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There does not appear to be “any credible risk” that Northern Powergrid will be underfunded following Ofgem’s final determination on its business plan for the RIIO-ED2 price control, Citizens Advice has stated.
The consumer charity has raised several concerns about the appeal against Ofgem’s decision which was lodged by the distribution network operator (DNO) in March. The Competition and Markets Authority (CMA) will use Citizens Advice’s intervention to help it determine the outcome of the appeal.
Specifically Citizens Advice argues that allowing the appeal would grant Northern Powergrid “significant additional revenue, to be funded by consumers, without any related improvement in service or investment”.
In its appeal against the ED2 decision Northern Powergrid claimed that the way costs have been allocated contain “material errors” that will ultimately have an adverse effect on its income.
It claims Ofgem misallocated allowances between cost categories. In particular, the DNO has taken issue with the way costs have been allocated for the uptake of low-carbon technologies such as electric vehicle charging points, heat pumps and batteries.
It further claims that Ofgem “failed to compare costs on a rational and consistent basis when determining [business plan incentives]”.
As a result of these alleged miscalculations, Northern Powergrid claims that the combined adverse impact of these errors is £171 million.
Yet Citizens Advice has accused the DNO of failing to provide evidence for why its appeal is in the best interest of its customers, or consumers more generally.
“We, similarly, have been unable to find any such arguments,” it said.
The charity added: “NPg has not demonstrated that it will receive allowances at a level below what it expects to spend. It has simply demonstrated that if you calculate allocations using a different method you get a different answer (that is favourable to NPg).
“Indeed, when comparing with NPg’s business plan – which should theoretically represent NPg’s view of actual required expenditure – there is evidence that NPg would be over-funded if their preferred allocation method was followed.
“So, there does not appear to be any credible risk that NPg will be underfunded or, as a consequence, be unable to make acceptable returns on investment. This means that allowing this appeal would lead to substantial windfall gains for NPg.”
It further warned that to allow windfall gains, on top of what it calls an “already generous settlement”, is “likely to bring the overall regulatory regime under further pressure”.
The CMA has until 29 September this year to make its final determination on the issue.
In November 2022, Ofgem approved £22.2 billion of investment by electricity distribution networks over the five-year ED2 price controls beginning in April.
The final determinations represent a £2.9 billion decrease when compared to the total expenditure (totex) allowances requested by DNOs in their business plans but a £1.3 billion increase when compared to the regulator’s draft determinations published in June last year.
All other DNOs have accepted their final determinations.
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