Select Committee on Northern Ireland Affairs Minutes of Evidence


Further Memorandum submitted by Northern Ireland Electricity plc

  Thank you for your letter of 1 April 1999 in which you put further questions to us and invited our comments on aspects of Ofreg's evidence taken before the Committee on 10 March 1999.

  We enclose a further Supplementary Memorandum which we have structured in two parts, trying from the point of view of the convenience of the Committee to confine our detailed technical responses in a separable annex.

  We would be pleased to respond to the Committee if any clarification is required or if there are further questions arising.

Supplementary Memorandum submitted by Northern Ireland Electricity to the Northern Ireland Affairs Committee enquiry into the electricity supply problems in Northern Ireland over the Christmas and New Year holiday periods

  This Supplementary Memorandum addresses a number of issues which arise from the Minutes of Evidence from Ofreg of 10 March 1999 as identified by ourselves and/or requested by the Committee.


  Ofreg in their evidence set out to address five areas, viz., the ability of the company to minimise supply interruptions by its choice of network investment strategy; the extent to which investment strategy is hampered by lack of resources; the company's communications with customers; the efficiency with which customers were reconnected; and the goodwill payments to customers for the inconvenience of prolonged supply loss. They also gave their particular perspective on the role of MMC.

  On the issue of goodwill payments, Ofreg acknowledged that the company has done very well and that the payments made by NIE probably exceed even the benchmark of guaranteed standards: "most customers are going to get more than they would have got under the guaranteed standards and certainly none of them will get less". They stated also that the level of customer benefit "certainly is as good if not better than was achieved for customers in other parts of the United Kingdom and in the Irish Republic".

  Since a question arose in evidence as to the costs to be borne by shareholders, it may be helpful for the Committee to know that NIE currently estimates the total cost of payments to customers at £8.8 million. These and all other uninsured costs of repairs will be borne by shareholders under the current price control. There appeared to be some misunderstanding on this point in the evidence session: there is no convoluted mechanism by which these costs are collected from the customer—as Mr Coulthard clearly understood, this is unplanned expenditure which was not taken into account in the price control, it exceeds the allowances set by MMC, and these costs have to be borne by shareholders.

  On the issue of the efficiency with which customers were reconnected, Ofreg's evidence, set in the context of communications handling, supports NIE's position. They referred to the problem that existed in other places, including the Irish Republic, where there was "a failure to reconnect customers which was at least, if not worse, than what happened in Northern Ireland. There certainly was a region in the Irish Republic where there were 400,000 customers of whom 200,000 were off supply. Many of then were off supply for much longer . . .". From our own contacts, we are confident that the process of reconnection of customers was at least as efficient as that of other utilities in similar circumstances.

  On the issue of communications with customers, NIE recognises clearly that communications handling during the recent storm was quite unsatisfactory from a customer viewpoint and we have described the steps we are taking to put in place a much more effective system of communications for the future.

  In the following sections, we have attempted to respond constructively on the remaining issues of network investment strategy and the broader issues of regulation, prices and the role of MMC as they arose within the evidence session with Ofreg.

  We enclose a separate Annex expanding on some of the issues arising in greater technical detail and we respond there to a number of specific technical questions raised by the Clerk to the Committee.


  Ofreg in their evidence touched upon a number of issues, including: the priorities for investment; whether the rural network was being given the priority it merited; the significance of past capital underspend; and whether lines are restored to a 1950's specification or better.

Priorities for investment

  In our previous submission to the Committee we described how investment and maintenance policy relies upon age monitoring, particularly of poles. We indicated how this is combined with other condition monitoring to determine the refurbishment needs of the network, avoiding unnecessary wholesale replacement of serviceable equipment, and thus reducing costs to the customer. This is industry best-practice and is fully in line with Ofreg's Mr Thomas' philosophy: "I am far less concerned about the age of equipment as I am about its fitness for purpose and its condition of maintenance". NIE's approach to assessing the performance benefits of specific categories of work is set out clearly in paragraph 6.22 and following of the MMC Report.

  We provided the Committee also with evidence of the type provided within our price review to show that refurbishment can improve reliability performance on individual circuits by a factor of 3.5. We pointed out that this type of industry-standard analysis led us to focus a particular effort on 11kV network refurbishment during the first regulatory period and to propose a continued programme at a high level in our submissions to the Ofreg price review and to the MMC.

  Ofreg cannot possibly claim now that they are unclear as to whether the rural network was being given the priority it merited, given that they were party to our analysis of the performance benefits and contested vigorously at MMC the specific merits of the higher level of investment we sought for rural networks to enhance their reliability.

  NIE has not argued that the lower level of investment allowed in the first two years of the present price control contributed substantially to the failures on our distribution networks in the recent storm. They could not possibly have done. The condition of the Northern Ireland system is a function of pre-privatisation under-investment which the MMC calculated would take up to 10 years to redress at the rate of refurbishment allowed (paragraph 7.47 of their report).

  What we have argued is that, by most standards, the levels of investment going into distribution networks is actually high and that, to the extent that Ofreg represents the customer interest, the evidence from the recent price control review is that the customer interest has called for lower rather than higher levels of investment in rural networks.

  The view that a lesser level of investment in rural networks in Northern Ireland is merited could be a perfectly tenable one, if based on a proper consideration of all the issues. We accepted it as an outcome of the MMC. What we find difficult to accept is that having been told that we should not invest at the level we proposed in rural networks, we should now be told that, in the light of the recent storms, we as a company got it wrong and we should have really been investing at a much higher level.

  However, we have also argued that Ofreg have been extremely slow to recognise the merit of high investment in rural networks and it is clear from Ofreg's evidence to the Committee that they still have difficulty in recognising its merit. It is a fact that we switched substantial resources during the first price control period specifically into rural refurbishment, because we were able to demonstrate its importance to reliability. We attempted to make the case for maintaining those resources at a high level during the present price period but, despite the evidence we provided as to the effectiveness of such programmes, Ofreg opposed the allocation of resources at the level we requested.

  Nevertheless, even with higher levels of investment, as Mr Thomas' evidence indicates: "You will never build an overhead system which is completely and utterly immune to the effect of weather", and the statistics from other utilities, hit by what for Northern Ireland was the worst storm since records began, will demonstrate that other rural distribution systems were similarly affected. What we will not accept is that Ofreg, who argued for lower rates of refurbishment on rural networks, should now suggest that they were given insufficient priority.

Capital underspend

  Capital underspend has not at any time affected the rate of investment in rural networks. In fact, because the refurbishment of rural networks is less capital intensive than other forms of performance improvement, our decision during the first price control period to give priority to rural networks contributed to creating the savings in the capital programme. The MMC Report notes at Paragraph 7.7: "A further factor (in the underspend) was that NIE had substantially altered its investment strategy post-privatisation to one of concentrating on improving the quality of supply in rural areas." This change in investment strategy occurred under the new management installed at privatisation and the new major programme of refurbishment of 11kV overhead lines only began in 1994-95, the financial year immediately following NIE's flotation.

