The next regulatory control period: “RIIO-GD3"

Wales & West Utilities Limited

18 December 2024

 

Wales & West Utilities Limited ("WWU")

Planning for the next regulatory control period: "RIIO-GD3"

Today, WWU published its Business Plan to Ofgem for the next regulatory control period ("RIIO-GD3") which will run from 1 April 2026 to 31 March 2031. 

A copy of this Business plan can be located on WWU's website (www.wwutilities.co.uk/about-us/business-plan) and should be read in conjunction with the remainder of this announcement.

In the foreword to the Business Plan, Graham Edwards, CEO, states: I'm very pleased to present our 5-year Business Plan for RIIO-GD3. A demonstration of our commitment, the plan contains a detailed vision for the work we will continue, using our expertise to keep on delivering a safe and reliable network to our customers. While we navigate the future of energy distribution, our strategy will be strengthened by innovative initiatives and dedication to fulfilling our role to the highest possible standard, not just to meet the requirements set by our regulator - but because it's the right thing to do and is embedded in our ethos.

Document 58 of the Business Plan covers finance, and we outline below some key highlights.

1. WWU Business Plan

a.  This plan assumes revenue allowances will cover efficient operating, financial and investment expenditures. We project a step change increase to our Totex, which is 96% mandatory, to ensure continued strong levels of safety, reliability and customer service performance.

b.  It is supportive to our investment grade ratings including our long-standing debt rating of A- for class A debt since March 2010 with two rating agencies, which is unique in the sector, and underpinned by significant shareholder equity support in 2023 of £344 million.

c.  Revenue allowances for cost of capital are based on independent expert evidence. The Plan uses an allowed cost of equity of 6.89% (real, CPIH), a base distribution rate of 5%, and an allowed cost of debt equivalent to 5.00% (real, CPIH). A gearing target of 60% of RAV is applied and maintained, in a context of accelerated RAV depreciation reflecting Ofgem's policy intent.

d. The impact of this Plan to the network distribution charge component of the average annual residential customer bill for RIIO-GD3 would be an increase over RIIO-GD2 (in 2023/24 prices) by £91 from £153 to £244 (2023/24 prices).  This represents an estimated increase of 11.5% of the total gas bill (excl VAT).   Most of this increase stems from Ofgem methodological policy decisions on cost of capital and RAV depreciation, together with higher Totex noted in 1a. above. Our customer research showed a majority of respondents in support of the bill level and direction.

2. Ofgem required plan versions: Ofgem Notional Company and Ofgem Actual Company

a.  Ofgem requires licensees to submit two plan versions (we refer to these as the "Ofgem Notional Company" and the "Ofgem Actual Company") with financeability assessments and assurances.

b.  These two plan versions use Ofgem's assumptions for revenue allowances for cost of equity of 5.43% p.a (real CPIH) and cost of debt equivalent to 2.9% p.a. (real, CPIH). We assume gearing is controlled to 60% of RAV in each case, in a context of accelerated RAV depreciation.

c.  For each of these two plans, their impact to the network distribution charge component of average annual residential customer bills for RIIO-GD3 would be an increase over RIIO-GD2 (in 2023/24 prices) of £73 from £153 to £226 (2023/24 prices).  This represents an estimated increase of 9% of the total gas bill (excl VAT). Most of this increase stems from Ofgem methodological policy decisions on cost of capital and RAV depreciation, together with higher Totex noted in 1a above.

d.  We consider the Ofgem Notional Company should be financeable for RIIO-GD3, but with significant reservations.  As for the RIIO-GD2 Business Plan submission in 2019, we consider the Ofgem Actual Company plan would not be financeable mainly because the assumed cost of capital would be too low.  

Final remarks

There remains considerable uncertainty surrounding the level and composition of the final revenue allowances for RIIO-GD3 and this will continue at least until Ofgem's Draft Determination in summer 2025. There is the ongoing Judicial Review expected to be heard in 2025 at the High Court in London against the CMA's Final Determination of WWU RIIO-GD2 appeal. There is also the impact of uncertainties on the gas distribution sector regarding pathways to the Government's Net Zero Carbon 2050 target.  Accordingly, at this time, we are unable to predict with sufficient certainty the final level and composition of revenue allowances for RIIO-GD3.

However, we face those considerable uncertainties from a position of operational strength with our long-standing track record of excellent customer service, compliance with regulatory outputs and efficient operations.  When combined with ongoing shareholder support - notably their equity support of £344m in 2023 - we expect our strong credit rating of A- on our Class A debt with Standard and Poor's and Fitch Rating Agency to support our debt programme in the coming years. 

WWU will continue to work closely with Ofgem and other stakeholders. In the meantime, in relation to any financial matters, the following WWU executives are available for discussion:

Chief Executive: Graham Edwards

Email: [e-mail]

Director of Finance: Neil Henson

Email: [e-mail]

Head of Treasury and Tax: Ian Weldon

Email: [e-mail]

 

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