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Ofgem could save consumers a further £4.1bn in next set of energy network price controls

Energy regulator Ofgem has the opportunity to further cut the excess profits made by energy network companies - the private companies that run the UK’s pipes and wires - and save consumers an additional £4.1bn during its next set of price controls (RIIO-2).  

New analysis released yesterday by Citizens Advice shows how these companies could benefit to the tune of £4.1bn if the regulator doesn’t look again at how risky they are to investors. It reveals that Ofgem could deliver major savings for consumers if it accepts and applies findings of a landmark study commissioned by UK Regulators Network (UKRN).

Ofgem has already signalled that energy network companies should expect around £5bn in reduced profits in the next set of price controls. The new analysis by Citizens Advice suggests that the regulator can and should go further, resulting in a total saving to consumers of £9.1bn.

Regulated monopolies are much less risky than average firms

The UKRN study suggested the current methodology used by Ofgem to calculate the risk to investors - the equity beta - may be flawed. The study proposes a new methodology to more accurately measure the riskiness of the these companies. Citizens Advice finds that this could result in major savings for consumers.

The current methodology estimates that energy network companies are as risky as the average firm on the stock market. UKRN’s research suggests that energy network companies are actually far less risky than regulators have previously estimated and pose less risk still than Ofgem have acknowledged in their RIIO-2 proposals.

The market data used to calculate this risk is also crucial. Currently regulators model the risk of regulated monopolies over two to five year periods. But UKRN’s research suggests looking at these companies over longer periods, a decade or more, which reveals them to be much safer investments, around 30-50% of the risk of an average firm.

Applying the new methodology

With the first elements of the next price controls not set to take effect until 2021, Citizens Advice is calling on Ofgem to conduct further detailed analysis of these findings.

Gillian Guy, Chief Executive of Citizens Advice, said:

“These decisions may seem extremely technical, but they matter. Get them wrong and it hits consumers directly in the pocket.

“Regulators face a difficult balancing act. Firms need to be able to attract investment and investors need suitable levels of returns. But regulators need to ensure that the decisions they make don’t allow companies to make billions in excess profits and leave customers to pick up the bill.

“A new approach to analysing the risk of these firms will mean lower returns for investors, but the result is a better deal for consumers.”

Notes to editors

  1. £4.1bn figure is taken from Citizens Advice report - Things can only get beta: An opportunity to get financing costs right for consumers
  2. UK Regulators Network (UKRN) - Estimating the cost of capital for implementation of price controls by UK Regulators (March 2018)
  3. The Citizens Advice service comprises a network of local Citizens Advice, all of which are independent charities, the Citizens Advice consumer service and national charity Citizens Advice. Together we help people resolve their money, legal and other problems by providing information and advice and by influencing policymakers. For more see the Citizens Advice website.
  4. The advice provided by the Citizens Advice service is free, independent, confidential and impartial, and available to everyone regardless of race, gender, disability, sexual orientation, religion, age or nationality.
  5. To get advice online or find your local Citizens Advice in England and Wales, visit citizensadvice.org.uk
  6. You can get consumer advice from the Citizens Advice consumer service on 03454 04 05 06 or 03454 04 05 05 for Welsh language speakers.
  7. Local Citizens Advice in England and Wales advised 2.5 million clients on 6.2 million problems in 2014/15. For full service statistics see our publication Advice trends.
  8. Citizens Advice service staff are supported by more than 21,000 trained volunteers, working at over 2,500 service outlets across England and Wales.
Original article link: https://www.citizensadvice.org.uk/about-us/how-citizens-advice-works/media/press-releases/ofgem-could-save-consumers-a-further-41bn-in-next-set-of-energy-network-price-controls/

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