Ofgem chairman warns networks to be ‘mindful’ of their legitimacy

Networks' double digit returns threaten public confidence, says David Gray

Ofgem’s chairman David Gray has warned energy networks that they must be “mindful of the way they are perceived” after the publication of a report by Citizens Advice which claimed the companies are making £7.5 billion in unjustified profits.

Speaking at Utility Week Congress in Birmingham, Gray said the report raised a “question of legitimacy”.

“We all need to ensure public confidence in the regulatory regime and this means consumers believing that the companies are running efficient and effective networks and are earning a fair return,” he said.

Gray added that, under the existing RIIO regulatory framework, the financial performance of energy networks has been “much stronger” than the regulator had anticipated.

He reiterated Ofgem’s message that these returns will be trimmed in the next regulatory cycle, saying that “companies should prepare for lower returns as well as delivering better outcomes for customers” in RIIO2.

Gray added that Ofgem is exploring the potential for introducing in-period adjustment mechanisms which would “automatically respond if the returns actually achieved by the companies are systematically high”. His comments build on those made by Ofgem’s senior partner for networks in July, when the regulator set out its initial thinking about the structure of RIIO2.

Fellow conference speaker and chief executive of UK Power Networks Basil Scarsella, responded to Gray’s comments on network returns with the suggestion that if the regulator thinks it is “making too much money” it should “talk to my shareholders”.

Scarsella welcomed Gray’s broader comments on the improving levels of customer satisfaction and innovation. Saying the regulator had given a “ringing endorsement” of the benefits networks are delivering for customers.