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