U.K. Regulator Proposes to Cut Returns for Power Distribution Companies -- Update

By Jaime Llinares Taboada

The U.K. energy regulator Wednesday proposed lower return allowances for electricity distribution networks for the 2023-2028 regulatory period known as RIIO-ED2, raising criticism from the companies.

Ofgem has published its draft determinations for the five-year cycle starting April 1 that set the amount of money that can be earned by the distribution network operators. The regulator has proposed a total expenditure package of 20.94 billion pounds ($25.52 billion) to be split across the six companies: Electricity North West Ltd., UK Power Networks, Western Power Distribution, Northern Powergrid, SP Energy Networks and Scottish & Southern Electricity Networks.

Ofgem is also proposing a baseline return on equity, or RoE, allowance of 4.75% and a weighted average cost of capital allowance of 3.26% for most companies.

RBC utilities analyst John Musk said in a note that he regards the proposals as a slight positive for the companies, given that expectations were for similar total expenditure, or totex, and a RoE of around 4.6%. Companies had asked for totex of GBP25.2 billion and a RoE of between 5% and 6%, he said. However, totex levels could be revised upward in the final determination in December, and there will be mechanisms that allow greater spending, if required, Mr. Musk said.

"Ofgem is...proposing tough efficiency targets for the networks along with a sharp reduction in their allowed rate of return, meaning less of consumers' money goes to company profits," the regulator said, adding that most consumers could see a small drop in network charges.

The RoE allowance in the current regulatory period is 7.0% for SSE and SP, and 7.4% for WPD, according to Mr. Musk.

The energy watchdog said this plan will also boost grid capacity, improve customer service and resilience to prevent outages, and prepare the way for more greener energy generation.

SSE PLC said that the draft proposal is tough and stretching, and that work is required to ensure the final settlement reflects customer and stakeholder needs.

"This includes further refinement to properly allow for the necessary delivery of improvements in infrastructure and the deployment of technologies required to reach net zero and build network resilience in the context of climate change," SSE said.

National Grid PLC, which acquired WPD last year, said it is working through the detail of the proposals, in particular the proposed reduction in total expenditure across each company.

The Energy Networks Association, which represents the British distribution companies, said the final regulation will need more work for it to be compatible with customers' expectations of an energy system that enables the transition to net-zero greenhouse-gas emissions.

Shares in National Grid at 0743 GMT were up 1.4% at 1,084.5 pence. SSE was up 0.2% at 1,669 pence, and SP owner Iberdrola SA was down 0.1% at 10.16 euros.

Write to Jaime Llinares Taboada at [e-mail]; @JaimeLlinaresT

(END) Dow Jones Newswires

June 29, 2022 04:02 ET (08:02 GMT)

Copyright (c) 2022 Dow Jones & Company, Inc.