Ofgem has urged Northern Gas Networks and Wales and West Utilities to follow the example of other gas network operators by making voluntary contributions to customers.
Senior partner for networks Jonathan Brearley said the current RIIO price controls have been too generous to networks and repayments are necessary to maintain the legitimacy of the regulatory system.
He said it was in the companies’ “own interests” to join their peers in making voluntary contributions.
Speaking at the Low-Carbon Networks and Innovation Conference in Telford today (6 December), Brearley told delegates: “When we set the price controls we expected that financial performance would vary based on levels of efficiency and the performance of companies against incentives.
“However, the outturn as it looks today has been somewhat different. All companies in certain sectors are at or close to real double digit returns. At the same time financial markets have fundamentally changed meaning that these returns are high compared to current market expectations.”
Brearley said that since the RIIO framework began operating in 2013, Ofgem has secured £4.5 billion of savings for customers through mechanisms within the price controls and ongoing discussions over re-openers. He said this was partly due to voluntary contributions from some companies including National Grid, Cadent, SSEN and most recently SGN.
“In total those voluntary contributions result to around £650 million being paid back to consumers”, he added. “There are two companies which have still yet to move – Northern Gas Networks [NGN] and Wales and West Utilities [WWU], which are both owned by CKI and have yet to make a contribution.
“They may ask why they need to do this. My argument is it’s in their own interests to do so, to build public trust and maintain the legitimacy of the regulatory system.
“Network companies need a licence to operate not just from the regulator but from society at large. The money that they make must be seen as legitimate. Therefore I hope that NGN and WWU take note but ultimately it is their decision. We simply hope that they do so.”
Brearley also reiterated Ofgem’s warning that the next round of the RIIO price controls will be tougher on network returns: “As we start to examine the evidence for RIIO 2 therefore we have already said that current evidence points to a lower cost of capital and returns being tighter than they have been from 2021 onwards. Therefore network companies need to prepare for this as well as delivering better outcomes for consumers.”