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.
PRICES
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)
NETWORK INVESTMENT
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.
BALANCE OF
RETURN BETWEEN
CUSTOMERS AND
SHAREHOLDERS
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).
CUSTOMER SERVICE
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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