  The programme of rural refurbishment post-privatisation was built up as quickly as possible to the rate of 1,500 km per annum, as now under the current price control. For the current price period, we had proposed 1,750 km per annum and, as indicated above, Ofreg argued for a reduction to 1,200 km. The scale of the 11 kV overhead line refurbishment programme which was capable of being undertaken 6-7 years ago was limited by NIE's non-financial resources (principally skilled employees and subcontractors). It was also constrained by practical limits on our ability to change direction and to find methods of organising and planning the rural refurbishment work, including the introduction of new techniques to minimise the disruption to customers' supplies, such as live-line working and the use of mobile generating sets.

  The issue of past capital underspend, therefore, is not its impact on rural reliability but rather how to ensure an equitable split of the benefits of underspend between customers and shareholders.

  This is not a new issue in incentive price regulation: it has featured in almost every price review to-date covering some 40 companies which make up the electricity and the water industries. The MMC has demonstrated how to evaluate the issues, which are not all to the disbenefit of the customer, and how to apply mechanisms such as claw-back, taking account of all the public interest issues involved.

  In general, there are two conflicting forces in the management of capital expenditure from a customer viewpoint, viz to have a higher spend which ensures more is delivered to the customer and to have a lower spend which ensures less upward pressure on price. Incentive regulation deals with this conflict by scrutinising capital expenditure proposals in detail at the time of a price review and then providing a specific incentive within the price control to encourage the company to manage capital expenditures efficiently and effectively. The price review process itself tests the legitimacy of any previous underspend.

  In our previous supplementary submission we set out the salient facts in relation to our underspend in the first regulatory period.

  The extent of underspend was by far the greatest in the transmission network which was relatively unaffected by the storm. On distribution networks, some 83 per cent of the capital allowance was fully spent. In the enclosed (and in Appendix 7.1 of the MMC Report), details of the bulk of the underspend are set out and accounted for in terms of specific actions which were taken by NIE to manage the capital programme efficiently. These actions are described under capital efficiency headings such as demand-side management measures undertaken by the company, delayed transmission asset replacement, more cost-effective procurement, improved labour productivity and changes in investment strategy.

  In setting NIE's new price control, the MMC took full account of the level of underspend in the first price period.

  Ofreg's evidence to the Committee appears to give the impression that they would have handled the underspend very differently. But Paragraphs 2.108 and 2.118 of the MMC Report show that Ofreg accepted that efficiency gains in capital expenditure were a factor in the underspend and Ofreg proposed a clawback of some £7 million NPV in projected revenues, whereas the MMC imposed a clawback of £7.2 million, slightly in excess of the Ofreg proposal.

  The benefit to customers of the underspend is that final prices to customers are now some 1.9 per cent lower than they would have been if the full capital expenditure which was forecast at privatisation had indeed been spent. Over the present five year period alone, this is worth some £50 million in lower bills to customers in the present five year period, compared to some £25 million of cost to customers in the previous five years. If all of the capex savings result in deferments maintained for a further five years beyond the current period, there would be a further gain of some £37 million to customers in lower bills. (All of these figures are expressed to a 1996-97 price-base).

  Our response to the Clerk of the Committee specific questions on the linkage between the underspend and prices is set out in more detail in the Annex at Section A4.

Overhead Line Design

  In their evidence to the Committee, Ofreg laid particular emphasis on a statement that NIE's refurbishment of lines is to a 1950's specification and implied that we did not take advantage of appropriate new technology for insulated overhead conductors.

  In the Annex at Section A2 we show that this is a completely wrong understanding on Ofreg's part of our policy on refurbishment. Specifically:

    —  NIE's Overhead Line Design Specification has continued to evolve with industry best-practice since the 1950's and the current standard, which is the same as that adopted by the majority of the GB distribution companies, was newly issued in 1992;

    —  refurbishment of overhead lines is undertaken entirely in line with this standard;

    —  a range of design improvements which we will introduce over the next 12 months will result in further improvements in performance;

    —  and the experience in GB of the new insulated conductor technology referred to by Ofreg has highlighted a range of serious problems which is causing the distribution companies in GB to review their use of the current design. We have been involved in the development of an improved specification and we hope to see it introduced with the benefit of the GB experience, prudently avoiding the costly development-stage problems which have been to the detriment of customers on other systems.


  As the Committee will be aware, NIE's T&D price control was reviewed by Ofreg in 1995-96, with a view to the introduction of a new price control with effect from 1 April 1997. In the event, NIE rejected Ofreg's proposals for a new price control, and Ofreg therefore referred the matter to the MMC for resolution. In March 1997, the MMC determined NIE's T&D price control at a level which the MMC clearly considered to be the minimum necessary to enable NIE to finance the carrying on of its T&D Business to the standard which they considered to be what the public interest required. The MMC reached their conclusions after lengthy examination of the issues, and a minute analysis of NIE's past and projected expenditure. The MMC drew on their own resources and expertise gained from other similar inquiries, and used external consultants to provide additional support on technical matters relating to NIE's networks.

  Despite the thoroughness and rigour of the MMC's report, Ofreg refused to accept its findings and sought instead to impose on NIE a price control allowing substantially less revenue than the MMC had concluded to be necessary and appropriate.

  We pointed out to Ofreg as early as May 1997, that they were bound by the MMC's conclusions as to the appropriate level of allowable revenues to be factored into the price control. We do not know what view Ofreg took as to the legal position, since they declined to reply in substance to our letter. Ultimately, their refusal to discuss the issue with us left NIE no option but to apply to the court for a declaration as to the binding effect of the MMC's conclusions. Although the court rejected our case at first instance, the Court of Appeal found unanimously in our favour. Ofreg still refused to accept the outcome, and sought leave to appeal to the House of Lords. The House of Lords has refused leave to appeal.

Ofreg's challenge to the role of the MMC is unique

  It is clear from the nature and style of their evidence to the Committee on the role of the MMC in determining NIE's price control that Ofreg are implacably opposed to the MMC's authority.

  Yet the MMC's authority in relation to Ofreg is absolutely no different to its authority in relation to any other Regulator in the UK in terms of resolving disagreements between the Regulator and the company over licence modifications, e.g., to give effect to a new price control. Its authority is provided for on a similar basis within legislation throughout the UK and, following a recent comprehensive review of the effectiveness of regulation, the Government has decided to reinforce the MMC's authority over regulators in relation to price controls in a very significant way. Its purpose is to make regulation more transparent, more accountable, more predictable, and thereby to ensure its stability and its legitimacy.

  No other regulatory authority has placed itself in opposition to the MMC in this way. Ofreg's very prolonged and continuing challenge to the role of the MMC is entirely unique within the UK regulatory system and appears increasingly idiosyncratic. Ofreg's position with regard to the MMC increasingly raises questions as to whether its own judgement on these matters is well-balanced. In view of Ofreg's evidence on this issue, the Committee may find the following alternative perspective helpful.

Ofreg's position with regard to the MMC

  Ofreg attempt to portray their challenge to the MMC as absolute vital in protecting the interest of the Northern Ireland electricity customer.

