Regulator publishes NIE T&D price control final determination

23 October 2012

The Utility Regulator today publishes its final determination relating to the NIE Transmission and Distribution (NIE T&D) price control (called RP5).  The publication of the final determination follows a public consultation on the Regulator’s proposals, which were published in April 2012.  A separate public consultation was also conducted on an element of the final price control, relating to NIE T&D capitalisation practice.  The final determination includes a decision on the NIE T&D capitalisation practice.

Utility Regulator Chief Executive, Shane Lynch said:

“The publication of our final determination follows an extensive consultation process which has produced an excellent response.  In addition to our consultation workshops, we received 32 written responses, half of which were from consumer organisations.

“We have also been encouraged by our engagement with NIE T&D. This has assisted us in formulating our final determination and further information provided by the company, since our draft determination, has had an impact on our decisions.

“We have put a range of measures in place to deal with uncertainty (in particular for capex requirements and pension costs), to protect both consumers and NIE T&D. Additionally, we have also ensured that consumers do not pay twice arising from NIE T&D’s change in capitalisation practice during the RP4 period.

“Overall, our final determination is a balanced outcome.  We want to make sure that electricity consumers continue to have a high performing and secure network, which accommodates renewables, at the lowest possible cost.”

Key decisions within the price control determination include:

Capital expenditure
• We have determined a capital expenditure allowance of £396 million (five years equivalent) which has increased by 26% from our draft determination. We have also put special arrangements in place for approving additional capital expenditure to accommodate the integration of renewable generation and further interconnection, consistent with Northern Ireland’s Strategic Energy Framework.  NIE T&D have estimated this additional expenditure to be up to £223 million (five years equivalent). 

Operating costs
• We have determined an operating expenditure allowance of £271 million (five years equivalent).  NIE T&D will be allowed to retain efficient outperformance against this allowance.

Pension costs
• We have accepted NIE T&D’s proposals in full for pension costs associated with existing employees.  As a matter of principle, we have determined that, from RP5 onwards, NIE and Powerteam will be allowed efficiently incurred and prudently managed pension deficit costs.  The pension cost allowance for RP5 is £58 million (five-year equivalent).  We will review this again following the next formal pension valuation in 2014. 

Allowed rate of return
• Our allowance for the cost of debt of 3.39% (pre-tax, real) reflects NIE T&D’s actual weighted average cost of debt.  We have determined an allowed weighted average cost of capital (WACC) of 4.55% (vanilla, real).  This has increased from 4.45% in our draft determination.  This same WACC will be applied to all three capital expenditure funds and to the existing regulatory asset base (RAB).

Funding
• NIE T&D has indicated that, given the overall level of capital investment will increase significantly, they will need to raise additional funds. During the RP5 period, we anticipate that this will be a mixture of debt and equity (or retained dividends) to maintain its existing capital structure.
• Our financial analysis concludes that NIE T&D will be able to continue to finance its activities.

Tariff impact
• Network charges presently account for about 20% of the overall electricity bill for a domestic consumer.
• Before investment to facilitate renewable and for interconnection, network charges for domestic consumers will remain flat and for most business consumers will slightly decrease, on average and in real terms, over the price control period.
• With the investments to facilitate renewable and for interconnection included, network charges for domestic consumers will increase by on average around £4 per year or 2.7%. For large industrial consumers, network charges will increase by around £11,000 per year or 9%.
• Under NIE T&D’s proposals, and before investment to facilitate renewables and for interconnection, network charges for domestic consumers would increase by on average £21 per year or 16%. For large industrial consumers, network charges would increase by around £19,000 per year or 15%.

Capitalisation practice
• We have determined that consumers will not pay twice for operational expenditure that was re-categorised as capital expenditure during the RP4 period. To have allowed this would have been inconsistent with the principle of ‘no double counting’ established for the RP4 price control.
• An adjustment to NIE’s RAB of £32 million will be made to reflect this.

RP5 documentation and related information can be accessed by clicking the link .