Mr D McIldoon
Regulator for Electricity and Gas
OFREG
Brookmount Buildings
Fountain Street
BELFAST

13 February 2002
Dear Douglas

OFREG CONSULTATION PAPER - NIE T&D PRICE CONTROL

1 Review of NIE's T&D Business

The Committee for Enterprise, Trade and Investment met to discuss the above issue following the meetings with yourself and NIE. Our considered response is detailed below and I hope you will find this useful in your deliberations.

Systemic Divergence

The Committee supports OFREG in addressing the causes of divergence, rather than the existence and size of the price gap, in the current price control review. The Committee is particularly interested in assessing the nature of divergence with the most comparable regions in England and Wales.

Price Divergence

The Committee is concerned at any increase in divergence and support OFREG's conviction that corrective action needs to be taken. The Committee is particularly concerned at the degree of divergence predicted to continue over the next five years. This divergence should be monitored in comparison with the most similar English RECs.

The Committee do not wish to comment specifically on the most appropriate form of the T&D business but they would hope that a structure, capable of delivering value for money and arresting divergence, is put in place at the earliest possible opportunity.

Unregulated business and Investment Grade

The Committee agrees with the Regulator that the issues surrounding NIE's business transactions with other Viridian companies needs to be dealt with in a fair and transparent way. The Committee supports a full examination of any inappropriate costs imposed on NIE customers.

Comparing T&D with English RECs

The Committee believes that comparison should be made with the most similar RECs.

Returns to Shareholders

The Committee has noted that the divergence between the return, which a modest low risk investment would have earned, and the return which NIE's shareholders have earned mimics the growth in the divergence between Distribution costs in GB and Northern Ireland.

The Committee is concerned that returns to NIE shareholders should be commensurate with the perceived risk associated with their investment.

Systemic Divergence - the longer term

The Committee would like further information to explain why GB companies adopted a strategy of depreciating their pre-privatisation assets faster than NIE. Is OFREG satisfied with NIE's strategy in this respect?

The OFREG paper states that, 'The system NIE is creating will - apart from the Moyle Interconnector - be much the same as the system sold at privatisation. But it will cost customers three times as much to finance.' The Committee welcomes a full investigation to address this observation.

Conclusion

OFREG has examined the evolution of electricity demand and capital expenditure over the last fifty years in order to determine if this provides a reason for the divergence. They have also carried out research looking at the cost drivers affecting divergence in the distribution of electricity.

The Committee acknowledge the work carried out by the Regulator in this respect and share his view that, if systemic divergence is proved unjustified, then NIE cannot retain any unjustified benefits.

2 Strategic Energy Policy Issues

The Committee does not wish to comment in detail on the specific questions posed by the Regulator on page 28 of his paper but wish to make the following points:

All reasonable measures should be taken to introduce energy efficiency measures. The Committee is particularly concerned with the role energy efficiency measures may have in alleviating fuel poverty.

Based on the information presented it would appear reasonable that renewables should pay a slightly lower Distribution Use of System charge on the grounds that they only use part of the system. The Committee is interested in the potential of other measures to ease access for renewables (e.g., flat charges, green corridors, favouring embedded generation, net metering for micro auto producers) to be dealt with in the final proposals.

The Committee is very interested in the work of European cities bringing together architects, energy providers, planners, politicians and local communities in a myriad of small scale creative projects, which are producing substantial CO₂ reductions, and in some cases communities, which may eventually be CO₂ free. It would appear reasonable that NIE is incentivised in some way to assist and facilitate programmes aimed at learning and disseminating information about buildings as energy producers.

The Committee is also very interested in the potential of the rural community and community groups in developing their own energy solutions. It would be appropriate therefore to explore the role NIE T&D may have in developing this potential.

3 Operating Costs

The Committee supports the analysis being carried out by PKF on behalf of OFREG and would like to be kept informed of their findings.

4 CAPEX

The Committee supports OFREG's review of capital expenditure and agree that significant variances between the MMC plan for capital investment and that executed by NIE are thoroughly investigated.

The Committee notes NIE's proposed capital expenditure program and are interested in the outcome of the investigation being carried out by consultant's on behalf of OFREG's.

Back-ending Investment

The Committee is concerned at the practice of back-ending investment. The Committee feels that perhaps this may be an opportunity for NIE to redirect the estimated £3m, accumulated through the practice of back-ending investment, to assist some of the estimated 170,000i households in fuel poverty, for example.

5 Financial Issues

The Committee welcomes a detailed consideration of the financial issues relevant to the T&D price review.

If you need clarification on any of the above points I would be grateful if you contacted the Committee Clerk, Cathie White on 9052 1230.

Yours sincerely

PAT DOHERTY MP MLA
Chairperson
Committee for Enterprise, Trade and Investment

i Northern Ireland Family Expenditure Survey (NIFES) cited in Fuel Poverty in Northern Ireland, NEA Policy Report November 1997