DCC Review Phase 2: Determination of Allowed Revenue - conclusions

What changed

Ofgem has concluded the cost-control workstream of Phase 2 of the DCC Review. The decision, published 9 May 2025, sets out how the Data Communications Company's Allowed Revenue will be determined under the Successor Licence that replaces the current arrangement expiring in September 2027. The headline shift is from the existing pass-through model, where DCC recovers its costs from suppliers largely as incurred, to an *ex-ante* regime where revenue is fixed in advance against an agreed business plan. This is the same direction of travel that network price controls took two decades ago, and it imports the same logic: set the allowance up front, let the licensee bear the consequences of cost variance within defined risk-sharing limits, and use incentives to drive efficiency.

The conclusions cover five areas: the scope and cycle of cost control, how risk and uncertainty are managed within the allowance, the financial incentive package, customer engagement through a Customer Challenge Group, and the implementation arrangements for the first Business Plan. Alongside the decision, Ofgem opened a statutory consultation on interim licence modifications to give legal effect to the *ex-ante* transition and to close out the legacy Baseline Margin and External Contract Gain Share mechanisms. A second consultation covers draft guidance documents for the Customer Challenge Group's terms of reference and the Business Plan submission itself. Both consultations are expected to conclude in summer 2025.

What this means in practice

DCC is the monopoly communications backbone for the smart metering rollout. Every smart meter message between supplier and meter passes through its infrastructure, and its costs are recovered through supplier charges that flow into domestic and non-domestic energy bills. Annual DCC charges have run at over £400m in recent years, and the trajectory under the current pass-through arrangement has been one of repeated overruns against original baselines. The move to *ex-ante* control is an attempt to fix the structural incentive problem in the existing licence: when costs are recovered as incurred, the licensee has no direct exposure to inefficiency, and the consumer pays whatever the project costs.

For DCC, the practical change is that it will now have to submit a Business Plan, defend it against an independent Customer Challenge Group, and live within the resulting allowance. Cost overruns will fall partly on the licensee rather than entirely on suppliers and consumers. The risk and uncertainty mechanisms in the decision are how Ofgem proposes to handle the genuine cost categories that cannot be forecast accurately (mass meter replacements, cyber security incidents, regulatory change), with re-openers and pass-through categories carved out from the fixed allowance.

For suppliers, the change matters because DCC charges are a material and rising line item that they cannot control and cannot pass through transparently to customers under the default tariff cap methodology. An *ex-ante* allowance gives suppliers predictability over the cost base and, in principle, a lower trajectory if the efficiency incentives bite. For consumers, the read-across is to bills: smart metering charges sit inside the standing charge and are recovered from every domestic electricity and gas account.

The wider significance is that Ofgem is now applying the RIIO logic, ex-ante allowance, totex framework, customer engagement, financial incentives, to a sector that has historically operated outside it. The DCC licence has been a hybrid of regulated monopoly and contract-managed procurement. The Successor Licence pulls it firmly into the regulated utility category. That has implications for how DCC is financed (the cost of capital and gearing assumptions will now matter in a way they did not under pass-through), and for the kind of organisation it has to become to operate within an allowance.

What happens next

The immediate steps are the two parallel consultations Ofgem opened on 9 May 2025: the statutory licence modification to enact the *ex-ante* transition, and the guidance consultation on the Customer Challenge Group terms of reference and Business Plan template. Both are expected to conclude over summer 2025. The licence modifications are the legal mechanism that converts the policy conclusions into binding obligations on DCC.

A third Phase 2 policy consultation is due "over the coming weeks" from the 9 May date, covering the future role of DCC, its objectives, and its operating model. That consultation closes out the policy design work for the Successor Licence. After that, attention turns to DCC's first Business Plan submission under the new framework, the Customer Challenge Group's scrutiny of it, and Ofgem's first *ex-ante* determination.

The Successor Licence itself takes effect when the current licence expires in September 2027. That gives roughly two years from the May 2025 conclusions to first determination, which is tight for a price-control-style process. Watch for the Business Plan Guidance to see how prescriptive Ofgem intends to be on cost categorisation, and for the Customer Challenge Group terms of reference to see how much independence the scrutiny body will actually have. Both will determine whether the *ex-ante* regime delivers the discipline it is designed to deliver, or becomes a renegotiated pass-through under a different name.