Ofgem proposals for National Grid system operator charges

Ofgem consultation (57 pages, PDF) on a proposed price control for electricity system operation charges in Great Britain in 2007/2008.

The proposal is a one-year risk-sharing formula similar to the one rejected by National Grid last year. A review of that structure is to be undertaken ahead of proposals for arrangements from April 2008.

Ofgem proposes to disregard National Grid's estimates of the rents that it may have to pay to generators with local market power in order to resolve transmission constraints, stating instead that:

2.52. ... if a gas plant appeared to deviate markedly from operating patterns that might reasonably be expected given prevailing market prices and/or appeared to offer materially different prices to [National Grid] in constrained periods relative to unconstrained periods, then this might be evidence of abuse of a dominant position under the Competition Act 1998. OFT guidance on the application of the Competition Act in the energy sector explains that Ofgem may assess potential abuses of dominance in temporal markets and that, in this respect, it would consider the effects of any deviations from competitive price levels even for relatively short durations.

It seems that Ofgem considers that charging for local scarcity would be an exploitative abuse if it is not constrained by competition. The document does not provide further information on the doctrine of exploitative abuse relied on by Ofgem to disregard concerns about the potential costs of local market power to National Grid.

The document includes the statutory notice for the proposed licence modification to give effect to Ofgem's proposals. The proposed algebra includes a formula that specifies that an amount calculated as 75 per cent of actual capital expenditure plus 25 per cent of projected capital expenditure "shall be added to the [system operator] regulatory asset base" (the document does not say when this addition takes place or whether notional financing costs will be included). This arrangement seems intended to displace Ofgem's usual rule of rolling forward the regulatory capital value using actual expenditure minus efficiency adjustments.

Responses by Tuesday 27 March 2007.

For further information or advice please contact Franck Latrémolière.

Filed under Article 82, Electricity, Ofgem, Price controls.

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