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Thursday 12 August, 1999


Draft Price Proposals

12 August 1999

Ofgem announces draft price proposals for electricity distribution

Ofgem today published its draft price proposals for the 14 regional
electricity distribution businesses of the Public Electricity Suppliers (PESs)
in Great Britain. The proposals, which are due to be finalised around the end
of November, will affect electricity prices for five years from April 2000.

Ofgem proposes a reduction in distribution prices for 2000/01 averaging 25 to
30 per cent and a further annual reduction of 3 per cent below the rate of
inflation until 2004/05. This includes a reallocation of costs, accounting for
9 per cent of next year's cuts, out of the PESs' distribution businesses. This
reallocation transfers costs to the supply businesses where they will be
increasingly subject to competition. But the remaining 16 to 21 per cent will
contribute to a reduction in customer bills next year.

Distribution charges make up just under one third of the typical domestic
bill. The effect of today's proposals on an average domestic bill is complex
but the substantial reductions in distribution charges proposed should have
the effect of reducing domestic bills by an average of around 5 per cent
(about £15) next year. These figures vary from region to region.

Today's proposals are in addition to other initiatives Ofgem is taking to
reduce electricity prices, including the reform of the electricity trading
arrangements, and the reviews of the PESs' supply businesses and the Scottish
transmission businesses, which are also due to be completed around the end of

The proposals published today include stronger incentives on companies to
maintain and improve the quality of supply, and add further incentives to
encourage energy efficiency and for companies to meet customer needs better. 

Callum McCarthy, Director General of Electricity Supply, said: 

'I regard these proposals as tough, fair and realistic.Today's proposals offer
benefits and opportunities for customers, companies and investors.

'For electricity customers, distribution costs account for some 30 per cent of
the final domestic bill. These proposals will reduce that component by 18 per
cent on average or 5 per cent of the final price -- equivalent  to a reduction
 next year of  about £15 on a typical bill. Setting X at 3 should mean that
this component not only comes down, but stays down.

'There should be further price benefits to customers from the proposals on
pool reform announced by Ofgem last week, which are designed to place strong
downward pressure on the wholesale price of electricity, which accounts for
about half the average domestic bill.

'At the same time, the additional measures on quality of supply will mean that
customers should see further improvements in quality of service over and above
those which they have seen over the last five years.

'For the companies, we are providing strong incentives for all of them to
improve efficiency and service. These incentives take today's performance as
their starting point but give a better prospect of out-performance to those
who are currently efficient. We are also giving greater clarity to companies
in terms of future incentives - something which we will build on in the
ongoing work programme to improve information and incentives.

'We are offering providers of capital a return which is appropriate for the
risk characteristics of these distribution businesses. Distribution is not,
and should not be, a 'high risk, high return' business. I am confident that
what we propose will enable the companies to meet their licence obligations
and to attract new capital.'  
Notes to editors
The average domestic electricity bill is around £250  (about £262 including
VAT.) It is made up as follows:
  Generation costs                                   49 per cent
  Transmission costs (National Grid)                 5 per cent
  Distribution costs                                 32 per cent
  Supply costs and margin                            13 per cent
  Fossil fuel levy                                   1 per cent

The proposals for the individual PESs are as follows:
              Proposed         Impact on P0 of   Proposed         price impact
              reduction in P0  proposed           reduction in P0  in 2000/01
              including        reallocation of    excluding
              reallocation of  costs (mainly from reallocation of
              costs (%)        distribution to    costs (%)
                               supply (%) 
Eastern       28-33              10                18-23            £10-13
East Midlands 28-33               9                19-24            £13-17
London        30-35              17                13-18            £9-13
Manweb        23-28              10                13-18            £11-15
Midlands      26-31               5                21-26            £14-17
Northern      26-31               8                18-23            £14-18
Norweb        30-35               9                21-26            £16-20
SEEBOARD      37-42              15                22-27            £14-17
Southern      21-26               3                18-23            £12-16
Swalec        29-34               7                22-27            £23-28
SWEB          21-26               5                16-21            £14-18
Yorkshire     24-29               9                15-20            £11-14
Scottish Power12-17               8                4-9              £3-8
Hydro-Electric15-20               7                8-13             £6-10
AVERAGE       25-30               9                16-21            £12-16

Copies of the document 'Review of Public Electricity Suppliers 1998-2000. 
Distribution Price Control Review: Draft Proposals' are available on the Ofgas
website   Paper copies of the document are available  from
Ofgem, 130 Wilton Road, London SW1V 1LP from 07:30 on  Thursday 12 August. 
From Friday 13 August please phone (0116) 277 2617.

Media Enquiries 

Chris Webb               0171 932 1608
Joanna Kail              0121 456 6234
Andy Whateley            0171 932 1668
Out of hours             0374 728971


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