Price control of distribution networks

Turvey, R (2002) Price control of distribution networks. Working Paper. London Business School Regulation Initiative Working Paper Series.

Abstract

In its last Distribution Price Control document fixing allowed revenues for 20002005, Ofgem stated that its primary objectives were to strengthen the incentives on companies to increase efficiency and reduce costs, so that prices to customers can be lowered, while recognising that sufficient revenue must be raised to maintain an appropriate quality of supply, to fice required new investment and to allow an appropriate return to capitial providers. It went onto admit that a system had not yet been devised which weighted quality of supply againist cost; and which permitted capital and operating expenditure to be treated in such a way that overall cost efficieny could be judged without reference to the individual cost components. It hoped to improve matters by further work which was then promised and some of which has since been carried out under the title of the Information and Incentives Project. Recently, in a documents describing how it intends to go about the next Distribution Price Control, Ofgem has explicitly recognised the importance of most of the issues raised in this paper. What this paper does is, first, to describe the present system introduced by the last Distribution Price Control, and then, in the second part, to examine some of these imperfections, discussing possible improvments.