British regulator threatens to slash profitability of utilities

OILPRICE | Ofgem, the UK’s energy regulator, characterized in the past as “feeble” and “toothless”, now has threatened in a recent proposal to halve the profitability of regulated utilities. This is likely more than a minor regulatory kerfuffle for UK investors. It looks like the handwriting on the wall for utilities on both sides of the Atlantic, portending a dramatic repricing downward of equity returns. 

The UK regulator, then, permitted its regulated utility companies to earn about 9% or more on assets when risk free government yields were below 2%. That’s a pretax risk premium over government bonds of 7-8%. This is way over any historical precedent for returns on asset base or cost of capital.This level of return is uniquely generous to the utilities and their shareholders.

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