DCC Review Phase 2: Determination of Allowed Revenue

What this is about

Ofgem is consulting on the architecture of the cost control framework that will sit inside the Data Communications Company's Successor Licence from 2027 onwards. The current Smart Meter Communication Licence, granted to Capita's DCC subsidiary in 2013 on a twelve-plus-two-year term, expires in 2027. Phase 1 of the review (closed August 2023) set out the regulatory principles. Phase 2 turns those principles into mechanism design across three workstreams: governance, cost control, and the future role of DCC. This document is the cost control workstream.

The substance is the move from the current internal cost review process, in which DCC submits annual business plans and Ofgem assesses them ex-post against actual spend, to an ex-ante framework where allowed revenue is set in advance for a defined regulatory period. The shift matters because DCC's costs flow through to consumer bills via supplier charges. Under the current licence, DCC has earned a guaranteed margin on Internal Costs (its own operating spend plus baseline margin) with limited downside if delivery slips, and External Costs (CSPs, DSPs and other contractors) flow through as pass-through with thin commercial discipline. Cumulative DCC charges to industry have run substantially ahead of the 2013 impact assessment. The consultation is the design moment at which Ofgem decides whether DCC2 enters a RIIO-style ex-ante regime, how aggressive the efficiency challenge is, and where the boundary sits between costs DCC carries risk on and costs it passes through.

Ofgem is also flagging a transitional move: tightening business planning discipline under the current licence before the Successor Licence goes live, so the 2027 handover does not start from a standing position.

Options on the table

The published consultation does not present a clean menu of mutually exclusive options. It works through design choices for an ex-ante framework, with Ofgem signalling preferences and inviting challenge. The substantive choices being worked through:

Full ex-ante allowed revenue with totex-style envelope

The lead proposal. DCC is given a fixed revenue envelope for the regulatory period, covering both Internal Costs and as much of the External Cost base as can credibly be brought inside the cap. Underspend is shared with consumers via a totex incentive mechanism; overspend is shared too, with a meaningful equity-side stake. This is the closest analogue to RIIO-2 network price controls. Winners: consumers, who get genuine cost discipline for the first time since 2013, and new entrants in any future DCC service procurement, because contestable activity is exposed to competitive tension rather than buried in pass-through. Losers: DCC and its parent, whose guaranteed-margin economics on Internal Costs disappear, and incumbent CSP/DSP contractors who currently sit behind a pass-through wall.

Hybrid ex-ante with ring-fenced pass-through for contracted External Costs

A softer landing. Internal Costs and any Externally-procured spend where DCC has genuine commercial leverage sit inside an ex-ante cap. The legacy CSP and DSP contracts, plus any costs Ofgem accepts DCC cannot meaningfully influence, remain pass-through but with a strengthened scrutiny regime: ex-ante baselines, justified variances, and reopeners only on defined triggers. Winners: DCC, which keeps the risk profile tolerable through the contract re-let cycle; existing CSP/DSP incumbents, who retain their commercial position into the early years of DCC2. Losers: the discipline argument, because the largest spend category stays partially insulated. This is the most likely landing zone given Phase 2 implementation timelines.

Ex-ante baseline with extensive reopeners and uncertainty mechanisms

A nominally ex-ante framework with a wide menu of uncertainty mechanisms, volume drivers, and reopeners that allow allowed revenue to adjust in-period for defined cost categories (new service obligations, regulatory change, traffic volume changes, security mandates). Winners: DCC, which gets ex-ante optics without ex-ante risk; the smart metering programme, because new mandates do not have to fight for headroom inside a fixed cap. Losers: the credibility of the cap. Every reopener is a hole in the discipline. The risk is a framework that looks like RIIO on the cover and behaves like the current arrangements in practice.

Transitional tightening of the current licence ahead of 2027

Separate from the Successor Licence design, Ofgem proposes to bring ex-ante business planning disciplines into the existing licence in the run-up to 2027. DCC would submit a forward business plan against which subsequent spend is assessed, rather than the current largely backward-looking process. Winners: continuity of discipline across the licence transition, and Ofgem itself, which arrives at the 2027 cutover with better baseline data. Losers: DCC, which faces stricter scrutiny on costs that under the current licence are largely recoverable as efficiently incurred.

