Figures which suggest it earns a much greater return from its investments in the UK than from those in the US are largely illusory, a senior figure at the group has told Utility Week.
“People say: ‘Well, you earnt a 9 per cent return in the US but you earn 13.3 per cent in the UK: Don’t UK customers pay more’,” noted chief financial officer Andrew Bonfield.
He said the disparity is mainly down to the difference in regulatory approaches of the two countries: Nominal regulation in the US “means you get a cash return faster”, whilst real regulation in the UK means “the customer in effect defers part of the bill through indexation into the future years”.
“There’s also an element within the 13.3 per cent we earnt in the UK last year, which relates to legacy allowances… That’s about 0.7 per cent of the total,” Bonfield added.
Furthermore, he said there is the difference between the level of debt in the UK and US to take account of: “In the US entities are geared generally around 50-50. In the UK its actually 62-38 across our UK businesses”.
Overall, he said this means “actually on a cash basis, for each $1000 we put into the ground in the US we get actually get more money back than we do in the UK on cash terms.”
“The net-net is that the economic outcome is not hugely different,” he said. “It’s the mechanics of it that are different between the UK and the US.”
Bonfield continued: “The UK regulation is designed to incentivise us to outperform in order to deliver customers benefits. So actually as part of RIIO we are delivering some £330 million over the first three years back to customers through the incentive mechanism.
“When Ofgem started with RIIO they said good performing companies should be able to deliver 200 to 300 basis points of outperformance. That’s the range we’re delivering in. So I don’t think we’re overearning.”
Comparison of National Grid returns in the UK and US
Source: National Grid Note: RoE = Return on Equity
His comments came after the company reported an adjusted operating profit from its regulated activities in the UK of £1,259 million in the six months to the end of September, as it invested £970 million in the businesses. By comparison the group invested £1,039 million in its regulated activities in the US over the period, whilst generating earnings of just £435 million.
Co-founder of energy price comparison site Energy Helpline Mark Todd said: “National Grid is the biggest fat cat in British energy and it is exploiting a broken regulatory system that serves them and not the British people to make billions of pounds of obscene profits a year. The unfairness of the UK profits is highlighted by contrasting them to the US.
“Their US business is of an almost identical size but tougher regulation means that they make just a third of the profits and invest more. In the UK they are making three times the profits and investing less. Much more profits and less investment. If their UK profits were cut down to a similar size the saving would be around £1.6 billion or about £61 per household energy bill.”
Todd urged Ofgem to “tear up” in the regulations concerning National Grid: “This would be a big step but it would also show that they are now willing to take on the fights necessary to put right our broken, unaffordable, energy market.”
A spokesman for the regulator said: “Ofgem’s regulation of Great Britain’s network has consistently delivered for consumers. The energy network is 17 per cent cheaper in real terms than 25 years ago.”
He continued: “Comparisons between the GB and US regulatory regimes can be misleading. National Grid is only half way through its current price control and some factors which work to its advantage currently may be to its disadvantage in four years’ time when the price control finishes. US regulation also works differently to our regime.
“For example, the US regime examines costs actually incurred and then makes decisions on whether these costs were necessary and efficient. We believe our approach is more effective at encouraging cost efficiency.”