COMMITTEE FOR ENTERPRISE, TRADE AND INVESTMENT
OFFICIAL REPORT
(Hansard)
Rising Energy Prices
25 September 2008
Members present for all or part of the proceedings:
Mr Mark Durkan (Chairperson)
Ms Jennifer McCann (Deputy Chairperson)
Mr Paul Butler
Mr Leslie Cree
Mr Simon Hamilton
Mr Alan McFarland
Mr Sean Neeson
Mr Robin Newton
Mr Jim Wells
Witnesses:
Ms Susie Brown)
Ms Eleanor Gill ) The Consumer Council
Ms Ciara McKay )
Mr Iain Osborne )
Mr Dermot McCann ) Northern Ireland Authority for Utility Regulation
Mr Douglas McIldoon )
The Chairperson (Mr Durkan):
I welcome the first set of witnesses from the Consumer Council: Ms Eleanor Gill, the chief executive; Ms Ciara McKay, the senior consumer affairs officer; and Ms Susie Brown, head of communications. As I understand it, Eleanor will concentrate on the scope and terms of the reference of the review. Is that correct?
Ms Eleanor Gill (The Consumer Council):
Chairman, with your permission, I will make some opening comments to clarify the Consumer Council’s position, and then I will happily move on to the specifics of the terms of reference.
The Chairperson:
Yes; that is OK. I want to remind you that Hansard will report this session.
Members will want to touch on some items that appeared in today’s news, but I ask you to save discussion on those until later. It would be very easy to let today’s headlines occupy our time and distract us from the intended agenda. I do not wish to set those issues aside; rather I want to deal with them in a more cogent manner.
Ms Gill:
Before I start, I offer the apologies of Steve Costello, our chairman; he was pleased that the Consumer Council was invited to attend this meeting. He wanted to attend but had a personal commitment that he could not breach. However, he has asked me to advise the Committee that he has given me the authority to speak on behalf of himself and the council today.
The Chairperson:
I accept and appreciate those apologies.
Ms Gill:
The Consumer Council’s primary concern is to ensure that we protect consumers’ interests in the price review system. We are all aware of the perfect storm that consumers face because of the rising cost of living; we talked about it the last time that we were here. We appreciate people’s concerns about the size of the increase in energy prices.
In 2006, one in three people were in fuel poverty. Our estimate — albeit with health warnings — is that the figure could rise to between 45% and 50%. Last year, there were more than 500 cold-related deaths and many cold-related illnesses. How many more might there be this year? This matter is all about people and ensuring that their short-, medium- and long-term interests are taken care of.
The Consumer Council is speaking today from its experience as a consultee in price review systems. Its experience goes back some five years, and it has participated in 15 price reviews. We have been involved in the review of gas and electricity price increases, which will come into effect on 1 October 2008. There has been total openness and transparency as regards the evidence to support the 19·2% increase in gas prices, and the council is satisfied with the robustness of that evidence. The council is satisfied with the consultation on the increase, even though it is a huge hike in price for consumers to deal with this winter.
However, we do not have the same confidence in Northern Ireland Electricity’s 33·3% increase in prices. My next point is emotive in that it is based on our feelings about the price review; this review has felt different from any other price review in which we have been involved over the years, specifically when compared to the review of the gas price increase, which happened simultaneously.
We are not saying that the 33·3% increase cannot be explained or justified; indeed, based on what we have seen of the way in which the system works and its rules, it most probably is explainable. In many instances, our problem is with the rules that pertain to the price review increase and how it is worked out.
Neither are we saying that NIE Energy has made a penny more from the increase. For us, the issue is one of costs rather than profits. Conversely, given the current economic climate and the fact that we must all be more prudent about our spending, why is it that NIE Energy has not made a penny less? That issue must be examined. Although we accept that there are tight profit margins in regulation for NIE Energy — it is regulated to a low margin of 1·8% — other elements of Viridian’s business have generated huge profits. That issue must be examined.
