Division

United Kingdom

Table 14

Regulated Settlement Benchmarks: Allowed returns on regulated assets for UK energy and water utilities in recent regulatory price controls

Regulator	Ofwat	Ofgem	CC	Ofgem	CC	CAA	ORR
http://www.ofwat.gov.uk/pricereview/pr14/gud_tec20140127riskreward.pdf
https://www.ofgem.gov.uk/ofgem-publications/86375/fast-trackdecisionletter.pdf
https://assets.digital.cabinet-office.gov.uk/media/535a5768ed915d0fdb000003/NIE_Final_determination.pdf. The Commission notes that while Table 13.10 of the quoted document provides a ‘low’ and a ‘high’ estimate for the reported financial indicators, the UK's submission seems to be based on the ‘high’ estimates alone.
https://www.ofgem.gov.uk/publications-and-updates/riio-t1-final-proposals-national-grid-electricity-transmission-and-national-grid-gas-–-overview
Source was not provided in the submission.
http://www.caa.co.uk/docs/33/CAP%201140.pdf
http://orr.gov.uk/data/assets/pdf_file/0011/452/pr13-final-determination.pdf
Nominal values are calculated using an arithmetic approach. A geometric approach would add 0,1 per cent-0,2 per cent to nominal cost of equity and nominal vanilla WACC estimates.
Credit Suisse: National Grid — No longer a growth/value play, cut to Neutral, 29 May 2014; Credit Suisse: SSE — Referendum risk to be addressed, 15 August 2014; Macquarie: National Grid — Quality costs, but better opportunities elsewhere, 24 March 2014.
The submission interpreted the length of the investment horizon as the length of a price control period. However, the submission notes that the asset lives of the investments undertaken by regulated companies often span multiple price control periods, having ‘useful lives’ of up to 60 years.
The value ascribed by the regulator to the capital employed in the licensee's business.
Where source RAV values are stated in historical price terms, they have been converted to current prices using the ONS RPI index (unless otherwise stated).
We note that regulated companies' investment expenditure is in diverse, multiple projects that typically form only a small proportion of its RAV.
http://ofwat.gov.uk/regulating/prs_web_rcvupdates
http://www.westernpower.co.uk/docs/About-us/financial-information/2014/Annual-reports-and-financial-statements/Financial-performance-for-website-Mar-14.aspx
http://www.uregni.gov.uk/uploads/publications/RP5_Main_Paper_22-10-12_FINAL.pdf (page 100).
This is Ofgem's forecast for RAV at the end of the price control period. Note that at the start of the price control period SHETL is estimated to have a RAV of 0,7bn (which is forecast to increase to 3,6 bn by 2020-21): https://www.ofgem.gov.uk/ofgem-publications/53747/sptshetlfpsupport.pdf (pages 36 and 37) and https://www.ofgem.gov.uk/ofgem-publications/53602/4riiot1fpfinancedec12.pdf (pages 8 and 9).
http://www.bristolwater.co.uk/wp/wp-content/uploads/2013/04/Annual-Report-2013.pdf (page 27).
http://www.heathrowairport.com/static/HeathrowAboutUs/Downloads/PDF/Development_of_Regulatory_Asset_Base_30-Jun-2014.pdf
http://www.networkrail.co.uk/browse%20documents/regulatory%20documents/regulatory%20compliance%20and%20reporting/regulatory%20accounts/nril%20regulatory%20financial%20statements%20for%20the%20year%20ended%2031%20march%202013.pdf (page 331).
Source: based on UK submission ‘SA.34974 Hinkley Point C State aid case — Answers to the Commission's questions received 16 September 2014’.
Determination	PR14 (not final)^f1	WPD 14^f2	NIE 2014 Final^f3	RIIO T1 2012 (NGET)^f4	Bristol W 2010^f5	HAL 2014 Final^f6	NR 2013^f7
Gearing	62,50 per cent	65 per cent	45 per cent	60 per cent	60 per cent	60 per cent	62,50 per cent
Real cost of debt (pre-tax)	2,8 per cent	2,6 per cent	3,1 per cent	2,9 per cent	3,9 per cent	3,2 per cent	3,0 per cent
Real cost of equity (post-tax)	5,7 per cent	6,4 per cent	5,0 per cent	7,0 per cent	6,6 per cent	6,8 per cent	6,5 per cent
Real vanilla WACC	3,8 per cent	3,9 per cent	4,1 per cent	4,6 per cent	5,0 per cent	4,7 per cent	4,3 per cent
Inflation	3,5 per cent	3,5 per cent	3,5 per cent	3,5 per cent	3,5 per cent	3,5 per cent	3,5 per cent
Nominal cost of debt (pre-tax)	6,2 per cent	6,1 per cent	6,6 per cent	6,4 per cent	7,4 per cent	6,7 per cent	6,5 per cent
Nominal cost of equity (post- tax) ^f8	9,2 per cent	9,9 per cent	8,5 per cent	10,5 per cent	10,1 per cent	10,3 per cent	10,0 per cent
Nominal vanilla WACC	7,3 per cent	7,4 per cent	7,6 per cent	8,1 per cent	8,5 per cent	8,2 per cent	7,8 per cent
Analyst return on equity forecast (ex ante)				c 14 per cent^f9
Investment horizon^f10 — Price control length	5	8	3	8	5	5	5
Investment Size: Regulatory Asset Value (RAV)^f11 ^f12 ^f13	70m — 11,7bn^f14 (estimated 2014 — 15) values)	5,9bn (2014)^f15	c GBP 950m (forecast across price control)^f16	2,2bn — 14,8bn (forecast RAV range of companies over price control)^f17	0,39bn (2013)^f18	14,9bn^f19	45bn (2013)^f20
Degree of revenue protection	More than HPC — see answer to question 2c — NNBG Submission on Rate of Return, 10 September
Degree of construction risk	Less than HPC. See detailed discussion recitals 124 – 131 — NNBG Submission on Rate of Return, 10 September
Degree of operating risk	Less than HPC. See detailed discussion recitals 132 – 135 — NNBG Submission on Rate of Return, 10 September
Degree of financing risk	Less than HPC. See detailed discussion paragraphs 136 – 139 — NNBG Submission on Rate of Return, 10 September
Other risks	Less than HPC. See detailed discussion on difference in fundamental business models; diversification of assets; and technology risks in recitals 113 – 122 — NNBG Submission on Rate of Return, 10 September
Contingent equity required	None

