By Jaime Llinares Taboada

 

U.K. power and gas network companies face lower returns over the next five years after the U.K. Competition and Markets Authority provisionally upheld new rules by energy regulator Ofgem that lower regulated profits for the April 2021-March 2026 period.

The CMA on Wednesday published a provisional decision on new rules following appeals by the infrastructure companies. Ofgem in December decided to cut allowed returns for 2021-2026 compared with the previous regulatory cycle.

The CMA said that Ofgem's decision on the allowed cost of equity--an important ratio measuring allowed returns on investment--wasn't wrong. Its final report is due by the end of October.

The regulation will affect network infrastructure owners such as National Grid PLC, SSE PLC and ScottishPower's owner Iberdrola SA.

The CMA's provisional decision is a negative outcome for National Grid and SSE, and is likely to disappoint investors, said John Musk, analyst at RBC Capital Markets. U.K. regulated networks make up just under 50% of National Grid's earnings before interest and tax--including the recently acquired WPD business--, and around 40% for SSE, Mr. Musk said.

Shares in National Grid at 0903 GMT were down 1.0% at 942.3 pence. SSE was down 0.4% at 1,607.5 pence.

National Grid said it was disappointed that the CMA's decision wasn't in favor of the appeals against the cost of equity.

SSE said that Ofgem's cost of equity is flawed and doesn't reflect the risks associated with the investment needed in electricity transmission. It also said that the CMA's decision differs from its own approach for the water industry.

The 4.55% cost of equity ruling is lower than the 4.76% consensus expectation, given that it was widely anticipated that the CMA would deliver a return similar or in excess to that of water companies, said Jenny Ping, analyst at Citigroup.

 

Write to Jaime Llinares Taboada at jaime.llinares@wsj.com; @JaimeLlinaresT

 

(END) Dow Jones Newswires

August 11, 2021 05:21 ET (09:21 GMT)

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