Regulator launches consultation on NIE T&D price control proposals

Key proposals within the price control include:

Capital costs

- Similar high levels of investment of £314m in RP5 as in the current price control (RP4), to maintain a high level of network reliability.

- Lower consumption means that less investment is likely to be needed in this area.

- Special treatment for investment in the grid to facilitate renewable generation and interconnection (and energy policy). Allowed revenues will be ring-fenced and the process of approval will reduce risk and address uncertainty.

- Incentive mechanisms in place to encourage efficiency where appropriate.

Operating costs

- Allowances for operating costs are set to encourage further efficiency gains. We have identified an opportunity to reduce operating costs by 9% over the five year period.  Costs have been benchmarked and further efficiency gains may be possible.

- Allowed operating costs over the period of £257m.

- Incentive mechanisms in place to encourage efficiency and to ensure the appropriate allocation of risk.

Pension costs

- For ongoing pension costs for NIE T&D employees, we have accepted NIE T&D’s proposal in full.

- Consumers will only pay to repair a deficit in the NIE T&D pension fund, to the extent that this deficit is both unavoidable and the legal responsibility of NIE T&D.

- The total deficit as at 31 March 2011 was £87m. Consumers will pay to repair £36m of this over 15 years. Over the five year RP5 period, the proportion is £12m.

Rate of return

- Our proposed allowance for the costs of capital reflects NIE T&D’s actual cost of debt and is slightly higher than their nominal rate of return (also called the weighted average cost of capital - WACC) in the current RP4 period.

- Whilst our proposals are similar to what equivalent electricity distribution network operators were awarded in England and Wales in 2009, they are less than what NIE T&D proposed.

- The proposed rate of return for renewable and interconnector investment is 45 basis points lower to reflect the lower level of systematic risk.

Funding

- NIE T&D has indicated that, given the overall level of capital investment will increase significantly with renewable and interconnection, they will need to raise additional funds. We anticipate that this will be a mixture of debt and equity (or retained dividends) to maintain its existing capital structure.

- Our financial analysis concludes that NIE T&D will be able to continue to finance its activities.

Tariff impact

- Network charges presently account for about 24% of the overall electricity bill for a domestic consumer.

- Before taking account of inflation, we expect our proposals will lead to significantly lower tariffs than that envisaged in the NIE T&D price control submission. 

Utility Regulator Chief Executive, Shane Lynch said:
“Today marks the beginning of a formal 13-week consultation on this price control.  Our proposals are focused on protecting consumers, both now and in the future, while at the same time protecting investors. 

“Consumers deserve to have a modern high performing electricity network which will accommodate renewables, at a reasonable cost. Our proposals are designed to achieve all of this and we look forward to further discussion with NIE T&D. We also intend to engage extensively with other stakeholders over the period of public consultation”.

Relevant documents include:
Main paper - the draft determination
Summary
Key point briefing
A number of appendices are also available within electricity publications.