The energy industry must feel confident about locating and investing in Northern Ireland and about working in a system that is different from systems elsewhere. Difference is good, but it can also result in a shakiness of resolve if people do not have confidence in the system. We did not come here today to attack the profits that companies make; as a consumer body, it would be perverse for us not to want companies to do well. Rather, we want to ensure that there is a balanced system that works as well for consumers as it does for the industry.
Where are we now? We welcome the Minister’s letter to us of 22 September 2008 and are happy to discuss it if necessary. However, the letter describes us “the de facto complainant” in the case. The Consumer Council wants to emphasise that it made no complaint and is not, therefore, not a complainant. We said that, in our statutory role as consultee, we cannot make a judgement because we do not have the answers that we need. We want the Committee to recognise that, as a statutory consultee, the Consumer Council considers that the statutory consultation has not concluded; indeed, in many instances, it has been ignored.
The Consumer Council has issues about the process and the outcome. I will not go into those in great detail, but I will give a brief summary. We identified the late arrival of key information, which it impossible for us to carry out any conclusive analysis until the day before the increase was announced. We have outstanding queries about the increase being double the rate of that imposed in GB. Questions that we asked, even as late as 9 September 2008 — the day before the increase was announced — remain unanswered.
The drip-feeding of information surrounding the increase has undermined the process in many ways, and we question the fact that the Northern Ireland Authority for Utility Regulation (NIAUR), as the proxy competitor for consumers in Northern Ireland in the absence of competition, explains the reasonableness of the monopoly supplier during a price negotiation. If the intention was to explain to consumers what would happen and why, we would have expected NIAUR to conclude the process with the statutory consultee. We also want to examine whether there was a sufficient evidence base, because the examination of the price increase seemed to be more of an audit than a regulatory scrutiny.
I can return to any of those points, but, as suggested, I want to address my final comments to the review chairman, because the Committee might like to hear our views on the terms of reference today. I am glad that the Minister’s letter recognises that we strongly support the need to examine the situation because lessons must be learnt, and the systems and rules that govern the outcomes, such as the 33·3% increase that has been passed on to consumers, must be examined.
The Consumer Council welcomes the review and the Minister’s action to encourage the regulator to take part in it. However, we feel strongly about the way in which the review developed and was presented to the Consumer Council as a statutory consultee and to the Committee. It seems perverse to the Consumer Council that we were merely advised of the review, as we support the argument that the review is required to renew public trust and confidence in the system. However, if that is the case, why were we, without being part of the commission of the review, not even invited to take part in the discussions? No effort was made to ensure that people understood the basis or motivation behind the review despite the opportunity to talk about it and get it right.
Transparency and the building of relationships and trust are vital because there is a great deal of work to be done and, in the absence of full competition, we must have total confidence in the regulatory system. Our chairman, Steve Costello, wrote to the chairman of NIAUR to emphasise the need for everyone to work together to ensure proper communication and that each side understands the issue from the other’s perspective. Everyone has much to learn about dealing with price reviews.
Our experience strongly suggests many areas for consideration in the current regulatory system and price control process to ensure that consumer need is properly balanced against that of the industry in the short and long term. However, in six days’ time, by our estimate consumers will be paying approximately £150 million in revenue per annum. A review cannot, and should not, be a substitute for questions being answered in a way that creates a level of openness and transparency that enables consumers to understand what they are paying for and why. Responses to questions should be passed to the statutory consultee.
As we listen to the reviewer, Mr Douglas McIldoon, we will be seeking assurances and grounds for confidence. I am sure that both will exist in his approach and in his ability to nail down the terms of reference so that we need not wait until December to discover that questions that require answers could not be accommodated.
We believe that we need to be able to answer the questions for people before 1 October. They do not have the luxury of waiting for some of the answers to our needs in the future.
However we do believe that there may be a way of incorporating both needs. For example, we have explored and want to further explore with the reviewer today, whether some of those issues could come upfront and whether we can examine different elements of the terms of reference at different times. Perhaps the first thing that could be examined is an explanation of the 33·3% increase in electricity prices, and the fact that we are seeing double rate increases et cetera. We could then proceed to the longer-term lessons about the rules that have caused things to go one way or another.
