National Grid has said it will accept most of the RIIO2 final determinations for its electricity and gas transmission businesses but will submit a technical appeal on the cost of equity and the outperformance wedge to the Competition and Markets Authority (CMA).
It said the final determination for the Electricity System Operator will be accepted in full.
“Having reviewed in detail Ofgem’s final determination for the RIIO-2 price control, published on 8 December 2020, we are pleased to see the increase in allowances from the draft determination,” the group said in a statement.
It said the package, covering around £10 billion of capital expenditure over the five-year price control, represents a significant increase in yearly investment when compared to the current regulatory period.
“However, whilst Ofgem has increased the overall returns in the final determination for the transmission owners as well as addressing other issues with the draft determination, the board has decided on a technical appeal to the CMA focused on the cost of equity and outperformance wedge,” it added.
“We believe that the methodology Ofgem used to set the cost of equity ignores evidence for higher total market return and risk-free rate levels. We also maintain the view that the outperformance wedge, a downward adjustment to allowed returns in expectation of future outperformance, is conceptually and practically flawed. We were disappointed it remained in the final determination.
“If the CMA accepts to hear our appeal, the six-month process will begin from April. Based on timelines for similar processes, provisional findings would be expected around July with final determinations in early October.”
Network operators in the gas and electricity transmission and gas distribution sectors have until tomorrow (3 March) to decide whether or not appeal their final determinations to the CMA. They are having to make the decision without knowing its final stance on the cost of capital in the appeal of four water companies against Ofwat’s decisions for PR19 after the CMA recently delayed its final redeterminations once again until mid-March.
Analysts at Barclays recently predicted that all of the network companies would appeal their final determinations, describing it as a “low-risk” option given their new ability to challenge specific elements, rather than the whole package, and later withdraw their appeals once the CMA has issued its final decision for water.