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
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
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
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
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 email@example.com;
(END) Dow Jones Newswires
June 29, 2022 04:02 ET (08:02 GMT)
Copyright (c) 2022 Dow Jones & Company, Inc.
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