Ofgem is consulting on a request by distribution network operators (DNOs) to be allowed to set Distribution Use of System (DUoS) charges at shorter notice than usual for the first two charging years under the RIIO ED2 price controls.
In a letter to the regulator in May, the DNOs asked to be relieved from their normal obligation to publish upcoming DUoS charges with 15 months’ notice, warning that they would otherwise be required to set prices for 2023/24 and 2024/25 without knowing Ofgem’s final determinations on spending allowances.
They said this could require large corrections to made in later years once the final determinations become known, creating “significant price volatility”.
In the consultation document, Ofgem explained that the 15-month notice period, which was previously set at just 40 days, was introduced through a modification to the Distribution Connection and Use of System Agreement (DCUSA) in 2015. The regulator said it approved the change after concluding that the benefits of earlier notice of charges for suppliers and large customers outweighed the additional forecasting risks faced by DNOs.
“We are not reopening the overarching decision, but we acknowledge that the start of a new price control period can create significantly more uncertainty than within a price control period, potentially leading to greater charging volatility,” it remarked.
Outlining the timeline as things currently stand, Ofgem said DNOs would be required to publish their DUoS charges for 2023/24 alongside the submission of their final business plans in December 2021.
The regulator said it expects to issue its draft determinations in mid-2022 and its final determinations the following December. DNOs would also be required to publish their DUoS charges for 2024/25 by the end of the month.
Ofgem noted that spending allowances may not be completely certain until September 2023 if the DNOs decide to appeal their final determinations to the Competition and Markets Authority as the other energy networks have already done for theirs.
Furthermore, the regulator explained that if the under or over-recovery of charges exceeds the correction factor – or ‘k’ factor – tolerance limit, set at 6 per cent of allowed revenues, a penal interest rate may be applied and the DNOs may be subjected to a loss of revenue of 1.5 per cent of under or over-recovery.
“Also, in case of significant under-recovery, DNOs could face some short-term cash flow risk, due to timing factors beyond their control,” it added.
The specific changes requested by DNOs would allow them to publish the DUoS charges for 2023/24 with 60 days’ notice or 20 working days after Ofgem publishes its final determinations – whichever is later – and the charges for 2024/25 with at least three months’ notice and no later than 31 December 2023.
Ofgem said issuing these directions would mitigate the risk of under or over-recovery and limit any price volatility from subsequent “true-ups” but reiterated the benefits of the 15-month notice period for suppliers, which previously lacked sufficient notice to be able to reflect DUoS charges in their tariffs: “As a consequence, they had to incorporate higher premium risks in their final tariffs, increasing costs faced by their customers.”
The regulator said that if it did decide to retain the current notice period, it could still mitigate some of the risks faced by DNOs issuing a “letter of comfort” confirming that it would not apply a penalty interest rate for 2023/24.
“Under this option, as DNOs will still have to publish charges for this year by 31 December 2021 based on more uncertain estimates in their final business plans, we would provide reassurance that, if their under or over recovery exceeds the k factor bands and any forecasting errors are due to the difference between expected and final allowed revenue, rather than poor quality estimates in general, they would not be penalised.”
Ofgem also noted a third option of altering the notice periods for 2023/24 and 2024/25 through another DCUSA modification but said there are number of problems with this alternative, including that a code modification is resource and time intensive and may not be approved sufficiently quickly to address the issue at hand.
The regulator asked for feedback on the various options, with 9 August set as the deadline for responses.