Britain's energy regulator is proposing to cut equity returns for power distribution networks by about a third from 2023, expanding its cuts to investor payouts after trying to push through a similar proposal for transmission grid owners.
The Office of Gas and Electricity Markets, or Ofgem, said March 11 that it wants to cut the allowed baseline return on equity for power distribution to 4.4%, compared to 7% under the current regulatory period.
Ofgem's proposal would affect returns for local distribution companies owned by European utilities Iberdrola SA and SSE PLC as well as U.S.-based Berkshire Hathaway Inc. and PPL Corp., which is trying to sell its U.K. subsidiary, Western Power Distribution PLC.
The distribution companies the utilities own run Britain's regional grids as monopolies, with Ofgem regulating the rate of return the companies can make on their investments. The money the companies spend is ultimately paid for through consumers' bills.
Ofgem's proposal comes after it recently finalized its framework for power and gas transmission and gas distribution networks, where it cut returns amid heavy opposition from the network owners.
National Grid PLC, which owns Britain's high-voltage power grid, was downgraded by all three major rating agencies following the adoption of the transmission framework, which Ofgem had softened after engagement with the industry. National Grid and eight other companies have appealed the decision to the U.K.'s markets regulator, with a decision expected in the fall.
Ofgem had first announced that it would aim to cut returns for power distribution, which follows a different regulatory schedule, in 2019. Its latest plan, which is not final, includes a 4.65% cost of equity and is adjusted for expected outperformance of 0.25%. Ofgem said it expects the returns to be broadly comparable with other European regulatory regimes for the same five-year period.
"We're driving local electricity networks to help make sure that every watt of energy produced from plant to plug is better used, for example by ramping up their use of battery storage, saving bills and the planet," Jonathan Brearley, Ofgem's chief executive, said in a statement.
"At the same time, these financial arrangements will significantly cut investor returns to make sure consumers pay a fair price for energy whilst networks attract the investment they need to be safe and green," Brearley said.
Ofgem said that together with its assumptions on debt and depreciation policy, the cuts would reduce companies' average annual revenues from current levels and lower network charges on household bills by about 9%, or £2 billion, over the period.
The cut to returns assumes similar levels of investment made during the current regulatory period, and Ofgem said any increase in spending, for example to support the U.K.'s net-zero emissions target, would dilute the positive impact on consumer bills.
