Ofgem's treatment of distribution merger efficiencies

Ofgem letter (2 pages, PDF) issued “in the light of recent speculation on mergers in the electricity industry” and purporting to clarify the treatment of merger-related and other efficiency gains within the distribution price control regime.

The letter reaffirms Ofgem's £32 million "merger tax" policy.

It also refers to the "existing incentive mechanisms as set out in Appendix 1 to the November 2004 final price control proposals, including the rolling capex incentive and opex incentives. However, it leaves the door open to a more stringent claw-back of unexpected efficiency gains (whether merger-related or not) by stating that

no assurance has been given as to the methodology that will be used to set cost allowances at future price controls


For avoidance of doubt [sic], there should be no expectation that cost allowances or other targets relating to the period after 2010 will provide for retention of cost savings or other improvements achieved before 2010.

For further information or advice please contact Franck Latrémolière.

Filed under Electricity, Ofgem, Price controls.

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