The new electricity tariff review is unconvincing, says John Simpson. We need more clarity on both its composition and on future policy
Douglas McIldoon, a former electricity regulator, was invited by the current Regulator, Iain Osborne, to review the recent domestic tariff increase of 33%.
Asking Douglas McIldoon to undertake this task, while acknowledging his accepted credibility, was always likely to be criticised since, having previously held the position, he could be heavily influenced by past systems and decisions.
That vulnerability has unfortunately been reflected in the report now published.
Mr McIldoon's report is challenging and much more far reaching than a simple response on the merits of the recent tariff increase. On the main question, he has endorsed the 33% decision as an inevitable outcome given the rising fuel prices at that time.
Although the argument for a tariff increase was justified by the international fuel price increases, there is no disagreement that neither the regulator nor NIE could have foreseen their more recent collapse.
Those mistaken expectations are now part of the evidence to justify an early tariff correction from a date yet to be agreed.
However, there remain key weaknesses in this report.
The tariff increase is justified by the claim that the process which was followed was similar to the process which had been followed successfully in the past; it was no less rigorous than in previous years.
This conclusion controversially asks electricity customers to accept that previous scrutiny had set acceptable precedents. It neither sets out adequate justification nor does it suggest any examination of alternative modelling.
Mr McIldoon does not offer an articulated model showing how the 33% was calculated.
There were (at least) two main variables. These were the possible differences in tariffs if the method of buying fuel for electricity generation had varied and also, just as significantly, what decisions were possible on the allocation of costs (and revenues) if the formula might have allowed different levels of over or under-recovery: the so-called K factor.
The Regulator is accountable to the public for his decisions. However, there is still no tradition of setting out in a pro forma statement the arithmetic on which decisions are based. One of the factors drawing criticism of the 33% decision was then, and remains, the inadequate disclosure of basic arithmetic.
There is something of a contradictory tension in Mr McIldoon's presentation.
He starts with reassurance based on the argument that the Regulator has been as rigorous as in previous years.
Later, he argues extensively that electricity prices are higher than they need to be because policy is confused and contradictory.
To be fair, the two statements can be reconciled since the former is his answer to today's tariff question while the latter is his perspective on a much wider range of questions, many of which are controversial.
His conclusions on the relationship of tariffs to fuel poverty are well argued and controversial.
In a careful review, he says: “It should by now be evident that the hope of eliminating fuel poverty through the price system in the energy markets, as they operate at present, will have to be abandoned.” He continues: “Using the present market structure to eradicate the scourge of fuel poverty is a mathematical impossibility.”
If better answers to reduce fuel poverty are to be found, differential means-tested electricity tariffs are unlikely. Mr McIldoon suggests that the Consumer Council might challenge the legitimacy of today's system.
In a new metaphor, in support of Mr McIldoon's suggestion that the present electricity markets operate too much in favour of the generators, he sums up by saying: “It is as if when the Titanic hit the iceberg all the lifeboats were reserved for the crew.”
Minister, Mrs Foster, over to you! The wide policy questions posed call for greater policy clarity.