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11 May 2010
London, 11 May 2010 -- The price limits set by Distribution Price Control Review 5 (DPCR5) will
be relatively neutral for the business risk profile of UK electricity
Distribution Network Operators (DNOs), says Moody's Investors
Service in a new Special Comment.
In December 2009, the UK energy regulator, the Office of Gas
& Electricity Markets (Ofgem), published its Final Proposals
on the price limits for the electricity DNOs in Great Britain for the
five-year regulatory period from 1 April 2010 to 31 March 2015
(DPCR5). These price limits have been accepted by all 14 DNOs.
Companies will be allowed to raise prices by an average of 5.6%
p.a. above inflation over the 2010-2015 period,
mainly to fund ongoing operating and capital expenditure which will amount
to GBP14 billion (in 2007/08 prices) during this period.
"Between March and April 2010, Moody's affirmed the
ratings of the DNO groups that are primarily assessed on their own merits
-- namely WPD, CE Electric and ENW," says Paul
Marty, a Moody's Vice President -- Senior Analyst and
author of the report. "These rating actions generally reflected
the relatively neutral impact of the final determinations on the business
risk profile of the DNOs, which in turn balances the reduction in
risk associated with the removal of the volume revenue driver and the
cap now applied to the losses incentive with a challenging efficiency
and performance framework. We further believe that the ongoing
accelerated regulatory depreciation partly mitigates the significantly
increased expenditure over DPCR5 and the associated funding requirements."
In the report, entitled "DPCR5: Rating-Neutral,
But Greater Complexity Will Challenge Monitoring of Financial Performance",
Moody's notes that it has also factored into its rating assessment
the material reduction in the return on capital allowed by Ofgem.
"Whilst such a reduction will exert downward pressure on the industry's
adjusted interest cover ratios, we note that the regulatory settlement
for DPCR5 includes various incentive mechanisms designed to reward the
best-performing networks (or conversely penalise the worst performers),
which may significantly improve returns," says Mr.
Moody's views positively Ofgem's desire to remove potential
distortions embedded in previous price control frameworks and recognises
the rationale for the new incentive mechanisms introduced by the regulator.
However, the rating agency also believes that the complexity of
the DPCR5 financial framework will challenge the monitoring and assessment
of the financial performance of DNOs. Moody's further cautions
that the increased opacity surrounding companies' performance may
complicate the investment decisions of capital providers.
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Moody's: DPCR5 is rating neutral for UK DNOs
Vice President - Senior Analyst
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