That, I hope, will demonstrate our support of the review and our support of Douglas McIldoon and the work that he must do. Importantly, I hope that it will also ensure that those people who must pay an increased tariff from 1 October will be doing so with confidence and transparency.
Mr Neeson:
Eleanor, thank you for your presentation today. I am concerned by the letter from the Minister to the Consumer Council that states:
“that it would be in the wider public interest for the reviewer to be given space to complete the assignment quickly and expeditiously and so I do not believe that it would helpful to speculate about the process or comment publicly on it until conclusions have been formed.”
Do you think —?
The Chairperson:
Is that the letter dated 17 September 2008?
Mr Neeson:
Yes.
The Chairperson:
We must clarify that as several letters will be under discussion today.
Mr Neeson:
Is the Minister is telling you not to rock the boat?
Ms Gill:
I can only speak as I find. There has been absolutely no attempt by the Minister or her officials to preclude the Consumer Council from addressing that issue. That is demonstrated by our presence at the last evidence session and at the evidence session today.
It is clear that everyone is viewing those issues through different lenses, and rightly so. What we must do is to ensure that all those different perspectives are brought together so that there is confidence as we proceed, as it is in no one’s interest for that confidence to be diminished. As I have said, I can only speak as I find and as I am able to act.
Mr Neeson:
By the same token, do you believe that the Consumer Council should have been consulted on the terms of reference before they were decided?
Ms Gill:
Absolutely. It would be disingenuous to suggest that there was an understanding, because we made our concerns publicly known. When one is in a state of proper dialogue and proper trust and relationship building, concerns can be teased out and one can ensure that those concerns are addressed.
I am the mother of two teenage sons and they often raise issues with me that I try to resolve. Subsequently, I find out that the problem that I was addressing was not their problem at all. Therefore, it is only through dialogue and addressing the essence of what needs to be answered that progress can be made.
In the spirit of the Minister’s letter, we would like to propose some cogent suggestions as to how we can refine and nail down the terms of reference. That will ensure that those assurances are given and that the review can carry those assurances. Furthermore, that will mean that Mr McIldoon will not feel that he is restricted in any way in his work. That would be a great outcome for us today.
The Chairperson:
Mr Neeson referred to the letter from the Minister to the Consumer Council. The chairman, Steve Costello, replied to the Minister and following that, the Minister subsequently replied to him on 22 September 2008. Were the issues raised by Mr Costello sufficiently addressed by the Minister in her last letter?
Ms Gill:
I welcomed the action. I also welcomed the clarification of the Minister’s motivation with her suggestion that the regulator should carry out the review swiftly in an open and transparent manner. The Consumer Council has suggested those ideas to the Committee before and therefore we are very supportive of such action being taken. We were also appreciative of the fact that the Minister recognised our statutory responsibility and responded to the issues that we have raised.
Through this letter we also got a sense of the level of robustness and the lack of disappointment that we should have in how wide the terms of reference should be. Indeed, I would like to return to some of those in time. From that point of view it is fine, but our difficulty relates to the Minister ignoring our statutory consultation status and the legitimate expectation that we have as a statutory legislative consultee. The council believes that not only should we be listened to but that our views should be conscientiously considered and responded to. The council still has outstanding issues and unanswered questions, and we believe that no review can replace the questions that need answered before 1 October. Indeed, the Minister has said that she has great faith that those questions will be answered in the review.
They need to be answered now; the review can look at that in greater detail but in the meantime customers will have to pay. The double rate of increase or, indeed, the rate compared to the Republic of Ireland, as mentioned at the SEM meeting, are much out of kilter; we need to get answers so that people can have confidence.
The Chairperson:
I have some points that I want to return to, but I want to let other members speak. Jennifer, do you wish to ask a question?
