Select Committee on Northern Ireland Affairs Minutes of Evidence

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

  Further to my letter of 3 February, I am now writing to you to confirm that I have received NIE's report on the storm damage.

  I enclose a copy of the press release[1] which I issued. I welcome the report as marking a new willingness by NIE to meet the needs of the community and to respond to community concern. I have not commented on the contents of the report and particularly not on its recommendations and I do not propose to do so until I have had the opportunity to consider it in detail and discuss it with the company. At this stage, however, there are a number of observations which I would make about the report.

  The first is that the report is short on analysis on the relationship between the age of the network and the vulnerability to storm damage. It may be that there is a strong relationship but, if so, it has not been demonstrated by this statistical report. Until that relationship is established the re-allocation of expenditure is a knee-jerk reaction which may prove to be ill considered. At this stage I have an open mind about the age/damage vulnerability relationship. I do think however that NIE has a difficulty. If the company believes that the relationship has not been established, how do they justify the re-allocation of expenditure; on the other hand if they believe that there is a strong relationship why have they underspent their CAPEX allowance by almost £109 million in the first six years of privatisation?

  The second observation is that I am saddened by the attempt to attribute blame to parties other that NIE's management or expenditure decisions. The report seeks to contrast unfavourably CAPEX expenditure in the ten years before and after privatisation. In the early 80s the rural network would, for the most part—according to the information in the report—have been about 20 years old and therefore, on the company's argument, not in need of replacement. If low expenditure on the rural network was the main contributory factor to the extent and severity of the power cuts the relatively low expenditure in the early 80s is irrelevant to this issue. In the five year period after privatisation while expenditure at £243 million was barely above the amount in the previous five years, customers actually paid electricity bills which were calculated on the basis that expenditure would be £339.4 million. If underspend is a relevant factor here it was obviously less relevant in the mid 1980s than in the mid 1990s as the bulk of the investment was by then ten years older.

  Other parties which were blamed by the report include the MMC and Ofreg. The price control to which NIE is operating is the MMC's and I do not accept responsibility for it. It is certainly true that if my original price control had been accepted by the company, the total amount of CAPEX NIE would have been allowed would have been lower. In fact the capital underspend in the first year of the present price control period of £12 million shows that NIE did not even spend the amount I would have allowed. Moreover, I always made it clear to the company that, once the total amount had been set, it was for management to organise the priorities on the basis of their own judgment and in the light of the network performance. In the light of events since I am not any longer satisfied that this lack of accountability for CAPEX expenditure is defensible. I have appointed consultants to examine NIE's CAPEX programme with a view to ensuring that investment projects are subject to adequate financial appraisal and monitoring. There are also wider issues about the involvement of customers in determining both the total size of the CAPEX programme and the priorities within it. This is an issue which will be covered in my forthcoming consultation paper after I have had the opportunity to discuss with NIE in depth the analysis underlying their report.

  Thirdly I think it is somewhat disingenuous of NIE to give the impression that the problem is being solved by the company at its expense. All the money involved in the proposals is existing money and is customers' money since it is paid for by customers through their electricity bill. If expenditure is being switched, then it is incumbent on the company to show that a better return is being achieved for customers than would have been achieved by sticking to the old programme. A cost benefit analysis of the expenditure switching is therefore essential.

  I hope that you find these observations above helpful. I regret that it is not possible for me to give your Committee a considered response to the NIE report at this stage. I will forward a copy of my consultation paper after my discussion with the company.

Douglas McIldoon

5 February 1999

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