RIIO-ED1 Final Determinations
On Friday 28 November, Ofgem published Final Determinations (FDs) for the remaining 10 electricity distribution network operators (DNOs), having already agreed a ‘fast track’ determination for the four Western Power Distribution (WPD) DNOs in February.1 These FDs set out Ofgem’s proposed price controls for the 2015-23 period, including the outputs and targets the DNOs need to deliver, their expenditure allowances and the allowed cost of capital.
Some of the key features of the FDs include:
- expenditure allowances of £17.5bn, £1.3bn (or 7.1%) less than the amounts requested by companies. Ofgem’s reductions to company proposals broadly related to different views on efficiency, the savings that could be achieved from smart grids and the expected differences between input cost pressures and RPI inflation (to which DNOs’ revenues are indexed);
- a real, post-tax cost of equity of 6.0% (compared to the approximately 6.4% requested by most DNOs), and a cost of debt based on a trailing average of benchmark bond indices, the same as proposed for the Draft Determinations (DDs). Slow-track DNOs will face one of the lowest WACCs (3.8% real, vanilla) ever set by an economic regulator in the UK;
- a package of rewards, penalties and incentives that Ofgem considers will enable each DNO to earn a return on equity in a range of roughly 2 – 10.5% (at 65% gearing), somewhat less advantageous than the 3 – 12% range available to the fast-tracked WPD DNOs; and
- the FDs will entail significant reductions in DNOs’ customer charges in 2015/16 (up to £35 in 2012/13 prices for SPMW), followed by more gradual reductions over the remainder of the period.
Senior Managing Director