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Ofgem Publishes Guidance on Cost of Capital for DNO’s

17 Feb 2014

Ofgem has today published guidance which will reduce the assumed cost of equity and cost of capital for electricity distribution companies.

The cost of equity is an important financial parameter. Changes to this affect the assumed cost of capital, which determines the return a company can earn on its investment during a price control. We are currently setting the electricity distribution companies’ price controls for 2015 – 2023.

In November, we assessed the business plans from all six distribution companies. We sent five of these plans back as we considered that they could deliver more value for consumers. The companies will resubmit their plans in March. Today we are setting out our baseline assumption of 6% for their cost of equity, resulting in an estimated cost of capital at 3.8% for the first year of the price control, 2015-16. As these companies are yet to resubmit their plans, a decision cannot be finalised at this stage.

When we assessed the business plans, Western Power Distribution (WPD) was the only electricity distribution company deemed suitable to be considered for fast-tracking, as its plans demonstrated clear value for consumers. This meant that in November we consulted on accepting its plans subject to our consultation on calculating equity market returns.

Today’s decision means that to stay in the fast-track process, WPD will need to make an equivalent reduction in its assumed cost of equity to 6.4% resulting in an overall cost of capital estimated at 3.9% for 2015-16.

WPD now has to decide whether to accept these adjustments. If it does not, it will revert to the slow-track process and resubmit plans in March, along with the other five companies.

Story appears courtesy of Ofgem.