The role of efficiency estimates in regulatory price reviews: Ofgem's approach to benchmarking electricity networks

Electricity regulators around the world make use of efficiency analysis (or benchmarking) to produce estimates of the likely amount of cost reduction which regulated electric utilities can achieve. This short paper examines the use of such efficiency estimates by the UK electricity regulator (Ofgem) within electricity distribution and transmission price reviews. It highlights the place of efficiency analysis within the calculation of X factors. We suggest a number of problems with the current approach and make suggestions for the future development of X factor setting.