National Grid Accepts Regulatory Proposal


On Feb. 28, National Grid announced it has accepted U.K. regulators’ proposal for natural gas distribution and gas and electricity transmission rate structures for 2013-21. Regulators will issue a final ruling in the coming weeks in line with the agreed-to proposal. ADR shares after incorporating the final plan terms.

The proposal implies an 80% increase in National Grid’s U. K. regulatory asset base through 2021 to near GBP 40 billion. Combined with its U.S. utilities, this likely would make National Grid one of the largest utilities in the world. Our projections through the first half of the RIIO period are consistent with the proposal, but our growth projections through the second half of the rate period are significantly lower than what is included in the proposal.

The offset between raising our capital investment assumptions but also raising our earnings growth assumption should have a slight net benefit assuming National Grid can meet proposed cost targets and earn incentive returns. The proposal included a 7% real allowed cost of equity for electric transmission, 6.8% real allowed cost of equity for gas transmission and 6.7% real allowed cost of equity for gas distribution.

These are slightly lower than recent average U.S. nominal awarded returns, but with incentives, additional leverage and inflation adjustments, National Grid has the opportunity to earn nominal returns well above what most U.S. utilities earn.

Management said it plans to issue its financial projections, notably setting its dividend policy, before or together with its fiscal 2013 results release expected in May.


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