Two electricity distribution network operators request relief from the effects of over-recovery

Ofgem is consulting (5 pages, PDF) on requests by two electricity distribution network operators for relief from the consequences of over-recovery of allowed revenues. The paper does not say which network operators have made the requests. The operators reportedly argue that data adjustments called "gross volume corrections" (GVC) distorted losses reporting and hence led to involuntary over-recovery. Responses by Tuesday 31 August 2010.

The losses mechanism is described in Ofgem's DPCR5 Financial Methodologies document (59 pages, PDF): see page 21. It sets the allowed distribution losses based upon historical losses performance, with each distribution network being set an allowed loss percentage (ALP) which is equal to the average over the five years of DPCR4. Losses are calculated as the difference between the number of units entering the network and the number of units distributed. From this target, operators are penalised or rewarded depending upon whether distribution losses in each regulatory year are above or below the target.

The two distribution network operators requesting relief from the consequences of over-recovery argue that the amount of distributed units for 2009-2010, and in all likelihood 2010-2011, were depressed by the application of gross volume corrections and hence the companies are set to have higher losses than their allowance. Gross volume corrections allow for adjustments to correct for historical measurement errors. These adjustments are reported to be atypically high due to:

This will lead to a lower allowed revenue and therefore an over-recovery which will lead to a reduction in next year's system use tariffs. This reduction will be increased due to the penalty interest rates that apply to over-recovery if recovered revenue exceeds 103 per cent of allowed revenue.

Ofgem's preliminary position is to provide the relief from the penalty interest rate provided that the companies can satisfactorily prove that the abnormally high losses are due to data adjustments unrelated to their performance and that these losses lead to recovery being over 103 per cent of allowed revenue. Ofgem is also minded to allow the operators not to reduce their system use charges in 2010 unless there is another regulatory reason to do so. They assert that they believe that it is not in the interests of customers to reduce the system of use tariffs, since:

Rich's view: The assertion that consumers will not benefit due to supply contract cycles is not entirely convincing; in a competitive retail market some suppliers could be expected to pass on the savings to attract new customers. Similarly, if a supplier had not passed on the reduction in system use tariffs in the previous year there does not seem to be a compelling reason to suspect that they will now raise their prices once the charges return to their normal levels. Some level of competition would arguably prevent such behaviour.

For further information or advice please contact Richard May.

Filed under Electricity, Ofgem.

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