Backlash against Ofgem’s crackdown on financial returns to foreign owners

The Wales & West network that provides gas to over 7 million homes and businesses is owned by Sir Li Ka-Shing who said that he is ‘deeply concerned’ and that the price controls proposed by Ofgem are threat to the network’s financial health.

The new pricing regime that is due to launch next year will halve the returns handed out to investors with the aim of cutting household bills by an average of £40 per year.

The credit ratings agency Moody’s said that the plans will see returns falling far short of the companies borrowing costs with the gas network expected to see significant cash outflows for the next 20 years under its contracts.

The ratings agency warned that the ‘expensive and long-term debt burden’ was far higher than that of competitors.

It has downgraded the firm’s debt, saying: ‘Although all companies will be affected by the expected cut in returns, Wales & West is most exposed as a result of its high borrowing costs.

“To deliver our services sustainably, it is critical we are properly funded. Shareholders cannot continue to subsidise the business for underfunded debt costs. We are very concerned it may just be a matter of time before emerging concerns amongst ratings agencies will intensify – transmitting nervousness into investors and higher capital costs into the market for regulated energy networks. This would not be in the interest of our customers. We will be strongly arguing for a financial case that not only allows us to continue to deliver the services our customers want and need, prepare the energy system for the future, but also delivers a fair return for our investors,” said a spokesperson for Wales & West.

Wales & West said that its shareholders had ‘demonstrated restraint’ and had agreed to suspend dividends between 2021 and 2026. It added that the new regulations also threatened shareholder pay-outs after that date. Shareholders have already agreed to stump up £220 million to service the firm’s debt since 2013.

“Network companies have been, and remain, free to choose their preferred financing approach. They take the risks and rewards associated with these decisions. As a result, companies with higher financing costs may earn less than the sector average,” said an Ofgem spokesman.

The new framework puts the environment at its centre with the aim of pushing electricity distribution companies to take further steps to decarbonise energy generation. A move it says will lead to energy distributors making lower company returns from 2023 and one that will push them to invest more in a carbon-neutral system.

Ofgem vows to ‘squeeze investor returns’ and reduce consumer electricity bills

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