Select Committee on Trade and Industry Annxes to the Report

Follow-up Questions


It would be helpful to have the latest estimate of the cost of electricity liberalisation up to the present, including an indication of whether these costs are within the allowable costs described in the Government Response to the Tenth Report 1997-98


What has been the outcome of the review of the allowable costs of the PESs which the Response to the Tenth Report said would be reviewed this year?

  The 1997-98 estimates of the allowable costs of electricity liberalisation given to the Committee are set out in the table attached at Annex 1. The Committee used these figures to derive a total cost (over five years) of £726 million. The Pool set up costs subsequently increased from £59 million to £84 million. Only half of this increase was an allowable cost which could be recovered from suppliers (an increase of £2.5 million a year over five years). This was more than compensated for by a reduction in Pool annual operating costs from £20 million to £10 million, of which only half (£5 million) is recoverable from suppliers.

  The Committee noted that PESs continued to dispute the level of allowable costs claiming that costs would actually be higher. As a result the Committee recommended that the DGES use the review of price restraints in 2000 as an opportunity to reassess the PESs' allowable costs. As recommended by the Committee, Ofgem reviewed the PESs' allowable costs for set up. Having considered the PESs' arguments, Ofgem considered it appropriate to extend the life of the set-up cost allowances for a further two years, to 2004-05, adding an extra £136 million to the PES allowances.

  The revised PES set-up cost allowances, together with the revised Pool set up allowable costs, increase the total costs by £148.5 million. This is offset to some extent by the reduction in Pool annual operating costs. Because the revised PES allowable set up costs have been extended for a further two years the annual allowable costs reduced slightly from £155 million to £152 million. (Revised costs are shown in Annex 2). The extent to which companies will be able to recover supply business costs from customers will depend to a great extent on the development of competition.

  These costs need to be set against the benefits to customers. 6.5 million customers had changed their electricity supplier by June 2000. These customers have together seen their bills fall by some £294 million since the start of competition. Customers who have not switched are also paying lower prices overall by some £450 million (largely as a result of Ofgem's reduction in price caps).

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