Select Committee on Northern Ireland Affairs Minutes of Evidence


Further Memorandum submitted by the Director General of Electricity Supply for Northern Ireland

  You asked for an explanation of the difference in the estimation, between NIE and ourselves, of the supply and generation components of the domestic electricity bill. I apologise for the delay in responding but it took longer than I anticipated obtaining all the information we required.

  Apart from Transmission and Distribution (T&D) costs NIE has two blocks of costs to recover from its customers—namely the revenue for the Supply Business allowed by the Price Control and secondly the costs of generation. How these costs are allocated between customers is largely a matter for NIE and is decided each year when they set tariffs.

  Our methodology differed from NIE's in that the residual for our calculation was generation costs, whereas in NIE's calculation the residual was the supply margin.

  Since the Bulk Supply Tariff on which generation costs are priced for customers is itself a construct we believe our approach is on a strictly cost reflective basis the more logical approach.

  Our estimate of the breakdown of the average domestic bill therefore gave the following results:

    —  A 3,300 kw/h average consumption per annum a unit charge of 9p/KWh and a total bill of £297.

    —  Use of System (UOS) charges of £117 per annum derived from use of system charges to domestic customers.

    —  A cost reflective supply margin of £17 per annum based on information originally supplied by NIE to the MMC in 1997.

    —  A residual generation charge of £163.

  Our reasoning is supported by information supplied to us by the Electricity Association about cost allocation in GB in 1998-99. This gives the following results for a 3,300 kw/h customer:
Distribution £74.82 29 per cent
Transmission £10.32 4 per cent
Generation£152.22 59 per cent
Fossil Fuel Levy £2.56 1 per cent
Supply £18.06 7 per cent
Total£258.00100 per cent

  NIE derived a figure of £9 for its supply margin based on 3,300 KWh consumption per household. It was and remains Ofreg's view, however, that a fully cost reflective margin for the Supply Business based on average allowed price control revenue per unit is closer to £15 per household.

  In practice, however, as the average domestic customer—because of larger household sizes and the absence of gas for cooking—in Northern Ireland consumes 3,700 KWh, NIE collects £14 per average domestic customer ie, enough to allow the Supply Business to cover its costs.

  NIE's approach appears however to result in undercharging some domestic sector customers and overcharging domestic customers who consume above average amounts of electricity. As the resulting cross subsidy is entirely contained within the domestic sector I have supported—and would continue to support—what NIE is doing because it would have the effect of incentivising domestic customers to invest in energy efficient appliances and reducing prices for consumers of below average amounts who are more likely to be low income households.

  But this approach is also manipulative in that it slightly disguises the extent to which the domestic price divergence with GB is increasingly caused by high T&D charges rather than crude generation cost divergence. Although the latter continues to be an important cause of price divergence its effect is much more significant in the industrial and commercial sectors than in the domestic sector. (The next distribution price control in England and Wales will mean that NIE's T&D charge for the average domestic customer this time next year will be £115 (in 1999 prices) or almost double the figure in England and Wales which will be about £67.)

  I have now obtained all the information I require from NIE to publish my Report into the Boxing Day storms. This will, I hope, be a comprehensive report and will not as I had originally feared be in two parts. I hope to publish it in the last week in July and I very much regret that due to the pressure of work in Ofreg at present it has not yet been possible to finalise this report.

9 July 1999

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