APPENDIX III
OFREG RESPONSE
Letter to the Clerk of the Committee from
the Director General of Electricity Supply for Northern Ireland
I would like to thank the Committee for the opportunity
to respond to the recommendations in the Second Report which relate
to me directly. My response follows the order of recommendations
as published on page xxi of the Report.
Conclusion (d)
Ofreg has commissioned studies to develop suitable
network performance measures which will be used in the remaining
years of the current price control and more specifically for the
next price control, which will link network performance (and hence
quality of supply) with network related expenditure (both capital
and operational). These output measures will help determine the
level of expenditure required over the next price control period
to achieve the desired quality of supply.
In the course of the 2002 review process, Ofreg will
examine detailed submissions from the company in relation to their
expected requirements over the five years 2002-2007 for capital
and operational expenditure. If Ofreg deem that capex estimates
from NIE for the new control period are such that they include
a re-submission for projects not carried out in the existing control
period, then the expenditure for such projects will be disallowed,
i.e. the price control process will explicitly disallow further
funding for projects which were not carried out due to inefficiency
by the company in allocating its resources—unless of course
the money was allocated to another project of a demonstrably higher
priority.
Operational expenditure by the company faces similar
scrutiny, with a "bottom up" approach being used to
derive appropriate levels of operational expenditure. Evidence
from the previous control period will inform the decisions taken
with regard to the appropriate levels of expenditure in the following
period, and efficiencies will immediately be passed on to customers
by a one-off reduction in allowed revenues (a "P0" drop)
followed by ongoing annual reductions under RPI-X methodology.
It should be acknowledged that the quality of economic
decision making in NIE appears to be improving no doubt, in part
at least, because of the pressures which come from regulatory
accountability and parliamentary scrutiny.
Conclusion (f)
Ofreg will survey the views of customers as part
of the price control process, and customer views on quality of
service and willingness to pay for quality will be taken into
account in price control decision making in relation to capital
spend. It should be noted that customers' views were however ignored
by the MMC when it set the current price control and I will be
happy, should it be necessary, at the appropriate time to make
your Committee's views known to the Competition Commission.
Conclusion (g)
I welcome the Committee's support for my proposal
that cost-benefit evidence should be provided by NIE to support
efficiency claims of any capex priority changes during a price
control period.
Conclusion (h)
I welcome the Committee's support for my assurance
that reducing prices to consumers in Northern Ireland can be achieved
alongside improving quality of supply, and I can confirm that
NIE will be entitled to such revenues as can be demonstrated to
be necessary to maintain and improve their network.
Conclusion (k)
I have completed my report into lessons to be learned
from Christmas 1998 storm and will forward copies to the Committee
prior to publication.
I look forward to the Committee publishing a Special
Report of responses to their recommendations.
Douglas McIldoon
27 October 1999
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