent decision not to license its digital rights management (DRM) technology FairPlay to competitors of the iTunes Music Store.

Drawing on the ECJ's guidance in the recent IMS case, we consider (4 pages, PDF) the conditions under which EC competition law (Article 82) may require Apple to license FairPlay to other retailers of music downloads to enable head-to-head competition in the supply of downloadable music content to iPod users.

This article argues that Ofcom's cross-promotion rules for commercial TV broadcasters, inherited from the Independent Television Commission (ITC), should now be reviewed.

The cross-promotion regulations seek to achieve a balance between the information benefits of cross-promotion, the concern that promotions may irritate and confuse viewers, and the risk that excessive cross-promotion damages competition.

The paper (2 pages, PDF) proposes a change in the nature of the regulations to enhance both competition and information provision.