Regulator allows electricity firms to raise prices

The energy regulator Ofgem appeared to have forestalled a revolt by regional electricity companies yesterday after it ruled that they could increase prices for connecting customers to the local power grid.

The energy regulator Ofgem appeared to have forestalled a revolt by regional electricity companies yesterday after it ruled that they could increase prices for connecting customers to the local power grid.

Ofgem said prices would increase next year by 1 per cent in real terms and by the rate of inflation in the following four in order to fund £5.7bn of investment in low-voltage networks.

In June, Ofgem had proposed a reduction in these so-called distribution charges of 2 per cent next year and 1 per cent in succeeding years. This sparked an angry reaction, notably from EdF Energy, which owns local networks covering London, southern and eastern England.

Distribution charges account for 25 to 30 per cent of household bills. The price rises announced yesterday take effect next April and will increase the average domestic bill by 6p a month or £1.70 a year. Under the draft proposals in June, prices would have fallen by about £1.30 a year.

Ofgem said Britain's 14 operators of distribution networks would be allowed a 4.8 per cent return on their investment, compared with a 4.6 per cent cost of capital proposed in June. It has also been more lenient on their operating costs, saying these will only have to fall by 3 per cent on average compared with the recommendation of 10 per cent. This will mean the 14 companies can spend £759m on running their networks over the next five years against the £830m they asked for.

As well as the £5.7bn investment, Ofgem is allowing distribution companies to spend £500m connecting sources of renewable energy, such as wind farms, to the local network. The costs of this will be met by the generators themselves. But they will ultimately be passed on to consumers through the wholesale prices paid by suppliers such as Powergen and npower.

Sir John Mogg, the chairman of Ofgem, said: "Through open and transparent consultation we have produced a package of measures that strikes the right balance between attracting investment and ensuring that customer prices are no higher than they need be."

EdF, which had indicated that it would probably appeal if the regulator refused to relent from its June proposals, is expected to accept the final set of price controls which will allow it to spend more than £1.6bn on its three networks.