Utility Week

8 | APRIL 2021 | UTILITY WEEK The top stories… Regulation M&A Energy What has happened A lot! On 8 March all eight of the transmis- sion and gas networks covered by RIIO2 announced they were rejecting at least some elements of Ofgem's final determination. While the arguments varied across the com- panies, the cost of capital and approach to outperformance was a common gripe (see p15-17). These decisions had to be made prior to the announcement from the Competition and Markets Authority on the water appeals, which was returned a week later. This saw the CMA move much closer to Ofwat's view on rates of return than it had indicated in its preliminary redetermination in September 2020 (see Review, p6). In between these two landmark What has happened The regulator is consulting on plans to force energy retailers to hand back credit balances to customers at the end of each year. Under the plans, suppliers would set pay- ments so that customer credit balances return to £0 each year on the anniversary of starting the payments. The total amount being held in credit bal- ances is difficult to gauge, especially in the context of Covid lockdowns, however Ofgem has cited a figure of £1.4 billion based on data from October 2018. Outlining its proposal in a consultation on its supplier licensing review, the regula- What has happened National Grid has emerged as the success- ful bidder for Western Power Distribution (WPD). It has agreed to pay WPD's current owner, PPL Corporation, £7.8 billion, while the Narragansett Electric Company, based in Rhode Island, will go the other way for £2.7 billion. National Grid framed its decision as a "strategic pivot" to bolster its power assets while also announcing plans to sell its gas transmission arm. The deal values WPD at a c70 per cent premium to its regulatory asset value (RAV), although this is boosted by the fact that this deal was also an asset swap. It is understood that it was the inclusion of an asset swap that swung the deal for National Grid, which was up against sev- eral other heavyweight investors, including Scottish Power owner Iberdrola. What they said John Pettigrew, chief executive of National Grid: "The integration of WPD into National Grid will bring complementary strengths to Cost of capital in the spotlight National Grid to buy WPD and sell gas assets Water company Wacc tightened Little evidence yet that consumers care much Ofgem asks suppliers to return credit balances the group as we move along the energy tran- sition pathway." Vincent Sorgi, chief executive, PPL: "We believe these transactions, which follow our highly competitive UK sale process, repre- sent wins for PPL, National Grid and the cus- tomers we serve." What it means Where to start? Clearly, from an M&A stand- point alone this is a hugely significant deal. The premium to RAV would have raised eye- brows at any time but given that this deal tor accepted that credit balances can be of benefit to customers, particularly in smooth- ing out bills throughout the year. However, it said that due to a range of factors, such as setting the direct debit too high, suppliers can collect more credit balances than they require to service their customers – hence Ofgem's term "surplus credit balances". What they said Ed Dodman, director of regulatory affairs at the Energy Ombudsman: "Just as people are expected to pay their energy bills on time, we think it's fair to expect energy suppliers to do the same with refunds. announcements came Ofgem's view of cost of capital for the distribution networks, which will submit their ED2 business plans in July (also in Review). What they said Rachel Fletcher, chief executive of Ofwat (at the time of writing – due to join Octopus at the start of April): "Crucially, the CMA has backed the principle we have been advocat- ing, that investors must work hard for their returns, bringing customers better, more resilient services and a healthier environ- ment for generations to come." Keith Anderson, chief executive of Scot- tish Power: "There's almost competition between regulators as to who can be the best

• Cover