LONDON (Dow Jones)--U.K. gas and electricity markets regulator Ofgem Monday increased the rate of return companies can recoup when they invest in their networks to 4.94% of capital invested for the period April 1, 2008 to March 31, 2013.
This is up from its previous proposal of 4.84%, but less than the 5.55% allowed for the 2005 to 2010 electricity distribution price control. The main driver for the reduction since the 2005 electricity distribution price control is the continuing evidence of relatively low interest rates, Ofgem said.
Ofgem acknowledged that network operators face costs that are rising faster than the rate of inflation, but the regulator is demanding that they trim expenditure by increasing their productivity by 2.5% a year.
Each of the U.K.'s eight gas distribution networks will be allowed an average annual operating and capital expenditure of GBP1 billion, 36% higher than the average for the period 2002 to 2007. The proposals will increase household gas bills by approximately GBP2 a year.
The revenue will allow the network operators National Grid Gas (NGG), Scotia Gas Networks operated by Scottish and Southern Energy PLC (SSE.LN), Wales and West Utilities and Northern Gas Networks, to spend GBP5 billion on infrastructure improvements over the five-year period, Ofgem said.
The main area of investment will be replacement of aging iron gas mains, which is required by the U.K. Health and Safety Executive.
Ofgem's proposals also include stronger obligations for network operators to offer good customer service and incentives to reduce their customers carbon dioxide emissions.
Ofgem Chief Executive, Alistair Buchanan, said: "Our proposals are a fair deal for the gas distribution networks and for customers, who will benefit from these investment increases."
The network operators have until 7 January to respond to the proposals. David Smith, Acting Chief Executive of the Energy Networks Association said: "The companies will now be assessing the proposals in detail over the next few weeks to see whether they are prepared to accept them."