Ms J MCCann:
Given the events of the past couple of weeks and the concern that exists, does the Consumer Council support the review, which will be ongoing, but — and correct me if I am wrong —feel that it does not go far enough? Local people are paying for the price rises: there were 500 cold-related deaths last year, and, given the huge rise in prices, many more families will be pushed into fuel poverty this year. That is something that we have to look at.
It seems to me that the review concentrates on only one aspect of the Utility Regulator’s role; people want to see a review of that 33∙3% price hike. I appreciate the Consumer Council’s honesty in saying that that price increase might be justified; we owe that sort of honesty to people. Can the Committee initiate an inquiry into whether that price rise was justified? My constituents say that they are paying for the running costs of the energy companies; those companies’ profits have not gone down, neither has there been a fall in the shareholders’ slice of the profits.
How can the Committee help our constituents to get through this muddle and to find out whether the 33∙3% price increase was justified? That is what people want to know. Some of my constituents who used pre-payment meters to buy their electricity ahead have been unable to avail of the current price scale. They will be billed for when the price increase was added.
The Chairperson:
Other members will want to come in on that issue, so perhaps we can park it for now. However, we will return to it.
Ms J McCann:
How can we help to look at the price increase and not just the role of the regulator?
Ms Gill:
It appears to the Consumer Council that there are two things to be resolved: first, there was a statutory negotiation and consultation process and, in our view, that process has not been properly concluded. There are outstanding questions around the explanation of, and the justification for, the 33∙3% price increase. Those questions pertain to the specifics that we have raised about the double rate of increase and how we have a renewed divergence, after spending many years working the legacy issues out of pricing. Secondly, for the first time inside 10 months we are paying sixfold more in our bills than in GB. That is a huge question for people and it is something that needs to be answered for the statutory consultee, irrelevant of the review.
As I have said, it may be that this price increase is justifiable; the review could be very handy in explaining that. The rules will probably point to the fact that that is what the conclusion of the review will be. A system that has a 100% pass-through rate is not really being regulated but audited to make sure that the figures add up and that everything works together.
If that is the case there are many different issues in it relating to the purchasing windows, the risks and penalties, incentives, and the potential for greater asset returns in different parts of the business if it was a mutual-type interest.
Lessons must be learned from those interests to ensure that we have the best possible regulatory system, one that balances the needs of people with ensuring that companies will come here and invest and make profit. Everyone will be happy, because that is the way that the world goes around. That has not been addressed. I hope that when Mr McIldoon speaks those issues will come out. Such questions will continue to be asked, particularly as prices go up, until we have examined whether better regulatory systems can be obtained for the price review.
Mr Wells:
Eleanor, we cannot keep meeting like this; we seem to be questioning you every day of the week.
Ms Gill:
Yes; we spoke about buses yesterday at the Committee for Regional Development, and today we are speaking about wires.
Mr Wells:
On a serious note, a letter from the Utility Regulator to the Committee, dated 17 September, states that:
“Consumer Council concerns over the explanation of the differential between electricity prices in Great Britain and Northern Ireland were only raised with the Utility Regulator on 9 th September.”
I assume that that refers to 9 September 2008.
Ms Gill:
That is correct.
Mr Wells:
The letter continues:
“Moreover, it is important to state that the Consumer Council were invited to attend meetings to discuss the tariff review on 2 nd, 5 th and 8 th September, but did not attend.”
It seems that the Consumer Council was given a fair opportunity to meet the regulator behind closed doors to tease the issues out. Why did you decide not to take that opportunity?
Ms Gill:
I said at the start of today’s meeting that the Consumer Council has no issue over the availability, the openness or the transparency of the Utility Regulator, which has extended an invitation to meet us at any time. Our problem is that the key information that we needed on which to take a considered position did not arrive with us until 5 September. The information was sent after close of play on 4 September, and the Consumer Council and the regulator received it on 5 September. I know that the review will consider that issue in detail.
