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6 | DECEMBER 2020 | UTILITY WEEK The Month in Review Ofgem: 'There's no case for higher network returns' T he chair of Ofgem's RIIO2 chal- lenge group has reaffirmed its view that there is no case for raising the cost of capital beyond the levels currently proposed for the next set of network price controls. Speaking in a series of open hear- ings on the price controls beginning in April 2021, Roger Witcomb said the coronavirus pandemic had made the stable returns of regulated utilities more attractive to investors, meaning "if there is argument at all, it will be for a reduction". According to its dra determina- tions for the sectors released in July, Ofgem expects the cost of equity to be set an average of 4.2 per cent in real terms for gas transmission and distri- bution, from which it plans to subtract 25 basis points for expected outper- formance to give an allowed return on equity of 3.95 per cent. As a result of a lower assumed gear- ing level – 55 per cent versus 60 per cent – the cost of equity for electricity transmission is expected to be set at 3.93 per cent and the allowed return on equity at 3.7 per cent. Networks have complained that these rates, which represent a reduc- tion of around half when compared with current price controls, will leave them struggling to secure investment. They have been particularly critical of the decision to, for the first time, draw a distinction between the expected and allowed cost of equity. On the subject of this "outper- formance wedge", Witcomb said: "Probably most of us when we first saw that were extremely doubtful about whether that was a good idea. Since then, we've looked at it further and we've decided it probably isn't a very good idea but is better than all the oth- ers to address what is a real problem. "The problem is one of histori- cal outperformance," he explained. "That's not just the fact that RIIO1 has seen some very high returns to the network companies. It's over the entire tapestry of utility regulation; across all the utility sectors that are price regulated and across not just the UK but other countries as well." He continued: "On average, if you look at it from a statistical point of view, they have significantly outper- formed the rates of return which were expected and that's an obvious conse- quence of the asymmetry of informa- tion and occasionally asymmetry of resources as well." "Everyone's got a touchpad out there, with all their records and maps, and they return everything electronically." Patrick Clarke, director of network operations, UKPN,. talks digital field forces, p34 Kwasi Kwarteng: 'I don't see the problem with returns', p.15 £117m Drop in operating profit for the six months to September reported by National Grid, which were principally felt in its US business. 38,000 Applications for the Green Homes Grant as of 12 November. 30GW Onshore wind generation now operational, under construction or at some stage of planning or development, according to RenewableUK Flat green gas levy would set 'risky precedent' Plans to impose a fixed per- meter charge on gas customers to fund a new support scheme for biomethane injection would set a "risky precedent" for future low-carbon levies, Citizens Advice has argued. The charity said a flat fee would leave households "bear- ing a disproportionate share of costs", noting that "a studio flat will be paying the same levy as a large manufacturing facility". The consumer advocate said the Green Gas Levy as proposed by the Department for Business, Energy and Industrial Strat- egy (BEIS) in a consultation in September would be "the first flat cost levy applied to the gas system to fund a decarbonisa- tion measure in which all users, including domestic consumers, would pay the same". Citizens Advice said the charges would be "regressive" and "place more of the burden on the poorest in society".