COMMITTEE FOR ENTERPRISE, TRADE AND INVESTMENT
OFFICIAL REPORT
(Hansard)
Energy Price Increases
11 September 2008
Members present for all or part of the proceedings:
Mr Mark Durkan (Chairperson)
Ms Jennifer McCann
Mr Paul Butler
Mr Leslie Cree
Mr Simon Hamilton
Dr Alasdair McDonnell
Mr Alan McFarland
Mr Gerry McHugh
Mr Sean Neeson
Mr Robin Newton
In attendance:
Mr Jim Wells
Witnesses:
Mr Dermot MacCann ) The Utility Regulator
Mr Brian McHugh )
Mr Iain Osborne )
Mr Stephen Costello ) The Consumer Council
Ms Sinead Dynan )
Ms Eleanor Gill )
The Chairperson:
Please switch off all mobile telephones, because they interfere with the audio recording equipment.
Mr Iain Osborne (The Utility Regulator):
Thank you for the opportunity to explain recent events and our work. I shall begin with introductions: I am Iain Osborne, chief executive of the Utility Regulator. That is our working title — the formal name is the Northern Ireland Authority for Utility Regulation. To my right is Dermot MacCann, the authority’s electricity director, and, on my left, Brian McHugh, gas director.
I will talk through some slides. I understand that packs containing the slides, and explanatory material that was published yesterday and placed on the authority’s website, have been circulated.
The energy price increases announced yesterday are clearly regrettable and will have a serious impact on many people in Northern Ireland. We consider the increases to be justified — not as some type of trade-off of the interests of consumers against being fair to the companies, but justified in respect of the long-term as well as the short-term interests of consumers.
The increases would have been greater had it not been for careful and diligent regulatory work over the past year or two, and we followed a process in agreeing the increases that we believe is defensible, and which we will explain. We consider this to be a transparent and open process, which I am happy to explain. The outcome is clearly regrettable for the citizens of Northern Ireland, as it is for many others in Britain and the Republic of Ireland who are facing similar challenges. Nevertheless, the increases are justifiable.
I shall describe our roles in this situation and explain the drivers of the increase of, first, electricity and then of gas, and the process through which we have gone. I know that there is particular interest in comparisons with Britain, so I have a slide on that specific subject.
The Utility Regulator approves changes in retail prices. In order to do that, we ensure that there is no padding and no excess profit. We also ensure that the development of new retail tariffs is done through an appropriate process. We deal with some material that is commercially confidential, but it is important that the Consumer Council, as a statutory consultee, is involved in this process, as well as the Department of Enterprise, Trade and Investment. That is our first job in respect of the process and scrutinising of price increases.
Our second role is to squeeze out costs. The bills that drop onto consumers’ doormats cover the cost of the raw energy, but also other elements. The raw energy is not sourced in Northern Ireland, and we cannot directly control that. However, we can control the costs of the networks in Northern Ireland, the billing systems, and meter reading.
We have been extremely active and have stepped up our level of activity in scrutinising the cost of companies. This year’s price of utilities to consumers across electricity and gas would be around £15 million higher had it not been for our work over the past couple of years on price controls. That is a one-year number. Over a number of years, our work last year generated a net present value of £60 million. This is activity that is saving consumers large amounts of money.
Thirdly, we have a role in developing a wholesale market and overall arrangements that improve the overall stability and ability of the market to manage risk. We have a difficult legacy in respect of energy in Northern Ireland, and we are very actively managing our way out from under that legacy.
The first slide on the detail of the price rise is a very busy slide. I am not going to go through every line on it, but I can take any questions. Essentially, this slide has two tables. One is the cost elements that we set directly as a regulator, the second is the elements that we are consulted on and approve. There are no gaps here and no elements that we do not control as a regulator.
The slide sets out in percentage terms the drivers —
The Chairperson:
Sorry, given that this appears to be an important slide, is there any readable version available to members?
Mr Osborne:
I do not think that we have a larger version.
Mr Dermot MacCann (The Utility Regulator):
The material is included in one of the papers that members have received.
The Chairperson:
OK. It is just that I can see some members struggling to see the information.
Mr Osborne:
The waterfall chart simply reproduces the numbers that are on the next slide, which I hope is readable. Those figures are shown in the percent-change column. If the full change that we are seeing in electricity prices is 100%, how then does that build up? Ninety-nine per cent of it is about energy. The network costs have risen, some of that is just the normal change from one year to the next, with inflation, and some of it is due to carry-over.
Those of us who have been involved in energy over the years have often talked about public-service obligation (PSO). That is the vehicle by which legacy costs are passed to consumers. That is right down this year, because fuel prices are so high. The legacy contracts are in many cases, and for once, doing us some good because they have fixed costs. The cost of the PSO is down by over half and that has reduced the increase by 6%.
We then come to the system support services, the System Operator for Northern Ireland (SONI) and supply. That concerns the cost of supply for meter reading, billing, etc. That also includes the profit element that is unchanged. I have another slide on profit. I will particularly focus on that slide in a moment.
Gas is a pretty similar story. There has been a very modest increase in transmission charges, but that, again, is essentially due to inflation. Distribution charges are unchanged because that is an April-to-March cycle and we are currently in the middle of that cycle.
It is the wholesale cost of gas that has really driven the price increase. There has been a large increase in the cost of gas and a modest over-recovery, as there was last year, thus having relatively little impact. The supply operating costs are kept steady and the margin has kept steady as a percentage of turnover. Margin covers working capital and, as the turnover increases, so the working capital requirement increases. That all equates to a 19·2% increase.
We have included a graphic to show what the key driver of the price increase is; that is the increase in wholesale gas prices. The blue line shows the price of gas for winter 2008 when purchased in summer 2007. At that stage, the price of wholesale gas was 40p to 50p per therm. The red line indicates the price in the last few weeks, in purchasing gas for winter 2009. As members can see, it has more than doubled.
There are a number of reasons for that. We still buy all our gas from the British market. We are working hard to identify a way of running the gas system on an all-Ireland basis. That will, among other things, give us access to the indigenous gas supplies off the coast of the Republic of Ireland. We will implement change only if we can see benefits to consumers, but it appears that this is an area worth examining. For the time being, we are tethered to the British market. In that market, North Sea supplies are declining and we are seeing higher levels of imports from Continental Europe. That is not a secure supply, in that it is part of a long chain. In the middle of August, it was announced that a pipe in Norway was leaking and that led to the closing down of one of the Norwegian fields. That led to an immediate increase in the British wholesale price. It is not a happy situation to be tethered to a market that is so finely tuned that the price responds to such an event. We will work our way up from under that setback — that is part of what drove that price increase.
This is the slide on profit. Northern Ireland suppliers have a regulated, rather than a competitive market. There much consumer interest in moving to competition. However, our current situation means that Northern Ireland suppliers make much less profit than in Britain. The typical profit level in Britain varies from 5% to 8%; we allow NIE 1∙8% and Phoenix Natural Gas 1∙5%. I argue strongly that, although we do not have competition, and we would like to have it, the regulatory process is standing up for consumers.
That was a rapid run through what has driven those price increases. I am sure that you will want to refer back to that in your questions: we have left plenty of time for questions at the end. I want, briefly, to describe the process that we go through — we go through this process annually. The process is settled, now that we are into the single electricity market (SEM) world, and it includes the statutory partners. We aim to ensure that it is relatively transparent.
The way in which we regulate the retail part of both NIE and Phoenix Natural Gas — the way in which we set their respective price controls — has been subject to public consultation. After that consultation, we set up the process in a manner so that the wholesale prices have the ability to move consumer prices fairly directly.
In April 2008, NIE came to us to describe how it intended to buy wholesale power for the coming winter. We do not do the buying for them or with them — they are accountable for doing that effectively. However, we scrutinised the strategy that they were adopting. They then went ahead, through May and June, to secure their power for the coming winter. One of the big changes is the creation of a competitive market in which the price of power for the coming winter is not set through an administrative process or across the desk of someone in the Viridian Group. The prices that NIE have bought into have been set through an open auction process, with the whole of the all-island electricity market watching and participating in the auctions.
As I said earlier, we are working our way out from under a difficult legacy. The SEM is one element in which we can have much more confidence than in the past. First, we have the most efficient plant, burning the most efficient fuel, setting the prices across the single electricity market in the island of Ireland; and secondly, the prices into which NIE have locked for the coming year, have been set through an open auction.
From June onwards, NIE came to us with the results of the auctions and with their expectations about the many other variables that contribute towards electricity prices. As you have seen from the earlier slide, many elements combine to decide the final price. A few of the elements were fixed, and some were based on assumptions. We have been in a spiral ever since, moving towards a fixed view. During the summer, we, the regulator, have set many of the network charges for the coming year, so that has reduced uncertainty to the point where, a week or ten days ago, we received the final, definitive submission.
During July, we received a submission from Phoenix Natural Gas. Members will recall that when we were last here in May 2008 after Phoenix last reset its prices, we had hoped that it would be possible to avoid an in-year price increase. However, the movements in wholesale gas prices, about which I spoke a few moments ago, are exceptional. People who have worked in the energy industry for many years have not previously seen the types of movements that took place over the summer.
We must live in the real world, so Phoenix came to us with a proposal for an in-year review, and it also wrote to and consulted the Consumer Council with its proposals. Throughout July, August and the beginning of September, we have been working with the companies and the Consumer Council to review those proposals, which has been an extremely thorough process.
I will now talk about the comparison in prices with Britain. Over the past 24 hours, many people in Northern Ireland have been dismayed by bad news. We have been out talking to people, and I keep hearing a couple of questions. First, they ask why the oil price reduction is not benefiting them. The simple answer is that oil is not burned to produce electricity. Sometimes the oil price affects the wholesale gas price, but, this summer, it has not.
The other question that people ask is whether Northern Ireland is worse off than Britain. One cannot safely compare a single year when comparing two fundamentally different market structures. If such a comparison had been made in 2006, Northern Ireland would have done rather well; in 2008, we are facing a sharper price increase than in Britain. If prices are compared over a multi-year period, NIE is in the middle of the pack. If the UK suppliers are lined up, NIE’s prices are around fifth.
The reasons that our market operates differently from the British market are to do with ours being a regulated and relatively new market, and theirs being a competitive one that is relatively mature. Over a multi-year basis, a change in prices such as the current one will hit British suppliers progressively over time. Our suppliers do not buy over a multi-year basis, but on a single-year basis. We are currently experiencing sharp increases, but if the wholesale market falls right back next year, Northern Ireland will get the benefit of that more quickly. The fundamentally different market structure means that single-year analysis is a bit misleading.
