National Grid wins Ofgem concession on prices

A summer of wrangling with the regulator paid off for National Grid yesterday, when Ofgem announced a unexpectedly generous price settlement.

A summer of wrangling with the regulator paid off for National Grid yesterday, when Ofgem announced a unexpectedly generous price settlement.

Ofgem, the regulator, published price controls for National Grid that were significantly more lenient than outlined in the watchdog's draft proposals set out in June.

The company, which saw its shares close up by more than 5 per cent to 585p, has been locked in negotiations with Ofgem since then.

Fraser McLaren, an analyst at Charterhouse Securities, said that Ofgem would have been mindful of the recent reversal of unfavourable settlement imposed on the water sector by its regulator. Ofgem sought to avoid a similar fate, he said.

The Competition Commission earlier this month ruled against the water regulator's price controls, following a challenge by two water companies.

Ofgem's announcement yesterday will mean an increase of £100m in 2001-2006 total revenues above the draft figure, taking the revenues allowed to £3.8bn for the period.

The ruling also allowed for a cost of capital of 6.25 per cent, which was at the top of the range in Ofgem's draft proposal. The higher the cost of capital assumed by the regulator, the better rate of return on capital a regulated utility can expect to make.

Roger Urwin, National Grid's group director for the UK, said: "We're obviously pleased with this outcome."

It is thought that the National Grid will accept the final Ofgem proposals rather than take an appeal to the Competition Commission. However, it is believed that National Grid had argued for an assumed cost of capital of 6.5 per cent.

Jason Goddard, an analyst at CSFB, said: "Every gain [in revenue allowed] flows through to the bottom line. The company got a good deal out of the regulator." Analysts said that earnings forecasts for 2001-6 will now be upgraded.

The Ofgem announcement means that transmission prices charged to electricity supplies will be flat, rather than falling, for the five years from 2001. These charges have, up to now, seen sharp drops since National Grid was privatised in 1990. Analysts said this was bad news for electricity suppliers but it would have little impact on consumers. Transmission charges make up 4 per cent of household electricity bills.