IQI Reviewed: Comments on Frontier Economics' Paper
21 October 2008
By Graham Shuttleworth
In August 2008, on behalf of CE Electric, Frontier Economics (FE) wrote a paper that considered the strengths and weaknesses of Ofgem's Information Quality Incentive (IQI) for capital expenditure projections, and offered suggestions for its future development. In response, EDF Energy asked NERA Director Graham Shuttleworth to review the FE paper. FE had used two years of experience under the IQI to criticize the behavior of certain distribution network operators, claiming that the industry had underspent its capex allowance because of an inadequacy in the IQI, and suggesting various ex post penalties to "tilt" rewards. However, Mr. Shuttleworth argues that FE's criticisms cannot be supported by the evidence cited by the FE paper. He contends that two years' experience provides no basis for judging whether there is over- or underspending relative to a five-year capex allowance, and that the IQI does not provide any reward for over-forecasting or underspending. Mr. Shuttleworth notes that there are a number of other possible explanations for the observed underspend, but because FE had not considered them, FE's analysis is partial and its conclusions are incorrect.
