National Grid will appeal against a ruling by the energy regulator that will cut its allowed returns.
The FTSE 100 utility said on Tuesday it feared a cut to its credit rating in light of energy regulator Ofgem’s December decision, which from April will reduce returns for companies that own UK electricity and gas infrastructure in Britain by almost 40 per cent.
Energy network companies, which also include Cadent, SSE and ScottishPower, are monopolies so their returns and how much they are able to charge households via their energy bills to maintain and improve vital infrastructure are regulated by Ofgem through a “price control” framework. Network costs typically make up just over a fifth of a household energy bill.
Ofgem proposed in December to slash baseline annual rates of return to 4.3 per cent for the five years from April, down from 7 per cent to 8 per cent under the current regime, although it had earlier proposed a much harsher crackdown that would have seen returns sliced nearly in half. Network companies’ returns have come under sharp scrutiny in recent years, with charity Citizens Advice claiming in a report in 2017 that they had been allowed to make “eye-watering” profits.
National Grid said it would launch an appeal to the UK’s Competition and Markets Authority regarding key parts of Ofgem’s ruling including the cost of equity, arguing that it felt the regulator had “ignored certain evidence” including total market returns when making its calculations.
“It’s really important from a UK perspective that investors get a fair return that reflects the cost of capital for the risks that they are taking,” said John Pettigrew, chief executive.
The new pricing regime applies to companies that own national gas and electricity infrastructure as well as local gas grid owners, and analysts will watch carefully to see if other companies launch appeals before a deadline on Wednesday.
National Grid said that from its next full financial year it would aim to deliver annual dividend per share growth in line with the CPIH measure of inflation, a change from its current policy which aims for growth “at least in line with” the higher RPI rate of inflation. It said the decision reflected the fact its asset base in the UK would be indexed according to CPIH inflation under the new regulatory regime.
Pettigrew insisted that while National Grid was braced for potential downgrades in its ratings as a result of the new framework, he expected the company to maintain a “strong investment grade”.
Shares in National Grid were up marginally by 0.5 per cent in early trading on Tuesday to 828p.
Martin Young, analyst at Investec, said the appeal, which could take up to seven months, was “a brave call, but the right call”.