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Energy Regulator faces a triple challenge after it makes difficult decisions

By John Simpson

Just as the all-island electricity market launches the more ambitious I-SEM (Integrated Single Electricity Market), draft contracts determined by the Regulator with SONI (the System Operator), with NIE Networks (making the electricity distribution system reliable and sustainable) and with Firmus (supplying gas to 10 urban centres) are being (or have been) challenged. Northern Ireland may ask the Competition and Markets Authority to conduct three separate investigations into the reasonableness of the Regulator's decisions.

These appeals to the CMA are a coincidence. Each represents a disagreement between professionally-led organisations, each believing that the Regulator has reached mistaken conclusions. Energy customers have understandable interests in the nature of the tensions and the possible impact on prices.

The argument is complicated. Short-term regulatory decisions may sometimes be challenged but, even more sharply, may be seen as erroneous. Alternatively, although unwelcome, they may be competently made.

SONI review

SONI has been seeking an acceptable operating determination for the period from 2015 to 2020. An initial bid was responded to by the Regulator in April 2015 but was unacceptable. After unsuccessful negotiations, in April 2017, SONI submitted an appeal.

This is already a difficult delay and the outcome of the appeal is expected in the autumn. SONI argues that the decisions of the Regulator will not provide "for a sustainable business (which) allows SONI to act in the best interest of electricity users". A financial outcome that does not allow SONI to recoup its costs would not be a sustainable business. An outcome that "does not include any allowance for investment in innovation", which is ultimately in the best interests of consumers, is argued to be contrary to the wider needs of the economy.

NIE Networks review

The search for a new agreement with NIE Networks has not yet been finalised. NIE Networks submitted its proposals for the period up to 2024 in June 2016. The Regulator responded with its amended suggestions in March 2017. However, NIE Networks has identified concerns described as "significant unjustified shortfalls in the... allowances when compared to (the)... RP6 business plan".

Superficially there could be an argument that the disagreements are mainly about money.

That is a part of the tension but, as NIE Networks makes clear, there are tensions which can be seen as balancing risks, probabilities of systems or capacity failures, and delivering results in terms of sustainable outcomes, against events such as bad weather risks. By June 28 the Regulator must publish a response which, if acceptable, would be a welcome surprise but if unacceptable might again be passed to the CMA.

Firmus review

The CMA review of the arguments behind the delayed contracts affecting the supply of natural gas to the '10 towns' area is well advanced and is expected during this summer.

There should be no surprise that the regulation of electricity and natural gas produces operational tensions between the delivery organisations and the Regulator. That is inherent in the nature of the man-made systems. However, two factors point to questions about the Northern Ireland systems.

First, the local market is small in both population size and relative to English regions or districts. Second, a small regulatory structure in NI is expected to assess all aspects of business plans with a small number of professional experts covering the full range of organisational, financial and technical questions.

Nevertheless, the degree of differences in technical and financial starting points in negotiating new regulatory contracts is so large that someone (the CMA?) should ask whether competent professional organisations should be expected to differ less sharply. The costs and outcomes of these special investigations, due later this year, will set important precedents for future regulatory processes.

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