Effect of regulation on distribution companies investment policies in the UK

The electricity industry in England and Wales draws distinction between energy retail (´supply´) and the transportation of electricity to end customers (´distribution´). Due to their monopoly situation, the distribution network operators (DNOs) are required to operate their wires network within a cost based price cap regulation. This paper discusses the basis upon which the allowable revenue is presently determined The paper points out that the network designers are under pressure to accept a minimum investment rather than minimum life cycle costs. Examples based on the comparison of the costs incurred and the revenues obtained under the current regulatory framework when purchasing an efficient rather than a standard transformer, and also when purchasing 11 kV cables with optimal cross section, demonstrate the present lack of incentives to achieve efficient level of losses.