  To support this, in evidence to the Committee on the MMC's impact on prices, Ofreg stated: " . . . they (prices) were not allowed to fall dramatically in 1997 because the MMC intervened and until that is put right that element (of price for which NIE is responsible) will not be reduced." It is very difficult to reconcile this statement with the fact that, as a direct result of the MMC price control, NIE's component of price fell by 28 per cent per unit in April 1997. Moreover, the difference between the MMC and Ofreg price controls is stated clearly within the MMC's Report to amount to just 2 per cent for domestic prices (Paragraph 2.211): this is around £6 per annum on the average domestic bill.

  For prices to large industrial customers, Paragraph 2.213 of the MMC Report estimates the difference to amount to around 1 per cent, the effect being lower because generation accounts for a much higher proportion of the price to commercial and industrial users. Yet, Mr Mclldoon is quoted in an interview in the 1 April 1999 edition of Utility Week as stating that the MMC decision would "devastate Ulster's fragile economy" and would damage the province's ability to compete with the Republic. Of the fallout from the MMC ruling, Utility Week quotes Mr Mclldoon as stating: "I wouldn't like the responsibility for screwing up a regional economy like this."

  Ofreg's comments suggest that they have entirely lost sight of their own objective. They are on record as stating quite clearly that generation costs are the crux of the electricity pricing problem in Northern Ireland and that MMC are part of the solution.

  Ofreg have previously estimated generation costs in Northern Ireland to be some 43 per cent above an open-market price: if these figures from Ofreg were to be taken at face value, they would suggest a price disadvantage to Northern Ireland customers of around 34 per cent in the large industrial sector and over 20 per cent in the domestic sector due simply to generation costs. The only lever which Northern Ireland has available to encourage the generators to enter into a real negotiation on their contracts to resolve this problem is the threat of an MMC referral. As Ofreg indicated in their evidence to the Committee: ". . . the Monopolies and Mergers Commission could decide that the existing arrangements were acting contrary to the public interest in which case the President of the Board of Trade would be entitled to restructure the industry . . ."

  It is difficult to see how Ofreg can expect the MMC to produce a solution to such issues, and for the MMC's solution to command respect, in the face of Ofreg's continuing assault on the competence and authority of the MMC.

  Moreover, it must be borne in mind that the MMC were themselves critical of Ofreg's own review of NIE's T and D price control. The following is an indication of some of the areas specifically mentioned by the MMC.

  Ofreg's original price control was based on two key reports by external consultants—one on the capital expenditure needs of the networks and the other on NIE's operating costs. Both of these reports were roundly rejected by MMC, albeit in diplomatic language. In the case of the capital expenditure report, MMC stated: "we consider that conclusions drawn directly from that report are not sufficiently robust in themselves to form a basis on which we can reach appropriate price control decisions. We have accordingly sought to reach an independent view . . ."; and in the case of the operating expenditure report: "Although the DG had described the findings of PKF's report in putting his proposals to NIE, he had not made the report itself available to the company. When we did so, NIE submitted evidence on what it regarded as errors, inconsistencies and unreasonable assumptions in the report. Having studied the report ourselves (with the help of consultants), and having taken account of comments by NIE, the DG and PKF, we believe the conclusions are not sufficiently robust in themselves to form the basis for the future price control. We have accordingly sought to reach our own assessment . . ." (Paragraphs 2.121 and 2.149 of the MMC Report refer).

  We believe that it was clear at MMC that Ofreg's specific opposition to a higher level of spend on rural networks was poorly informed and represented a serious failure to come to grips with the real capital expenditure issues. As we indicated in previous evidence, Ofreg's capital expenditure submission to MMC was produced by consultants (RKD) who did not even visit Northern Ireland and were not allowed to discuss their findings with NIE. As regards Ofreg's management of this aspect of the price review process, the MMC Report states: "Although RKD sought permission to contact NIE, the DG considered that that would delay matters. He was also concerned that NIE would seek to steer the consultants towards conclusions which justified a higher level of capital expenditure. While we note the DG's reasons for not letting RKD contact NIE, the lack of dialogue undoubtedly made it harder for us to compare information from the DG and the company, who had not even reached agreement on how the various items of expenditure should be categorised" (Paragraphs 2.120-121).

  In the same context, Ofreg suggested to the MMC, as they suggested in evidence to the Committee, that the quality of information provided by NIE was poor or poorly documented. The MMC rejected this suggestion in the following terms: "..our own consultants did not experience difficulty in finding the information they sought during the course of our inquiry. We noted, however, that the RKD report refers in several places to lack of access to information and it appeared during the course of our inquiry that RKD might have misunderstood NIE's approach to some issues" (Paragraph 7.19). RKD's difficulties clearly related to the DG's refusal to accede to their request to contact NIE, much less allow them to visit the province whose system capital expenditure needs they were to help determine.

  Furthermore, Ofreg's evidence to the MMC on the extent to which customers required the performance of the system to be improved was supported by a customer survey which we believe was recognisably defective and clearly damaging to the interests of the rural customer. This survey, as Ofreg's evidence to the Committee indicates, set out to demonstrate that the Northern Ireland electricity customer was largely satisfied with the current level of service and did not think that the quality of electricity supply needed to be improved. The obvious defect of the survey was that it did not distinguish between urban and rural customers who are exposed to starkly different experiences of customer minutes lost (CML) off-supply.

  While the DG stated to the MMC that there was no case for NIE to improve its relative level of service, the MMC very clearly understood the underlying issue and dealt with it at length in Paragraphs 6.21-26 and in 2. 126-129 of their Report. Paragraph 2.126 states: "Customers in the more rural parts of Northern Ireland, who tend to be served from long stretches of 11kV overhead wire, experience a much higher level of CML than customers in urban areas. By concentrating its efforts on refurbishing the worst-performing circuits, NIE can achieve a significant improvement in overall average CML as well as delivering a better service to customers who at present experience a relatively high level of interruptions." Far from being remote from the customer and the issues, as Ofreg have suggested to the Committee, the MMC Panel itself visited Northern Ireland to view at first hand the nature of the investment need and engaged with the issues in a way which Ofreg and its consultants signally failed to do.

  The MMC Report provides an extremely comprehensive analysis of every aspect of the transmission, distribution and supply of electricity in Northern Ireland, including a very detailed evaluation of the real issues which impact upon customers, such as capital expenditures, investment in rural networks, the treatment of capital underspends, return on investment, etc. It sets out in detail the MMC's reasoning in support of their conclusions and is a model of the transparency of regulatory procedure which the Government has now set out as a key principle governing the regulatory process. No such comprehensive document was ever produced at the time of privatisation of the industry, when the basis for important decisions taken was entirely opaque to those outside of the Civil Service and regulatory structure.

  The MMC Report not only provides clear recommendations and conclusions, it also sets clear regulatory guidelines which, if properly used, will be an invaluable aid to monitoring performance and to the conduct of future price reviews. A review of this type would be invaluable to a public understanding of the issues surrounding the current negotiations on the generating contracts and that is why NIE has continued to support Ofreg's original suggestion of an MMC referral. There can never be a substitute for a transparent process in which all parties are required to address the substantive issues within the framework of a quasi-judicial process, as at MMC. The interest of the customer will not be well served by anything less.

