Ofgem should cut £500 million a year from the revenue allowed to distribution network operators (DNOs) over the 2015 to 2023 period, British Gas argued. This would be achieved by further squeezing the assumed cost of equity, greater efficiency, extending asset lives to 45 years and tightening outperformance incentives.
British Gas also suggested two moves Ofgem could make to cut DNO income by £500 million and deliver a one-off saving of £13 to the average household. These related to electricity distribution losses and double-charging for certain connection services.
The supplier accused the regulator of being “overly generous” in the revenue it allows networks to recoup from customers. There is a “lack of transparency” on network costs and greater scrutiny is “long overdue”. It made the comments in a submission to the Energy and Climate Change Select Committee, which is preparing an inquiry into energy network costs, which make up around a fifth of the energy bill.
Ofgem is considering the DNO business plans for the next 8-year period and is due to publish draft determinations in July.
On the cost of equity, Ofgem has already cut the allowed returns to shareholders 6.3 per cent to 6 per cent, in line with a different approach suggested by a Competition Commission ruling. British Gas urged the regulator to go further, potentially as low as 3.8 per cent.
The price controls for energy transmission and gas distribution networks have already been set out to 2021. However, British Gas hinted some elements could be revisited to find further savings for customers.
The only other supplier to submit evidence to the select committee was EDF Energy, which called for better forecasting of network charges. If DNOs rather than suppliers took the price volatility risk, it would save around £40 million a year, according to analysis commissioned from Cambridge Economic Policy Associates.