Price Control Review

RNS Number : 6516D

Scottish & Southern Energy PLC

07 December 2009

SCOTTISH AND SOUTHERN ENERGY PLC

ELECTRICITY DISTRIBUTION PRICE CONTROL REVIEW

SSE (Scottish and Southern Energy plc) has received Ofgem's final proposals for the electricity distribution price control for the five years from 1 April 2010 in respect of its Scottish Hydro Electric Power Distribution and Southern Electric Power Distribution subsidiaries.

SSE stated in its financial report on 11 November that it would assess Ofgem's final proposals against the combined impact of three key criteria: the scope to earn additional revenue through operational efficiency and excellence; the treatment of ongoing pension costs; and the allowed return for shareholders as measured by the weighted average cost of capital.

At 4%, the headline allowed weighted average cost of capital contained within the proposals is significantly below all comparators including that set by Ofgem in its previous electricity distribution price control, the gas distribution price control and the electricity transmission price control. Moreover, these were all set before the reassessment of risk and the cost and availability of finance that has characterised global financial markets in the last 18 months.

It is also significantly below the level of return proposed by Ofwat for the water and sewerage industry last month. Unlike that review, Ofgem's final proposals represent the first time that electricity distribution companies have had any firm indication of the allowed cost of capital.

SSE will now have to examine extremely carefully the detailed proposals on capital expenditure, operating costs, pension contributions and service and sustainability incentive arrangements. It will then have to determine whether the scope for out-performance is sufficient to allow it to earn an adequate return on capital, commensurate with its status as the most efficient and effective operator of electricity distribution assets and consistent with what is needed to allow it to fund the necessary spend on both reducing the carbon impact of electricity networks and improving the service delivered to customers.