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RIIO-2 Sector specific consultation - Citizens Advice submission

18 March 2019

In our response to the RIIO-2 Sector specific consultation [ 0.67 mb], we continue to be broadly in support of Ofgem’s direction of travel for an ambitious RIIO-2 package, both in terms of its commitment to improving stakeholder engagement across the network companies, but also in relation to the ambitions financial package being proposed to deliver value for money. Whilst we are pleased to see Ofgem’s ambition to introduce a number of new and refined tools to tackle the excessive profits being earned by network companies in RIIO-1, we do think that a clearer statement would be helpful regarding the overall financial package and Ofgem’s intentions for future price controls.

Many of the decisions to be made around financial proposals relating to the Cost of Debt, the cashflow floor and company financeability should be framed in the context of the two outlying companies, those whose past decisions have led to particularly poor debt portfolios in the present day. The pressure on Ofgem, from these companies in particular, will be significant in the coming years. Ofgem must ensure that these outliers make significant changes to clean up their debt portfolios as soon as possible. Making the most of the current low interest rate environment, for debt restructuring, is a valuable tool in this respect.

Looking ahead, Ofgem should be striving to reflect current low interest rates in future price controls (i.e. RIIO-3) by reducing the Cost of Debt further (as well as mandating more ambitious credit ratings), something that would be made possible by forcing these outlying companies to improve their debt portfolios.

We think there is a risk that until Ofgem convinces these two companies to fix their debt problems, that it will be very difficult for future price controls to be as ambitious as they otherwise could be. If Ofgem doesn’t tackle this, then across the board there will continue a strongly negative impact on consumers, in terms of value for money delivered. We would welcome Ofgem being bold and firm in their management of these companies, as well as decisions around the equity beta and Cost of Debt.