The Chairperson:
During your presentation, you said that regulation protects the consumer. You will understand that not many people feel particularly protected this week, after the recent announcements. You mentioned that the profit margins allowed to NIE were 1·8% Does that refer to the total profit margin for the NIE/Viridian family, or does that refer to NIE Energy Ltd alone? If your figures refer to NIE Energy alone, who are the other members of the NIE/Viridian family and what are their profits?
Mr Osborne:
The figure that we gave of 1·8% refers to the turnover of NIE Energy — the supply business that is responsible for such aspects as billing and meter reading. The network is regulated through a five-year regulatory contract. Every five years, we review costs and we work out how efficient we think the company ought to be, and set a target. The company has the opportunity to outperform those targets if it is able to. If it finds efficiencies, it keeps those for a limited period. At the end of the five-year contract, those efficiencies are passed to consumers. As part of the five-year contract, we allow the company the costs of the money that it needs to borrow in order to invest in the network. The current cost of capital for the NIE network is around 5·8%. Dermot, do you have the figures to hand?
Mr D MacCann:
It is around 6·8% in nominal terms, and 4·7% in real terms.
Mr Osborne:
Right —
The Chairperson:
Is there an answer there?
Mr Osborne:
I am sorry —
Mr D MacCann:
I do not have the precise figures, but it is around 6·5% nominally and, in real terms, taking inflation into account, it is around 4·5%. We can provide the Committee with the detailed figures, because they were the subject of a published price-control decision that was taken two years ago to cover the period 2007-2012.
The Chairperson:
Is it the case, when you are examining NIE Energy, that some of the wholesale costs that it says it has to bear, and which you are allowing to be passed through to the consumer, include significant profit margins for other parts of the NIE business?
Mr Osborne:
No, it is not.
The Chairperson:
So there are no profit margins in the other wholesale costs that are being passed on?
Mr Osborne:
The wholesale costs are what NIE has contracted for as part of the auction process that I described. That is a pure pass-through. There is no extra margin allowed on top of that. There is a certain amount of profit that they are allowed to make, but that is not any bigger because of the price increase.
I described the situation for the network. We could establish a windfall tax and take some of the network profits, but those profits have been allowed to enable the company to continue to finance its business. We have been focusing on the long-term interests of consumers. If we ask NIE for a major grid extension to allow for more wind farms to be connected across the west of Ireland, or to build more substations in greater Belfast because its population is growing, or for any other investment project, we do not want the company to turn around and say that it cannot finance such ventures. NIE might say that we will have to allow it a profit margin of 9% in future, because investors now regard Northern Ireland as a risky place in which to invest.
Above network level, Viridian Group has operations in the Republic and runs power stations there. It also runs Energia, a company that buys and sells power in the industrial and commercial market. We do not regulate those parts of the group’s business. There are profits in those areas, but they are competitive. We must be clear about the long-term direction of travel. If we push out the border of regulation in order to bring back areas of the market where competition is developing, we would not be doing any favours for the long-term interests of consumers. Consumers and business users clearly want competition.
The Chairperson:
It is not much consolation or compensation to consumers who are feeling real pain to hear about their long-term interests being safeguarded. It is not their long-term interests that are causing stress and vexation for families. Are you comfortable with a system, particularly in the current climate, which simply passes on wholesale costs to the consumer and does not attempt to put any brake on that transfer?
Mr Osborne:
I am certainly not comfortable about the situation that we are in. Any form of words that might be used to try to smooth the edges of this scenario in order to say that it is not an awful situation for householders would be wrong. This is a really difficult situation for Northern Ireland householders.
We are entering a period of rapid change for the energy industry. As things stood, the industry faced increased costs for its future borrowings. That would have created a problem for us in five or 10 years’ time, and for our children in the future. The Utility Regulator exists, in large part, to ensure that the long-term interests of consumers are considered.
The Chairperson:
You say consumers’ interests are being considered, but it is not clear whether the Utility Regulator has the last word on such matters, which is a topic that other members will take up. How many people sit on your board?
Mr Osborne:
Seven, at present.
The Chairperson:
How many of them pay the bills that you have approved?
Mr Osborne:
Two.
The Chairperson:
Therefore, two out of the seven will actually pay the bills that they approve.
Mr Osborne:
I and one other member of our board live in Northern Ireland.
The Chairperson:
That is interesting.
Is it the role of regulation to benefit consumers by encouraging competition of the type that is seen in other markets, particularly Great Britain’s? If that is the case, why are we facing much bigger increases here than consumers in the GB market? We started the year paying just under 5% more than consumers in GB and we will soon be paying 25% more than them. If regulation is ensuring that we receive the same effects and benefits as competition in that market, why are things happening differently here?
Mr Osborne:
Participation in the GB market has never been on offer. We are not part of it and there is no practical way that we can be part of it.
Regulation delivers the same benefits as competition in the sense that competition is a mechanism by which companies cannot overcharge and are held to account. Regulation delivers that. However, we are working our way out from under a difficult legacy.
As well as scrutiny, the regulator has a third role. That is to develop a wider framework to get Northern Ireland away from a rather poisonous legacy. Doing so will enable us to use the existing infrastructure as efficiently as possible and create structures which inspire confidence that market players can set prices, rather than it being done in a closed room.
Those are changes that we have been making over the past few years. We have briefed the Committee in the past on the single electricity market. We look forward to doing so again.
No system can work miracles or completely protect consumers from the fundamental facts that Northern Ireland has no fossil fuel reserves and, at the moment, we are dependent on fossil fuels.
The Chairperson:
I and other members want to know whether you have ever refused a request for a price increase.
People want to know whether regulation is making any difference or is it merely a case of rises being waved through like the Bridgend Customs — just nodded through. Fundamentally, the public want an answer to the question: does regulation make any difference?
The Committee does not ask that question smugly. I know that the public also wants to know whether devolution makes a difference in any of this. I am not trying to dump all the issues on the regulator. However, those are the questions.
Has the regulator ever prevented an increase? You penned an article for the ‘Belfast Telegraph’ a couple of weeks ago in which you mentioned the possibility of a 30% price increase, which may have helped condition the public expectation and mood. The increase is even bigger than that.
What happened in those weeks? Where did that difference come from? It is now more than 33% — where did that other increase come from? Has it emerged only in the past couple of weeks? If it has, was it properly subject to robust scrutiny?
Mr Osborne:
In answer to the first question: yes, there has been a whole serious of really difficult discussions with the companies.
I talked about the amount of money that we have taken out of companies’ pockets and put into the pockets of consumers. When we reset price controls, at least one of the companies came close to referring our decision to the appeal body, the Competition Commission, because the company believed that it was an excessively tough control.
We did not think that it was excessively tough; we thought that it was fair, and now they have to live with that. Yes, we have a whole series of difficult discussions, and the same is true with the other companies as well.
As regards the current price increase, the companies have made a relatively straightforward request as their costs have increased by so much. Our response is to check whether that claim is true. We understand the energy markets, and we use the data available and the considerable experience in the office to see whether that is true. If the companies had been swinging the lead and had provided us with information that was not true, and which the wholesale market data did not support, we would have had no hesitation in striking it down, but what the companies said was true. However, we did not say that we agreed that their costs had increased by so much but that we would shrink it. That was because of the issues that I talked about earlier regarding the long-term interests of consumers and not running the companies into the ground. Northern Ireland consumers need a robust energy industry.
My article in the ‘Belfast Telegraph’ was not an announcement. As I said earlier, we had been spiralling towards the final numbers —
The Chairperson:
I cannot believe that that is not butter territory.
Mr Osborne:
The sooner that consumers and households — and particularly businesses that are setting budgets — know where they stand, the better. It seemed useful to let people know. We made remarks on the record in May about the wholesale markets then — and those markets have performed significantly worse that we expected over the summer. If people had those remarks in mind when we were talking about an increase of 10% to 15%, that was not right. However, I was not making an announcement: a ballpark number seemed to be much more appropriate than a precise number — even had I had a precise number at the time, which I did not.
The Chairperson:
Therefore, there was not an added difference?
Mr Osborne:
The numbers had not settled. At that point, we were working on assumptions in several areas. I am trying to be straight with people.
The Chairperson:
The earlier part of your answer about costs raises several questions. I am sure that members will ask about how far those costs are controlled and whether people had questionable competence on their own costs and passed the liability of that on to others rather than suffer it themselves.
Ms J McCann:
I do not want to go into a lot of figures. You said that you act on behalf of the consumer and that no profits had been made by the energy companies on the increases. You also said that you felt that the increases were justified. Some 34% of people were already living in fuel poverty before those increases, and many more people will be spiralling into fuel poverty. We are no longer just talking about people who are unemployed or on low incomes; we are talking about working families whose electricity bills have increased by 33% and whose Phoenix Natural Gas bills have increased by 19·2%. The annual turnover for Phoenix Natural Gas was £99·2 million, and it made a profit of almost £20 million. The turnover of Viridian Group, who own NIE, was £1,022 million, and it made a profit of £150 million.
I find it incredible that you can say that those increases are justified, given the large profits that those companies have made from the consumers. I also find it incredible that 34% of the people who live here are already living in fuel poverty, and yet we will spiral even more people into fuel poverty. Do you not believe that those large energy companies have a corporate social responsibility to the local people who will spiral into fuel poverty, and to businesses?
In the past few weeks, we have all heard the news that people will have to either heat or eat. A lot of people will have to make that choice, because the price increases have come on the back of other price increases. I find it incredible that you can say that the increases are justified. Furthermore, I find it incredible that you said that you are working in the interests of consumers. With whom exactly did you confer and consult in order to come to that conclusion? Did you consult with, for instance, the Consumer Council? Did you consult with people in the local communities to find out how they would be affected by the prices?
Do you feel that large energy companies have a corporate responsibility to turn some of the profits that they make on the backs of people back into some sort of emergency fund so that people can have an emergency payment this year? People need to receive such a payment now; they will be affected by the short-term effects of the price increases. Do you feel that the energy companies have a responsibility to pay into an emergency fund so that people will not have to live in homes without food and heat this year?
The Chairperson:
Some of those questions may move beyond your remit, but feel free to answer them if you feel you could offer any useful advice.
Mr Osborne:
Our approach to prices was not decided in the past few months. We published proposals as part of a public consultation. When we conduct public consultations, we put papers on our website and send the papers to a long list of consultees, including local councils and the various groupings that have particular expertise on poverty and environmental issues, as well as statutory consultees such as the Consumer Council. The overall approach is that we pass through fuel trends from outside Northern Ireland, rather than give the companies a haircut. We consulted widely on the issue. In reviewing the increases, we recently held detailed discussions with the Consumer Council.
I do think that the companies have a corporate social responsibility. All large companies in the modern economy must be socially responsible. I think that, to a large extent, they are socially responsible. The energy companies and the utilities do more than almost any other company in the economy to address the needs of poor people. That does not mean that more could not be done.