Regulatory principles and the role of the MMC as restated by Government

  There is a popular misconception that the focus of Government policy in regulation has been uniquely on the regulated companies. It was quite clear in the recent review of regulation that Government has been equally concerned to ensure fundamental reform of the regulators' offices in order to address the idiosyncracies and lack of transparency evident to date in regulatory decision-making. The prevalence of such idiosyncracies and lack of transparency were clearly viewed by Government as prejudicial to the long-term stability of the regulatory framework and indeed to its very legitimacy. This is not just an issue for shareholders—it is also in the vital interest of customers as the following excerpts from the Government's Green Paper "A Fair Deal for Consumers—Modernising the Framework for Utility Regulation" and its subsequent White Paper show.

  The Green Paper emphasises that making regulation open and accountable is critical to ensuring that decisions are fair and that the regulatory framework is accepted by all stakeholders and has long-term stability [Paragraph 1.25]. It indicates that reform of regulation is important because the regulatory institutions and processes are important. "They are key to securing better decisions, better understood and more widely accepted decisions, and greater legitimacy. With legitimacy and acceptance comes regulatory stability" [Paragraph 7.1].

  The Green Paper sets out the case for protection against the idiosyncrasies of individual regulators and the lack of discipline in relation to advisers: "Conferring significant powers on individual regulators has produced a system where regulators have a strong element of individual responsibility. It may have had advantages in a period in which most regulators have been focused on driving forward competition. But there are risks in concentrating too much discretion on an individual. There are few formal checks and balances on the regulators. In practice, the regulators have made ad hoc use of advisers to assist them, but there is no statutory obligation on them to do so, and no disciplines on the regulators to follow the advice given. They are not accountable to a board of directors or equivalent. There is a risk, therefore, of unpredictable and unaccountable decision-making" [Paragraphs 7.5-6].

  The Green Paper sets out the role of the MMC: "The Monopolies and Mergers Commission (MMC) plays an important role in the regulatory framework where regulators and utility companies cannot agree a licence modification (e.g., to give effect to a new price control). In these circumstances, the matter may be referred to the MMC. It is important, therefore, that MMC procedures for handling licence modifications are considered along with the other aspects of regulatory process to establish whether they can be improved to secure better and more transparent outcomes while not compromising the timeliness of MMC processes" [Paragraph 7.47].

  The Green Paper goes on to explain how in a price reference the MMC may frame their adverse findings in such a way as to limit the regulators' discretion on remedies (as the MMC did in the case of NIE's review) so that the MMC's conclusions are then final, as they always are in price references in the water sector. The paper recognises the view that MMC panels are not as well placed as regulators to specify the technical details of the licence modifications necessary to give full effect to their conclusions but goes on to state: "However, giving regulators wide discretion over how to remedy adverse effects (subject only to judicial review) is regarded by many observers as unsatisfactory" [Paragraphs 7.54-55]. The Government considered two possible remedies for this problem—one was to require the regulators merely to consult with the MMC on such licence modifications, the other was to require actual reference of the regulator's proposals back to the MMC for final endorsement. The Government chose to reinforce the position of the MMC unequivocally through a requirement for final endorsement [White Paper Conclusion 7.14 Paragraph 93].

  The White Paper sets out policy for the future structure of regulation, noting that the results of their consultation process shows "strong support for reforming the top-level structure of the regulators' offices, in order to ensure the right checks and balances exist on individual regulators . . . . The Government has concluded, in light of detailed consideration of the responses, that small executive boards of three full time members should provide the most effective regulatory model for all the sectors covered in the Green Paper. This model offers the advantages of collective but streamlined decision-making by a small cadre of high calibre, professional regulators; greater accountability; scope for greater continuity and consistency when new regulators are appointed; and an ability to spread the regulatory burden—this is particularly important in energy and telecommunications, given the increasing complexity of these sectors" [Paragraphs 69 and 70].

  Ofreg have attempted to characterise their challenge to MMC as seeking the necessary power to enable them to implement Government policy. It is crystal clear that Government policy is to ensure the pre-eminence of MMC as the ultimate appeals body to ensure regulatory stability and to replace what has been termed the out-dated cult of personality.

Ofreg's relationship with NIE

  The relationship between NIE and Ofreg is conducted successfully at all levels on many different issues. However, it is clear that Ofreg's challenge to the MMC and the company on the price control has been conducted in such a way as to cause inevitable damage to the overall working relationship. Ofreg's highly adversarial and idiosyncratic approach to these issues is unique in UK regulation.

  The regulator has available extremely wide powers in proposing a new price control and within the process is effectively answerable to nobody. The decision by a company to reject the regulator's proposals is not taken lightly and the MMC process from a company viewpoint is extremely demanding of senior management time and carries many risks of an unsatisfactory outcome. NIE's purpose in going to the MMC was clearly stated as two-fold viz to address the issue of the level of resources to operate and maintain the system and, equally importantly, to ensure a greater level of discipline and consistency in the regulatory process than we had experienced within the Ofreg price review. The Electricity (Northern Ireland) Order 1992 provides for the MMC as a formal appeals mechanism to resolve disputes over licence modifications between the regulator and the company. Ofreg's problem is not with the nature of the existing legislation, which is common throughout the UK, but with its own capacity to operate successfully within it.

  The MMC reduced NIE's revenues to what they described as "the minimum level consistent with securing that NIE is able to finance the carrying on of its licenced activities and protecting the interests of customers in respect of continuity of supply and quality of service". The impact of the combined price control was to reduce NIE's revenues by an immediate 28 per cent per unit with an efficiency factor going forward reducing revenues by a further 2 per cent per annum below inflation. NIE's profitability is a function of the massive amount of capital invested in the business and its profitability is entirely in line with MMC assumptions.

  NIE is entirely open to a constructive dialogue on how best to address the interplay between the important public interest issues of investment strategy, resources for investment, quality of supply and price, as we were required to do by the MMC. Our concern, stated over a period to Ofreg, is that the failure to be able to sustain a focused and objective dialogue within the framework of regulation as it operates in Northern Ireland can only be damaging to the customer interest. It fails to address coherently and consistently key issues in such away as to find a resolution on which all of the parties may move forward. This failure not only impacts the resolution of issues in the transmission, distribution and supply side of the industry, but also the effective resolution of issues in relation to the generator contracts where NIE has been concerned that Ofreg's pursuit of its disagreement with the MMC has risked being a serious distraction from finding a solution to the high generation costs which hold the key to achieving much more significant reductions in customers' bills.

  We perfectly appreciate that the law relating to the regulation of licensed utilities is complex and relatively new; it is therefore bound to raise difficult issues which sometimes need to be referred to the courts for resolution.

  However, we are concerned that, in this instance, Ofreg's opposition to MMC goes beyond that. We are now more than two years into the present price control period, and the matter has only now been finally resolved by the courts, yet the DG persists in his attempts to discredit the MMC's conclusions and continues to rake over the issues in every available forum, frequently in terms which we find quite objectionable in areas relating to our own business ethics.

