The Competition and Markets Authority (CMA) is set to uphold the decision of the Gas and Electricity Markets Authority (GEMA, through Ofgem) to sharply cut the returns network companies can make in the coming five years (the RIIO-2 period), but not to claw back gains from company ‘outperformance’.
In its provisional conclusions into an appeal by nine gas distribution networks and gas and electricity transmission networks, the CMA said appellants “offered no compelling evidence that regulators are required to aim up” on determining costs of equity in assessing the allowed return. It said GEMA was “not wrong in its assessment of financeability or its application of the finance duty”, it has provisionally determined that GEMA’s allowed cost of equity of 4.55% was not wrong.
The CMA agreed with GEMA that the companies would be expected to outperform in RIIO-2 but not with the regulator’s solution of an ‘outperformance wedge’ that would cut returns if they did outperform. The CMA said outperformance in previous energy price control periods “provided strong support for GEMA treating the scope for operational outperformance as an important risk area for RIIO-2.” It thought GEMA, should “take a step back and consider whether those arrangements overall could be expected to provide for an appropriately stringent and robust price control, and if not, to identify whether additional (and potentially novel) responses were appropriate.” Nevertheless, it decided that the outperformance wedge was not the right solution. It was “poorly targeted” and “might also undermine broader regulatory certainty”.
The final decision will be published on 4 October.
Read the full provisional finding here.