The question of whether the utility companies should do more is part of a wider question about where Northern Ireland society is going on these points. Do we want a fighting fund? To whom should the money be given? Should a contribution be made from tax and other utility customers, as well as from shareholders? That is a wider question, and it is essentially a political question. As I previously said to the Committee, as the regulator, we have no ideology on the matter; we have compassion. We stand ready to participate and make the changes happen if we get a political steer. No one has elected us, and you would quite rightly be the first to criticise us if we went off on a solo run in making up social policy.
Mr Neeson:
I have dealt with energy issues in Northern Ireland for a considerable period of time. Mr Osborne, this is the first time that I have met you, although I know that you have appeared before the Committee on one previous occasion. Your predecessor as Utility Regulator, Douglas McIldoon, kept in regular contact, not only with me as an individual but with the Committee for Enterprise, Trade and Investment. He always dug his heels in on price rises, particularly in the electricity sector. In many ways he became the scourge of the electricity market in Northern Ireland.
Bearing in mind the substantial differential between the price increase in Northern Ireland and the price increase in the rest of the UK, do you feel that you have done enough to protect the interests of consumers here?
The Committee was very supportive of the development of the single electricity market, which was supposed to benefit consumers, both North and South. How active have you been in trying to protect the interests — not only of consumers but — of generators in Northern Ireland? What is your record of attendance at meetings relating to the body that was set up to deal with the matter?
Finally, if Firmus Energy can keep its natural gas prices at the same level, why have you allowed Phoenix Natural Gas to bring about such an enormous increase yet again? I say "yet again" because we believed that the introduction of the natural gas market to Northern Ireland would increase competition. That has not happened and, indeed, the situation has been exacerbated.
Mr Osborne:
Your first question was about whether we have done enough to protect consumers’ interests. I hope that it was clear from my remarks that we are in the process of digging our way out of a difficult legacy; it is important that that process continues. We have a busy work programme and, later in the year, we will be consulting on where we should go next. Regarding that price increase, we have been as active in the past couple of years as at any time in our history in taking money out of companies’ pockets through the price-control process. I am very proud of our record, and we published our annual report the other day. Consumer benefits from regulation are as much as ten times the cost of the regulator.
You asked how active we are in protecting Northern Ireland generators in the context of the single electricity market. Our organisation was created by statute, and it is Assembly politicians who can change that statute. Our duties in a single electricity market are focused on consumers and are not to protect Northern Ireland generators. As a citizen, I think that that is right. My attendance at the SEM committee is very much at the forefront of that.
However, that does not mean that it is doom and gloom for Northern Ireland generators, quite the contrary. The SEM is a framework within which generators can assess what is going to happen in the market. They are not subject to private decisions by private companies. It is a much more open and transparent market, and it is a good market in which to invest. Indeed, new companies — such as Scottish and Southern Energy — have bought into the Northern Ireland market. They would not have done that if we had not created the SEM, so that represents a vote of confidence.
We have recently been debating the size of capacity payments that go from consumers to generators. Dermot informs me that one Northern Ireland generator wanted to set a level that was double what we eventually set — we halved what they wanted. Sometimes there is a conflict between generators’ interests and consumers’ interests, and we must consider the long-term and short-term interests of consumers.
Why can Firmus Energy hold its prices and Phoenix Natural Gas not? That is partly due to the respective purchasing behaviours of those companies. However, the fundamental reason is that Firmus Energy still sells relatively small volumes of gas. If a company were not selling any units at all, it could set the price per unit at whatever it wants because it would not cost them anything. Firmus Energy’s economics are driven by building a network; not by the cost of gas.
In designing the SEM, we hoped that we were setting up a good platform for competitive development and there is still reason to believe that that will be the case. There has been a lot of interest in entering Northern Ireland to build new power stations or to buy into the Irish market. Indeed, new players from outside the UK and Ireland have announced that they will be buying in.
We also believe that the SEM is likely to be a good basis for companies to access the downstream market — for example, Bord Gáis from the Republic has indicated that it would like to build a retail business, which would provide competition.
It will take time, and there are probably more things that we, as the Utility Regulator, can do to accelerate that process. Recently, we have consulted publicly again — using the transparent process that I have described to Jennifer — about how we can progress that more quickly.
The Chairperson:
I know that it is not your fault but, for consumers, the single electricity market is still just a market in theory and a market in waiting.
Mr McHugh:
You are welcome to the Committee, gentlemen — it is useful to be able to put our questions to you.
My main concern is for the most vulnerable families. We are facing the winter and people mentioned making the choice between eating or heating. Many families will not be able to do either to any great extent because the increase in electricity prices affects both their ability to buy an adequate amount of food and to heat their home. Therefore, both those needs will come under pressure rather than just one of them.
You said that you were able to justify the increase on the basis of the long-term interests of the consumer, which seem to involve a more global energy situation. However, that is something that you are not certain about, nor do you have any control over it, and there are places such as China that are not taking that into account. Local people are faced with increased prices regardless of any long-term interest that may or may not exist, and the same argument is not being followed in Britain to bring its prices to the same level.
The Utility Regulator’s first job is to work on behalf of the consumer but, in this case, the Committee was not even asked about the second price increase for the consumer. In this instance, I do not believe that you are working on behalf of the consumer; rather, you are just going with the flow for an easy life and rubber-stamping the increases both times. That has happened at a time when there is a downturn in the world prices of crude oil, something which should have been taken into account. None of that saving ever comes back to the consumer.
You mentioned a profit margin of 2%, but an increase in price for the customer always results in a higher increase in profits, every single time — the more money that is taken in, the more profit that is made.
You mentioned a need to upgrade the underground facilities to take account of increased use in somewhere such as Belfast. However, if we were to follow your first argument, one would have thought that this is a time when people should be using less energy and we should be building fewer power stations — how can you reconcile that?
Given the downturn in oil prices, will there ever be a drop in energy prices for the consumer? That is hardly likely to be the case, but have you built that possibility into any components of your work as Utility Regulator?
Mr Osborne:
There is nothing speculative about the work that we have been doing over recent months in relation to global energy markets. We have been checking facts — for example, we have been checking what someone will have to pay if they go to the market in London to try to buy gas for next winter. I am very wary of speculating about energy costs in the long run. However, I will point out that the power of the Organization of the Petroleum Exporting Countries (OPEC) is greater than it ever has been — one of the news stories that seemed to get overlooked yesterday was that OPEC has intervened to put a floor under oil prices, so I would be surprised if the cost of oil drops much more.
In the long run, there are all sorts of drivers that suggest that we might be looking at a high-cost future. The article that the Chairperson referred to mentioned renewables as an insurance policy and, given the high cost of fossil fuels and the role of renewables for security of supply and for price — never mind saving the planet — saving money is very important.
The price of oil has an indirect relationship to almost all energy commodities, but it is an indirect relationship. Over the summer, we have not seen gas prices come down when oil prices have fallen. That is partly because a significant part of the reduction in the price of oil in dollars has been soaked up by the fact that the dollar has strengthened against sterling. It is an unknowable.
Regarding profits, I refer members to my earlier comments — these are regulated businesses, and we know how much profit the company can make and we have set that allowance.
We should be encouraging people to use less energy. The long-term trend in Northern Ireland is that as people get richer, they use more and more energy, but we have recently seen the effects of price affecting the volume of consumption. There is a huge amount of activity to try to drive energy efficiency which seems ever more important.
It is also important to recognise that the need for investment in generation stations in the grid is partly a result of taking short-term decisions over many years. Across the island of Ireland, we have been left with a lot of very old, inefficient generation stations, and the Northern Ireland grid is not going to be sufficient to meet the needs of the next generation. Decisions have been taken in the past not to spend money, and the results of those decisions are catching up with us. We must ensure that we are taking account of the long term as well as the short term.
Dr McDonnell:
People are having great difficulty in understanding why energy prices are rising. You tell us that you are keeping profits to a margin — and we believe you — yet when energy companies release their very generous year-end results, they are doing very well. Those companies seem somehow to be making money by other means that we do not know about.
Although gas may be 20% cheaper for a lot of the time, nevertheless, the oil price sets the gas price. Once the price of oil hit $147 a barrel, that, in turn, had a knock-on effect; that is the difficulty for a lot of people. The price of oil is now dropping towards $100 a barrel, so it is at two thirds of what it was at in July. It is still up maybe a third on what it was a year ago, but people cannot understand why energy prices are doubling when the oil price has risen by a third, maybe 35% to 40% of what it was, because we are told that oil price is the driver.
The graph in the Utility Regulator’s presentation would appear to indicate that the price of oil is the big driver towards input fuel. Bearing in mind that background information, what would it take for us to see a reduction in the price? How far would oil prices have to fall before we would see a reduction in energy costs? If oil fell back to the price that it was at a year ago, would energy prices return to what they were at a year ago? The logic is that if the price of oil falls back to a reasonable level, then the other energy components should fall back.
I want to ask a brief question on a comment made about the legacy of contracts to 2010-12 and how much of an input they will have — will our electricity prices drop once those contracts run out, and are they just a virtual millstone?
Does electricity flow out of or into the Moyle interconnector? My understanding was that that interconnector would balance our prices with Britain, and that we would have access to relatively cheaper electricity than in the Scottish or English systems.
I am aware that I have asked several questions.
The Chairperson:
Perhaps some of those questions could be banked. Will you tell us to what capacity the Moyle interconnector is currently being used, and why it could not be used to better effect?
Mr Hamilton:
I was at the launch of the Utility Regulator’s annual report on Tuesday. I listened to the string quartet playing, but in the background was the imminent one-third increase in electricity prices and one-fifth increase in gas prices. I felt that there was an air of the Titanic about it all. Given the announcements that were made that week, it was unfortunate and inappropriate to have such a lavish launch. I hope that you will reflect on that comment in future.
My question is essentially the same as Alasdair’s, so it is really one question between two members. Are there flows out of the Moyle interconnector, and, if so, why is electricity flowing out at a time when electricity prices here are so high, and where are the profits going?
Mr Osborne:
The Moyle interconnector is reasonably well used, mostly for power flowing from GB into Northern Ireland. Moyle trading is having some impact on prices, but the challenge for Moyle traders is that the market structure in Britain is fundamentally different from the single electricity market here — and that increases the risk of trading. The SEM committee has recently discussed the issue to see whether there are actions that it can take. The interconnector is being used.
Mr D MacCann:
Traditionally, the Moyle interconnector flow has been one way only — from Great Britain to Northern Ireland. Increasingly, the flow is starting to go the other way. For the first time, there are now two-way flows. As you said correctly, interconnectors are about balancing prices. If prices were pretty stable in both markets, there would not be any flows. However, there are always flows at different times of day; perhaps Great Britain has a shortage of energy at one time and we have a surplus, and vice versa. Historically, the flow has always been into Northern Ireland, because prices have always been higher in Northern Ireland. Now, at the margins, flows are starting to go the other way, which shows that, at times, the balancing price in Great Britain is higher than it is in Northern Ireland.
