Citizens Advice urges Ofgem to tackle network debt costs

Citizens Advice has urged Ofgem to take action against two unnamed network companies to enable the regulator to lower the allowances for the cost of debt under the RIIO framework.

Citizens Advice urges Ofgem to tackle network debt costs

In its response to a consultation on the RIIO2 price controls, the charity said Ofgem is currently being prevented from doing so by the two outlying companies whose debt portfolios are more expensive than others.

“At present, most of the network companies can outperform their debt allowances, especially with the use of bank loans, intra-company loans, credit facilities and finance leases,” the document states.

“However, for two of the network companies, due to past decisions made around raising debt, their debt portfolios are in a distinctly poor state.”

It continues: “Ofgem must ensure that these outliers make significant changes to clean up their debt portfolios as soon as possible. Making the most of the current low interest rate environment, for debt restructuring, is a valuable tool in this respect.”

The response says this would enable the cost of debt allowances for network companies, which are determined on a sector-wide basis, to be set at “a more ambitious level”. It says consumers should “always be protected where companies have poorly managed their debt”.

Citizens Advice would not publicly disclose the identity of the two companies referred to in its response. However, sister publication Utility Week understands them to be Electricity North West and Wales and West Utilities.

In an outlook published in October 2018, Moody’s said the outstanding debts of Electricity North West are “more expensive than that of other network operators in Britain due to the timing of issuance”. In another outlook published in February this year, the ratings agency said Wales and West Utilities has a cost of debt that is “high relative to peers”.

A spokesperson for Electricity North West responded: “The electricity distribution sector’s debt costs as a whole are being met by the current allowance, but Electricity North West and one other network are materially underfunded while two network groups are receiving substantially more than they require.

“This is basically down to the timing of when debt was taken out and some differences in the calculation methods. Ofgem’s one-size-fits-all approach doesn’t work. If Ofgem adopted a company-specific methodology, debt allowances would more closely match network debt costs and customers would not pay more overall.”

A spokesperson for Wales and West Utilities said: “As Ofgem themselves state, the cost of debt is a ‘significant driver of the cost of network services.’

“For that reason, the methodology used to set an allowance representing efficient cost should not have any propensity for material windfall gains or losses across individual companies in each sector. If a company raises debt efficiently, the methodology should set an allowance that covers the cost of that debt; no more and no less.

“We recognise that Ofgem does not have a straightforward task to set allowances for each company in the energy sector due to different debt positions and we welcome the opportunity for continued dialogue on this matter.”


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