On 4 September, we sent an email to the NIAUR stating that we were grateful for the invitation to meet, but that the invitation was not of any use because we did not have the information. We had not yet received the tariff increase when I sent the email at 8.33 that morning. It stated:
“We will now need time to look at this and consider receiving it only four working days before the announcement. We cannot and will not be in a position to confirm a date, time or venue for a meeting until we have done this.”
We did not have the data, so there was no point in meeting until we knew what the tariffs were and what the submission was. Our email continued:
“I note from your message that even now this is not complete, in terms of the breakdown of drivers for example, for this increase. I would ask this to be forwarded in writing to us as a matter of urgency. I also note from my discussion with Stephen McCully from NIE yesterday that he stated that there were still points that he had not settled. This whole situation is getting very close to the wire. My commitment now, as it has been all along, is to turn our position round as soon as we have all the information that we require. I reiterate that commitment on behalf of the Consumer Council.”
Three working days before the price increase we said that we did not have the information. When we did receive it, we immediately sent our queries overnight to NIAUR, who responded the following Friday to say that it had only just received the submission and that it would need to come back to us to answer our queries. Pertinent queries were still outstanding on Monday 8 September. We continued to work long into the night to get our considered position from what we had, because we had to decide what to do with the information that was available to us. It was not until 9 September that we were able to produce our final analysis that the rate of price increase in Northern Ireland was double that of GB. We did not know that before then.
Mr Wells:
Did you ask for more time? If you did not, why did you not?
Ms Gill:
The email highlighted the fact that we knew that it was close to the wire, but our resources were ready to go. When our analysis revealed that the rate in Northern Ireland was double the rate of that in GB, I rang NIAUR, NIE and DETI and cogently outlined my concerns about the lack of timeliness of the information.
I also raised the key issue about outstanding information on the fact that the rate of increase in Northern Ireland was double that of GB. I waited all day for an answer to that, and, at about 5.30 on Tuesday evening — the night before the increase — we asked for the increase to be withdrawn and reviewed to ensure that there was public trust and confidence in the understanding of it before the announcement was made. We received no response to that request.
It could well be that, as the whole process is followed and it is proven that the rules are totally unfair — that the system is viable and reasonable — and that all that Mr Osborne has done is to apply the rules by which he is constrained. Why attack the regulator in that sense? I am playing devil’s advocate here, but why attack the regulator and his office if all he is doing is applying rules that you believe to be unfair but which he cannot change?
Ms Gill:
As the letter in the members’ packs will show, this is not an attack on the regulator or his office or on the Northern Ireland Authority for Utility Regulation. Our job as a statutory body is to protect and safeguard the consumer’s interest. We need to make sure that when a price review occurs it is open, transparent and timely. We need to see not just that the rules have been applied, but that there is robust challenge to the system. Was everything done to drive out the cost? Was everything done to bring the cost down? In this situation it was not.
We were told in June that the increase, as in the opening submission from NIE, would be 33%; it was implemented on 10 September. We are saying that this is not how it happened. We are not raising an issue about the gas price increase, and there must be a stark contrast here. When we analysed the increase, there were questions that remained unanswered and remain unanswered to this day. We wish that they were explained, and the review is useful because it can get behind the rules that cause this to happen and see whether they continue to be fair.
Mr Wells:
My understanding is that people are taking a popular stance by asking why the regulator cannot cut NIE’s profit margin — its 1∙8%. However, my understanding from the regulations is that that cannot be done. The regulator has no power to slash that profit in half; that NIE could take a hit of £30 million or so, and pass that on to the consumer as a reduced tariff. I do not honestly believe that that regulation exists within the present framework.
Ms Gill:
That is a fair point. I should clarify to the Committee that, at our last meeting, the Consumer Council did not intend to say that more profit was being made from this increase; however, no profit was lost as a result of the increase. Northern Ireland Energy gets a guaranteed profit margin, and it will get that return on the turnover. Our issue, as we demonstrated at our last appearance before the Committee, is that the profits made by NI Energy, as part of the Viridian group, are 1∙8%. Other elements of the Viridian group have greater profit margins than that, and some of them are unregulated, for example in the area of generation.
