Examination of Witnesses (Questions 40-46)
ENERGY NETWORKS
ASSOCIATION
16 NOVEMBER 2004
Q40 Sir Robert Smith: You and the Chairman
touched on the fact that reliability from the model that Ofgem
have come up with is very much going to be achieved by improving
tree-cutting and vegetation management. Do you think the incentives
built in are going to solve this problem?
Mr Phelps: I imagine that tree-cutting,
and the like, will be done on a three-year cycle. Clearly, there
will be improvements as a result of that. What we were looking
for, and what we believe customers are looking for, is something
more fundamental than that. That is for some real capex to be
spent to improve the resilience, particularly, of the overhead
networks and perhaps undergrounding some of them as well to improve
performance. I think tree-cutting can only go so far, and if you
look further into the future then this has got to have a capex
solution addressed to it. I believe that Ofgem have, to some extent,
delayed their decision because of the concerns about measurement
of output, and I think that is a risk that they should not have
taken.
Q41 Linda Perham: Just, finally, on the
quality of service standards, if I can focus on that. How achievable
do you think the high quality of service targets are that Ofgem
are proposing for the next five-year period?
Mr Phelps: It is interesting,
as Alistair pointed out, overall the changes in performance are
not that great; performance has been very good over the last few
years and the targets are not that severe, if you just look at
the overall percentage improvements. Where companies have concerns
is the amount of money that is allocated to achieve those targets.
In the last review there was quite a bit of criticism of Ofgem
because we were allowed only £2.30 per customer per year
to improve quality of supply. This time round that amount has
fallen even further; there is less than £1 per customer to
improve customer interruptions, less than £1 per customer
to reduce our restoration time and so improve our Customer Minutes
Lost (CML) performance. In fact, what that means is that the quality-of-supply
targets are less severe in a physical sense and the money that
is being allocated to achieve those targets is where the concern
is. It is a very small amount of money compared with last time,
and for many companies it is insufficient, they feel, to reach
the target that has been set for them.
Q42 Linda Perham: What about the proposals
for the next price control period? Are they an improvement on
the last period of price controls?
Mr Phelps: When you say "improvement",
it is for a reduction in customer interruptions and in CMLs. It
is just that the money allocated is perhaps, we think, insufficient
in some cases. It is certainly less money than was being allocated
last time round when there was quite a bit of criticism about
the amount of money being allocated to improve quality, because
customers from the Ofgem survey (which you touched upon with them)
were saying that customers would be willing to pay quite a bit
more to improve their quality of supply than, perhaps, Ofgem are
suggesting in their September proposals.
Q43 Linda Perham: Is there something
you could single out as the most important thing Ofgem could do
to improve its proposals for the next price control period?
Mr Phelps: This is generally,
now?
Q44 Linda Perham: Generally. Just overall.
Mr Phelps: I guess the one thing
that we have not spoken about and which the companies are very
exercised about is the ace up the sleeve of Ofgem at the moment,
which is, of course, the cost of capital figure, on which at the
moment their working assumption is a 4.6% figure, and the companies,
as one, are saying that this figure should at least be up towards
the top of Ofgem's range—up around the 5%—if we are
to encourage investors to invest in the industry so that we can
meet all these targets for higher levels of investment that we
are hoping to meet over the next five years. Again, it is something
where we have made a number of submissions; we have compared the
risks that we as an industry face compared with water; water have
been given 5.1% and at the moment we are sitting at 4.6 and we
think that is inequitable, it is wrong and could lead to a flight
of equity out of the electricity industry and into other competing
industries. So this, perhaps, is our main concern, as we sit here
waiting for the tablets of stone at the end of the month.
Linda Perham: November 29. We are all
waiting for that with bated breath.
Q45 Chairman: Do you think that you are
comparing like-with-like when you compare a myriad of water companies
with comparatively few DNOs?
Mr Phelps: I do not know whether
the volume of companies is important. I think what we should be
looking at, and what investors should look at, is what sort of
risk environment do they operate under? Water UK did a study and
came out with the view that even National Grid and the DNOs were
a more risky operating environment than water (other things being
equal), suggesting they needed a higher rate of return. Water
also has established mechanisms for dealing with uncertainty within
their regulatory framework; we have some being introduced but
nothing to the extent of water. We have more revenue exposed in
the quality of supply targets because if we do not hit our quality
of supply targets then companies can be fined up to 3% of revenue—and
this increased from 2% in the last review. So we believe there
are a number of uncertainties which water companies are not facing.
So whilst one could argue that water have got it wrong at 5.1
the situation is it is there at 5.1, investors can see 5.1 and
so at 4.6 we believe there is still room for Ofgem to increase
that figure towards the top end of their range at around 5.
Q46 Chairman: All will be revealed on
29 November. For us, I think, we are in a position to say we will
understand a bit more about it. Thank you very much. If there
is anything we need to get from you we will get back to you. If,
on 30 November, when you have licked your wounds, you think that
something else needs doing then you know where we are. Thanks
very much for your time and your trouble this morning. We are
very grateful.
Mr Phelps: Thank you very much.
| 
