Critique of DTe Benchmarking
2 November 2000
By Graham Shuttleworth and former NERA Senior Consultant Erik Sleutjes
This report critiques DTe decision 00-059, in which DTe sets down the basis for capping the revenues that the distribution business of NuonNet i.o. (NuonNet) is allowed to earn in the years 2001-2003. Having reviewed the relevant material, the authors conclude that the methods used by DTe to set NuonNet's allowed revenue are not reasonable or rational, and are inconsistent in economic terms with certain duties assigned to DTe under the Electricity Act 1998.
DTe is required by Article 41 of the Electricity Act 1998 to cap the revenues of each electricity distribution business by defining a "price cap," i.e., a cap on the average price that each business can charge for its electricity distribution services. The Act requires DTe to adopt a price cap formula commonly described as "cpi-x". A so-called "cpi-x" price cap is adjusted each year in line with (1) the rate of change in the consumer price index (cpi) and (2) the expected rate of change in unit costs (i.e. in efficiency) in the distribution business ("x"). DTe is required under Article 41 of the Electricity Act 1998 to encourage efficient operations. However, the method that DTe has adopted to set the "x-factor" in the "cpi-x" formula is not conducive to efficiency. The value of "x" set by DTe for NuonNet does not provide a reasonable measure of the rate at which NuonNet's costs will change in the future, and so the price cap formula will not provide a reasonable prospect of cost recovery. Because the resulting revenues will not provide a reasonable prospect of cost recovery, investment will be discouraged and consumers will suffer from rising costs or declining quality of service.
