Charge limits could see SSE leave auction of networks

Published on Monday 7 December 2009 21:39

SCOTTISH & Southern Energy has warned that it might pull out of the £4 billion auction of the electricity networks of EDF because of new limits on distribution charges.

Scotland's second largest company was a leading candidate to buy the three networks, all of which are based in England and have been put up for sale by the French group.

Following a review of what utilities can charge customers on the networks, SSE said it would "have to reassess its appetite for further investment in, and acquisition of, electricity distribution and transmission assets".

SSE already owns two regional distribution networks, which manage the lines between substations and the consumer.

Ofgem, Britain's energy regulator, announced its final review into investment in the UK's distribution network between 2010 and 2015 yesterday.

It sets out investment of 7.2 billion over five years, including a 500 million fund to encourage new low-carbon initiatives for the regional grid. A 38 per cent increase on the 2005-2010 period, it is 8 per cent below what the utilities had requested. It will add about 4.30 a year to the average electricity bill.

Both Ofgem and the utility companies say more needs to be invested in the network – which was mostly built between 1945 and 1965 – but disagree over the cost. The dispute centres on Ofgem's calculation of the cost of capital, which sets the benchmark for the utilities to calculate their return on operating the network.

SSE, which has previously declined to comment on the review, said the 4 per cent headline cost of capital was "significantly below all comparators".

The company refused to comment beyond the statement.

Ofgem chief executive Alistair Buchanan dismissed the criticisms as "tosh", saying the 4 per cent headline figure was irrelevant and the actual rate was 4.7 per cent, pre-tax.

Buchanan said the figures had been calculated after consultation with PricewaterhouseCoopers, which used evidence such as recent bond issuances by utilities.

"Our assessment is that low-risk utilities like the distribution network operators can adequately finance themselves at this rate."

SSE has previously signalled that even utilities were finding the debt markets more difficult. Analysts said its decision to raise 480 million in a share placement in January was probably to avoid a credit rating downgrade.

Shares in SSE fell 10p to 1,115p yesterday.

Utilities have until 6 January to respond to the review.