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
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 partaccording to the information in the reporthave
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.
5 February 1999
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