National Grid Slams Ofgem Plan On UK Energy Network Investment
07/16/2012| 05:46am US/Eastern
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--National Grid slams Ofgem plan to fund U.K. gas, power network upgrades
--National Grid says Ofgem plan doesn't give enough incentive for companies to make the required investment
--Analysts say National Grid may need to raise capital, cut dividend to fund the investment
By Selina Williams
LONDON--U.K. gas and electricity network operator National Grid PLC (>> National Grid plc) said Monday that new proposals by energy regulator, Ofgem, on funding upgrades to Britain's gas and electricity transmission network do not give enough incentive for companies to make the investment needed.
Ofgem's proposal to allow network operators to charge their customers GBP22 billion to make necessary investments in the eight year period from 2013 was far below the GBP30.7 billion built into National Grid's business plan. It will not cover the cost of the large scale investments required in the coming years, the company said.
Investors in National Grid, which is by far the largest operator of gas and electricity networks in the U.K. and would suffer the most from Ofgem's proposal, reacted negatively. The company's shares fell by 2% and analysts said it may have to raise more capital or cut its dividend.
Ofgem's proposal is not final and will go out to consultation with interested parties after July 27. The regulator intends to publish the final proposals in December 2012.
"We believe that these initial proposals will not appropriately incentivize the essential investments necessary to provide safe, reliable networks for the U.K. consumer and avoid delays to the achievement of the U.K.'s environmental targets," National Grid said in a statement.
Analysts said that, if Ofgem's proposals prevail, National Grid would be able to recover less of the cost of its investments from customers, so may have to raise capital over the next two to three years, or cut its dividend next year.
"There's a risk to the dividend from next year," said Investec utilities analyst Angelos Anastasiou, adding that he had factored in a 10% cut next year if Ofgem's plan is implemented.
Anastasiou has a price target of 549 pence a share for National Grid and a sell recommendation. At 0848 GMT, shares in National Grid were down 2% at 679 pence, under performing the broader U.K. market.
Ofgem's proposal for funding the upgrade and renewal of the high voltage electricity network in England and Wales, the high pressure gas network across the whole of Britain and local low pressure gas networks is around 20% less than National Grid and the other companies, including SSE PLC (>> SSE PLC) had requested.
Ofgem said its plan is intended to drive, "improvements in company performance [and] to ensure costs are kept as low as possible for consumers."
Around GBP15 billion of the proposed investment includes upgrade and renewal of the high-voltage electricity network in England and Wales and the high-pressure gas network across Britain. An estimated GBP7 billion would be spent on ensuring the low pressure gas networks remain safe and reliable.
Ofgem said the impact of the total package should lead to household bills around GBP7 higher in 2013, rising to a GBP15 increase in 2021. The average increase on annual household bills across the eight years of the plan is around GBP11, compared to this year.
The GBP22 billion investment takes into account capital expenditure and replacement expenditure costs and is based on 2009 to 2010 prices.
-Write to Selina Williams at selina.williams@wsj.com
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