Belfast Telegraph

Wednesday 23 July 2014

NIE accepts 'harsh' intervention

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Two years ago, Northern Ireland Electricity (NIE) initiated an intervention from the Competition Commission (CC), following tough proposals by the Utility Regulator. Now NIE has accepted the newly published decisions of the CC, while describing them as harsh and demanding.

In addition, NIE acknowledges some significant improvements in its operating environment. The big gains are, first, an acceptance that the regulatory systems should now be realigned with those existing in Great Britain and, second, some unwelcome retrospective adjustments to its finances should be disallowed.

New price control decisions for NIE were due to be implemented early in 2012. Now, following the guidance of a CC investigation, the new price control will be implemented in October 2014 -- over two years late.

The delay was caused by the rejection by NIE in 2012 of proposals from the regulator that NIE regarded as seriously flawed. The disputed proposals were examined in an intense, detailed review. The CC has issued its report and, after careful consideration, NIE and the regulator have agreed to its implementation. NIE faces tighter constraints on its investment plans and operational costs. The CC investigation proved expensive. However, as the CC chairman has argued, the costs should be seen as small in proportion to the impact on much larger funding questions. Northern Ireland now has a better understood and more acceptable basis for electricity pricing.

The costs of over £2m represent a good investment in improved regulation.

From a customer perspective, the CC has trimmed down the allowable costs and tightened the methods of their calculation so that the NIE portion of an annual electricity bill will (in current real prices) be £10 lower at £142 in 2017. That basic conclusion co-incidentally confirms a similar impact to the proposals in the original review by the regulator.

From an NIE perspective, the CC has rejected several major investment schemes, including an expensive scheme that would have reduced marginally the risk of ice accretion causing breaks in electricity supply in a severe winter, as well as new equipment to reduce some of the risks to interruptions in rural supplies.

In addition, further investment to facilitate further renewable sources of electricity joining the grid (sometimes through the location of special clusters of wind generators) is to be subject to project by project approval by the regulator.

The line by line analysis of NIE's direct and indirect costs is painstaking. Regulation at the level of detail revealed by the CC easily excites concerns about whether regulation actually becomes a form of micro-management. Northern Ireland customers will be reassured that regulation is working in their favour: NIE shareholders will have concerns that earnings on commercial investment are likely to be modest, and the permitted rate of return on capital may be unrealistically low.

In a more critical vein, the CC has shown little regard for the need to strike a balance between excessive minimalist dissection of costs and calculating global allowances for normal costs.

The CC has published a 503-page report with further appendices. When the CC report was published, local media reports unhelpfully only rarely looked behind the headline conclusions.

The CC report was not a piece of easy reading, even for interested observers.

On two features, the CC report was surprisingly silent: no debate on high electricity prices for industry or on issues of fuel poverty.

That said, the CC itself should not escape criticism. The final report had a welter of detail but lacked a clear tabulation of the arithmetic that would allowed readers to see how the conclusions on a reduced NIE bill in 2017 could be justified.

Perhaps more important than specific details, the CC said that relationships between the regulator and NIE have shown 'signs of stress.'

This led to the hope that the regulator and NIE will engage "in a constructive manner ... to ensure that the public interest is best served".

Constructive open dialogue can begin.

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