Northern Ireland Electricity Regulator publishes MMC Report

Northern Ireland Electricity Regulator publishes MMC Report
25 April 1997
Mr Douglas McIldoon, Director General of EIectricity Supply for Northern Ireland, today published the Monopolies & Mergers Commission Report on Northern Ireland Electricity’s price controls.

Mr McIldoon said:

“I am grateful to the Commission for the work they have done considering NIE’s price controls for its transmission and distribution business and its supply business for the period commencing 1 April 1997. I now have a duty to consider and have regard to the modifications proposed in the Commission’s report and to make such modifications as I consider requisite for the purpose of remedying or preventing the adverse public interest effects identified by the Commission (“the public interest detriments”). My present intention is to largely accept the Commission’s proposed modifications. These are summarised at Chapter 1 of the Commission’s report, a copy of which is attached as Annex 1 to this notice.

I am not, However, currently, minded to accept the modifications proposed by the Commission for NIE’s transmission and distribution business price control without an adjustment. The recommendation of the Commission is based on attributing a particular value to the asset base for NIE’s transmission and distribution business (paragraph 1.4(b) of the Commission’s Report - see annex 1).

There, are two issues which lead me, to depart from a recommendation based on this asset value:

(a) Uplift
The Commission’s recommendation is set by reference to the opening day valuation of NIE after applying an uplift to that valuation. Neither the evidence adduced in the Report nor the analysis of the Commission has persuaded me that my original. decision to propose licence modifications based on NIE’s opening day valuation without uplift was in any way wrong or inappropriate.

(b) Depreciation of pre - flotation assets

I am not presently minded to accept the Commission’s recommendations to the extent determined by a proposed change to the company’s depreciation policy for pre-flotation assets on which NIE earns a return under the price control. I am not currently satisfied that the Commission’s arguments for a change of policy and a consequent adjustment are strong, and I remain satisfied that my original proposal, which is in line with standard regulatory practice, acts in the, interests of shareholders and customers,

I have a difficulty in deciding whether to accept the Commission’s recommendation for, the level of capital expenditure (capex) and the operating expenditure (opex) for NIE’S transmission and distribution business.

The Commission’s assessment of the company’s capex and opex programme was completed on the basis of a different set of figures than the ones which had been submitted to my consultants in 1995. Although I saw some of the new figures, I have not had the opportunity to review them to the degree necessary to satisfy myself that I can adopt the Commission’s recommendations in this respect.

I have asked the company to submit to me the corporate plan on which the Commission relied, but it has not to date been prepared to let me have a copy. I am today writing formally to the company instructing it to provide me with the corporate plan and with the revised figures on capex which it submitted to the Commission. These documents should enable me to judge the appropriateness of the Commission’s proposals on capex and opex in the light of my statutory duties.

However, I do not believe it appropriate to delay modifying NIE’s price controls until I have completed a review of the new data. Accordingly, in order to provide the company with the degree of certainty required to plan its commitments, to have proper regard to the Commission’s deliberations while at the same time satisfying myself as to the necessary level of capex and opex based on NIE’s new figures, I am currently minded to allow the MMC’s proposed level of capex and opex for 1997/98 and 1998/1999 and the level which I had originally proposed for the, last 3 years of the price control.
The company will over, the next months, have the opportunity to put to me the, arguments and data it put to the Commission. If I am satisfied that this demonstrates the need for higher capex or opex for the final three years than I had originally proposed, I will increase the figures for the last three years to the extent that the allowance is insufficient for the company’s needs.

The effect of the Commission’s proposals adjusted in line with my current thinking will be to change the transmission and distribution allowed revenues over the period of the price control to £540m in net present value terms compared to £575m (Commission Report, paragraph 1.5). The, effect of varying the Commission’s recommendation’s in respect of uplift and depreciation only, and accepting their recommendations in respect of operating and capital expenditure, would be to set a price control which would allow NIE to recover revenue with an NPV of £555m. (I intend to accept the allowed revenues for NIE’s supply business proposed by the Commission.) The effect on domestic electricity prices calculated on the same basis as used by the Commission (Commission Report, paragraph 1.9) is a drop of 15% in real terms between 1996/97 mid 1997/98, compared with a drop of 14% as proposed by the Commission.

I would welcome comments from interested parties by the end of May, in particular on the issues I address in this notice. Once I have these comments, I will prepare and publish proposed licence modifications. At that time I will also publish a note on the factors which I find to be important in settling modifications to address the public interest detriments. Interested parties will then have 28 days to make representations and objections. Once I have considered these, I shall make the modifications I then Consider requisite.

Notice to editors

1. Copies of the Commission Report Northern Ireland Electricity plc - A report on a reference under articl 15 of the Electricity (Northern Ireland) Order 1992 are available from HMSO bookshops, price £26.
{ISBN 0337112436}
2. Comments on the report should be sent to Director General , OFREG, Brookmount Buildings, 42 Fountain Street, BELFAST BT1 5EE.
3. Information from Kim Heron, GCAS, 557778.