German regulator ups level of returns on power grids

From next year electricity providers will be allowed to earn a return of 7.56% before taxes on their existing networks, up from the 6.37% proposed in May and the 6.5% they can charge until the beginning of next year, the Federal Network Agency said on Monday. “The higher rate makes E.ON’s sale of its long-distance power network more attractive and increases RWE’s earnings from the business,” said Munich-based Unicredit analyst Karin Brinkmann.

The regulator oversees returns from electricity and gas grids in Germany to ensure that any utility can get access to clients at the same rate in order to get more companies to compete for customers and curb soaring power prices. Regulation has so far cut RWE’s sales from its network business by a fifth from the €5 billion ($7.82 billion) of 2006.

E.ON, which in February decided to sell its long-distance, high-voltage electricity grid, declines to reveal earnings figures for its grids. As there is only one electricity and gas network in most regions in Germany the utility operating it has the power to give preferential treatment to its own deliveries of power and gas, keeping prices artificially high. The return on existing gas grids -- as opposed to the return on newly built networks -- will drop from 7.8% to 7.56%, the Federal Network Agency said. “That decision hits E.ON’s gas unit Ruhrgas and will dent profits from RWE’s planned sale of its gas grid,” Brinkmann said. For new investments the regulator raised returns.

Power and gas providers will from next year be allowed to earn a return of 9.29% on the capital they invest in their grids. The regulator’s previous proposal for returns of 7.82% had led utilities to warn that profitability might be too low to maintain grids at their current reliability. Investments in new networks are crucial to connect planned windfarms in the north with areas of large demand in the south and the west of the country. The regulator also said it is in favor of bundling all German power networks into one company. E.ON is Germany’s largest utility by sales, followed by RWE, Energy Baden-Wuerttemberg and the German unit of Swedish utility Vattenfall (Reuters)