One of the examples that I gave was that there are very few assets and returns on the books of Northern Ireland Energy. It is pretty much out there. When it was split up in November 2007, its assets were transferred to various parts of the Viridian group. As I have explained to the Committee previously, the keypad meters had an asset book value of £11 million. A profit margin of 1∙8% was returned on that. With the break-up, that £11 million transferred to NIE Energy transmission and distribution, and there it is allowed a margin of 4∙8%. There is a danger that we could spend all our time looking in a room where there is no furniture, when in fact the furniture could be piled up elsewhere.
Regarding the provision for a profit to be exerted, we are not trying to drive business into the ground or make it unattractive to other businesses in the future — far from it. When we look to the GB situation, we see a test of corporate social responsibility. As our sister body energywatch has identified in GB, the level of return that these companies are making to help with the vulnerable and with energy efficiency amounts to around 1∙25% of their turnover. This is a small amount of money with which to make a huge difference, whether that is in the companies or in their generators. There is something to look at in the regard of corporate social responsibility within their rules, as well as that of legislators.
The Consumer Council has to ask questions and get appropriate answers. An answer for us cannot be a letter to the Committee or a referral to an answer that has been given to the Committee. As a statutory, consultative body, we must be consulted to ensure that we are a part of the process.
That is a huge issue.
Not only do we need to make sure that Northern Ireland Energy makes no extra profit as a result of this, we need to find out whether other parts of the Viridian business have benefited. That is the type of thing that needs to be looked at.
The Chairperson:
I want to pick up on a couple of things. In June, was NIE Energy seeking an increase of 33%?
Ms Gill:
That was its opening position.
The Chairperson:
Going back to the previous session, the impression given was that people had been expecting a 30% increase. In late August, early September, that was the figure that was in the public domain; everybody — media speculation, MLAs — was talking about 30%.
One section of your evidence reflected that added increase, when that figure became 33∙3%. How aware was the Consumer Council that in June, NIE Energy were actually bidding for a 33∙3% increase, and not the 30% that everyone had been talking about? When did the Consumer Council get to know about that?
Ms Gill:
What often happens is that an outline opening position is put forward. Typically, we would then see a drawing out of and a bearing down on every cost that could come out of that system. That may happen rapidly or it may happen over time. As a consultee, we would look at the extent to which pressure seemed to be being exerted to bring that price down.
To return to a previous question: why did we only unearth our issues on Tuesday when the price increase was announced on Wednesday, which did not give us appropriate time for those issues to be addressed? For several weeks, and up until that Thursday evening, we had been working on the figure of 30%. That figure went up 11% overnight, without our knowing. We were then dealing with a submission with a new figure and that meant that we had to go back and check all the figures. Our information was made available and audited; it had to be very detailed information in order to come to our position.
The Chairperson:
Why were you dealing with the 30% figure? Was it only because that was the figure in the public domain?
Ms Gill:
Yes; my understanding of the background to this is that different bits of information were still outstanding —such as the use of systems and so on — and had to come in from different parts of the system. Therefore, no one was sitting with the settled position. Those things were supposed to have been done much earlier; we ended up with an extremely back-ended system. The statutory consultee did not know until after the close of play on 4 September that the increase was now 33% and had to spend two furious days trying to work out what those matters meant.
I will give you an example of where we are at the moment. On Monday we asked about what we perceived to be a gap of £19∙6 million between the revenue that NIE Energy said that it would collect to make a 33∙3% increase and the revenue that the regulator said would be used to get the 33∙3% increase. However, we got an answer only yesterday before coming to the Committee. We have since been advised that we got that wrong because the information that NIAUR put out at the time — and has posted on its website and given to members — was incorrect.
The Chairperson:
Who do you mean by “we”?
Ms Gill:
The Consumer Council; we got that wrong because NIAUR’s information was incorrect. That information remains incorrect on the website and we had to draw its attention to that yesterday. That was not our issue, however; our issue was the £6 million and that has been explained, totally to our satisfaction.
