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24 June 2003 - A framework for how UK energy regulator Ofgem will approach price controls for monopoly gas and electricity networks over the coming years was set Tuesday and included provisions for suppliers to pass on the costs of under-funded pension provisions to customers.
The framework addresses the issues involved with pension costs and propose guidelines for how these costs may be treated under forthcoming price controls.
Ofgem Managing Director, Regulation and Financial Affairs, David Gray, said, "Circumstances facing companies and consumers change over time which means that Ofgem must adapt the regulatory framework to continue to meet its primary objective of protecting customers.
"The framework published today will improve the incentives on companies to run their businesses more efficiently and invest for the future, enabling them to operate more cost-effectively and bring extra benefits to customers. It is important for companies to have confidence that their efficiently incurred costs can be recovered and for customers to know they are paying no more than is necessary.
"The rising cost of pensions is a concern for everybody. We are therefore proposing guidelines for the treatment of these costs, which are a normal part of company employment costs. Our proposals do not in any way affect individual employment or pension rights - these are a matter for others, not for us.
"There can be no 'blank cheques', however. Our guidelines aim to set out where costs can be fairly passed on to consumers through price controls and the circumstances where this would not be right." Ofgem said that pension costs represent only one per cent of the cost of energy.
The framework is an important starting point for price control reviews - beginning with the review of electricity distribution companies which starts this year and will be completed in April 2005. The detail will be refined as part of each review.
Price controls set the amount of money monopoly businesses, i.e. the companies that run the pipes and wires, can earn. These companies also have a range of incentives to encourage them to run their businesses more economically and efficiently, ultimately benefiting customers.
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