Publishing his final proposals for NIE’s Transmission and Distribution Price Control for the period 2002/2007, Electricity Regulator, Douglas McIldoon to-day proposed a new approach to more effectively align the interests of customers, the environment, employees and shareholders.
Mr McIldoon said:
“The paper which I am publishing today includes a traditional Price Control proposal. But it also proposes an alternative which, although it will not immediately achieve as large a price reduction as my initial proposals, would provide the basis for a longer term change in the way in which NIE’s price controls are set. It sets smaller and more gradual price reductions and offers NIE a raft of incentives which would reward the company in a predictable, consistent and fair way for the steps which it takes to reduce its costs or improve the environment, thus aligning the interests of the company and customers.”
The traditional price control operates on the basis that NIE makes short term additional profits by cutting its costs. These cost reductions provide the scope for lower prices in the next period. The Regulator’s alternative proposal offers NIE a number of incentives by which it will always be in the company’s interest to seek to cut costs and - by promoting the more efficient use of energy - reduce demand growth. This would as a consequence give the company much more control over the way in which it allocates costs and runs its business.
Continuing Mr McIldoon said:
“In terms of their impact on prices my alternative proposal would provide for a 5% reduction in the cost of one unit of electricity in 2003 - a reduction of approximately £6 in the average electricity bill next year - and in each of the following three years. This is based on NIE’s assumption of demand growth. I accept that customers may be disappointed that larger price cuts don’t come through at once. However, I hope they will accept that this gradual approach is a small price to pay for a much better long term future and that the benefits of the new approach will come through quickly.”
This new approach to price controlling T&D is seen by the Regulator as a logical development from the incentive based price controls which NIE and Ofreg have developed first for the NIE Supply business and are at present further refining for the Power Procurement Business. These two price controls are bringing real benefits to customers. However Douglas McIldoon stressed that the proposals outlined would not deliver any value to customers unless NIE fully enters into the spirit of a new relationship with its customers.
“Unlike the traditional T&D price control this sort of price control cannot be imposed on an unwilling partner. While I am hopeful that NIE will accept these proposals, if it does not I will have no alternative but to revert to a traditional price control. If this is the only option, I shall seek to achieve the maximum immediate price reduction for customers,” said Mr McIldoon.
Notes for Editors
The Final Proposals paper contains both a traditional Price Control proposal and the alternative Price Control proposal. The paper can be downloaded from this web-site or alternatively a hard copy can be ordered from Ofreg, Brookmount Buildings, 42 Fountain Street, Belfast, BT1 5EE, tel. 028 9031 1575.
Under his alternative proposal the Regulator is offering NIE the following incentives:
(a) the retention for five years of efficiency gains in reducing their costs through better asset and Opex (Operating Expenditure) management.
(b) a 1% higher rate of return on Capex (Capital Expenditure) expenditure which goes into demand side measures instead of traditional network investment;
(c) a sharing in the saving to customers from avoiding network investment because of steps which the company takes to reduce demand growth for electricity; and
(d) an incentive payment in respect of the units of electricity which customers do not purchase through the use of near market renewable technologies.
However it is accepted that badly designed incentives can produce unintended or perverse results. The next step would be for NIE and Ofreg together to refine the incentive proposals to ensure that they work for both customers and shareholders.
The cost of capital would be 6.5% pre - tax real for both the existing distribution and transmission asset base. This is the same as the rate for distribution in GB and slightly higher than the rate for transmission in GB.
Because of the need to minimise new capital expenditure and pay for the Moyle interconnector, the Regulator proposes to stick closely to the Capital expenditure figure in his initial proposals. He does however, propose to add the allowance NIE sought in order to maintain its rural refurbishment programme. This additional Capex is being allowed because of the importance NIE attributed to it in order to maintain its capability to respond to storms and emergencies and because of its disproportionately large employment aspect. The Regulator proposes to ring-fence this expenditure and he will require NIE to spend it as they propose or surrender it. In summary this means a Capex programme of £227m excluding the Moyle interconnector which will add over £100m to the asset base.
In the meantime, the Regulator proposes a cost of capital on the Moyle interconnector of 6.25% - this being the rate currently allowed in England and Wales for major transmission assets.
The Regulator does not propose being prescriptive about the allocation of the other elements in NIE’s allowed revenue. It is up to the company to decide how it will allocate its revenues provided only that it does not do so in such a way as to increase outside this price control period the burden on customers.
For further information or to arrange an interview with Douglas McIldoon, please contact Nick Carson on 07711 482807 or 028 9127 5965