  We regret that the DG cannot simply accept that NIE's new T&D price control is settled, and move on to address some of the other issues facing the NI electricity industry.

14 April 1999


  This Annex to NIE's Supplementary Memorandum dated 14 April 1999 provides further technical details on the issues of capital underspend and overhead line design as referred to in the main body of the submission. It also responds to the further questions put to NIE by the Clerk of the Committee, in his letter dated 1 April 1999. Finally, it deals with a number of other points raised by Ofreg's evidence.


  In the paragraphs which follow we set out a description of the range of specific management actions which were taken by NIE during the first five-year regulatory period with the specific intention of producing lower costs or higher quality than had previously been anticipated and which gave rise to capital expenditure savings.

  Those management actions encompassed a range of measures such as demand side management, delayed transmission asset replacement, more cost effective procurement, improved labour productivity, and changes in investment strategy. Each of these are explained more fully below in the form in which they were presented to the MMC.

Demand-side management allowed network reinforcement to be deferred or avoided

  Even against the background of approved programmes of expenditure, it is not in customers' interests for NIE to incur capex on system reinforcement any earlier than is strictly necessary. If capex is incurred during one regulatory period, future price controls will need to be set to remunerate investment in the new assets, and prices will be correspondingly higher.

  Following privatisation, NIE therefore set out to promote customers' interests by taking steps to defer the need for network reinforcement.

  Principal among these was the introduction of new cost-reflective tariffs incorporating a very strong cost signal during the narrow daily time window in which peak demand on the system occurs. It is this peak demand which determines the peak loading and capacity constraints on transmission and distribution equipment and hence a significant part of the overall capital expenditure requirements. The resulting tariff signal was sufficiently strong as to cause many customers to reconsider load management measures in a very active way.

  In conjunction with the tariff signalling measure, NIE devoted new resources to a focused Key Account Management programme in which all large account customers were given individual advice on load management measures specific to their process needs.

  Evidence of the effect of tariff signalling can be seen in the system load factor which improved from 56.8 per cent in 1991-92 to 60.4 per cent in 1995-96.

  Through its key account management programme and through use-of-system tariff signalling to encourage a reduction in the growth of peak demand, NIE successfully deferred capex projects to beyond the end of the first regulatory period.

  At transmission voltages, various projects were deferred including the following:

    Voltage compensation at Enniskillen (£2.3 million), Omagh transformer replacement (£0.3 million), Belfast transmission (£14.7 million), Coolkeeragh interbus transformer (£3.9 million), Newtownards development £6.0 million), Tyrone development (£1.8 million), various others (£3.4 million).

  These savings were partially offset by other minor schemes amounting to £2.1 million giving a net savings in Transmission of £28.3 million.

  The largest item of deferred expenditure shown above relates to Belfast transmission reinforcement as an integrated development scheme which could not be implemented in part or in stages. This deferral arose because of uncertainty about possible future developments at Power Station West. NIE believed that it was in the interests of customers to delay the final decision on proceeding with the development until this uncertainty was reduced.

  At distribution voltages, reduced expenditure of the order of £6 million resulted from load management or more effective schemes being implemented.

    Schemes deferred included: Eniskillen Main Reinforcement (£1.2 million), Newtownards Main (£0.8 million), Coleraine South (£0.3 million), Newtownards Central (£0.4 million) and Nelson Drive (£0.5 million). Schemes cancelled included: Drumahoe West (0.2 million), Cairnshill (£0.5 million), Newtownards North (1.6 million) and Stranmillis (£0.5 million).

Delayed transmission asset replacement

  As a result of research undertaken by NIE, the assets on the network are no longer replaced on the basis of age alone. Since privatisation, NIE has worked with external suppliers to develop and procure equipment to enable more accurate assessments of asset condition to be made. As a result, asset replacement in the sum of £9.6 million was postponed on the transmission network, after condition assessment demonstrated that the plant could remain in service. This consisted of savings in projected replacement costs of 275 kV circuit breakers (£4.7 million), 275 kV overhead lines (£1.7 million), 110 kV switchgear (£1.0 million) and transformers at Power Station West, Ballymena and Newry (£2.2 million).

More cost-effective procurement

  NIE made further capex savings owing to its efficient procurement programme. There is evidence to show that in an industry-wide comparison of costs, NIE outperformed the average of the electricity companies in GB.

  NIE engaged consultants to develop new functional specifications which would permit open tendering on the international market. NIE was one of the first electricity companies to take this initiative. NIE estimates that during the first regulatory period some £2.7 million was saved against the transmission budget for this reason.

    Examples of such savings are: £0.7 million on transformer procurement, £0.3 million on 275 kV protection equipment, £0.6 million on 110 kV line refurbishment/build and £0.5 million on 110 kV switchgear.

  Distribution plant and equipment has always been more competitively priced due to the large volumes in use and savings in this area are estimated at £0.6 million largely due to the purchase of high voltage cable on the international market.

Improved labour productivity

  By increasing the productivity of its own staff during the first regulatory period, NIE estimates that it saved a further £0.4 million against its transmission budget, and a further £2.0 million against its distribution budget.

Changes in investment strategy improved network performance at lower capital cost

  In the T&D Business, much of NIE's capex budget is allocated to sustaining and improving network performance. Before incurring capital expenditure on network projects, NIE assesses the proposed expenditure against four output tests:— improved safety, improved reliability, greater economy (i.e., lower maintenance costs) and higher environmental standards.

  During the first regulatory period, NIE decided to concentrate its resources on improving network performance (in a manner which took account of the other output measures identified above).

  Network performance may be improved by different methods (e.g., general worn asset replacement, reinforcement, and refurbishment). Of these methods, worn asset replacement is the most expensive way of achieving a given level of performance improvement (i.e., requires the highest capex spend), while targeted refurbishment on rogue circuits requires the lowest capex spend. However, targeted refurbishment requires a higher level of skilled labour and engineering input.

  Thus, in some cases, it is possible to achieve the same outputs (i.e., a measurable improvement in network performance) by different methods which are less capital-intensive.

  The assumptions underlying the capex budget factored into the initial price controls envisaged a general programme of worn asset replacement.

  During the first regulatory period, NIE ultimately pursued a programme of network refurbishment and improved protection (concentrating on rogue circuits in order of priority) to achieve the maximum possible improvement in network performance in return for its capex spend. There were nett capital savings from this strategy even though some £3.7 million of expenditure was incurred on protection equipment not identified within the original budget.

  Some high risk decisions on Supervisory Control And Data Acquisition systems and metering were also postponed pending technical developments because of specific concerns as to the unproven nature of the equipment on offer from suppliers. Other utilities delayed their purchasing decision on similar equipment for similar reasons.

  By contrast, unanticipated environmental costs arose during the first regulatory period where overhead lines in urban areas attracted considerable criticism. A programme for undergrounding of overhead lines in urban areas was introduced incurring additional expenditure amounting to some £11.3 million.

  The changes in investment strategy described above resulted in a reallocation of capex to projects where it was most effective in delivering benefits to the customer.

