DCC exceeds annual cost forecast by £68 million

Forecast for full license term grows to £2.68 billion

The Data Communications Company (DCC) spent £210.8 million connecting smart meters with suppliers over 2016/17, according to an annual price control review by Ofgem

The figure marks a £68.2 million – or 48 per cent – increase over the forecast from last year’s review. The forecast for total costs over the license term has swelled by 27 per cent – or £566.7 million – to £2,681 million.

Ofgem says the rise resulted from the move to a two-stage release for live services, driven by the need to update meter specifications on security grounds, and programmes to expand smart metering capabilities such as SMETS1 enrolment.

DCC’s regulatory submission for 2016/17 was “largely clearly laid out and evidenced, providing reasonable justification for the majority of costs incurred,” the document states.

However, the review also raises concerns over resource efficiency, namely an increase in the number of people employed by the DCC, as well as mistakes in the management of external contracts.

“There is evidence that DCC has incurred additional costs at consumers’ expense on activity that that should be delivered by their fundamental service providers,” it adds.

Furthermore, Ofgem says the level of the remuneration for some contracts was not “economic and efficient” and that DCC failed to provide sufficient justification for costs relating to external services and service management.

It has therefore deemed £1.751 million of DCC’s total costs for 2016/17 to be unacceptable and plans to refuse a £71.295 million increase in the forecast for the rest of the license term.

DCC applied for a £13.955 million boost to its baseline margin for 2016/17 to 2021/21. The company claimed the extra revenues were warranted due to the increased complexity of the programme, shifts in the timeline for delivery and higher than anticipated resource requirements.

Ofgem has instead proposed an increase of just £5.134 million for 2016/17 to 2018/19. This was partly on the basis that “any ramp up in operations activity is evidence of DCC underestimating the operational requirements at bid stage, rather than directly as a result of activity relating to new requirements”.  The figure was also reduced to reflect Ofgem’s decision on unacceptable costs.

The baseline margin has additionally been reduced by £4.702 million in response to the poor performance of the DCC against its final milestones for delivery. Ofgem says DCC “largely failed” to meet milestones 9 and 10 relating to first and second release of live services.

The regulator has conversely increased DCC’s allowed revenues by £3.261 million through an incentive mechanism called external contract gain share. This was due to the refinancing of the set-up costs of a fundamental service provider.

Ofgem has invited stakeholders to submit their views on the preliminary decision by 21 December 2018. A final decision will be published in February 2016.

The DCC license spans 12 years from 2013/14 to 2025/26.