Gas distribution price controls: Ofgem's initial proposals
Ofgem's fifth consultation (117 pages, PDF, with 84 pages, PDF and 56 pages, PDF of appendices) on price controls for gas distribution networks in Great Britain for the period 2008-2013.
Developments since the March 2007 paper include:
- The decision on whether to implement a rolling incentive scheme for operating expenditure is postponed to September 2007.
- The system of information quality incentives and variable incentive rates for capital expenditure over- and under-spends is confirmed. This is a menu scheme similar to the one used for electricity distribution in 2004, but with a lower basic uplift: a company agreeing with the regulatory assessment and delivering it is to receive a 2.5 per cent bonus instead of 4.5 per cent for electricity distribution.
- Specific figures are proposed for the assumed effects of input price and productivity growth. Ofgem chooses to express an assumed difference between gas distribution and comparator industries as a "comparative competition effect" rather than a "privatisation effect", and uses a figure created as part of the impact assessment of the sales of the networks by National Grid as a quantification of this effect. Different assumptions are made for different companies based on econometric models. Further work is promised on input price trends.
- The assumed cost of capital is based on 62.5 per cent gearing, a 3.55 per cent cost of debt and a 7 per cent cost of equity (all relative to RPI). A Centrica proposal to index the allowed cost of debt on market rates of interest is briefly discussed, but not adopted for the initial proposals: instead Ofgem's allowed cost of debt includes an allowance for the risk of rises in interest rates, albeit a lower one than in previous price control reviews.
Responses by Friday 13 July 2007.
For further information or advice please contact Franck Latrémolière.
Filed under Gas, Ofgem, Price controls.