Thus, there is some convergence of those prices. Iain has already talked about how, at a given point in time, the retail-price increase may not match that of GB, but looked at over the longer term, those prices tend to match. As Iain said, over the past three years, retail prices here have grown broadly in line with those in GB. Therefore, time is the issue. If anything, compared to five or 10 years ago, prices in Northern Ireland — and on the island of Ireland through the single electricity market — and GB are beginning to converge.
The Chairperson:
When the electricity flows from here to GB, do the customers in GB pay the same price for it as we do?
Mr D MacCann:
People will buy the capacity —
The Chairperson:
Are those customers paying the lower GB prices for Northern Ireland-generated electricity, or are they paying the Northern Ireland consumer prices?
Mr Osborne:
The electricity does not go to a consumer; it goes to a company, which then blends it in with everything else to set its cost base. As we said earlier, the cost base of a GB supplier is much more complex in their market structure, and any changes to it are slower than changes to ours.
Mr Hamilton:
I asked where the profit went. It might be my fault, but I do not completely follow the explanation. I do not understand why we are sending any electricity out of the country at a time when our electricity prices are 25% higher. Where do the profits from that electricity generation go? They are obviously not being used to assist the consumer in any way.
Mr Osborne:
When a generator uses power to exploit, sorry, export oil into GB —
Mr Hamilton:
I think that that might have been a Freudian slip.
Mr Osborne:
A generator would export power when it thinks that the lines are crossing in the fluctuations of GB and SEM prices, thereby creating an opportunity to make profit. If our prices were less competitive, they would not do that. There are two possible types of profit, one of which is the difference in prices, and it is the nominating party who captures that. The other type of profit is the money made by the Moyle interconnector — a mutualised company for the benefit of consumers — which auctions its capacity. At the end of the year, any profit goes towards reducing price increases.
Mr Hamilton:
Do you regulate profits that are made by the generator?
Mr Osborne:
No; we do not regulate the generator’s profits directly. We are trying to create a market framework in which competition will drive prices down. However, the market must allow for new entries; we need a greater number of more efficient power stations in order to maintain downward pressure on prices.
The Chairperson:
Alasdair McDonnell asked other questions unrelated to Moyle.
Mr Osborne:
Regarding year-end results, I mentioned the stack of profits. Phoenix Natural Gas sells, unregulated, at the top end of the gas market. The Viridian Group does several things that we do not regulate, and, therefore, we are not on top of their entire balance sheet — there are good reasons for that.
Jennifer quoted some large numbers. That is partly because of the need to earn a return on capital; companies must borrow money to build, and will need to borrow in the future. Some of that is about incentives. We have reset Phoenix’s price control and taken a lot of money from the company. They had found efficiencies, which we grabbed and are giving to consumers. That is an incentives mechanism, and it works.
Alasdair mentioned the fact that oil prices set gas prices — that has not happened this summer. The GB wholesale gas price is determined by how much traders are prepared to buy and sell for. If they think that there is a risk of a shortage, the price of gas will remain high, regardless of oil prices. It is difficult to say what it will take to produce a reduction. If traders in the GB market are satisfied that there is no serious risk of shortages, and if there are drops in prices of the linked products that drive pricing — oil, oil derivatives and transport costs — then yes, there will be a reduction. As I said earlier, OPEC’s intervention, when prices dropped to approximately $104 a barrel, signifies its intention to ensure that oil prices do not drop further. It is optimistic to think that prices will drop again.
Alasdair mentioned legacy contracts — those contracts create a fixed element in the prices. If the prevailing price is below the fixed legacy price, it will cost us money. That has been the situation for most of the past 20 years. However, today’s situation is unusual because the prevailing price is higher than the fixed element and, therefore, those contracts have been good this year. As I have said, the PSO is better than it has been for a long time, which makes it easier to explain why I cannot pre-empt our thoughts on 2010. In 2010, we will have to ask: what do we expect for the next 10 or 15 years? Do we expect prevailing prices to be high or low? Moreover, we will have to consider a decision on carbon permits, because, at the minute, the value of carbon goes to consumers. Although I want to answer Alasdair’s question, it is difficult. It will be difficult to answer in 2010, but it is even more difficult two or three years in advance.
Mr Butler:
Many people who listened to your presentation this morning and to what you said yesterday will not believe that you have their interests, as consumers, at heart. The two price increases in less than one year from both Phoenix Gas and NIE were already mentioned. Future price increases cannot be ruled out. If you are protecting consumers against increasing prices, as you say in your mission statement, will you give a commitment that you will prevent any further price increases in the future, given that people are struggling as it is to pay unprecedented electricity and gas prices?
In addition, the Consumer Council — from whom we will hear — has grave concerns about agreeing to the price increase. Why did you go ahead and announce it without trying to talk to the Consumer Council about its concerns? You said that you work closely with the Consumer Council. Many people will believe that you are giving credibility to both NIE and Phoenix Gas.
On a point that we discussed before you came in — the majority of the board of the Utility Regulator do not come from here. Why is that? How come the majority of your board make decisions about people living here and it does not affect them?
Mr Newton:
My question concerns the opening remarks about public confidence. How can the consumer — the public — have complete confidence that the regulator’s work is fully robust? Is there not a greater need for transparency in the methods that are employed by your office in agreeing percentage increases? Building on that, if it is robust, what is the method of resolving disputes between your office and the energy supplier? Who has the final say?
Does the Consumer Council have a role? Is it involved in that in any way? In a Northern Ireland context, where there is a lack of competition, you will appreciate that public confidence is vital. The lack of public confidence is being manifested by the huge concerns that appear in all forms of the media at the moment and are being fed through to members of this Committee and, no doubt, more widely to councillors and Assembly Members. I have major concerns about that.
Mr Osborne:
Mr Butler began by asking for a commitment not to increase prices in the future. I can give you my view of the next year, which is that the companies have locked in a large part of their cost base. Something fairly extraordinary would have to occur in the wholesale markets for that to change — certainly through this winter and, I hope, for the next year. However, we have been living through an extraordinary period in the wholesale markets. It is a really unusual situation for people who have been in the energy industry for many years.
Against that context, the only way that I could give a commitment about price changes was if I were to dump what I talked about — the long-term interest of consumers — and I were prepared to say that we will not worry about future investment or higher capital costs. That would be a grave disservice to consumers. I can make a commitment that we will continue to be robust and challenging, and to take a stand when we can.
I did not appoint our board, and we did not appoint ourselves. We were appointed by the Executive Departments. Our board members are people with decades of experience in the utility sectors and in regulation. I imagine that the view was that those people would produce a really effective organisation.
The Chairperson:
You said that those people were appointed by the Departments of the Executive — when were they appointed?
Mr Osborne:
Our chairperson was appointed in April 2006.
The Chairperson:
In fairness to the devolved Ministers, that was well before the current Executive’s establishment.
Mr Osborne:
Civil servants were doing the work. DETI held that role, and, because we now cover water as well as energy, DFP now holds that role. I became involved later, in June 2006.
The people who know a lot about the subject and who take decisions about appointing future board members consider that it is extremely important to recruit local people, and I understand that. The Independent Water Review Panel, led by Paddy Hilliard, suggested that local knowledge should be a desirable qualification in the job specification, and we have no problem with that proposal.
As for public confidence, transparency and our work with the Consumer Council, as I said earlier, before getting into the reality of those situations, we set out in the public domain exactly how we would go about dealing with them, and we consulted publicly. When we got into those situations, we operated the normal process, which involved extensive consultation with the Consumer Council, dozens of emails and lots of opportunities to meet and discuss matters. We were dealing with the Consumer Council on a complex matter, but we regard it as an essential partner with a legitimate statutory role, and we were happy to put time into briefing it. Representatives from the Consumer Council will be here in a minute, and they can speak for themselves about any issues that they might have.
In addition, we took seriously Robin Newton’s comments in May, when, similarly, he told us that transparency and public confidence is important. Consequently, in addition to doing our day job, we have been working hard to be more communicative and to put more information into the public domain, and our website now includes an extensive explanation. Nevertheless, sometimes, you are damned if you do and damned if you don’t. We also write newspaper articles to help people understand the underlying energy-policy issues. I hear people’s anger — I live here — and I understand that they are dismayed and that they will have a rough winter.
Mr Newton:
You did not answer the part of my question about the resolution of disputes.
Mr Osborne:
I am sorry, forgive me, but I missed that. That is a statutory-framework matter, which depends on the dispute in question. When it comes to price controls and taking money off companies to give to consumers, if companies do not accept our proposals, the matter would be referred to the Competition Commission, which acts as an appeals body. There is no appeal procedure, other than through judicial review, to challenge our role in approving price increases — our decision is final.
Mr Newton:
There is always judicial review.
Mr Osborne:
Ultimately, we are in control.
Mr Newton:
How many decisions have gone to judicial review, or have you pursued any other avenues to resolve disputes?
Mr Osborne:
Earlier this year, we fought and won the Kilroot judicial review on the wholesale market. I can also think of a couple of occasions in the past one or two years when we have been threatened with legal action; however, in each case, having considered the facts and consulted its lawyers, the relevant company concluded that we had such a good case that it did not proceed.
Mr Cree:
I have listened with interest and, obviously, I am keen that the public has maximum confidence in the utility regulator. However, I am struggling to understand how that can happen. You said that you have worked hard and saved us a lot of money, and I must take your word for that. However, if the main plank of your role is to justify and check the accuracy of wholesale prices, you are only working around the margins.
As you said, companies’ profit margins are safeguarded as a percentage of turnover. As prices and turnover rises, the companies are happy with the situation, because not only are their margins protected, but they are enhanced.
On the wider scene, the eleventh report of the Westminster Business and Enterprise Committee, entitled ‘Energy Prices, Fuel Poverty and Ofgem’ states that the indexing of long-term gas contracts to the price of oil in European gas market creates a difficulty in responding to changes in supply and demand, distorting the wholesale gas market and the environment in which the investment and consumption decisions are made.
In that same report, we are told that the wholesale gas price determines wholesale electricity prices. Therefore, competitiveness of the gas market determines the competitiveness of the whole energy market.
We have the crazy scenario in which more than 90% of those matters are outside our control. That has been dictated and decided in other places; we have no input to it. Am I being uncharitable by asking whether the utility regulator is merely fiddling around the edges?
