Final Ofgem proposals for transmission price control

Ofgem's final proposals (123 pages, PDF) and appendices (63 pages, PDF) for the Transmission price control from 2007. A significant increase in capital expenditure is implied in price limits, with a "safety net mechanism" whereby price limits are reopened in the event of underspending by more than 20 per cent in any one year. Overspends and smaller underspends in capital expenditure compared to projections adjusted for revenue drivers feed into a symmetric five-year rolling scheme for inclusion into the RCV, subject to ex post efficiency review. Logging up is permitted in respect of BT's expected withdrawal of its circuit-switched leased line service, smaller windfarm connections in Scotland and cable tunnels in England and Wales.

Revenue drivers are provided as a combination of actual costs and a £/MW connected allowance for the Scottish companies, subject to the exclusion of high-cost connections from the main price control (instead the "reasonable profit" licence condition will apply); and on a zonal £/MW connected basis for National Grid Electricity Transmission.

The allowed return on capital is 5.05 per cent plus inflation on a vanilla basis, equivalent to 4.4 per cent "real post-tax", which is in line with gas distribution price controls. Ofgem's press notice (3 pages, PDF) explains the difference with the figure of 4.8 per cent used in the 2004 price control for electricity distribution by reference to "continuing evidence of relatively low interest rates" (rather than differences between transmission and distribution as it had previously argued). SHETL and SP Transmission are to receive an additional notional allowance for equity raising costs.

Ofgem has asked the companies to state whether they are content in principle with the proposals by Monday 8 January 2007. However, draft licence modifications capable of being accepted are not expected until February 2007.

For further information or advice please contact Franck Latrémolière.

Filed under Electricity, Ofgem, Price controls.

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