  The table below shows how the MMC summarised the reasons for the capital underspend during the first regulatory period.
Details of capital expenditure underspend for period 1992-93 to 1996-97
£ million
Reason for underspendTrannsmission project ValueDistribution project Value
Demand managementEniskillen voltage compensation 2.3Enniskillen main reinforcement 1. 2
Omagh transformer 0.3 Newtownardsmain0.8
Belfast transmission 14.7Coleraine south0.3
Coolkeeragh interbus transformer 3.9Newtownards central 0.4
Newtownards development 4.0Nelson Drive0.5
Tyrone development 1.8 Drumahoe West0.2
Various 3.4 Cairnshill0.5
Less additional schemes -2.1Newtownards south1.6
Delayed asset replacement
or change of strategy
275kV CBs 4.7Asset replacement 10.4
275kV O/H line 1.7 SCADA10.0
110 kV switchgear 1.0 Meters9.2
Transformers for Belfast
West Newry and Ballymena
2.2Additional U/G of O/H lines (due to public pressure) -11.3
Additional protection- 3.7
Sub-Total 9.6 14.6
Planning delays 2.1 3.6
Better procurement 2.7 0.6
Better productivity Contributions 0.42.0
Totals43.1 29.3

  In addition to the items of underspend in the above table there were further unidentified underspends of £8.1 million for Transmission and £16.5 million for Distribution. Set against these were amounts which NIE must incur if it is unable to proceed as quickly as it had wished with a capital project. For example, planning delays which result in additional operating costs in repairing and maintaining the old assets pending the receipt of planning consents and completion of a project.


  In their evidence to the Committee, Ofreg laid particular emphasis on a statement that NIE's overhead line refurbishment programme was based largely on a 1950's specification and implied that we did not take advantage appropriate new technology and were not following a policy of upgrading to a modern standard.

  In the paragraphs which follow we explain that this is a wrong understanding on Ofreg's part of our policy on refurbishment.

    —  NIE's Overhead Line Design Specification has continued to evolve since the 1950's, the current standard was issued in 1992 and is the same as that adopted by the great majority of distribution companies in GB;

    —  refurbishment of overhead lines is undertaken to the standard of the 1992 design specification;

    —  a range of design improvements which we will introduce over the next 12 months will result in further improvements in performance;

    —  and the experience in GB of the new insulated conductor technology referred to by Ofreg highlighted a range of serious problems which is causing the distribution companies in GB to review their use of the current design. We have been involved in the development of an improved specification and we hope to see it introduced with the benefit of the GB experience, prudently avoiding the costly development-stage problems.

Design specifications have been evolving continuously

  Our previous supplementary submission explains that a substantial proportion of the overhead distribution network was constructed in the period from the late 1950's to mid-1970's as rural customers were connected to the system through new rural electrification schemes.

  The overhead lines constructed during that period were designed to meet the requirements of the statutory Overhead Line Design Regulations and the national specifications in force at the time of construction. Over time, these designs have been subject to review and improvement in the light of operational experience.

  Since the mid-1970's, the overhead network has continued to expand with the building of additional lines required to connect new customers to the system. New lines are constructed to the current NIE Overhead Line Design Specification which is based on the requirements of the 1981 Regulations and standard EA-TS 43-10, a technical specification produced by the Electricity Association. NIE's current design specification which was issued in 1992 is the same as that adopted by the great majority of distribution companies in GB.

Refurbishment specifications bring lines up to current standards

  NIE's overhead line refurbishment programme began in 1994. Experience with the first phase of the programme indicated the need to adopt a higher specification for the refurbishment work in order to deliver the required improvement in performance (which was the primary objective driving the programme).

  The current refurbishment specification covers a range of measures aimed at improving both the mechanical strength and the electrical performance of overhead lines. It includes the repair of all known defects and the replacement of all insulators over 30 years of age. The structural performance of the line is improved by replacing all decayed poles together with the majority of wire stays which have deteriorated. The scope of the work also includes measures required to ensure compliance with new health and safety legislation.

  In addition to the work described above (which is primarily asset replacement work—replacing like for like), the refurbishment specification calls for alterations to be made to the design of the line to bring it up to the standard specified in NIE's 1992 Overhead Line Design Specification.

  Enhancement measures include:

    —  the application of a new fusing schedule to improve electrical performance;

    —  the introduction of new, more mechanically robust switching devices to replace less reliable air break switches;

    —  the replacement of all high voltage (HV) fuses which were prone to mal-operation with a more reliable device having better mechanical and electrical properties;

    —  the installation of pole mounted switching devices (reclosers) based on modern SF6 technology which has reduced maintenance requirements; and

    —  the application of new connection methods to facilitate live-line working to minimise the need to interrupt supplies to customers.

  In the case of lines which have been built to the early specifications, (e.g., BS1320 and Henley type construction), further alterations are carried out such as:

    —  repositioning of low voltage (LV) fuses to facilitate access to the LV system without the need to isolate the HV system in order to minimise the disruption to customer supplies; and

    —  the removal of pilot insulators which have been a cause of electrical problems in the past.

  In the case of lines originally constructed to the 1946 Overhead Line Regulations, additional poles are also inserted to reduce span lengths and wider cross-arms are fitted. Both these measures reduce the likelihood of faults occurring due to conductors clashing in high winds.

New technology requires a prudent approach

  We are aware of the insulated conductor technology which Ofreg referred to in their oral evidence. We are also aware, through our ongoing contact with the other UK distribution companies, that this technology has not yet been fully proven and companies who have used covered conductors extensively have experienced serious problems and failures due to design shortcomings. For example, there have been a significant number of failures caused by vibration problems, broken conductors, failed connections, broken insulator ties and radio interference. These problems become worse as the construction reaches 5-years-old and in some companies it appears that consideration is being given to reverting to bare wire construction.

  In order to gain our own experience of covered-conductor technology we have been piloting a trial scheme over the last four years on an 11kV overhead line fed from Coleraine West. We have also been involved in the development of a UK specification for a covered-conductor system and development work is currently nearing completion within the company for an NIE specification for covered-conductor lines. This will be an improvement on the current GB design as we learn from the GB experience.

  Given the problems experienced in GB with the new covered-conductor technology, we believe the prudent approach which we have adopted is the correct one.

Future enhancements are planned

  We are planning further design changes to improve the reliability of our overhead lines based on design work carried out over the last two years. These changes include:

    —  the introduction of polymeric insulators instead of glass discs as these have a greater life, they show improved electrical performance and are more resilient to vandalism;

    —  the introduction of steel or concrete poles at critical positions along an overhead line will remove the need for stay wires as the failure of stays has had a significant effect on performance. Arrangements for a trial are in hand;

    —  the use of new connectors, crimping tools and the introduction of all aluminium alloy conductor which will increase the capacity and electrical performance of new and rebuilt lines while reducing the likelihood of corrosion and mechanical failure.

  Most of these changes will take place over the next 12 months.