The Chairperson:
I will take another question before the regulator answers that
Mr McFarland:
You mentioned North Sea gas. I understand that 60% of our market is in North Sea gas, because 40% comes from further afield. Is North Sea gas traded? What residual control does the Westminster Government have over the North Sea gas fields and the production therein? If they have some control, it follows that they have some input into 60% of our gas market and its production.
Secondly, I am trying to understand why we are paying more than GB. You said that GB was less expensive because it took a multi-year approach. I presume that GB is buying gas for the following year. If it is buying gas for the following five years, it is taking a risk. Countries usually buy gas in tranches that can be adjusted if the market goes awry. How does that work? We are paying £75 million more than in GB, but the gas companies here operate on a 1·8% profit margin. GB expects to make a 5% to 8% profit. I am struggling to understand how they are cheaper than us and making 8% profits, when we are paying £75 million more for profits of 1·8%.
NIE bought oil in May and June. I think that the issue started to get hot in June, and I think that we held a meeting at that time. In June, everyone knew that we were heading for fairly substantial rises. The briefing that we received at the time informed us that prices would accelerate rapidly.
I presume that those who are involved in the market and who play the game knew before May or June that things would get rough. Or, are you saying that the rises came upon us suddenly? If we knew that the disaster was going to arise over the winter, why did we not buy earlier? Is it because we have a process to follow? That is how it looks.
If one follows a process — and this is where confusions can arise in market forces — one cannot be flexible and buy early to save a fortune. The requirement to follow a process means that consultations must be carried out, and by the time that is done, the opportunity to save millions of pounds has been lost. Is it a problem of process? Why did we not buy earlier? Why did we not buy in April or May if we knew that there was going to be a catastrophe and that energy prices would rocket?
The Chairperson:
In your response, please colour in the business of a purchasing period. Is there a set purchasing period? If there is, why is that so? Who does it help? Is it not similar to the football transfer window, which tends to lead to inflated prices at the time? Who sets that period? How is it working?
Mr Osborne:
The companies, particularly Phoenix, discuss with us how they will do that. The bottom line is that no one expected that gas would be so expensive in the summer, because that is not usually how the market works. In the summer, gas is usually cheap because demand is down, and people store it for the winter. This summer, for a variety of reasons that I mentioned in response to Alasdair’s question, was exceptional. With hindsight, it clearly would have been better to have bought gas in the spring, but anyone who knew when their house was going to burn down would know when to buy insurance. It is not fair to criticise or blame the company for not having known what was going to happen. Thus, we have been hit with an exceptional situation.
The Chairperson:
Would the company have been able to buy in the spring?
Mr Osborne:
Yes; the wholesale gas market is open. It is not the most liquid market, but it is perfectly functional for our purposes.
Alan McFarland asked a question about North Sea gas, and that is also potentially part of the market. In Britain, the wholesale gas market does not work by every unit being bought and sold. Typically, between 9% and 15% of the total amount of gas flows through the wholesale market. The idea is that that is sufficient to set the clearing price, and that is reflected throughout the rest of the market.
In answer to Mr McFarland’s question about how much residual control Whitehall retains over the North Sea, it issues new licences for its exploration. There is still quite a lot of activity in smaller pockets and less attractive areas of the North Sea to determine whether a bit more gas can be squeezed out. Importantly, Whitehall also controls the tax regime. An increase in taxes means less activity and exploration and, conversely, a reduction in taxes results in more exploration. However, Whitehall does not have direct control of the companies.
Leslie Cree asked whether the utility regulator is fiddling at the margins. The process is that, when we have worked through the cost of the network and squeezed out as much as we can, we are left with the wholesale price. This year, those wholesale prices have been so exceptional and enormous that they wiped out any possible gains from other measures. I am not saying that the same thing is true every year — far from it. The work that we do to turn the screw continually, year after year, to lower the cost of the elements that we can control in Northern Ireland is important because every little counts, and it adds up over the years.
Mr Cree also mentioned the problem of oil indexation. I have some sympathy for the view that that is an unhelpful aspect of the market because the continental markets in Europe are slower to change. Before I came to Northern Ireland, I worked in the European Commission, and I consider that I made a significant contribution to dealing with that problem. However, the authority can do relatively little from Belfast.
Mr McFarland made a point about fixed profits, and we discussed today the profits that are made at the supply end, which is the last part of the value chain. It is important to understand that, on the network costs, which constitute a much larger element, profits are not guaranteed. The authority sets a regulatory contract every five years on the basis that the companies will be efficient, and the efficiency target is challenging. If the company misses that target, it does not make a profit, and may even make a loss. The authority does not guarantee profits to the companies at the supply end, because 1·5% is a low-risk margin. Overall, to make money in the regulated market, companies must become increasingly efficient.
The Chairperson:
Perhaps this is not a question for today but, at a future meeting, some members will want to determine the exact profit margin set against the company’s assets. What exactly are NIE Energy’s assets? Going by an earlier reply, I am sure that it has a higher profit margin on its other assets. Will you provide an example of the company’s assets? Does payment for electricity via keypad meters represent an asset?
Mr Osborne:
The meters are now part of the network, and the assets involved in supply are relatively few: buildings; the billing system; IT licences, and so forth.
The Chairperson:
Can NIE Energy make a higher profit on those assets than the profit margin that you quoted?
Mr Osborne:
Working capital is the largest element from which NIE Energy must earn a return, because it ties up quite a lot of capital.
The Chairperson:
Did you address fully the question about the purchasing period?
Mr Osborne:
I hope so — let me have another go.
The Chairperson:
If companies purchase badly, instead of paying for their mistakes, they get you to pass the cost on to consumers.
Mr Osborne:
In the British market, there are five-year contracts. The gas producers want to lock in some of their revenue base, just as suppliers want to lock in some of their cost base. Consequently, contracts are struck over a series of different periods, sometimes much longer than five years.
A change in the prevailing price makes little immediate difference to the cost base of a supplier. Suppliers usually make some purchases on a short-term basis — sometimes just a quarter ahead. Therefore, there is some impact after three months and, as one goes through the first year, another set of contracts drop off, which means that the cost base increases some further. However, because suppliers buy ahead, it takes time for that cost to feed through. That is why, as Dermot said, the change in price in Northern Ireland over a three-year period is roughly equivalent to that in Britain.
In Britain, the wholesale shock is still feeding through — more price increases were announced recently, and it is possible that there will be further such announcements later in the winter. That also applies to the Republic.
The Chairperson:
Is there a set purchasing period in the Republic?
Mr Osborne:
The Republic has the same type of structure as that in Northern Ireland.
The Chairperson:
Is there a set purchasing period in GB?
Mr Osborne:
There is no set structure in GB — companies do what suits them.
The Chairperson:
So, there is no set purchasing period?
Mr Osborne:
No, there is not. That is consistent with markets that are maturely competitive at wholesale and retail level. In contrast, as we are still working our way out from under our legacy, we have a regulated system —
The Chairperson:
Will there be no change to the purchasing period?
Mr Osborne:
As part of the regulatory framework, we have a one-year purchasing period. Therefore, a price increase halfway through the previous year does not feed through immediately — it feeds through in the next period. That is the key difference between the British market and our market.
Mr Cree:
Iain did not answer my question about competitiveness. The most significant statement in the report is that the competitiveness of the gas market determines the competitiveness of the whole energy market. Is that the case? If so, where is the competition in the energy market?
Mr Osborne:
If competitiveness means whether we are supporting industry to compete more generally, that is a different discussion. However, you are asking how competitive the energy market is internally. The statement in the report is true of the British market, but much less true of the single-electricity market. In Britain, the success of generators in the electricity market is largely dependent on how they buy their gas. In contrast, because Ireland — North and South — takes a feed through from the British market, that is much less of a dynamic. The key dynamics of the single-electricity market concern how efficiently the generation plant is run and how efficient it is, which creates an incentive to build a new generation plant, because it will have a competitive advantage in as much as it will be more efficient and have lower costs. Therefore, for the time being, the statement in the report is much less true for Northern Ireland.
The Chairperson:
Thank you. From the comments and questions at this meeting, you will appreciate that Committee members have fundamental concerns. The Committee will want to examine those concerns further — we cannot end our interest in the issue on the basis of the quality of information that we have.
There is a real danger that answers about the long-term interests of consumers and other issues, important as they are, will sound like Marie-Antoinette’s famous words, "Let them eat cake". None of those other future notional and theoretical benefits compensate for, or relieve, the real burden that people are feeling now. People want to have more evidence and confidence that the regulatory system is working for them, and that the last word in decisions that you make is in their interests, and not in those of others.
Mr Osborne:
I understand that people are sceptical, that they are suffering pain and want to be convinced. I take Robin Newton’s point that it is more important that we are transparent. In that spirit, I would be happy to come again and spend more time talking to the Committee about the nitty-gritty of what we do, which involves so much of consumers’ money.
Mr Cree:
I hope that you will not be back in another three months.
The Chairperson:
It might be sooner. Thank you. We will now take a three-minute comfort break.
Committee suspended
On resuming —
[Assembly broadcasting was unable to provide Hansard with sound for the beginning of this session.]
Ms Eleanor Gill (The Consumer Council):
People have had to find an extra £3,000 or more, not to pay for luxuries, but for essentials such as food, fuel, heat, and mortgage payments in order to keep a roof over their heads. On top of that, we have engaged closely with consumers in order to discover how they are feeling, even ahead of this increase. What we found was very distressing. Nine out ten of people that we spoke to are worried about making ends meet, particularly during the coming winter. Importantly, however, of the people that we have surveyed to date, 66% are struggling to pay their bills. I wish to draw the attention of members to the fact that those people are not in the low socio-economic groups. Half of the people that we consulted are in the higher earning brackets. Some 66% per cent of the general population are saying that they are struggling to pay bills.
When we asked people what was at the top of their list of worries, 94% said that it was heat. When we asked them what was the first thing that they would do away with, almost all of them said that it would be heat, ahead of food, and paying for their mortgage. It was also worrying to discover that one third of respondents thought that they would have trouble keeping up with their mortgage payments. Half of those people surveyed said that they had cut back on savings. The fact that 44% of people in Northern Ireland do not have savings is a huge issue. One fifth of the people surveyed said that they would cut back on insurance. We saw what happened to people who were uninsured when unexpected events occurred, such as the recent flooding.
One third of the people surveyed told us that they believe that they are one salary payment away from financial hardship, should any exceptional circumstances persist. Increases such as the one we are discussing can be the tipping point for many people. The vulnerable can become more vulnerable. The rate of fuel poverty is double that recorded in 2006. For the purposes of this evidence session, we were not able to identify, given all the changes that have occurred since 2006, how many people are in fuel poverty. We have done our own crude calculations, and we would say that probably 45% to 50% of the population are unable to purchase fuel without spending 10% of their income, which is the indicator of fuel poverty.
