Framework for Assessing the Economic Efficiencies of Long-Run Network Pricing Models

This paper presents a framework for assessing the economic efficiency of different long-run network pricing models. The aim is to provide a quantifiable efficiency measure that will inform regulators, network operators, and network users when an alternative pricing model is contemplated. The efficiency measure is derived from the long-term network development costs that flow from a dynamic interaction between network pricing and planning; that is the response of network users to differing charging models, the consequential network investment, and new financial incentives that follow reinforcement of the network. To illustrate the approach, the framework has been used to assess the relative efficiency of three broad class of distribution pricing models in a study undertaken for the Great Britain (GB)´s regulator for gas and electricity markets in England, Wales, and Scotland-Ofgem. The study contemplated three pricing models that are used in practice. The efficiency assessment in the Ofgem study was conducted on a pseudo distribution reference network. On the assumption that the results from the reference network could be scaled up to the national level, then the assessment suggests that by moving from the present DRM model to the more economic LRIC approach, GB distribution network operators could save in the region of pound200 m over the next 20 years in their network investment costs. This paper draws heavily on the project undertaken for Ofgem, but any views expressed are solely those of the authors.