There is an extra £14 million sitting in the system; we are now being told that we failed to recognise that that cost was embedded in one of the figures. Our issue is this: we had figures from NIAUR, without the £14 million, which gave up the figure of 33∙3%; we now have figures with the £14 million, and the figure given is still 33∙3%. I am sure that that can be explained. However, that is the level of detail that we are still grappling with and trying to understand after the announcement.
I cannot express adequately the Consumer Council’s frustration; we want to come to the end of these questions and make sure that every penny is counted.
If we have made mistakes, we will admit to them; however, we are doing our best. I have one staff officer who works on gas and one who works on electricity, battling away and doing their best.
Mr Butler:
The Consumer Council’s letter to the Chairperson of the Committee stated that five fundamental questions were unanswered during the review. You touched on some of them, including the 33% increase. The last point in the letter is about there not being sufficient tension and robustness in the negotiation process between NIE Energy and the Utility Regulator.
There is a perception that the regulator’s office does not challenge and hold NIE Energy to account in the way that, perhaps, some previous regulators did. The letter claims that NIE Energy knew what the Utility Regulator was going to say to the media. Should the issue of the relationship between the Utility Regulator and NIE be part of this review, because many people do not have confidence — probably not even that this review will change anything — that the Utility Regulator is protecting consumers’ interests? I believe you said that there have been 15 price reviews, but the perception seems to be that the regulator just rubber-stamps any price increase sought by NIE.
Ms Gill:
I want to make it clear that when I refer to the regulator, I am referring to the office of the Utility Regulator, the Northern Ireland Authority for Utility Regulation. The Consumer Council works in many areas with NIAUR, and we have great confidence in our relationships with regard to openness and transparency, and information is undoubtedly made available in order to help us to understand issues.
The NIAUR and the Consumer Council have unique and distinct roles. Respect for those roles must be two-way, and there must be equality and parity in how they work. The Consumer Council, as a statutory consultee, must be properly consulted.
We need absolute assurance that there is a sufficiently robust relationship between the Utility Regulator’s office and NIE. The Consumer Concern is concerned about that because there is no energy competition here — customers cannot shop around. The Utility Regulator’s office is the proxy competitor for us all. There must be a tension, therefore, and a means to press energy companies to perform at the highest efficiency levels.
We do not get that sense with regard to this price increase. Indeed, we were disturbed by articles appearing in the press while the negotiation process was ongoing. We never once said that that article provided a pre-announcement amount for the increase.
The key issues with which we were dealing during the consultation process appeared in print while we were still raising those issues, such as the energy industry donating some of its profits or introducing variable tariffs in order to help the vulnerable. Then, lo and behold, we see the proxy competitor explaining those issues in public while negotiations are still continuing. We would not see Tesco releasing such an article for Sainsbury. Therefore, that tension must always be there between the Utility Regulator and the energy industry.
I am not suggesting bad intent. The information may have been released for a very good reason, but we cannot find it. If the thinking was about trying to help the customer to understand the issues and to prepare for the price increases, that is different from dealing with issues that are still under consultation. We need to be wise, reflect and be careful about the information that is released in order that people really do feel that their boy is in there and batting for them.
The Consumer Council examined this price increase in detail in an attempt to see what was extracted from the process. We could identify little or nothing of any substance, and that causes us great concern. NIE/Viridian must be made to feel that they are operating in a regulatory environment. Therefore, when Arcapita took over Viridian, one of the conditions stipulated by NIAUR was for independent, non-executive members on the board. They are not yet on that board.
Why are they not on that board?
The one thing that we do not want to do is lose confidence. The council has every confidence, but the process must be conducted in a way that is transparent and t explainable. People can then understand why they must pay that amount of money for their energy bills.
The Chairperson:
Mr Butler mentioned the evidence that shows NIE was aware of some details regarding the announcement of the price increase. Was that date fixed? If so, when was it fixed?
