UK energy regulator seeks to cut yields from utility companies (NYSE:NGG)

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UK energy regulator Ofgem proposed on Wednesday to cut the return on equity allocations for UK electricity distribution companies for the regulatory period 2023-28 to 4.75% from 6% to 6.4% for the current five-year period, which ends next year, and a weighted average amortization of the cost of capital of 3.26% for most companies.

The regulator has proposed a total spending package of £20.9bn (~$25.5bn), including £2.7bn in seed funding, to be split among the six companies involved, including National Grid(NYSE: NGG) Western Power Distribution, which it acquired last year.

National Grid (NGG) shares closed +1% in London on Wednesday, and are up by about the same percentage in US trade.

The other five UK distributors are Electricity North West, UK Power Networks, Northern Powergrid, SP Energy Networks and Scottish & Southern Electricity Networks.

RBC utilities analyst John Musk said he viewed the proposals as mildly positive for business, as expectations were for similar total expenses and a return on equity of around 4.6%.

Ofgem said it ‘proposes tough efficiency targets for networks along with a steep reduction in their allowed rate of return, meaning less consumer money goes to company profits’, adding that most consumers might see a slight drop in network fees.

The regulator will hold consultations on the proposed plan until August 25 with a final decision to be confirmed in December.

National Grid (NGG) is a “solid but [with] limited upside potential,” writes Retirement Pot in a recently published bearish analysis on Seeking Alpha.

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