energy news

Scottish Power at war with Ofgem


27th September, 2009

Tensions over how to finance the multi-billion-pound overhaul of Britain's electricity networks boiled over this weekend when the boss of Scottish Power threatened to take Ofgem, the regulator, to the Competition Commission over proposed spending cuts.

The regulator has issued a draft spending and revenue programme for the electricity companies, fixing their investment in 2010-15 at £6.5 billion, 17% less than they requested. Ofgem has not, however, cut its requirement for improvements to the networks.

Energy bosses reacted angrily, saying they were being asked to shoulder the responsibility for much of the government's ambitious plans for a low-carbon future but to do it on the cheap.

They are to meet Alistair Buchanan, chief executive of Ofgem, over the next few weeks to make their final pitches for a better deal for 2010-15 before the regulator's final decision in December.

Nick Horler, chief executive of Scottish Power, said he was prepared to take the unprecedented step of going to the Competition Commission unless the regulator changed its mind. "Ofgem is playing yesterday's game, which was sweating these assets and bringing costs down," he said.

"We are at a point where we need to make big new investments. Ofgem has taken a very narrow view of economics and we may have no recourse but to go to the commission."

Many of the networks, which are regional monopolies, were built in the 1950s. They need a radical overhaul to accommodate wind farms, new nuclear stations, small household generators and other technology. "We can cut carbon, we can cut costs, but we can't do both," said John Crackett, networks chief at Eon.

"We need to have fair returns that are attractive to investors. If they are not attractive, we are not going to reach the [government] goals because companies won't invest."

If the draft decision is rubber-stamped by Ofgem, there could be a wave of disposals by companies unwilling to invest billions for small returns.

Ofgem has not told the firms what their allowed profits will be. Andy Cox, energy partner at KPMG, the accountant, said: "A number of players are looking again at their networks and considering whether in a capital-constrained world the returns allowed for the next five years will be sufficient."

Steve Smith, head of networks at Ofgem, said the regulator was not trying to starve the networks of money. Network charges are set to increase by 25% between 2010 and 2015, he said, and the firms had made big profits since privatisation.

"We have 14 networks, and some of them say it is going to cost a lot more than others to do the same thing. So we have challenged that quite hard," he said. "If they disagree they can, of course, go to the commission as an independent referee."



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