Regulator Publishes Initial Price Control Proposals for NIE's Transmission & Distribution Business

The Electricity Regulator Douglas McIldoon to-day published his initial proposals for NIE’s Transmission and Distribution network for the period 2002 - 2007.

Commenting Mr McIldoon said:

“The cost of transmitting and distributing electricity has fallen across Great Britain throughout the first fifteen years following privatisation. There is an understandable and legitimate expectation that this pattern will be followed in Northern Ireland.

“In order to assist NIE to meet that expectation I have carefully refrained from including in this price control most of the recent additional costs which electricity companies in Great Britain have had to meet. Customers will, with good reason, expect price reductions in line with those in Great Britain.

“My proposals allow NIE £215 million for investment (excluding the Moyle Interconnector) and £225 million for operating costs for the five-year period. In line with falling rates of return for the UK utility sector the cost of capital will be in the range 5.8 to 6.75 percent compared to the present 7 percent. These proposals would lead to a reduction of about £36m in Northern Ireland’s annual electricity bill. This would result in a reduction in the bill of the average household, which takes 3300 kilowatt hours of electricity, of about £27 per year.

“I am conscious that this price control is being published at a time when many exciting ideas and initiatives are being floated which could lead to even more radical changes in the structure and cost of the whole electricity supply industry. In these circumstances I have felt it right to offer the company - before the passing of time renders it impossible - the option of leading the industry to a lower cost future for the benefit of its customers through allowing it to choose between a traditional price control - which would lead to the greatest immediate reductions for customers - and a price control based on tracking price trends in Great Britain and creating a longer term framework in which an incentive based structure could align the interests of customers and shareholders. However only the company can decide if it wants to take a long-term option of leading Northern Ireland into a future where its electricity supply industry will be an economic asset rather than an expensive inhibition to economic development.”

Notes for Editors

Price Control calculations are contained in Chapter 6 of the paper.
In the last NIE Price Control, the MMC reduced NIE’s T&D allowed revenue by the equivalent of £50m in current prices.
In 2001/2 the average cost of moving one unit of electricity through the T&D networks in GB was1.39 pence and the average for distribution alone was 1.01 pence. In Northern Ireland the cost for T&D in 2001/2 was 1.98 pence and the equivalent to GB distribution was 1.78 pence, based on 90 percent of T&D costs.
NIE was privatised in 1992. It was to be subject to price control at periodic intervals and across the United Kingdom the pattern has been for these price controls to be every five years. As privatisation occurred two years earlier in GB companies there are now operating under their third price control.
On average prices at the end of the third price control in GB will be 44% per cent lower, in real terms, than they were at privatisation.
At the end of ten years T&D prices in Northern Ireland were 28% real lower than at privatisation. Under Ofreg’s ‘building blocks’ approach they will be 50% lower at the end of year 15 from a higher starting point.
The price control process consists of looking at the industry’s existing costs and projected costs and allowing the company to recover sufficient revenue from customers to meet its financial commitments and pay a return to its shareholders. To assist it in considering the company’s forecast of costs Ofreg employs consultants with considerable expertise in the cost and efficiency trends in the industry across the United Kingdom.
The structure of the industry in Great Britain and Northern Ireland differs somewhat in that in Great Britain the regional electricity companies are responsible for the network within the regions and the National Grid Company is responsible for the high voltage network that delivers power across England and Wales. (In Scotland the two regional companies are also responsible for their own transmission networks.) Northern Ireland has not had to bear the cost of an external high voltage network and the internal transmission network is both short and of lower voltage than the typical peripheral GB region. Based on a comparison of distribution network costs only i.e. those internal to the region Ofreg calculate that the costs in Northern Ireland were 35% above the GB average at privatisation and that this year the gap is 83%. If allowance is made for Northern Ireland privatisation two years later the gap at the end of the first ten years of privatisation is 32%.
In 1996 the NIE T&D price control was referred to the Monopolies and Mergers Commission as NIE refused to accept Ofreg’s proposals. There has only been one other case in the thirty UK T&D price controls of a company taking its case to the MMC.
The price control, which is running approximately a year behind schedule, will take effect from 1 April 2002 and any change to NIE’s tariffs will be back-dated to that date.
These initial price control proposals do not include the cost of the Moyle Interconnector which will add to the cost of T&D in Northern Ireland as the total costs of the interconnector exceed, and are likely to continue to exceed, the money raised by use of interconnector charges. The extra T&D cost from the interconnector is however offset by the lower cost of generation sourced from Scotland. Moyle will however be included in the final proposals.
Following a period for comments and the consideration of responses Ofreg will publish final proposals in June 2002.
For further information or to arrange an interview with Douglas McIldoon, please contact Nick Carson on 028 9127 5965 or 07711 482807