Ofgem faces National Grid challenge over energy earnings plan

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National Grid has ignited an industry rebellion against the energy regulator by taking Ofgem’s plan to cut energy network company earnings to the competition watchdog.

The company said it would refer parts of Ofgem’s new regulatory plan to the Competition and Markets Authority (CMA) because it does not allow large enough returns for its investment in the UK’s gas pipes and electrical cables.

Other transmission cable operators, including Scottish Power and SSE, followed suit hours after National Grid announced that it would appeal against the five-year regulation plan that will cut returns for the companies by almost 40% from this April.

The Guardian understands that gas network operators including SGN, Wales and West Utilities, Cadent and Northern Gas Networks may also challenge Ofgem’s regulation before the deadline for appeals on Wednesday.

The industry revolt began brewing last summer when Ofgem initially set out plans to halve the returns allowed on investment in the UK’s transmission cables and gas pipes to protect household energy bills. The multibillion-pound investments are ultimately paid for by energy consumers, and typically make up one-fifth of the average household energy bill.

Ofgem softened its stance at the end of last year by raising the energy company’s allowed returns on investment from its original proposal of 3.95% to 4.3% for the next five years. The rate is still the lowest ever proposed for a regulated network company, and well below the 5.6% suggested by National Grid.

In the past, the regulator has been criticised for allowing energy network firms to rake in bigger than expected profits, by approving company spending plans that are higher than necessary and plans to recover generous returns from energy bills. Senior executives have speculated that Ofgem may feel under pressure to prove that it can be tough on company profits.

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John Pettigrew, the chief executive of National Grid, said Ofgem had “ultimately ignored certain evidence” presented by the industry in its consultation, and had underestimated the financial risk of its major infrastructure investments by setting returns that are too low.

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Ofgem said the rate was based on an assumed cost of equity of 4.55%, which it believes could fall lower if companies perform better than their efficiency targets. Pettigrew described the so-called “outperformance wedge” as “a curious mechanism” that is “conceptually and practically flawed”.

Energy network bosses at SSE and Scottish Power have raised the same concerns in their appeals. Rob McDonald, the managing director of SSEN Transmission, said the appeal raised “technical but very important issues”.

These include the “unacceptable risk” of a new mechanism to approve extra spending during the fixed five-year period without a right to appeal against the spending amount, and a change that could put SSE on the hook if National Grid’s electricity system operator undercharges energy consumers on their behalf.

National Grid said its credit rating faced a downgrade based on the parts of the regulation that it would accept, but it would continue to pay a rising dividend to its shareholders. Instead of tracking the retail prices index, the dividend would track the consumer prices index, it said.

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Akshay Kaul, Ofgem’s networks boss, said the regulation “drives a fair price for consumers, improves services and boosts green energy investment”.

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“We respect the Competition and Markets Authority appeal process, where we will defend robustly our decisions which are in the best interests of consumers and tackling climate change,” he said.

“While the appeals could take around six months to resolve, they will not delay any investment and we look forward to working closely with industry to accelerate investment for a green recovery.”