Select Committee on Northern Ireland Affairs Minutes of Evidence

Memorandum from the Director General of Electricity Supply for Northern Ireland

  Thank you for your letter of 21 January. May I begin by saying how much I welcome your Committee's inquiry. The case for making the electricity industry in Northern Ireland more publicly accountable and more subject to public scrutiny is, I believe, overwhelming.

  I attach as requested the answers to your queries with regard to my powers. (Annex A).

  On 28 December the Deputy Director General wrote to NIE asking for a report on the Boxing Day Storm by 20 January. NIE have to date provided two interim reports. The full report is expected by 3 February. I do not regard NIE's failure to observe the timetable as particularly serious. Offer gave Scottish Power three months to comply with a similar request for a report.

  Once I have considered the NIE report I propose publishing it, together with a consultation paper on the things which most require public discussion. Among the issues which I have already said I propose including in the consultation paper is a proposal to amend NIE's licence if, at any time in the future it fails to perform to an agreed achievable standard of communicating with its customers.

  As I have not received NIE's report I am not able to say at this stage if the company could have been expected to perform better in the extreme weather conditions experienced on 26 December. Equally, I am not able to say if a higher level of expenditure on network reinforcement would have reduced the damage to the network and the number of customers who were off supply.

  These are issues which I hope to explore with NIE over the coming weeks.

  The following items of background information may be useful to your Committee.


  Your Committee will be aware of the high price of electricity in Northern Ireland and its continued divergence from prices in Great Britain. Since privatisation, both generation and transmission and distribution costs have diverged further from Great Britain. Despite the first price control the Transmission and Distribution divergence from Great Britain is higher than ever and set to diverge more each year. When the second England and Wales price control takes effect in April 2000, the divergence will suffer a further stepped increase. The price regime which NIE are currently operating to is of the MMC's devising, and I am still seeking leave to challenge it in the House of Lords.

  Since privatisation, NIE's Supply business has improved markedly in absolute and relative terms. It is now greatly out-performing the GB average and is probably the best value in the UK. While the average domestic customer pays around 29 per cent more for Transmission and Distribution in Northern Ireland than GB he also pays 15 per cent less for Supply. It should be noted that NIE's distribution charges are higher than all but one of the comparators i.e., rural companies in GB, whereas at privatisation NIE substantially out-performed these companies. The accompanying graphs and table illustrate these points. (Annex B)


  Under-investment in parts of the network is not yet a proven cause of the widespread disruption though it may have been a contributing factor. I attach at (Annex C) tables showing network capital expenditure over the last 20 years in real terms. The figures were provided by NIE.

  The tables show that expenditure was low in the early Eighties but in the period before private ownership was at more or less the same level as actual expenditure during the first period of privatisation.

  Total underspend since privatisation, including the first year of the present price control, is £109 million. (More than enough to have paid for the Scottish Interconnector at no extra cost to customers.) However, the way the price controls work means that customers have still within price control periods to pay for the underspend as if expenditure had taken place. The underspend to date has involved a real transfer from customers to the company's profits of £22 million though the MMC required £7 million of this to be handed back.

  The high nominal levels of network investment mean that each customer in NI finances a larger quantity of assets than customers in England and Wales and the Capex programme means that the financing burden on NI customers is growing two to three times as fast as in GB. This increases and perpetuates price divergence.

  Hitherto, although Capex requirements for the purposes of constructing a price control have been based on building blocks of specific categories of expenditure, NIE has always had the freedom to determine its priorities within the total envelope.

  I have been concerned at the level of Capex expenditure, the underspend, the setting of priorities and the total lack of accountability of NIE to its customer base, or any public body in all these matters. In October, in Ofreg's Forward Work Plan, I indicated that I would be publishing a consultation paper on these issues in 1999.


  Northern Ireland customers have not seen the fall in electricity prices they were led to expect at privatisation. In relative terms, prices have risen and when due allowance is made for different tax regimes they may be the highest in the European Union. Ofreg has now established that there is no Northern Ireland factor which justifies this result. It is attributable to the arrangements for charging for both generation and T&D with NIE being the company which has benefited most from privatisation and which is least willing to remedy the customer/shareholder imbalance.

  Since privatisation customers have seen a relative deterioration of their position. Shareholders, according to figures provided in May 1998 by the Centre for Regulated Industries have enjoyed a 31 per cent per annum return on their investment. Since that date, shareholders returns have increased further as the share price rose from 580p to 740p at the end of January. The market value of the company which NIE said would fall to £50 million under my price control proposals is almost £1 billion (Annex D).


  NIEs level of customer service has improved since privatisation. Ofreg has noted with approval improving performance against the standards of service set and the achievement of zero disconnection and the offering of new products such as green energy and energy efficiency. NIE was awarded a Charter Mark in recognition of the quality of service provided.

  NIEs improved and improving awareness of the need to win customer approval was demonstrated by the level of payments which it offered following the Boxing Day storms. Most customers who were off supply will receive more than they would have received under the Guaranteed Payments and none will receive less. In comparison to an annual average domestic bill of £311 net of VAT, the value of the compensation payments in the worst case will be the equivalent of more than a year's electricity supply.

3 February 1999

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