![]() Both regulators compare costs across different companies in order to estimate an efficient allowance that would protect customers from overcharging, while allowing the relevant operator to invest sufficiently. Likewise, Ofwat’s 2019 price review process set revenue for 2020-2025.Ĭost comparisons are a core feature of these price reviews. Ofgem’s latest round of price reviews controlled revenue between 20 for gas transmission and distribution and for electricity transmission, and between 20 for electricity distribution. For instance, Ofgem must ensure that operators’ revenues are set “at a level which covers the companies’ costs and allows them to earn a reasonable return subject to them delivering value for consumers, behaving efficiently and achieving their targets as set by Ofgem.” īoth regulators control prices in fixed five-year periods. Both Ofgem and Ofwat must also consider incentives to invest and maintain the quality of the network. Those regulated charges represent only a proportion of consumers’ energy bills, but they are still substantial: in 2020, network charges accounted for around a quarter of the energy bill for a typical household. In energy, network operators charge retail energy suppliers, with charges ultimately passed on to final consumers. Given the absence of direct competition within a region, Ofgem and Ofwat control the prices that operators of these monopolies can charge their customers. Current structure of regional monopolies subject to price regulation by Ofwat ![]() Unlike in the energy sector, water retail services for households are also regional monopolies.įigure 1. Similarly, in England and Wales there are 16 regional monopolies that provide wholesale water services and retail services to households, of which 11 also provide wholesale wastewater services. Three of those companies also own the gas and electricity transmission licences. In Great Britain, six companies own the operators of the 14 electricity distribution networks and four companies own the operators of the eight regional gas distribution networks. An overview of price controlsīoth energy networks and water services are regional monopolies. Parallels between regulating water services and energy networksĪlthough they have differences, there are important similarities between how mergers could affect how Ofgem regulates energy networks and how Ofwat regulates water companies. The parallels shed light on how the special merger regime for energy may differ from the typical process for mergers in unregulated industries, and on the role economic analysis plays. We have advised the water services regulator, Ofwat, on the regime’s application, including during the 2021 merger between Pennon and Bristol Water. ![]() Since 2000, eight mergers between water companies have been assessed under that regime. In this article, we explore the potential significance of the electricity and gas merger legislation, drawing on our experience of a similar special merger regime in the water sector. Since privatisation – in 1986 for gas networks and 1990 for electricity – there have been many mergers among energy network companies, such that 10 companies now distribute and transmit gas and electricity in Great Britain. The regime aims to protect the ability of the energy regulator, Ofgem, to compare network companies’ costs and performance, which is an essential feature of its price control regime, RIIO (which stands for Revenues = Incentives + Innovation + Outputs). This legislation proposes a special merger regime tailored for these companies. ![]() The UK government recently introduced legislation to reform the merger assessment process for electricity and gas network companies. In this article, Joe Perkins and Orjan Sandewall share lessons for the energy sector by drawing on their experience of a similar special merger regime in the water sector. The reform aims to protect the ability of the energy regulator, Ofgem, to set effective price controls by comparing network companies’ costs and performance. The UK government has introduced legislation to reform merger assessment for electricity and gas network companies.
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