The Government Actuary’s Department (GAD) has undertaken an independent review of the methodology used in a report by Ofgem, the Office of Gas and Electricity Markets.
In ‘Ofgem - Specified Street Works Costs Reopener assessment (PDF, 782KB)’, GAD specialists provided a quality assurance review of the methodology the regulator planned to use when assessing funding claims from utility companies.
Street works costs
Ofgem was assessing submissions in the Specified Street Works Costs (SSWC) reopener. This allows utility companies to apply for expenditure allowances to cover the costs associated with undertaking street works. The SSWC funding requests are based on expenditure that utility companies incur or expect to incur when they carry out road works such as removing, repairing and replacing cables.
In the event, Ofgem allowed £45 million of funding requests by electricity distribution network companies to invest in street works projects. It refused around £68 million on street works projects which it considered were not justified, or poor value for money.
Road works utilities pipes
Methods and methodology
As part of our quality assurance work into the methodology used, Ofgem agreed with our 5 recommendations which included:
- retaining one source of data for benchmark calculations
- using a weighted average to calculate benchmarked average unit costs
- splitting out component parts of costs
In assessing this methodology, the report’s author Nick Clitheroe said: “GAD’s review focused on the calculations and method that Ofgem used when working out the level of funding requests.
“We considered permit fee costs, administrative costs and permit condition costs. We also examined the material provided as part of the consultation with the focus on the calculations and method.”