Updated transmission price control proposals

Ofgem consultation (106 pages, PDF) on updated proposals for the Transmission price control from 2007.

There is a separate appendices document (46 pages, PDF) covering revenue drivers, incentives and NGET's RCV calculations. Ofgem claims to "have completed the work on the form of mechanisms to adjust the revenue allowances automatically, either up or down, in response to the actual needs of users of the system". Consultation on the licence modifications to give effect to these revenue driver proposals will start in mid October 2006.

On capital expenditure efficiency incentives, Ofgem has decided not to implement a sliding scale or information quality incentive similar to that used for electricity distribution. This follows from a decision “to set an incentive rate of 25 per cent for each of the four transmission licensees”, so that the incentive rate cannot be used as a variable in the incentive compatible information quality incentive scheme. Ofgem explains the difference of treatment as follows:

7.4. The sliding scale approach adopted in DPCR4, in effect, tailored the incentive rate to each company's approach to forecasting its capex requirements and its attitude to the risk of variations relative to allowance. A company could, in effect, choose a lower incentive rate in return for a less challenging allowance. In part the DPCR4 approach relied on information provided from a comparative assessment of the various DNO groups. This is not possible to the same extent for transmission, because of the smaller number of companies and the substantial differences between them. We therefore propose to set the same incentive rate for all four companies.

A consultancy report (93 pages, 5.8M PDF) provides evidence on the cost of capital, including a review of statistical evidence on CAPM and the Fama-French multifactor model. The report claims that using CAPM using a historic value of beta (well below one) would be consistent with that evidence, and that any uplift that might be attributable to other factors is less than the effect of allowing a beta of 1. Ofgem does not update its initial proposals for the cost of capital.

Responses by Tuesday 24 October 2006.

Update, 16-18 October 2006: Ofgem has released an additional appendix (2 pages, PDF) and further consultants reports.

For further information or advice please contact Franck Latrémolière.

Filed under Electricity, Gas, Ofgem, Price controls.

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