Response to Ofgem consultation regarding the energy price cap operating cost allowance review

Response to Ofgem consultation regarding the energy price cap operating cost allowance review 281 KB

We believe that Ofgem should not make the operating costs allowance more generous without clear evidence. 

When considering benchmarking, lower-quartile is the appropriate approach to ensuring only efficiently incurred costs are allowed. This is well-established regulatory practice, across both the original price cap and network regulation, and is consistent with a focus on improving cost efficiency.

We believe there is a risk that the costs Ofgem uses for benchmarking include some exceptional items, such as system migration costs, which will require adjusting for. Ofgem also needs to ensure that ongoing productivity is taken into account to avoid the allowance becoming more generous over time.

We agree that it is important to recognise that this review is being undertaken within the context of a number of wider interrelated reviews of pricing reforms. At a high-level level, we believe it is important to separate out the impact of the wider context on this review into 2 distinct areas: 

• Areas considered within this review that would be better resolved elsewhere. In particular, the balance between standing charges and unit rates should be left to the ongoing standing charge review. 

• Areas where decisions made elsewhere may affect considerations within this review. For example, the introduction of targeted bill support would be expected to improve consumer price protection. This would affect the assessment of the potential trade-off between price protection and enabling competition, when considering how stringent benchmarking of costs should be.