Customer Challenge Group as a structural feature

Ofgem signals an intent to stand up a Customer Challenge Group as a standing input into DCC business planning, modelled on the CCGs that have shaped network price controls. Within the consultation this is presented as an enabling mechanism rather than an alternative to ex-ante control. The choice for respondents is on remit, resourcing, and how binding the group's challenge should be: advisory, consultative, or with formal status in Ofgem's determinations. Winners under a stronger remit: DCC's user community, particularly smaller suppliers and DNOs who currently have weak voice in DCC commercial decisions. Losers: DCC management discretion over scope and contracting choices.

Treatment of margin on Internal Costs

A specific point flagged in the consultation: how baseline margin on DCC's own activities is calibrated under the Successor Licence. Options range from retaining a guaranteed margin in line with the current arrangements, through performance-linked margin that flexes with delivery against targets, to a cost-of-capital-based return that puts DCC on a footing closer to a regulated network. The direction of travel Ofgem signals is performance linkage, and the live question is calibration: how much of the margin is at risk, and against what outputs.

Questions being asked

The published consultation web page does not enumerate the consultation questions in the abstract, and the source text above does not reproduce them. The questions sit in the main consultation PDF (Process for Determination of Allowed Revenue, 1.04MB) and the supporting workshop materials. Based on the design choices Ofgem is working through, the questions group as follows. Respondents should treat the themes below as the structure of the response; the specific question numbers are in the PDF.

Scope of the ex-ante cap

Which cost categories sit inside the allowed revenue envelope, and which remain pass-through. Where DCC's contractual position with CSPs and DSPs creates costs that respondents accept cannot be brought inside an ex-ante cap, and where ex-ante discipline is workable with contract renegotiation or re-procurement. This is the consequential question. The wider the ex-ante envelope, the more financial discipline DCC2 carries from day one.

Incentive mechanisms

How underspend and overspend are shared between DCC and consumers, what the equity-side stake should be, and how performance against output targets translates into adjustments to allowed revenue or margin. Questions on whether incentives should be symmetric, what the cap and collar should be, and how to weight cost efficiency against service quality and security.

Uncertainty mechanisms and reopeners

Which cost categories warrant volume drivers or pass-through within the cap, what triggers should reopen the determination in-period, and how to design these mechanisms so they accommodate genuine uncertainty without hollowing out the ex-ante framework. The drafting test is whether the list is short enough to preserve discipline and broad enough to be financeable.

Margin and cost of capital

How DCC's baseline margin is set, whether it is linked to performance, and whether the Successor Licence shifts towards a cost-of-capital-based return rather than a margin on internal cost. If cost of capital, how it is calibrated for an asset-light service company that does not look like a network.

Customer Challenge Group

Remit, resourcing, membership, and the formal weight given to CCG input in Ofgem determinations. Whether the CCG sees draft business plans and engages with DCC throughout the period or only at set-piece moments.

Length of the regulatory period

How long the first DCC2 cost control should run. A shorter first period reduces forecast risk and lets Ofgem recalibrate as the new framework beds in; a longer first period gives DCC and contractors investment certainty. The default question is whether the first period is shorter than steady-state and steady-state is longer.

Transitional arrangements under the current licence

Whether ex-ante business planning disciplines should be introduced under the existing Smart Meter Communication Licence before 2027, and the practical design of that transition. The substantive question is how much of the DCC2 framework can be tested in the run-up to handover.

Treatment of pass-through CSP and DSP costs

How to strengthen scrutiny of External Costs that remain pass-through, including ex-ante baselining, evidenced variances, and the case for re-procurement at contract re-let. The deeper question is whether the next CSP and DSP contracts should be designed to fit inside the ex-ante envelope rather than around it.

Service performance and security obligations

How service quality and cyber security outputs are specified, measured, and linked to financial incentives within the cost control framework. Where the boundary sits between mandatory obligations and incentivised performance.

How to respond

Closing date: 7 February 2025. (Ofgem's own "How to respond" text gives a 6 February submission date by email; the published Closed date is 7 February. Use 6 February as the working deadline.)

Submission: email to dccregulation@ofgem.gov.uk. PDF, Word or Excel accepted.

Documents: the main consultation document is "DCC Review: Phase 2 - Process for Determination of Allowed Revenue (consultation)" (PDF, 1.04MB), plus a workshop invitation document.

Stakeholder workshop: 21 January 2025 online event, focused on the proposed Customer Challenge Group. Registration by email to the same address.

Status: closed with decision. Conclusions document published as "DCC Review Phase 2: Determination of Allowed Revenue - conclusions" (the May 2025 Phase 2 conclusions). Respondents on the record include Alt HAN Co, Centrica, DCC, E.On, EDF, Energy UK, ENWL, Octopus, OVO, Scottish Power, the SEC Panel, and Utilita.