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Critique of UK Energy Regulator's Benchmarking
The Situation
A European electricity distribution company faced a regulatory review in which the regulator might use "benchmarking" techniques to set new cost allowances.
NERA's Role
A NERA economist described the benchmarking work of UK energy regulator OFGEM, and provided a detailed critique. The economist had previously helped a UK distribution company respond to OFGEM's work and was able to describe not only the technique, but also the regulatory process before and after, including how OFGEM defined costs and how OFGEM adjusted the results when setting final revenues. NERA also identified the omissions and methodological weaknesses in the analysis.
The Result
The company was able to prepare for discussions with the regulator by benchmarking its own performance against the UK data, and assembling data and explanations to support its own level of costs.