Select Committee on Northern Ireland Affairs Minutes of Evidence

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


  I am grateful to the Committee for giving me a further opportunity to submit evidence on this matter. It may be helpful if I set the effect of the storms on the Company's performance and the Company's reaction to them in the current regulatory context.

  When the electricity industry in Great Britain was restructured and subsequently privatised between 1989 and (in Northern Ireland) 1993, it was on the basis that the industry would work better without direct Government or public intervention and that by removing them from the public sector and putting them under the arm's length control of an independent Regulator, management would be free to take the decisions necessary to create efficient and profitable industries and the Regulator would be responsible for ensuring that the balance between shareholders and customers was maintained and the wider public interest represented. Large questions of public accountability of a self-perpetuating and self-selecting board of a monopoly service were never adequately addressed.

  The post-privatisation system, of which Northern Ireland is a part, looks at regulating outputs in terms of prices and quality of supply, while leaving the question of inputs under the day to day control of the management of the company.

  The way this process works is best expressed by looking at the Price Control Review process where a Regulator, on the basis of historic financial information and future estimates drawn up by the company and critically assessed by the Regulator, comes to a view on the level of resources both for capital and operating expenditure that an efficiently run company will need over a given future period, usually five years, in order to ensure that it can finance its business by attracting capital and at the same time protecting customers both in terms of price and quality of service.

  In practice, given the great gains in efficiency shown by the electricity industry in Great Britain since privatisation, it has been possible both to provide for an improved level of service and lower prices and increased dividends for shareholders. Importantly, however, it does rest on the assumption that the company is efficiently run and that investments are made to give the greatest value for money in terms of quality and security of supply.

  I have emphasised both the focus on outputs and the concept of an efficiently run company because both aspects need to be considered in the light of the recent storms in Northern Ireland and the large scale failure of supply that followed those storms. It is unquestionable that the weather, that Northern Ireland experienced along with Scotland and Northern England from Boxing Day until New Year just past, was the severest in recent memory. It must equally not be forgotten that this is the third occasion since 1992, when the industry was restructured, when Northern Ireland has suffered significant failures in supply due to weather; I refer to the 80 per cent loss of supply in February 1994, the Christmas storms in 1997 and the experience of last December. Following the first two occasions, I and my predecessor sought reports from the company on what had gone wrong and how best to ensure that the same occurrence did not repeat itself in future. With respect to the 1994 experience, the circumstances were unusual and the report indicated that a relatively minor technical adjustment to power station controls would or should ensure that we did not get a repeat of such large scale failure in supply in future. The storms of 1997 were different in so far as they were similar to but of a smaller scale than those which have just happened. Following those storms, officials of my Department and NIE staff met on several occasions to discuss those areas of concern to us, primarily speed of reaction and provision of information to customers and examined the company's actions to ensure that there was no repeat of those circumstances. These discussions last year culminated in a simulated emergency undertaken by the company last December which demonstrated to the company's satisfaction that they could cope with further very severe weather. Set in the context mentioned above, that it is an efficient company's job to deliver the goods to their customers, and the Regulator's job to ensure they have sufficient resources to do so, what took place in December 1998 must be viewed quite critically.

  There are, I believe, five major areas of concern which arise from the Boxing Day storms. These are:

    (1)  the ability of the company to minimise supply interruptions by its choice of network investment strategy;

    (2)  the extent to which that investment strategy is hamstrung by lack of resources;

    (3)  the ability of the company to minimise the inconvenience to customers by communicating effectively with them after supply interruptions;

    (4)  the efficiency with which customers are reconnected, and

    (5)  the compensation payable to customers for the inconvenience of prolonged loss of supply.

  Network investment is paid for by customers through the price control. It is collected from customers through their quarterly or monthly bill. I do not believe that it is in the interest of customers to create the impression that there is some affordable level of network investment which would entirely avoid bad weather interruptions. The question which remains unanswered is whether a different pattern of expenditure would have led to a less bad outcome.

  I opposed allowing NIE the level of Capex they sought for two reasons. The first was the (£97 million) underspend in the first price control. The second is that allowing the company revenue for investments—even when they don't make those investments—drives up prices. Since privatisation, as a result of bad price controls we have a structural 30-40 per cent T&D price divergence with Great Britain. Every customer in Northern Ireland, according to an internal Ofreg paper, will, by the end of this price control, be supporting £250 more of network assets than his counterpart in Great Britain.

  Under the present price control, for which the MMC must answer, we have the strange outcome that the company is investing at the level I would have allowed but customers are having to pay MMC prices. Given NIE's history of underspend, it is not credible for the company to argue that resources were the determining factor in the network's recent performance.

  The possibility that resources were not being invested to best effect has been one of my pre-occupations for some time. Hitherto there has been no requirement on the company to demonstrate that it had invested in successful and necessary projects.

  One of the paradoxical by-products of privatisation is that, while it was done in part to free management from political and civil servant interference, it led to the creation of regulatory government offices which know far more about the industry and the company than the Civil Service had ever known before. Just when utilities should have become truly free, they have public servants become increasingly capable of effectively challenging them. If the companies honour the privatisation compact, this would not be necessary and would not restrict their freedom. But as Burke put it over 200 years ago "Men are qualified for civil liberty in exact proportion to their disposition to put moral chains upon their own appetites." When I challenge the imbalance between returns to NIE's shareholders and the worst T&D price performance in the UK, I do it on the basis of regretful necessity, because it seems to me indisputable that they have not honoured the contract implicit in their privatisation. It is for Parliament alone to say if I overstated the wrong being done to customers.

  Set in this context, my concern is not whether the company has enough money; in 1997 it said it had and indeed it is still underspending that allowed revenue at the moment so this is obviously not a constraint. My main concern, and one which I would want to explore far more deeply with the company is the management of that investment and the criteria against which these investments are examined. Although it was not commenced in the light of the Christmas Day storms, fortuitously I have consultants currently looking at NIE's network performance and its investment appraisal methodology; both of these areas will be crucially important in terms of setting the parameters against which I would intend to engage the company in very detailed discussions to ensure that sub-optimal management of an affordable capital expenditure does not exacerbate the risk of extensive loss of supply during adverse weather conditions.

  While this would cover the Capex element in the situation, it is essential that the company also demonstrates effective plans for communicating with customers, a consistent approach to compensation and the efficiency of its reconnection programme.

11 March 1999

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