Ofgem consults on the way forward for Gas Distribution Price Control Review 2

Ofgem is consulting on the procedures for the next Gas Distribution price control (21 pages, PDF) which will start on 1 April 2013. Responses by Thursday 30 September 2010.

This paper sets out Ofgem's proposed process for setting gas distribution prices for Gas Distribution Price Control Review 2 (GDPCR2) following the recent RPI-X@20 (HTML) project's paper. At is stands, the price control will be an eight year period over which companies will be set various outputs within the context of a longer planning horizon of 25 years. Some indicative primary outputs are set out in Annex A of the consultation document.

The letter sets out several issues that are relevant to the price control and Ofgem's current thoughts on them. The issues cover a range of topics including replacement expenditure, environmental issues and financial issues. On of the issues raised is the treatment of environmental issues in the next price control. These relate to reducing greenhouse gas emissions and the introduction of bio-methane into the network. The method of incentivising emission reduction is to be considered by Ofgem, with a possible move to a system similar to the losses mechanism used on the electricity distribution network. This would use actual settlement data rather than the current modelled approach.

Another issue discussed is the treatment of Xoserve in the next price control period. Xoserve provides gas services, such as settlement and switching, some of which are paid for by all of its customers and others by the users of the specific service. As well as considering the general value for money provided by Xoserve to customers, there is also an issue with how Xoserve's role in the rollout of smartmeters will impact on how customers are charged. For example, it will need to be decided whether the cost of upgrading Xoserve's systems in response to the smartmeters be charged to all customers or whether a smaller amount be allocated, perhaps according to other services benefiting from the upgrade.

Financial issues could also form an important part of the next price control review, with many issues arising from the RPI-X@20 review. One financial issue mentioned in this consultation letter is the treatment of replacement expenditure (repex). The current system sees half of the cost of replacement expenditure, which is significant given the replacement of at risk iron mains, treated as operating expenditure and the other half treated as capital expenditure and therefore added to the RAV with a depreciation allowance. Ofgem proposes considering whether a higher percentage of replacement expenditure should be treated as capital expenditure, a development which would have a bearing on companies finances as well as customer bills.

As well as setting out the above issues, Ofgem also provides some details on the proposed steps for enhanced stakeholder engagement and how the move the output based regime will be implemented in practice. These issues are covered in Ofgem's consultation on Transmission Price Control Review 5 (HTML) which shares many common pages with the Gas Distribution Price Control Review 2 consultation document.

For further information or advice please contact Richard May.

Filed under Gas, Ofgem, Price controls.

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