  As regards to the Clerk of the Committee's request for our comments on Mr Thomas' assertion (at Q116 in the Minutes of evidence) about NIE's capacity to refurbish more than 1500 km of 11kV overhead line per annum, we respond as follows:

  The MMC said that it believed that NIE should now have the organisation and systems needed to implement effectively a programme of work of the size envisaged by the Commission [Paragraph 2.143 of the MMC Report]. This programme included 11 kV refurbishment at the rate of 1500 km per annum. In recommending an acceleration of that programme we have given careful consideration to the additional resources which will be required to deliver the additional work. The arrangements we have in hand include the following components:

    —  The proposed programme will be resourced both by resources internal to the Viridian Group and by NIE's strategic partner for overhead line work, Northern Utilities (NUSL).

    —  Within the Viridian Group, Powerteam, an affiliate company of NIE, will recruit additional manpower and secure additional contractor resources through Eastern Contracting.

    —  NUSL will increase their output by approximately 30 per cent and have embarked on a recruiting exercise to fill their management and manpower requirements.

    —  Additional NIE and contracted switching resources will be nominated, trained and authorised to facilitate the programme.

    —  NIE will train three additional live-line teams which, in addition to the one existing team, will be deployed on the pole replacement programme. This will make a significant contribution to the mitigation of the effects of the programme on planned interruptions to customers' supplies.

    —  The proposed programme will be managed by a Steering Group reporting to a Programme Directorate comprising the Managing Directors of the NIE business involved and Northern Utilities.

    —  We are confident that these arrangements will provide us with the capacity to deliver what is a challenging programme.


  The Clerk to the Committee requested NIE's response to two sets of questions on the linkage between capital expenditure and price, as follows:

    —  "Looking at the capex underspend for the last regulatory period, what estimate can be made to the extent to which, in cash and percentage terms, customers' bills were higher during that period than they would have been if the agreed level of expenditure had exactly equalled, both in amount and timing, the amount actually spent; and to what extent are customers' bills lower in the current regulatory period, both in cash and percentage terms, than they would have been if actual capex in the previous regulatory period had exactly equalled the capex allowed for at the beginning of that period (and the asset base had been correspondingly higher)?

    —  What are the consequences for customers' bills if NIE overspends on its capex within a regulatory period? Would the company be required to absorb the cost over the remainder of the regulatory period, with the additional assets being taken into account only in the next regulatory period? (What I am seeking to establish is whether there is a symmetry about this process and whether, in the event of an overspend, the respective positions of consumer and company are reversed compared to an underspend.)"


  We have used a cash flow model approach to estimate the effect on customers' bills if revenues for the first regulatory period had been calculated on the basis of a capital expenditure forecast which matched the amount actually spent in that period. (Although the cash flow model methodology has been widely adopted by UK regulators for the purposes of price control reviews, NIE's regulated revenues during the first regulatory period were set on a different basis. Nevertheless, the cash flow model provides a suitable basis on which to indicate the linkage between capital expenditure and prices.)

  We calculate that had revenues been set using the cash flow model and on the basis of forecast capex equal to the actual capex, customers' bills over the first regulatory period would have been some £25 million lower. This translates into an average reduction of 0.08p/unit which is approximately a 1 per cent reduction in average tariffs.

  If steps had not been taken to manage the programme efficiently and if the full expected capex had been incurred in the first period, tariffs in this second period would have been 0.15p/unit (1.9 per cent) higher than they actually are. The increase is due to:

    (i)  the higher opening regulatory asset base, and

    (ii)  the deletion of the capex clawback which represents money returned to customers in the April 1997 price cuts.

  Over the present five year period alone the current saving is worth some £50 million to customers in lower bills. If all the capex savings result in deferments maintained for a further five years beyond the current period, there would be a further gain of some £37 million to customers in lower bills. (All of the figures quoted for bill reductions are expressed to a 1996-97 price base.)


  An overspend on capex within a regulatory period could arise for a number of reasons such as the need to increase expenditure on environmental aspects of a project, e.g., undergrounding in order to secure planning approval.

  The higher costs of financing any additional investment over the period would be borne by the company.

  Although the MMC have established the principle of clawback where, in NIE's case, some of the underspend was returned to customers in the form of price cuts, it does not necessarily follow that, in the event of an overspend, the company would be able to recover retrospectively the additional financing costs through an increase in tariffs in the subsequent period.

  Although an underspend automatically results in a reduction in the regulatory asset base, any overspend would not automatically find its way into the regulatory asset base. The company would be required to demonstrate that the additional amount represented a prudent investment and did not arise, for example as a result of inefficiencies.

  In summary, as regards (i) clawback and (ii) the regulatory asset base there is not necessarily a symmetry in treatment of an underspend and an overspend in capital expenditure—the balance being in the customers' favour.


  The Clerk of the Committee's letter contained four further questions as follows:

    "Is it possible to give any breakdown of the number of poles that were replaced as to the number which failed structurally (i.e., snapped) and the number whose mountings failed (i.e., were uprooted)?

    The graph submitted on pole failure suggests that, if anything, it was newer poles that failed disproportionately. Is this a reasonable conclusion, and if so, are there any generic reasons (such as particular locations where specific circumstances (such as local wind conditions) may significantly shorten the life of a pole)?

    To what particular factors do you attribute the improved performance of the refurbished 11 kV circuits?

    The additional capital works now proposed in the light of the storm will, as I understand it, displace other works from the capital works programme. What will be displaced, and what studies have you carried out to establish the relative overall benefits of the revised programme, as compared to the original?"

Pole replacement statistics

  As a result of the storm a total of 1,133 poles required replacement, either because they had been broken or because they had been pulled out of the ground. This represents a failure rate of less than 3 per 1,000 in a total population of around 400,000 poles.

  Our analysis shows that 91 per cent of these poles had been broken and 9 per cent had been pulled out of the ground.

  In order to make the complete distribution network more resilient to storm damage as quickly as possible we have proposed a programme of selective pole replacement on those circuits which are not immediately scheduled for full refurbishment but which contain poles nearing the end of their useful life. Since the majority of pole failures involved broken poles, the above analysis supports the proposed programme of supplementary refurbishment.

Pole failure profiles

  Firstly, we apologise for a scaling error which went unnoticed in the pole failure graph contained in our previous supplementary submission. A correct version is presented below.

Figure 1. Actual and predicted pole failure profiles

  The chart exhibits a significant degree of correlation between the actual failure profile and the predicted failure profile. As explained in the previous submission, the predicted failure profile is derived by:

    (i)  modelling the probability of pole decay by assuming a normal distribution for pole decay as a function of the age of the pole and

    (ii)  applying that result to the age profile of the network.

  The following points explain differences between the actual and predicted pole failure profiles. We consider that such differences are not statistically relevant in the context of the less than perfect relationship between age and pole failure, since pole failure is not related uniquely to age alone, and as explained in Section 2.1 of our previous submission, other factors impact on the likelihood of failure.

    —  The predicted pole failure distribution assumes, as a first approximation, that the failure rate is directly related to the extent of pole decay and therefore can be predicted on the basis of age-of-pole alone. The assumed probability of pole decay is based on a normal distribution centred on an average pole life of 35 years. As with any statistical distribution, there is lesser confidence in the prediction at the extremities of the curve where small variations in absolute numbers appear as a more significant effect when expressed in percentage terms.

