John Simpson: Electricity and gas sectors are trading profitably in NI
The electricity sector in Northern Ireland has experienced big changes in recent years.
There have been changes in the ownership of some of the big companies and there has been the integration into the electricity grid of over a thousand new wind-based generators. The electricity generators at Ballylumford and Kilroot have been sold by the former owners, AES, to new investors from the Czech Republic.
Some of the older large generators at Ballylumford have been decommissioned. A changed feature of this sector is the absence in 2019 of any Northern Ireland ownership of the main businesses.
Power NI and Energia are both subsidiaries of the Viridian Group, itself owned by an international group. Coolkeeragh and NIE Networks are both owned by the Irish ESB and SONI is owned by Eirgrid, the Irish parallel service organisation.
The recently announced 6.1% tariff increase by Power NI, followed by similar increases from other supply businesses, generated serious interest in the justification of these increases, particularly against a background of reductions in the wholesale price of natural gas which is the main fuel for the large generating plants.
The 6.1% tariff increase was endorsed by the Utility Regulator.
The registered business accounts of the larger businesses in the electricity and gas sectors in Northern Ireland show that they are profitable.
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Two features merit a cautionary comment. First, using statutory registered accounts does not offer an immediate conclusion on continuing profitability.
The accounts reflect transactions in a trading year but they need to be read with an awareness of other relevant factors.
Second, because of exceptional items, pre-tax profits may need to be adjusted to give a 'better' indication of underlying trends. The presentation has been adjusted to exclude the impact of impairments or derivatives on the figures used.
To reduce the risk that trading figures for a single year may under or over state trading conditions, the results of the most recent three years have been averaged to reflect continuing trading patterns.
The combined analysis shows how profits compare as a percentage of turnover, how profits compare to the balance sheet value of shareholders equity, and whether there have recently been dividend payments to shareholders, usually in parent companies.
On this basis the nine businesses are trading successfully. Some of these businesses have large capital sums invested and inevitably this will test whether their trading results offer both an acceptable return on capital in addition to a competitive margin of profit.
The electricity and gas distributing companies tend to have lower sums invested in fixed capital assets than, for example, the generating plants.
On that basis, the distributing companies seem to have registered more comfortable results.
Stemming from these results there is an important question about the regulatory processes to which they are subject.
When these businesses change their regulated tariffs, the regulator assesses the merits of any change before endorsement.
The details of that regulatory review are not available for scrutiny.
Since the recent review of the tariff increase by Power NI has raised questions about its justification, the regulator could earn greater confidence if an independent assessment process was possible.