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National Grid will lead 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 electricity wires.
Other energy network firms, including Scottish Power and SSE, are expected to follow suit before the industry deadline for appealing against Ofgem’s regulation with the CMA on Wednesday.
The industry revolt began brewing last summer when Ofgem 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.
The regulator has been criticised for allowing energy network firms to rake in bigger than expected profits in the past, by allowing companies to spend more than they need to and recover larger than necessary returns from energy bills. Senior figures in the industry claim the regulator has now gone too far to prove that it can be tough.
Ofgem softened its stance in the latest crackdown 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 a rate of 5.6% suggested by National Grid.
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 which are too low.
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” which is “conceptually and practically flawed”.
National Grid warned that its credit rating faces 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 price index, the dividend will track the consumer price index, it said.
Akshay Kaul, Ofgem’s networks boss, said the regulation “drives a fair price for consumers, improves services and boosts green energy investment”.
“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,” Kaul added.