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Tough regulation could hurt NIE and its clients


NIE could be hampered by the regulations

NIE could be hampered by the regulations


NIE could be hampered by the regulations

On April 1, 2012, NIE was due to commence a new five-year contract, agreed by the electricity Regulator (the Northern Ireland Authority for Utility Regulation (NIAUR)), which would set the financial parameters leading to permitted charges to consumers to allow NIE to function as a commercial business.

Since finalising of the new price control mechanisms is proving very contentious, the reasons for delay are fundamental.

NIE must eventually operate its business within regulated outcomes for capital spending, operating costs, and possible retrospective adjustments to previous settlements.

On April 19, the Regulator published a demanding set of draft proposals affecting NIE. They are unacceptable to NIE which has published an extensive documented reply.

The easy, but dangerous, assumption for electricity consumers is that a good challenge to the ambitions of NIE by the Regulator is welcome and expected. Consumer price increases should be minimised.

There are at least two reasons why, this time, that assumption may be fallacious.

First, if the Regulator is challenging NIE excessively, there is a risk that an underfinanced NIE would mean that safe and reliable electricity services were put at risk. Second, it is not the role of the Regulator to make NIE commercially unviable. The Regulator has a public duty to be demanding but also fair and reasonable.

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NIE has hit back strongly. The Regulator risks damaging the reliability of NIE in the years ahead as well as frustrating the addition of significant renewable sources of electricity to the grid.

In a clash of two armies of consultants, employed by both the Regulator and NIE, there is a major battle. Interested parties should read, at least, a 200-page review by the Regulator.

Then they must read 200+ pages of counter argument from NIE. The argument ranges from allegations of incompetence and misunderstandings to putting Northern Ireland consumers at excessive risk and postponing necessary changes too far into the future.

Ideally the regulatory framework should work with shared analysis and with less expense on adversarial presentations.

NIE makes an impressive case that the Regulator has used an inadequate approach which moves towards micro-management of NIE affairs and challenges retrospectively (and therefore unacceptably) past agreements. A full review of the tensions would raise more than a hundred challenges by NIE to the competence or accuracy of the reasoning by the Regulator.

Three major issues stand out. First, how much capital investment is needed by NIE to maintain and sustain adequate and sustainable services? Second, what scale of investment to facilitate access for renewable electricity supplies should be approved? Third, can NIE be expected to remove, retrospectively, pensioners' prospective benefits already agreed?

The gap between NIE and the Regulator is most conspicuous in terms of the future capital investment programme.

The obligation to provide electricity services on a 'business as usual' meant that NIE needed to invest £607m over the next five years. The Regulator suggests approval of £293m.

This gap and the spending conditions that the Regulator seeks to impose are strongly challenged.

A critical difference is the rejection by the Regulator of a phased programme to replace some of the 11kV distribution wires which are now reaching the end of their useful lives and are over 40 years old.

Other critical differences are articulated in inadequate commitments for extending the networks and incentivising connection hubs for renewable sources of electricity.

A possible policy by the Regulator of approving individual investment projects challenges normal regulatory principles and risks damage to the commercial decision making of NIE.

Although there remains a (faint) possibility that the Regulator will modify the draft proposals to appease a reluctant NIE, the prospect is that this dispute will be referred to the Competition Commission for review, further delaying a settlement, increasing the risks of a disrupted capital investment programme and adding to the costs incurred by the stakeholders.

This has been an unacceptable regulatory process.