We are considering the difficulties of those price increases in that context. Fuel poverty can cause people to fall sick and die when they are without heat. There were 550 recorded cold-related deaths last year. The big questions are: how many more people will have to find more than 10% of their income to pay for fuel? How many people will become more ill or die sooner than expected? We are talking about people and the impact that these changes will have on them.
I want to move on to talk about the increases as we see them — although we have nearly run out of adjectives to describe such increases. Over the past 10 months, what we are finding in real terms is that on average, people have to find an extra £200 to pay their electricity bills and another £263 to pay their gas bills. That is an added burden to the calculations that we have already given the Committee.
A lot of emphasis has gone on comparing what is happening here with what is happening in the rest of the UK, which is a market of which we are a part. We are paying much more for our electricity and our gas than we were 10 months ago. In case it might be construed that we are only considering this year and, therefore, being conservative or misleading with our figures, our calculations go back to January 2007, and the same trend persists. We will leave those figures with members today so that you can see that this is not just a case of using those 10 months’ statistics in order to support an argument; this is a trend that we can trace back to January 2007.
Since January 2008, we have found that the cost of electricity has risen at a rate double to that in the rest of the UK. At the start of the year, we were paying £18 more in our bills than people in the rest of the UK. On average, we now pay £114 more; that is the extent of the gap. Gas bills have risen at a similar rate to that which we have seen elsewhere; to that extent, the movement in gas prices is more of a shared experience. However, that does not take away from the fact that we are paying a lot more for our gas in Northern Ireland than is being paid elsewhere. We started the year paying 37∙5% more for gas than in the rest of the UK, and we end the year paying 40∙3% more.
Gas and electricity prices may increase further next year, but what we have heard this morning is that that could happen anywhere and, therefore, we are taking a very firm view of how we can identify the market at this point in time. Ofgem and Energywatch tell us that they have no indications that further price increases will occur before the end of the calendar year. However, no one, as we have seen, can foresee the future. We must look at the evidence and decide whether we are getting those pressures into the system that will allow us to draw out the costs that people need.
I want to give an overall view of the situation as we see it. I appreciate that we have to have a regulatory system in place that gives good conduct, good order, and allows the companies coming in to understand what they are coming into and how they are going to invest. Sometimes I think that there is a danger that we see profit as a dirty word; but it would be perverse for consumers not to wish to see companies invest and make money.
Our point relates to the fairness and the level of that money, and to the corporate social responsibility return from that. I would love to expand on that point further with the panel and with my colleagues. We are without competition and we are in a regulatory system that has been in place for a good few years. That regulatory system may have worked in the past and it may work in the future, but the big question is whether is it working now.
There are lessons that we can learn from that system after what it has been through in the past year. There are aspects that will give assurance and satisfaction to consumers and demonstrate that in the absence of competition, the regulatory system is working. When we consider the bills, however, customers have big questions. We have not thrown out any of the costs and we have not driven them down; we need to see how we will do those things because at the minute, we are still paying.
Consumers in Northern Ireland cannot shop around and, as the Utility Regulator said, we have a very tight regulatory system, but it would appear, therefore, that the rules work against the customer. That includes the rules for when we can buy; the rules for guaranteed margins; and the rules for passing on 100% of cost to the consumers. As regards knowing what is going on, all that lends itself more to an auditing process rather than a regulatory process.
The public-service obligation (PSO) has been kind to us this year and the legacy bits are almost shaken out of the system. We need to know what the gap is and how it is going to be explained. We need to recognise that if we were a consumer body in GB, we would be recommending that people shop around to save, for example, £230. In Northern Ireland, they cannot shop around; that is a huge issue and tension needs to be in the system.
The regulatory system has the ability to take money out of some person’s pocket and to put it somewhere else. It has the ability to put extra pressure on customers and take money out of their pockets. It is vital, therefore, that this system is 100% transparent.
The role of the Consumer Council is not to negotiate, but to be consulted and to get assurances on behalf of the consumer that the process is open, transparent and that a robust challenge is entering into the system. The number of emails and the correspondence that have gone between ourselves and the Utility Regulator’s office shows the robustness in the work of the Consumer Council to ensure that we ask every question and get every answer that we can.
There has been openness and transparency in this consultation process from the point of view that the Consumer Council was given whatever it asked. Whenever we asked for meetings, people made themselves available. However, questions and disparities in that process remain unanswered. That does not detract from the fact that people are prepared to share, but we have questions that have not been justified or supported by an evidence base.
In the short term, as has been publicly notified, the Consumer Council wants a re-examination of the gap between electricity prices here and GB and to ensure that there is full justification and an evidence base that assures consumers that the process is working in their interests.
I also want to make the connection between the emergency fund and the comments that were made about the impact. The Consumer Council was able to calculate a figure of £40 million. That is a conservative, but credible estimate, and it should be considered as money that can be redirected to help the fuel poor. However, a contribution to helping the vulnerable must come from the energy industry.
As a responsible Consumer Council, we do not want to drive companies away because we are digging into their profits. This issue is not about pressing profits but testing corporate social responsibility. For example, if NIE gave a 10% discount this year to all its customers who are in fuel poverty, that amounts to 1·3% per cent of its turnover. That is not big business. That equates with Great Britain where, in some instances, less than 1% is contributed. The Consumer Council asked whether contributions were being sought, and they were not sought.
A variable tariff should be considered because some people are less well off than others and will be more affected. We advised the Utility Regulator that Economy 7 customers, for example, who are 4% of the customer base, should get protection because they were going to get such a big hit. We are pleased that the Utility Regulator was already considering that issue, and took our recommendations on board.
However, there are no innovative or creative products to ensure that people can be matched to more appropriate products. There are discounts for pay-as-you-go, for example; however, that is not a fuel poverty approach, but a budgeting approach to allow people to make better use of electricity. It helps the fuel poor, but is in danger of becoming, so to speak, a rationing tool, and that is a concern. In addition, gaps in information were not provided. When times are tough, the Consumer Council wants people to be confident that every aspect has been considered.
In the short term, we wish to talk about bearing down on costs, where assets sit in the company, whether there should be more progress on mutualisation, and how lessons can be learned in the regulatory system. In the longer term, we are pleased that the Minister is developing a strategic energy framework. That cannot happen soon enough, because we need to be considering storage, our mix, how we ensure security for the future, and that the system is a good proxy for competition.
The emergency fund is really needed for this winter. However, such issues will persist, and society must consider how best to protect the vulnerable, establish a social hardship fund, and introduce tariffs that meet the needs of the vulnerable.
In conclusion, it is probably about a month before the onset of cold weather, although many may argue that it has been cold for quite a few months. The sickness and death that is caused by the cold is undoubted and proven. That is not a dramatic statement; it is fact. It needs to be thought about very carefully. I do think that it is possible to help. If there is a will and a way, and we can actually begin to bring all aspects of the issue together, we will be able to deal with the short-term and the long-term interests of people suffering fuel poverty.
The Consumer Council does not wish to have decisions made today that may have an adverse impact on tomorrow; that would be crazy. The context in which we operate must be concerned with the present, but also concerned that things are made more flexible through the lessons that we are learning now. By doing so, we will not simply play around with margins, but actually have a better role than merely auditing the passing on of costs to consumers. The risk is that — regardless of the economic conditions — the customer will pick up a lot of that cost, without question. Those are the rules of the game, and perhaps that needs to be addressed.
The Chairperson:
Thank you very much, Eleanor. Are any issues on which you feel that the Consumer Council is still behind the pillar? Is there anything that the council still does not fully see or understand, and, if so, what exactly is it?
Ms Gill:
The Consumer Council has been working through a very intensive period to deal with the information that has been received, particularly with regard to electricity. As has been confirmed this morning, the Consumer Council, and, indeed, the Utility Regulator, was not in possession of the final submission from NIE until after business on Thursday 4 September — four working days before a major announcement. Once that was received, we could begin to compare and exchange the information in order to try to ascertain the meaning behind it. We were working to a very tight deadline to try to gain some understanding. When that understanding had been gained, some aspects were still outstanding, on which we still do not have full clarification.
In particular, the Consumer Council was not in a position, until one working day before the announcement, to have taken account of all the figures to the extent of discovering that such a gap in the prices existed between Northern Ireland and GB and was in evidence. Until Thursday 4 September, we were unaware of the price increase of one third, and we had to remodel all our figures in order to analyse that. When we became aware of the scale of the issue, we raised it; yet, it remains unanswered.
The Chairperson:
Before that time, was the Consumer Council working on the basis of a 30% increase in prices?
Ms Gill:
Yes. It is quite fluid. We in the Consumer Council cannot begin to conduct our assessment in full until we know that the negotiations have finished. It is only at that point that we can run our analysis model and give a response. There are lessons that have been learned that need to be immediately taken account of, because the problems I have outlined destroy confidence in openness and transparency.
The Chairperson:
When the Consumer Council was examining the factors that would be involved for a 30% increase, were there any additional factors or variations that pointed to the eventual increase by one third, or was it simply unsettled?
Ms Gill:
It was all very fluid, until Thursday, when it settled. Then, from Thursday onwards, we were able to compare the different sets of figures and begin to ask questions. A lot of those questions were openly and transparently addressed, and we have no complaints about that, but key issues concerning the evidence-based justification for the gap in prices, and other aspects, such as forward demand, remain unanswered.
Mr McFarland:
The main issue raised by the Consumer Council recently concerned its lack of understanding of how GB can be less expensive than here. Earlier in today’s meeting, an explanation was given for that — you may have been here to hear that explanation. Are you happy now that that is understood, or is there information that is missing, or that we have not been given? Is that any more explicable now than it was?
Mr Stephen Costello (The Consumer Council):
I honestly do not think so. Iain made the point that, if one looks to multiple numbers of years, three years, for example, Northern Ireland, or NIEE prices, would be in the pack. We have gone back two years, and the disparity that we are discussing today covers the two-year period.
Considering the process, it seems that the Utility Regulator conducts an audit function. We want to find out what incentive NIEE has to best-buy. That does not seem to be such an incentive in the system. NIEE buys, and the consumer picks up the tab — all the risk is down to the consumer. That is not right in a regulatory set-up. The customer wants NIEE to have an incentive to best-buy. However, they have no such incentive. If the margin is set at 1∙8%, the higher they buy, the more profit they make. It does not seem to be a fair system. That should have been picked up as a single issue that needed to be sorted out. Everyone has known for the past 18 months or so that prices would rise. That should be the work in progress, but we have not been able to get an answer to it. We do not think that that is right.
Mr McFarland:
I do not follow. I asked the question earlier, but I cannot understand. You said that everyone knew that prices were about to rise. We were told earlier that there was no indication that prices would rise and that, therefore, there was no indication that companies would have to buy early, buy wisely or buy now to save money later. Is that your understanding of where the market stood, and how far back was that the case?
