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Open Letter to Dermot Nolan OFGEM from energyhelpline May 16 National Grid Excess Profits

24-05-2016 Posted by:Mark Todd

24rd May 2016

Dermot Nolan,
Chief Executive,
OFGEM,
9 Millbank,
London.

Re. Concerns Over Extremely High Profit Levels at National Grid in the UK

Dear Mr. Nolan,

As a Senior Director and Co-founder of one of the UK’s largest energy price comparison companies, I would like to raise with you serious concerns of excess profits being made by National Grid in the UK. These, in turn, push up energy prices for British consumers and businesses. This is something that I have raised with OFGEM executives before and I now raise openly with you as Chief Executive hoping it will inspire you to investigation and action.

Your role, as laid down by law, is to “protect the interests of existing and future consumers”. Do you therefore agree that your job as regulator is to ensure that the UK energy market works for the British people and its businesses?

If so, I trust that you take this open letter seriously, investigate what is going on without defensiveness, and take appropriate action to ensure the British people and its businesses get a fair deal from National Grid.

National Grid’s Latest Results

In their latest results, National Grid boasts to stock market investors of fantastical operating profit margins of 38.4% on their UK business. This is far in excess of those at its US business which makes operating margins of 15.9% – less than half. It is also way in excess of comparable businesses such as Centrica and SSE that make 5.2% or Sainsbury’s 4%. Even Alphabet (Google’s parent) only makes a 20% margin.

National Grid’s Operating Profit Margins

Country Operating Profit Margin (%)
UK 38.4%
US 15.9%

Source: National Grid Results for Financial Year April 2015 – March 2016 published 19 May 2016

Return on Equity

National Grid also explains in its annual report that its achieved returns on equity were much higher in the UK than in the US. They were the following across their various divisions and territories:

Division Return on Equity
UK Electricity Transmission 13.9%
UK Gas Transmission 12.5%
UK Gas Distribution 13.0%
Weighted Average UK 13.3%
US Regulated 8.0%

Source: National Grid Results for Financial Year April 2015 – March 2016 published 19 May 2016

Clearly on both measures much higher profits are being made from UK infrastructure than US. On the operating profits metric, UK profits are 142% higher than in the US; and on the return on equity metric they are 66% higher. It’s also interesting to note that National Grid invested less last year in the UK than the US despite making 142% more profit in the UK.

Is National Grid in your view deserving of these very high profit margins in the UK despite investing less here than the US? Is it right that they make so much more profit from UK activities than US?

I also note from page 43 of their FY 2016 results presentation that in the UK they actually made a return on equity at a level 33% greater than allowed by you, the regulator (13.3% vs 10.0%). Is that something you will be taking action on?

What Could OFGEM Do?

OFGEM, as regulator, could take action to remove these differentials between the US and the UK, as you set the pricing for National Grid. The nation and its businesses are totally at your mercy, as it is in your power and your power alone to set these prices.

The costs of electricity and gas transmission and distribution are a large part of a typical energy bill comprising 20% and 18% respectively – around £220 a year of a typical household bill.

If you were to reduce the profit levels in the UK to US levels by imposing a price cut of 12-25% on National Grid, the savings due to UK consumers and businesses would be between £0.8BN and £1.7BN (dependent on which measure you take). £1.7BN of savings would give the UK’s 30 million households and businesses on average £57 each per year off their bills.

I would be interested to know your thoughts on the matters highlighted within this letter and whether they are also of concern to you? I’d also like to know if, in your opinion, this also presents a huge opportunity for you to do something great for the British people by taking action?

Yours faithfully

Mark Todd
Co-founder, energyhelpline.


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