    —  The application of a normal distribution to represent the probability of age related failure is a first approximation. In practice, the probability of pole failure will be affected by variations in design and equipment specifications that have been applied over the course of the last 50-60 years. In particular, it is generally recognised that poles added to the network in the 1970's and 1980's were of a standard that would tend to disproportionately increase their chances of failure.

    —  Furthermore, pole decay is not an absolute proxy for pole failure. In practice, pole failure is due both to age related failure and, to a lesser extent, to random failure associated with external influences which bear no age dependency e.g., interference from fallen trees, windborne material etc. This has a disproportionate effect on the failure of newer poles, particularly the first 10 to 15 years. In absolute terms, we would expect a similar number of such failures in each age category and, as such, account for a more significant number of the newer pole failures because of the small number of failures predicted by the age relationship. For example, on the basis of recorded information, over half of the failures of poles less than ten years old were due to external influences. This compares with only 10 per cent of pole failures in the 20-30 year old group.

  In summary, while it would appear that of the poles which failed, a greater percentage were in the young age category than would have been predicted, it would be more reasonable to explain the apparent discrepancy between predicted and actual pole failures in terms of the limitations of the failure prediction model.

Improved performance of the refurbished circuits

  The improved performance of the refurbished circuits is directly attributable to the various components of the work carried out under the refurbishment programme according to the specifications described in Section A2 of this Annex. As explained therein the two main categories of work involved are:

    (i)  the replacement of worm assets on a like-for-like basis and

    (ii)  alterations to the design of the line to bring it up to NIE's current design specifications.

  The various elements taken together combine to improve both the mechanical strength and the electrical performance of the circuits.

Reallocation of Capex

  The MMC gave careful consideration to the various public interest issues surrounding the capex requirements for the current regulatory period, and particularly so in the category of measures to improve the performance of the network. In adopting a particular overall level of capex for the purpose of setting the price control (a level to which Ofreg is now in agreement), the Commission said they were not prescribing an investment programme and they recognised that there would be competing demands on the capital budget which would give rise to a need to determine priorities among those demands.

  Following the storm, NIE sought and received feedback from customers, media, district councils and Assembly Members from which it is evident that there was a strong feeling that NIE should re-examine investment priorities. Having listened to what customers were saying to us in terms of the dissatisfaction, frustration, inconvenience and hardship created by the widespread interruption of supplies, particularly to rural customers, we believe that any addition that we can make now to our programmes to make the network more resilient to future severe weather would be strongly welcomed. In proposing an acceleration in the rate and scope of the refurbishment programme above that adopted by the MMC after their careful consideration of the public interest issues, we are engaging with Ofreg in a discussion on their approach to the higher levels of investment in measures which will make the network better able to withstand extreme conditions such as those experienced on Boxing Day.

  The estimated cost of the accelerated refurbishment programme detailed in Section 8.3 of the Storm Report requires the reallocation of £25.7 million within the capital expenditure plan for the current regulatory period. It is proposed that this will be funded from a combination of efficiencies and reprioritisation between components of the capital programme. The reallocation will involve a reduction in expenditure in the following categories: Transmission Load Related System Work (£12.2 million), Distribution System Development and Performance Related Work (£11 million) and other Asset Replacement categories (£2.5 million).

  The impact of the reallocation on each of the categories will be managed in the following ways:

    —  The transmission network in the north and west will be reinforced by a more efficient scheme than previously envisaged, based on 110 kV reinforcement from a new 275 kV substation at Dungannon as an alternative to the previously proposed Tyrone 275 kV substation at Omagh. This will enable funding to be released from the transmission load related category, while ensuring that NIE continues to comply with the relevant standards for transmission system security as specified in our licence.

    —  A review of distribution network investment priorities facilitates the reallocation from the distribution system development and performance related work category in respect of 11 kV automation and undergrounding of 33 kV and 11 kV overhead lines. While 11 kV automation remains an important strategy for improving average network performance, NIE now considers that there is a greater priority in making the distribution network more resilient to severe weather in as short a timescale as possible.

    —  We propose to reduce the programme of undergrounding HV overhead lines to facilitate an expanded programme of undergrounding of LV overhead lines. While overhead lines in urban areas give rise to ongoing safety, maintenance and legal difficulties, it is considered that the proposed reallocation will not prevent the effective management of these issues. Undergrounding is also undertaken to address environmental issues such as visual amenity, noise and bird nuisance. The proposed reduction in HV undergrounding will require the careful management of environmental issues with the removal of some problematic lines being delayed to the next period. This will be offset by the removal of additional LV lines which will also provide environmental improvement in addition to the primary benefit of improved network resilience.

    —  A review of asset replacement priorities has facilitated reallocation of asset replacement work, principally from a rephasing of the meter replacement programme. The meter certification programme will now begin in 1999-2000 and will continue into the next regulatory period. This rephasing will not prevent NIE from complying with its meter certification obligations.


  There are three further points from the evidence on which we would offer comment.

Transmission and distribution cost comparisons

  Ofreg refer to a 30 to 40 per cent structural price divergence in transmission and distribution costs in Great Britain. This comparison is on the basis of average GB costs. In our previous submission, we made the following points:-

    —  Price comparisons on the basis of average GB transmission and distribution costs are not meaningful since the size and nature of our customer base and service territory are key determinants of the costs involved in providing the network. NIE has one of the smallest customer bases of any UK electricity company and one of the most rural service territories serving a widely dispersed rural customer base.

    —  NIE's charges for transmission, distribution and supply compare favourably with those of the GB companies whose networks are comparable to ours.

    —  To the extent that transmission and distribution costs per customer have moved out of step with comparator REC's since privatisation, a reason can be found in the different investment profiles. NIE's higher rate of investment on a pounds per customer basis is entirely consistent with the needs of a network which had severe under-investment while in the public sector.

    —  Following the March 1999 announcement of new tariffs, end prices to customers will have reduced in real terms in three consecutive years, giving a cumulative 21 per cent real reduction for the typical domestic customer using 3,300 units per annum. The recently announced removal of standing charges means that the 90,000 NIE customers who have low consumption (less than 2,000 unit pa), among them customers who are fuel poor, old age pensioners and lone parents, will benefit from even greater savings. Very low users (less than 1,000 units pa) now have one of the lowest tariffs in the UK.

Opex and capex figures for 1997-98

  We cannot reconcile some of the figures quoted by Ofreg on page 42 of the transcript in respect of operating expenditure and capital expenditure for 1997-98. However we realise our copy of the transcript is an uncorrected one and Ofreg may have corrected the figures by now. If the Committee would like us to comment further on this we would be happy to do so.

The cost of regulation

  Ofreg states that they have about 17 full-time person equivalents in electricity regulation, describing it as a very small office.

  A comparison of the costs of regulation, based on estimated licence fees for 1998-99 indicates that the cost of regulation per customer is of the order of five times higher in NI than in GB.

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