Ofgem prohibits G3's structure of charges proposals

Ofgem decision (15 pages, PDF) to prohibit SP Energy Networks' G3 proposals for a new method for determining use of system charges on the SP Distribution electricity distribution network. A similar decision (14 pages and 1 blur, PDF) was issued in respect of SP Manweb.

Ofgem considered that it had powers to prohibit on the grounds that some aspects of the proposals were worse than the current arrangements. Specifically, it states that:

We do not consider it appropriate to approve a methodology which includes a generation model which produces counter-intuitive results. We also consider some of the input data to the model to be too subjective to produce cost reflective charges.

The first point is a reference to SP Energy Networks' proposal to use a test-size generator and probability as a way of calculating the expected level of investment required to accommodate lumpy and unknown future generation. Whilst Ofgem abandons the calculations in its consultation paper on this point, it states that it re-ran the analysis with more realistic assumptions and still considered the results to be counter-intuitive. The new analysis is not disclosed in the decision.

The second point is a reference to SP Energy Networks' proposal to use unit cost data reported to Ofgem (instead of internal management projections) as the basis for costings in the HV model.

On the basis of these alleged adverse effects of the proposal, Ofgem apparently concluded that the proposal would not better achieve the relevant objectives, and that it could take account of its wider regulatory duties in reaching a decision. One factor in support of prohibition appears to have been the prospect of implementation in 2010 of an Ofgem-mandated method, and a desire to avoid frequent changes of approach.

Despite this prohibition and the prohibition of SP Energy Networks' IDNO proposals, SP Energy Networks' combined IDNO/G3 proposal is still apparently under consideration and due to be consulted on (according to the last paragraph of the document, page 15).

Comment. I commented on Ofgem's seemingly defective intuition on the test size generator point at paragraphs 84-89 of Reckon's consultation response (22 pages, PDF). Ofgem maintains its reliance on a "counter-intuitive results" claim in the decision. I still fail to understand what Ofgem's reasoning is, or even why the results obtained by Ofgem should cause any surprise at all. And I cannot check the reasonableness of Ofgem's calculations and supposedly corrected assumptions since they are not disclosed. Franck.

For further information or advice please contact Franck Latrémolière.

Filed under Electricity, Ofgem.

Reckon LLP is an economics consultancy with expertise in data analysis, economic regulation and competition law.

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