Select Committee on Northern Ireland Affairs Minutes of Evidence


Examination of witnesses (Questions 60 - 67)

MONDAY 8 FEBRUARY 1999

DR PATRICK HAREN, MR HARRY MCCRACKEN, MR COLIN FALLON and MR OWEN MCQUADE

  60.  So that is about £10 million and £38 million. How much, and what proportion, of those costs will fall on the consumer and how many and what proportion will fall on the shareholders?
  (Mr McCracken)  Any investment that we make in assets in a company is made under regulations. The supposition is that that investment is being made for the good of the customer and therefore the costs of that investment would be borne by the customer over the asset life. Typically the customer will pay for that investment over a period of 40 years. In relation to what costs will not be borne by the customer, the goodwill payments will not be borne by the customer.

  61.  Can I just be clear then, if we are talking about the total cost being about £48 million, am I right in saying that £43 million will be borne by the consumer and £5 million by your shareholders? Have I understood that correctly?
  (Mr McCracken)  I think I would probably need to elaborate. As well as the £5 million which is borne by the company in relation to goodwill payments, the remainder of the costs associated with the storm will be costs that will fall directly to the company within this year, that is the extra labour costs, material costs etcetera. What will be borne by the company in total in relation to this storm is the full £10 million minus the insurance cover that we have for this sort of event.
  (Dr Haren)  I think that the other point to be understood is that the capital investment programme is then funded by shareholders out of a mix of either retained profits, shareholder funds etcetera. The shareholders and the company produce the investment on the first day.

  62.  Just to be absolutely clear, the crux of this though is that the vast bulk of this will be borne by the consumer, that would be a fair judgment, yes?
  (Dr Haren)  Yes.
  (Mr McCracken)  There is no new burden on the customer as a result of these proposals. The investment in new customer service IT was already planned; it is just a matter of accelerating that. The customer was bearing that and will bear it in relation to the new investment in the network. That is a reallocation from other categories of investment which the customer is already paying for.

  63.  Thank you very much. What do you estimate will be the effect on future electricity prices of the increased capital expenditure on the networks?
  (Mr McCracken)  Any additional investment will go through to higher costs to customers. Within this price control period the prices are fixed and therefore there would be no difference in customer prices in relation to decisions that we are taking coming out of this review. As we sit and look into a new capital expenditure period from 2001/02 forward the impact upon prices going forward from there will be determined by the discussions that we have with Ofreg and whoever else on what is required to be invested in the network going forward. There is the resetting of the arguments as you come to each price control and prices charged to customers going forward from there will be justified on the basis of the arguments put forward.

  64.  I take it from that that the assumption is that although you cannot give the figure, there will be an increase in electricity prices for the consumer as a result of the planned capital expenditure? Are you likely to consider giving the consumers a holiday then given the fact that the Regulator argues they have already paid for some of this in that your underspend reflects payments from customers which have not actually been translated into investment, otherwise you might argue that you are actually charging them twice?
  (Mr McCracken)  I think we need to try and untangle this thing because I think on the one hand you are asking me to make this investment now on behalf of customers and asking me how much extra it will cost if we do make that investment. I think I am trying to say it will not cost anything because it is already in the price for this whole period. If we had not made this investment that we are proposing now, the asset base in the next regulatory period would be lower, and therefore customers would save money if we did not make this investment, but we are all making the judgment now that we need to make this investment. That seems to me to stack up. If I go on to your earlier point, that is precisely the same argument, i.e. you sit on a price control period and you decide whether an investment is needed or not. What you are saying is what will be the benefit that will flow to customers if I do not make this investment. The benefit that flowed to customers as a result of not making that investment in the first price control period was some £50 million-worth of benefit in this price control period that they did not have to finance.

  65.  Thank you, Mr McCracken. I want the customers to have a fair and regular supply and a fair and regular price, but since we are dealing with a privatised monopoly I am simply trying to establish how much of the cost has been borne by the customer and how much has been borne by the shareholder and it does seem to me from what we have heard that the customer is paying the lion's share and they are going to be paying further through further electricity price increases as a result of this planned expenditure. I was simply trying to establish if that was the case.
  (Dr Haren)  If you want to revisit these problems, we would be delighted to have the opportunity to revisit them with you. They are problems which took an MMC inquiry six months to resolve. There is no magic and there is nothing hidden in them. We make investments as a regulated monopoly. We are allowed a very low regulated return on those investments. The equation that you have to examine is whether the investment is a good investment, doing something good for the customer and whether the customer should be asked to pay for it. I believe that the impact on price of these capital expenditure-type investments in networks are very very low. The impact on price is very very small, it is in the area of one and two percentage points. We are dealing in the Northern Ireland system with a tension on price and the tension is derived from what Ofreg analyse to be a 43 per cent price disadvantage on generation costs which pass through to customers and that 43 per cent price disadvantage in generation translates on average prices to a 24 or 25 per cent price disadvantage, if we use the Ofreg figures. The impact of these investments in the transmission and distribution networks is not strong compared to the issue of where is generation in the pricing problem in Northern Ireland. As far as the remuneration of those investments is concerned, and as far as the value for money behind those investments is concerned, we have an absolutely transparent approach, we have approached it transparently at the MMC and the MMC have done and dusted these issues to the best of the MMC's capability. Please understand me, I am not saying that in the sense of saying this is not something that we should revisit. We should revisit it whilst giving the time that is required to deal with what is a set of relatively complex issues, but broadly speaking this type of investment programme of one and two percentage points against a pricing tension is driven in our view entirely from the issue of generation costs which are not regulated and not subject to the MMC scrutiny which our price control has been.

Mr McCabe:  Thank you.

Mr Salter

  66.  It has occurred to me that the issuing of a goodwill payment to cover freezer loss or damage may run the risk of nullifying the customer's existing freezer insurance. A scenario could be that they have lost £250-worth of stock in a freezer. You are offering £50 as a goodwill payment. Have you checked to ensure that the rest of their loss is recoverable via a standard insurance policy? I have received information during the course of this Committee to suggest that it may not be, and you cited that as being something not to worry about because they would be insured anyway. Have you looked into that point?
  (Mr Fallon)  Our experience with customers who have their freezer contents insured is that generally they have an excess on that policy. That excess usually amounts to at least £50, so in these cases we are covering the excess. Their insurance policy will cover the contents. The other experience we have is with customers who are not insured at all. Our view is that they should be insured but, nevertheless, we will make a £50 contribution.

Mr Salter:  That answers my point. Thank you very much.

Chairman

  67.  I think after two and a half hours our gratitude should be to you for your patience in dealing with the questions we have asked. Any questions I might still have had I have no intention of asking at this moment. I said earlier that we had gone through over two hours this morning. That was the longest session this particular Committee has so far had, and I am grateful that we should have beaten it so soon afterwards in terms of asking questions to yourselves. You have been very patient with us. Thank you very much indeed. It is an indication both of public interest in the issue, and in the interest of this Committee, that we did go on at exhaustive and exhausting length. We are very grateful to you for the manner in which you have coped with a wide variety of questions and led us through a maze of the issues involved. Thank you very much indeed.
  (Dr Haren)  Thank you for the courtesy extended to us. I would reiterate that we would be delighted to deal with any other issues which may still remain unasked or which may arise as a result of your own discussions and we will try to respond to those promptly and fully.


 
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