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Ofgem to cut returns for UK power distribution companies

The U.K.'s energy regulator is set to cut investor returns at regional power grid operators from April 2023 as part of a broader clampdown on shareholder payouts in the regulated utility sector.

The Office of Gas and Electricity Markets, or Ofgem, said on Dec. 17 that it will propose a tougher price control framework for the country's six electricity distribution groups, including companies owned by Iberdrola SA and SSE PLC, as well as U.S.-based Berkshire Hathaway Inc. and PPL Corp.

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The regulator said the new five-year framework will use the same methodology applied to transmission and gas distribution operators, who could see their allowed return on equity drop by almost half starting in 2021 and are currently pushing for a more generous approach.

Ofgem has not yet published specific numbers for power distribution companies and will start consulting on the new rules during the summer of 2020. But it said a lower rate of return would better reflect the low risk level in the sector.

"Ofgem's stable and predictable regulatory regime will allow companies to attract the investment they need to go further in decarbonizing the system whilst saving consumers money by keeping returns as low as possible," Cathryn Scott, acting executive director for systems and networks at Ofgem, said in a statement.

The regulator said its new framework will look into integrating new demand, for example from electric vehicles, by making more use of flexible technologies like storage or demand side response instead of building costly new network infrastructure.

According to Ofgem, network companies have invested about £70 billion in the national and local electricity grids since 1990.

Utilities in Northern Ireland are separately regulated and do not fall under Ofgem's price control.