Annotations

Footnotes

f1: http://www.ofwat.gov.uk/pricereview/pr14/gud_tec20140127riskreward.pdf
f2: https://www.ofgem.gov.uk/ofgem-publications/86375/fast-trackdecisionletter.pdf
f3: https://assets.digital.cabinet-office.gov.uk/media/535a5768ed915d0fdb000003/NIE_Final_determination.pdf. The Commission notes that while Table 13.10 of the quoted document provides a ‘low’ and a ‘high’ estimate for the reported financial indicators, the UK's submission seems to be based on the ‘high’ estimates alone.
f4: https://www.ofgem.gov.uk/publications-and-updates/riio-t1-final-proposals-national-grid-electricity-transmission-and-national-grid-gas-–-overview
f5: Source was not provided in the submission.
f6: http://www.caa.co.uk/docs/33/CAP%201140.pdf
f7: http://orr.gov.uk/data/assets/pdf_file/0011/452/pr13-final-determination.pdf
f8: Nominal values are calculated using an arithmetic approach. A geometric approach would add 0,1 per cent-0,2 per cent to nominal cost of equity and nominal vanilla WACC estimates.
f9: Credit Suisse: National Grid — No longer a growth/value play, cut to Neutral, 29 May 2014; Credit Suisse: SSE — Referendum risk to be addressed, 15 August 2014; Macquarie: National Grid — Quality costs, but better opportunities elsewhere, 24 March 2014.
f10: The submission interpreted the length of the investment horizon as the length of a price control period. However, the submission notes that the asset lives of the investments undertaken by regulated companies often span multiple price control periods, having ‘useful lives’ of up to 60 years.
f11: The value ascribed by the regulator to the capital employed in the licensee's business.
f12: Where source RAV values are stated in historical price terms, they have been converted to current prices using the ONS RPI index (unless otherwise stated).
f13: We note that regulated companies' investment expenditure is in diverse, multiple projects that typically form only a small proportion of its RAV.
f14: http://ofwat.gov.uk/regulating/prs_web_rcvupdates
f15: http://www.westernpower.co.uk/docs/About-us/financial-information/2014/Annual-reports-and-financial-statements/Financial-performance-for-website-Mar-14.aspx
f16: http://www.uregni.gov.uk/uploads/publications/RP5_Main_Paper_22-10-12_FINAL.pdf (page 100).
f17: This is Ofgem's forecast for RAV at the end of the price control period. Note that at the start of the price control period SHETL is estimated to have a RAV of 0,7bn (which is forecast to increase to 3,6 bn by 2020-21): https://www.ofgem.gov.uk/ofgem-publications/53747/sptshetlfpsupport.pdf (pages 36 and 37) and https://www.ofgem.gov.uk/ofgem-publications/53602/4riiot1fpfinancedec12.pdf (pages 8 and 9).
f18: http://www.bristolwater.co.uk/wp/wp-content/uploads/2013/04/Annual-Report-2013.pdf (page 27).
f19: http://www.heathrowairport.com/static/HeathrowAboutUs/Downloads/PDF/Development_of_Regulatory_Asset_Base_30-Jun-2014.pdf
f20: http://www.networkrail.co.uk/browse%20documents/regulatory%20documents/regulatory%20compliance%20and%20reporting/regulatory%20accounts/nril%20regulatory%20financial%20statements%20for%20the%20year%20ended%2031%20march%202013.pdf (page 331).