OREANDA-NEWS. Fitch Ratings says that the final determinations published today by the Competition and Markets Authority (CMA) in two appeals against Ofgem's price control regulation (RIIO-ED1) have a limited financial impact for UK distribution network operators (DNOs) while the removal of regulatory uncertainty is positive for the sector.

In its determination on the British Gas Trading Limited (BGT, owned by Centrica plc, A-/Stable) appeal against Ofgem's decision to modify the licenses of the 10 slow-tracked DNOs, the CMA dismissed four of the five grounds of appeal. On the remaining point which sought to challenge adjustments made to rewards and penalties for DNOs in the Information Quality Incentive (IQI) scheme, the final determination increases the net penalties across all 10 slow-tracked DNOs by GBP105m over the eight-year regulatory period, reducing allowed revenue recovery by the same amount. We believe that the only route open to BGT to appeal the decision would be to apply for a judicial review of CMA's decision, which we view as unlikely.

The financial impact is limited. Electricity North West Limited (BBB+/Stable) would lose GBP8m or GBP1m pa of revenues over 2015-23. UK Power Networks would lose GBP36m of revenues across all three networks (London Power Networks plc BBB/Stable; Eastern Power Networks plc, BBB/Stable; South Eastern Power Networks plc, BBB/Stable). SSE plc (BBB+/Stable) would see its two DNOs, Scottish Hydro Electric Power Distribution and South East Power Distribution lose a combined annual average of GBP2m revenues. The reduction for SP Energy Networks (SP Distribution) and SP Energy Networks (SP Manweb), both ultimately owned by Iberdrola, S.A. (BBB+/Stable), is GBP14m combined over the price control.

In its determination on the Northern Powergrid (Yorkshire) plc, (NPY; A-/Negative) and Northern Powergrid (Northeast) Limited (NPN; A-/Negative, owned by Northern Powergrid Holdings Company; (NPG) BBB+/Negative) appeal against Ofgem's decision to modify its two licenses, the CMA dismissed two of the three grounds of appeal. It, however, upheld one ground in relation to savings from the introduction of smart grids and other innovations. As a result NPG's allowed totex over the current price control was increased by around GBP32m, which results in an GBP11m increase in allowed revenue over eight years.

However, this benefit is offset by the license modifications stemming from BGT's appeal. Net result of the two appeals is moderately negative: two networks will lose around GBP3m of allowed revenue over 2016-2023 (in 2012/13 prices). We view rating impact as broadly neutral. The Outlooks on NPN's and NPY's Long-term Issuer Default Ratings (IDRs) are Negative, reflecting our expectation of borderline interest cover ratios versus the guidelines in RIIO-ED1. First year performance under the new price control would provide more clarity on the rating evolution.

The positive impact of the NPG ruling does not apply to other slow tracked DNOs and does not offset reduction in revenue imposed by the BGT ruling. NPG ruling is company specific.