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Distribution network operators could lose up to £60 million a year if Ofgem goes ahead with plans to overhaul how it calculates their finances.
In a second blow to the DNOs, all but one of which were sent back to the drawing board with their RIIO-ED1 business plans on Friday, Ofgem made the surprise announcement that it may change the way it calculates their cost of equity allowance. The regulator said this would bring its approach in line with that of the Competition Commission.
DNOs privately warned Utility Week that such a move could wipe tens of millions off their business plans for 2015-23, when they have already been asked to find further cost efficiencies.
Taking the “worst case scenario” of a cut of 0.8 percentage points in allowed equity returns and assuming 65 per cent gearing, works out at an annual cost to the sector of around £60 million.
The outcome will apply to all DNOs including Western Power Distribution, which has been provisionally fast-tracked through the RIIO-ED1 price control.
The review was triggered by the Competition Commission’s provisional determination on the price settlement for Northern Ireland Electricity, published on 12 November.
The CC estimated a 6.0 per cent return for shareholders, which Ofgem said was “significantly lower” than regulators have conventionally used. Electricity North West assumed 6.8 per cent in its plan, while the other five DNOs modelled 6.7 per cent.
Ofgem said the CC’s position “on this material matter of policy” is relevant as its successor, the Competition and Markets Authority, is the appeals body for RIIO-ED1. It will consult on its methodology in early December.
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