Examination of witnesses (Questions 60
MONDAY 8 FEBRUARY 1999
FALLON and MR
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
(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
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.
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.
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.