Analysts expect all companies to reject RIIO2 determinations

Analysts at Barclays have predicted each of the gas and transmission networks will appeal their final determinations from Ofgem for the RIIO-2 price control.

In a note published this afternoon, the European Utilities team, led by Dominic Nash, describe appeals as a “low-risk” option for the energy companies.

Utility Week reported earlier this week that companies mulling their response to Ofgem’s final determinations will now have to come to a decision without reference to the Competition & Markets Authority’s (CMA) ultimate findings in the PR19 water appeals.

The energy companies must either accept or reject Ofgem’s take on their business plans by next Wednesday (3 March), whereas the CMA is now due to publish its decision on the four water appeals by mid-March.

However, the Barclays team points out that while historically the companies had to appeal the entire review, this time they can pick and choose specific elements. They also have the ability retract their appeal once they have seen the CMA’s decision in water.

The key crossover between the appeals made by Anglian, Bristol, Northumbrian and Yorkshire Water and any potential ones from RIIO2 is on rates of return for investors.

The analysts note that with a provisional finding of a cost of equity of 5.1 per cent in real terms – reduced to c.4.8 per cent real in January – the CMA is still 50 basis points higher than Ofgem.

The Barclays note said: “There is a low risk option on cost of capital appeal – companies can appeal the cost of capital, and then retract their appeal at any point to narrow the focus of any process. This means if the CMA materially reduces the cost of equity, then the companies could decide not to withdraw.”

So far, none of the gas and transmission networks or the electricity system operator (ESO) have publicly accepted Ofgem’s final determinations, which were published in December.

The energy regulator had softened its stance in several areas compared to its draft determinations issued last summer, including raising the baseline profit margin for investors by more than a third of a percentage point.

However, many of the companies remain unhappy with the rate of returns Ofgem has suggested and have accused the regulator of being out of step with the government’s net-zero ambitions.

Electricity distribution companies will also be keen to understand what precedents will be set in water to inform their own business plans, the first drafts of which will be submitted this summer.

The CMA has already shifted the target date for its decision on the four business plans several times. It had originally been mooted to arrive in late December.

After its provisional findings were far closer to the appellants’ original business plans, a series of working papers with novel approaches to costs left investors and stakeholders pleading against the revisions.