Customers have overpaid electricity network companies by £800 million since 2013 because Ofgem set the allowed rate of return too high, says the National Audit Office (NAO).

NAO said Ofgem did not place enough weight on up-to-date market evidence when it set the rate and was too concerned to be consistent with previous regulatory decisions.

Ofgem aimed to design the price control so that networks’ returns depended on how well they performed. The lowest return would be 2.5% and the best performing company could make 10.5%. In fact, three of the nine network companies are forecasting returns of around 10%, and the average forecast return is 9.2%. In comparison, NAO said that in recent years investors have come to expect returns from the FTSE at 3–4%.

NAO identified two other issues that have increased costs for consumers. Companies were promised a bonus for good performance. But Ofgem fixed targets too far in advance and network companies were already beating them before the price control started. Finally, Ofgem lengthened the price control period from five years, as before, to eight years. The intention was to provide investment certainty at a time when innovation was needed. But it  locked in higher returns for too long and Ofgem declined to revisit the price review during the period.

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Further reading

Reopening electricity networks price control could cost more than it saves, says Ofgem

Citizens Advice criticises Ofgem over “unjustified” energy network profits

RIIO2 will see cost of capital at 4%, says Ofgem

Ofgem’s RIIO2 proposal on cost of capital: the industry responds

Tougher regulatory settlement may signal downgrade for SGN

Electricity North West on negative ratings watch over lower returns in RIIO2

 

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