Ms Gill:
We are into the realm of whether speculation — which some people might translate as "helping people to understand what lies ahead" — is useful. Even aside from rises in commodity prices, who would have guessed what a bulky ride the world was in for? Those types of comment are not consumer-friendly. My job is to protect and safeguard consumer interest and such comments serve no good purpose for consumers.
The Utility Regulator announced in May that prices would rise well above 20%. The media interpreted that statement to mean that prices could rise by 30%, and that was not challenged. From May, the Utility Regulator gave indications that prices would be high.
Our point is that there is an auction period when things are purchased. Although there might be 5% of latitude to buy outside of that period, most purchases happen within an eight-week period. This year, that period occurred in June and July. In that period, prices were high and the company had to buy. That was known to those who were selling. It is rather like football clubs buying footballers at the end of the season — there is a time when all purchases are made. Such a system is understandable in some contexts; however, we need to learn lessons from it. We ask why the period for purchase is not longer, and why is there a narrow window of opportunity for purchasing.
Mr McFarland:
You asked that question three times, and we were told that there was no such window of opportunity. Where do you get that idea from? Three times we were told that there was no such window, the market was completely open, and the company could have purchased in January and February had it known that the price was going to increase. What interests me is this is that —
Ms Sinead Dynan (The Consumer Council):
NIE is in the electricity market. There is not a purchasing window in the gas market, but for the electricity market there is an eight-week purchasing period.
The Chairperson:
Who stipulates that?
Ms Dynan:
The Utility Regulator.
Mr McFarland:
That is for buying gas?
Ms Dynan:
No, for the purchase of electricity.
Mr McFarland:
Yes. However, what they are saying is that the only reason the price of electricity is so high is because they had to buy gas at a specific price that forces up the price of electricity.
The Chairperson:
What exactly are they buying in that purchasing period?
Ms Dynan:
In that period, they are hedging the electricity that they are going to buy for the year. That eight-week period is specifically for the electricity market. In the gas market, you can buy at any time and it is up to the individual company to decide what percentage of its needs it will buy for at once. Later in the year, it can buy on the market.
The Chairperson:
If it buys electricity in that period, how tied to that period is the purchase of gas or oil for the purpose of generating?
Ms Gill:
The generators sell to the single electricity market, from which the supply companies buy. The electricity generators have an eight-week period in which to set the price for the single electricity market. We have asked directly why that eight-week window exists and why there are perhaps not multiple windows. In the past, that system may have suited, and, on evidence, it may suit now. However, we need an absolute assurance so that we, as consumers, can be satisfied that the system works to the best of its ability. We based our questions on those points.
We have yet to receive responses to the points that we made yesterday. We know only what is in the public domain either from the media or from what we have heard here today. We do not have an evidence base with which to justify such a huge gap.
Ms J McCann:
Thank you for your presentation. Are the buy-in rules set by the Utility Regulator?
Ms Gill:
The system sets that.
Ms J McCann:
Why if energy companies had foreseen the price hikes — as most people had — did they not buy energy when the prices were lower?
Ms Dynan:
Electricity companies buy energy at a set price, which is fixed for an eight-week period.
Ms J McCann:
So the prices are set at a certain value?
Ms Gill:
Companies say how much they are prepared to pay at an auction.
The Chairperson:
Do the electricity-supply companies buy the energy?
Ms J McCann:
Do they decide what price the consumer will pay?
Ms Dynan:
The price at which they buy energy filters down through the regulatory process to decide how much consumers will pay.
The Chairperson:
We talk about "they", but there is only one buyer?
Ms Gill:
Yes. I hope that over the years we have benefited from that system, which sometimes works well. The problem is that no penalty is incurred if the system does not work well; instead the costs are passed on to the customer. That is the rule.
Ms J McCann:
Therefore, basically the consumer picks up the costs and takes the risks?
Ms Gill:
That is our understanding of the process. It is an issue in itself if we have misinterpreted that process in any way. We try our hardest to understand the system, but our interpretation comes with that health warning.
Ms J McCann:
From the evidence given during the earlier session, we know that the price hikes will potentially affect 50% of the population going into fuel poverty.
Ms Gill:
That is a rough estimate.
Ms J McCann:
That percentage relates to the whole of the North. Therefore, it is not going to be just vulnerable households that are affected; it is going to working families as well. The prices hikes are going to have quite an impact.
You suggested that energy companies could perhaps try to alleviate fuel poverty. However, some energy companies have told me that they already help the consumer through initiatives such as the promotion of energy-efficiency schemes. Will you clarify whether that it is the case and how much money they put into those schemes?
You also mentioned social tariffs, and those have been discussed. Has a lobbying body explained to the energy companies the ways in which they can make a difference — by putting money into those social tariff systems — to the lives of the most vulnerable people in society, such as the elderly and sick?
I also wanted to ask the Utility Regulator this question, had he still been here. You said that the decision to increase energy prices should be re-examined. Could that decision be overturned?
Does the regulator have that power? He told us that he consulted with the Consumer Council, the Department and local people, and I imagine that he is being told that the increases are unjustified. Is there any window for the regulator to go back to the energy companies and tell them that the increases are unacceptable?
Ms Gill:
It may be easier if I take the last question first. We are not saying that the prices are unjustified, but when they are re-examined, they may be proven to be unjustified. However, we do not have the information or the evidence base, as we could only ask for it the day before the increase, because that was when our analysis was completed. We do not have any basis for that justification; therefore, we might have to pay an extra £75 million of the £150 million being lifted, but we do not know. We cannot give that assurance until we find out that information. It would be wrong to raise expectations among people that the increases may not be justified — we simply cannot say.
With regard to the overall scheme, we have no say in the regulator’s approval process. NIE, Phoenix Gas and our other providers take a real interest in energy efficiency, as they should. It is important to ensure that everyone has a good level of understanding of energy efficiency and is supportive of it. However, we feel that the companies should contribute to that. For example, if we take the energy efficiency levy, for the past 10 years, domestic and commercial customers have paid £26 million for energy efficiency measures. That money has been paid for by the customers, not the company, but Northern Ireland Electricity is incentivised within that system to get savings above a certain carbon level. Of that £26 million, NIE gets £4 million, which is around 20%, and the Energy Savings Trust, which administers it on behalf of the regulatory system, gets 1·4%. Therefore, money comes out straight away before it goes anywhere else.
Incentives are very important, in the light of the dividends and turnover that is enjoyed by the companies. Companies should contribute to the pool of corporate social responsibility, and we have been very vocal about that. We are not saying anything new. This is not an attack on profits and companies. For example, last year, Viridian had a 157% increase in its dividends, and it paid out £121 million or £123 million to its shareholders. That is equivalent to almost £100 per household. Therefore, we are looking at a huge amount of need, but a small contribution would go a long way to help with corporate social responsibility.
The last time that we met the Committee, we called on energy companies to contribute to social tariffs, and we still hold that opinion. We are worried about the definition of the term "social tariff", but we should not be worried about it as it means agreeing on a way to get help to vulnerable consumers. However, people are suffering this year, and they need to get money directed to them. I suggest using the existing mechanisms, so that we do not get tied down if we can find the money. We have been working hard to try to come up with solutions to finding that money. Every year, we will need hardship funds or trust funds for people in need, and we must ensure that everyone is paying into that pot. We have done that, and the Consumer Council recently wrote to all the generators in Northern Ireland asking them for a contribution towards the needs of the people of Northern Ireland. I do not think that has happened before.
The Chairperson:
I know that you are not in the business of attacking profits, but the figures that you presented clearly show the difference in average household bills. Have you come up with figures to represent the difference in profits?
Ms Gill:
Do you mean how much additional profit there will be?
The Chairperson:
What will be the difference to NIE’s profit on the basis of those increases? What will be the difference in its profit figures for one year? We know what the difference will be in what the average household has to pay. We have been quoted the ratio. I want to know what the difference will be in quantum and profit terms. Has anyone been able to work that out?
Mr Costello:
NIE will pick up £150 million more in revenue — 1·8% of that is around £30 million, I believe.
Ms Gill:
We have also carried out an examination of costs of social tariffs. We can leave the details with the Committee rather than go into them now.
The Chairperson:
In addition to what it is already getting.
Mr Hamilton:
That is over 10%.
Mr Cree:
Are we sure that your statement is right?
Mr Costello:
I am not sure.
The Chairperson:
It would not be £15 million.
Ms Gill:
We know that Viridian made a 10% profit on turnover last year.
Mr Costello:
You are referring to additional money that NIE will make because of the price increase — how much additional profit will be made.
The Chairperson:
There is a danger that people will be confused about whether the defined profit margin is on turnover or on assets.
Ms Gill:
Sinead and the team have done some working out. For example, if we were to give a one-off payment in 2008, how much would that bite into profits and, indeed, turnover? We have calculated both, and we can share that information with the Committee. However, I want to make an overall comment on the 1·5% or 1·8% profit —
The Chairperson:
Can you give us a picture on assets? Do you understand that we are talking about NIE Energy’s assets? We must always be careful to refer to NIE Energy when discussing the matter. What assets does it have that are able to make that 1·8% profit? Where are its other assets?
Ms Gill:
The bulk of the assets — well over 90% or 95% — are now in NIE transmission and distribution. We can provide figures for that.
The Chairperson:
That is not in a tied profit?
Ms Gill:
No. When the company was broken up, you have what was well described by the regulator — at the end of the chain is NIE Energy’s supply. It can hold a 1·8% profit margin. However, it has occurred that that is not where assets are located. Therefore, if one considers a small matter such as keypad meters, which you mentioned earlier — keypad meters were transferred on their book value at £11 million. While that asset was sitting in supply, it was getting 1·8% profit margin. When it moves into transmission and distribution, the company will get a 4·8% return on that asset — 3% more. That is a small example. If you tracked all the assets, and you had the time, resources and forensics to do so, you would find that it is running rings round us, because while everybody is looking in one place, the return is actually happening somewhere else. That is what happens when the whole matter is broken up.
The Chairperson:
The profit load is somewhere else?
Ms Gill:
Yes, at a higher return rate. If we then consider assets in terms of mutualisation, Northern Ireland Energy Holdings now manages, in a non-profit way, the assets that it has under its control. Its return on assets is much lower than that of NIE or Phoenix Gas. We have asked whether there are other assets that could be more quickly transferred into that type of arrangement, such as the Bord Gáis Éireann (BGE) pipeline and the transmission network. What will it be? That may not be the answer. However, again, lessons are being learnt about which we need to ask questions. We aim to ensure that the best possible process exists. We are trying to develop competition, but God knows how long that might take and how well it will work. We must ask all those questions.
