Networks fight cut to finance allowance

Energy network companies are resisting regulatory tweaks that Ofgem says would shave £2 off the typical annual household bill.

The regulator’s proposed changes to the way it sets allowed shareholder returns are “inappropriate” and could harm investment in the sector, they said.

Ofgem is seeking to cut the cost of equity allowance for distribution network operators (DNOs) by 0.8 percentage points, in line with the latest thinking from the Competition Commission. That could cost the industry up to half a billion pounds over the 8-year RIIO-ED1 price control.

Consumer Futures and British Gas have backed the move, agreeing with the CC’s approach of giving more weight to recent data, which suggests investors are willing to accept lower returns.

However, in their consultation responses DNOs argued it could undermine investor confidence in the stability of the regulatory regime and push up finance costs in the long run.

A submission by consultancy Oxera on behalf of five DNOs criticised the timing of the proposal, late in the RIIO-ED1 process and before the CC have reached a final view on the matter.

It said: “The change in methodology at a late stage in the price review process could have long-lasting negative implications for investors’ perceptions of regulatory risk, and subsequently for the financing costs of the regulated networks. In future, this could negate the positive impact of lower bills for today’s consumers from the change in methodology.”