Correspondence from Mr Alan Rowlands, Key Customer Relationship Manager, East Midlands Electricity
I understand that you are taking evidence from the Chairman of the Gas and Electricity Markets Authority, Callum McCarthy, on 8 May in connection with the National Audit Office's Report into network regulation `Pipes and Wires'.
We support the majority of the report's recommendations and will be working with Ofgem to prepare for the next review of distribution price controls which will take effect on 1 April 2005. However I thought it might be helpful if we alerted you to a fundamental concern we have about the potential risks to maintaining adequate investment in networks arising from RPI-X price regulation.
The link between customer quality standards and investment levels is a key issue in determining appropriate investment levels and the point made in the report about determining the link is well made. The report recognises the work done in this area, including Ofgem's Information and Incentives Project, but a fundamental concern is that RPI-X applied over a five year term can deliver short term solutions which have insufficient regard to the longer term needs of the network.
This suggests that the RPI-X form of price regulation needs to be modified to take account of the requirements of the network over a longer period. There are two factors to be noted here:
1. The growing average age of network assets and the consequent increasing risks to future network security, masked by the inherent resilience of networks highlighted by the report; Ofgem and distributors will need to work together to develop a methodology for assessing appropriate investment requirements based on improved methods of assessing the condition of ageing assets to ensure that asset replacement and refurbishment programmes are initiated in good time;
2. The future demand on the network arising not just from demand growth but the increasing levels of `embedded generation'CHP, renewable generationwhich is connected at the distribution level rather than to the national grid, arising out of Government energy policy objectives; the impact on distribution networks was highlighted in the PIU review of energy policy earlier this year. This will lead to new demands and a potentially more active role for distributors in managing power flows on their systems. There needs to be a debate about the network investment needed to ensure these policy options remain open to the Government.
I hope these points are helpful.
Key Customer Relationship Manager
East Midlands Electricity