The Chairperson:
That is reminiscent of the line from the film when Clouseau says that
"I thought you said your dog did not bite".
To which the hotel clerk responds:
"That is not my dog".
Mr Newton:
I must say that I like your analogy, Chairman. I thank the Consumer Council for its attendance at the Committee. Obviously, the NIE figures have given you genuine cause for concern. I want to ask a few questions on processing. Did you ask for more time to examine that area? Were you allowed any more time? Did you make the case for more time? In a general context, do you get information in a timely fashion in order to assess price increases? When you raise concerns, what response do you generally get to them?
If there are any shortfalls in the information that you have requested, be specific about them. Do you think it would be more useful if you had additional information, or had it in a more timely fashion? Would that enable you to do your work on behalf of the consumer?
You used the phrase "progress of mutualisation" earlier — I did not understand that. Perhaps we can return to it at a later stage. However, it seemed to be part of the Consumer Council’s wish list, and you regarded it as quite important. Do you think the information was timely? Did you ask for more time?
Mr Hamilton:
I would like to know why you were working on the basis of 30%. Where had that figure come from?
The Chairperson:
In your response to Robin’s point, can you say who else is involved in this, and how well-sighted the Department is on these matters?
Ms Gill:
I cannot answer that. When we go to the Department, it is open, accessible and transparent. I cannot say anything more about its role in the process.
I turn to the amount of time that we have. There is a precedent where, for example, in the last increase, when I was with the Committee, we were not in a position to claim that we had asked for more time because we did not have the information that we needed in order to say that we had crossed every "t" and dotted every "i". Rather, that was in the process, and that is now on record.
This time around, we found that, although there was an established timetable, it became incredibly back-ended. Towards the end, things were getting very uncomfortable. Key pieces of information and the settling of bits that were even outside of Northern Ireland Electricity’s energy and supply were not within the system. No one knew what the settled position would be. We flagged up repeatedly that we were finding it to be very tight — and we have a full audit trail that we are more than happy to provide — but that we were still working to meet the deadline. Speculation in the media had grown to such an extent that Wednesday was to be called "Wicked Wednesday" and that is when it was happening. However, it would have been wicked not to have been working in the system to try to sort out what was going on with the data.
The timescale was already published; so was the amount. Yet, when we were consulting, we did not know what it was. When we got the final information together, on the Thursday evening after close of play, we began our analysis. It was not until Tuesday morning that we knew that there was such a significant gap in the data that we needed completed. Consumers would ask for that information, and the Consumer Council needed to be satisfied as to the answer. When we established that there was a gap, we asked for a response from the authority. No response was forthcoming.
Later in the evening, we corresponded again, to say that since we did not have justification or understanding, it should be withdrawn until we had that full understanding. That was not responded to. The system was already in train. We were reluctant to withdraw from this and throw everything up. What must be remembered is that, for most of it, we were positive. It was open, transparent and ready to go.
On the key points — the discrepancy between the company and the regulator about forward demand, and the issue over that gap and the explanation of it — information was not provided, and, therefore, we were not in a position to move forward. We tried hard to get that information but we were already on that continuum.
A process must be looked at. The Department helpfully agrees that there is a need to look into that. We need to consider the timescales, especially the back-ending of them. We must have a full understanding throughout. We do not believe that, during a consultation process, the discussion should be taking place throughout the piece that was referred to earlier.
We were still in consultation, yet issues that we were raising in the consultation about the contribution of profits were being answered by the regulator in an opinion piece in the paper. We are still awaiting an explanation for that.
The Chairperson:
It is signalling being minded to approve something, to borrow a phrase with which this Committee is familiar. [Laughter.]
Ms Gill:
We did not suggest that but we needed an explanation for the motivation behind it, in order to secure confidence. At the start of the process, in June, we were advised that the increase would be 33%, then it went to 30% and then, at the heel of the hunt, it became 33·3%, which made us wonder about it.
Mr Hamilton:
Where was that information coming from?
Ms Dynan:
The initial information came from NIE Energy. Quite often, there will be several iterations and the information will change each time.
Ms Gill:
The system is quite fluid. The problem is that when an increase is set, there is not a lot of time to turn that around. The Consumer Council has two members of staff working on energy — one staff officer working on gas and one on electricity — as well as the rest of us, who are trying to make sense of it. Therefore, we were struggling to complete our work in that window, which is an issue that I have identified already. The announcement for gas was made also, but we did not have any issues with that because we were able to get our head around what was happening with gas very quickly.
Mr Costello:
It is a bit like the football transfer window — all the pressure comes at the very end. So the lights in our office were still on at 11 pm on Tuesday night, while we tried to find a solution.
Mr Hamilton:
You did not get Robinho. [Laughter.]
Mr Costello:
But we paid Robinho’s price. [Laughter.]
Mr Newton:
You said that you have two members of staff working on gas and electricity — are they up to speed and available to you at all times?
Ms Gill:
They are sitting here today — they have made a valiant effort in completing their work and we commend their ability to get their heads around very complex issues. The fact that we have up-to-date information from our interpretation is a testament to that team’s ability, and they have also helped to calculate the windfall tax and all the different figures that we are presenting to the Committee today. We are massively proud of them, and they have been helped by both the authority staff and departmental staff, so we have no complaint in that regard — we have been given every opportunity to learn more. Staff from the regulator’s office and from the Department make themselves available to us all the time.
Our issue is that we do not have an explanation for a gap that equates to at least an extra £75 million being taken out people’s pockets, and until we are given an evidence base for that, we cannot give assurance on it. We are fine with the rest.
Dr McDonnell:
Although mutualisation is a slightly different matter to what we discussed earlier, I would like some guidance on it. How much would mutualising the transmission and distribution system here save us? How much would mutualising the gas pipelines save us? We must consider such issues, because mutualisation with the very low-interest funding is a much better approach. Although the previous system had its faults, this privatisation — or semi-privatisation, or whatever it is that we have at the moment — has too many faults. I am still looking for information on mutualisation — it is something that the Committee, the Consumer Council and the regulator must explore.
Ms Gill:
I am sure that mutualisation will have a place in the strategic energy framework. However, we must consider such things from the perspective of driving costs out of the system. Northern Ireland Energy Holdings is running the assets that it has taken to date at half the price that they were being run by NIE and Phoenix Natural Gas, according to its reported figures. Sinead can provide more detail on that.
Ms Dynan:
It is essential to know that assets of Northern Ireland Energy Holdings have had a return of approximately 7%, and they are now taking on a return of approximately 2%. That saving is going through to consumers, and that means savings of about £15 million per year to consumers through mutualisation.
Dr McDonnell:
What does that imply? I suppose that is like asking how long a piece of string is. Has anybody calculated how that would be reflected if we bought out and mutualised the electricity wires?
Ms Gill:
I think that they would look to extrapolate from the performance on the previous assets, the rate of return and the lower operating costs, and make some stab that way. However, perhaps you could ask Northern Ireland Energy Holdings that question.
Mr Neeson:
Is this a fait accompli? You are still putting heavy emphasis on the £40 million windfall tax. How important is Gordon Brown’s visit here next week in that regard? I have yet to receive an answer to a question that I have on a local issue: who pays the £100 million costs of flue gas desulphurisation equipment (FGD) at Kilroot power station. It certainly has not been AES Kilroot Power Ltd.
Ms Gill:
The regulator should be asked whether the situation is a fait accompli. The power is such that the regulatory system allows money to be moved about. Our job is to ensure that those moves can be justified. At present, we cannot answer that. We then have to ask whether the system being used is the best one possible and if its rules are working more to the advantage of the company than the consumer. We must also ask whether more balance can be brought into the system. I cannot answer your question on whether the situation is a fait accompli, but we stand to get the evidence that we need. I cannot answer the question about Kilroot power station.
We have provided you with any information that we have on the windfall tax, and we will leave the tables with you. We have identified what could be done with the £40 million — it could just about stretch to covering contributions of £200 to every fuel-poor household. Furthermore, if the Northern Ireland energy industry, generators and companies contribute money, it would start to fill the pot that we talk about — the chest of money that could be distributed in the winter. As a result of the Consumer Council’s cost of living work, we know that people cannot find money that they do not have. We are not being hysterical.
With regard to energy efficiency, one must remember that many people have reduced their heat as far as they can bear, and their next measure will be to turn it off. We cannot get into that situation, so we ask that the creativity and flexibility — that is absent from the system — is injected into it, with a will to do something.
The Consumer Council has done a lot of analysis, and we are happy to work with different people. We have worked hard with Minister Ritchie and the taskforce group to begin to acknowledge that the situation is difficult and that it will be hard to identify who should receive assistance and who should give it. However, it needs to be done, and we must set ourselves a goal and see how far we can go.
The Chairperson:
Announcements have been made across the water. Do you know where that money is coming from? What money is it? Is it new money? Is it merely repackaged and redirected money?
Ms Gill:
We are getting information today. We know that the £225 million that was previously identified and talked about by Gordon Brown was not new money; it was customers’ money. It was redirected money. We are waiting to see whether the money that has been announced in GB in new money that is coming from profits of generators, for instance. There are signs that some of it is new money, but it is too early to get ecstatic. We also realise that it does not apply here.
Mr Costello:
Water charging will have to be re-debated in the light of this, and it will be a hard sell.
Dr McDonnell:
If water charges are piled on top of this madness, people will lose their homes; the situation is that brutal.
The Chairperson:
I am conscious of the feelings on that issue.
Ms Gill:
The Consumer Council has been at the vanguard in ensuring that people realise that if they want good public services, they must be paid for — at a fair and affordable price. There is a question over how to bear the extra cost burden at a time when people are struggling, and that is something that must be discussed, debated and considered.
Ms J McCann:
I understand that the fuel poverty task force report is with the Minister for Social Development. Are you confident measures will be introduced to alleviate fuel poverty?
Ms Gill:
I believe that there will be a synergy involving the need for an emergency fund this winter. There is also a need to look at hardship in the longer term; how it will be dealt with and the introduction of more flexible tariffs for vulnerable people.
The Consumer Council does not accept that a social tariff amounts to a redistribution of wealth from one customer to another. The council believes that other people should contribute to that pool, including the energy industry.
Another thing we must consider is that 70% of Northern Ireland households are dependent on oil. Therefore, asking for the regulation of oil is noble, but it is a global issue. The Consumer Council and the Housing Executive have commissioned Bryson House to study the possibility of bulk purchasing oil on behalf of people. That is because some people, who cannot afford to bulk buy for themselves, are buying it at double the price in forecourts. We are examining whether mechanisms exist that allow bulk-buying in the market place.
That may extend to gas and electricity. I do not know where it will go. What is needed now — so close to winter — is a push.
The Chairperson:
I thank all three of our witnesses for their contributions.