Ms Gill:
That date was scheduled to be 9 September 2008. We contacted the company asking about the connotations of that date, particularly when people would view that news as a crisis or a disaster. We asked the company how that news would be received from an emotional point of view. At that time, we were also aware that Phoenix Gas was bringing forward its increase by two weeks. Therefore, there would be a double increase on that day, the optics of which, we felt, were very poor.
What we were able to see in the NIE media plan was that on 5 August 2008, NIE knew that an article was going to be sent out to the press. NIE also knew why that article was going to be sent out and what it is going to say. Furthermore, the company was aware that a further statement was to be sent out and that NIAUR were to advise the public that they were meeting with the Committee for Enterprise, Trade and Development on 9 September. That sent a signal to the journalists that that date was to be the date of the price increase.
All of that may have been for innocent reasons and I accept that the regulator has no control over what NIE puts into their media plan. However, that is not our issue; our issue is the level of understanding of who was going to do what —
The Chairperson:
That they were aware of what was going —
Ms Gill:
— and explaining the reasonableness as opposed to exerting the pressure into the system. That is something that needs to be talked about. The Consumer Council is uncomfortable with that.
The Chairperson:
From the perspective of the Committee, I am uncomfortable with that if the Committee is being used as a prop in —
Ms Gill:
I am not saying that. All that I am doing is stating the facts of the plan —
The Chairperson:
— some possible set pieces around those announcements. Certainly, I am concerned with the possible interpretations arising from the NIE media plan containing all of that detail in early August.
Mr Cree:
With respect to the response by the Minister to the chairman of the council on 22 September 2008, can you clarify whether the council is now satisfied with the independence of the review? Furthermore, are you satisfied that the reason given for the failure to consult? Moreover, are you happy with the terms of reference described in that response?
Following on from that, is the council happy with the current regulatory system? Are you satisfied that it could not be improved for the benefit of the consumer? Are there any specific aspects that you feel should be included in the review?
Ms Gill:
In relation to the Minister’s letter, I would like to put on record that the council has been very supportive of the independence of both the mind and approach of Mr McIldoon and the work that he has done. Indeed, the Minister refers to that in her letter. He is known to many of us in the council and the council and providers have always have a very robust, good and challenging relationship with Mr McIldoon.
We have put down a marker. We again have a situation where NIAUR are holding an independent review in which it is involved. However, I do accept from what the Minister has said that no provision exists for a review to be conducted in any other way. Perhaps that is something that needs to be looked at for the future.
From my point of view, the Consumer Council is content to move on. We want to hear from Mr McIldoon today, in order to help build assurance and confidence. We have no doubt that he will be fully engaging and we look forward to engaging with him.
We are not happy with the reason that has been given as to why we were not consulted. We are a statutory body, and feel that it is disingenuous that we were not consulted just because our views were publicly well known. The driver behind this — as the Minister has eloquently expressed to us — is to build public trust and confidence. That is done by engagement and by making every effort to ensure that it is understood and that the confidence is there before it is called. The letter that we sent to the Minister asked her to stop this until it was levelled out; that had to be done.
I think from that point of view, we feel that we have been ignored in the same way because of the conclusion of the consultation process. It would have been better had we been involved in that. I do not mean by getting involved in being the commissioner, or in dictating what should be included, but really by bottoming out what we think a review could usefully do and whether it could satisfy some, all or none of what our requirements would be. Again, we move on, and we are happy with that.
We believe that we need to make sure that the terms of reference are not a further audit of an audit, and that we look specifically at the questions within each of the terms of reference and pin them down as to what is required. That can be done in one of two ways: I can go through each of the terms and give you our view of what they should say, or I can leave them with the Committee. I am happy to do either.
The Chairperson:
We might want to do that when we come back. I think it is important to run through all of the terms of reference as a separate window.
Mr Newton:
I welcome the members of the Consumer Council to the meeting this morning. I think that there are huge concerns about this in the wider community, and indeed having called for transparency on the matter at previous Committee meetings, I think that is absolutely necessary to gain the total confidence of the public in this area.
I have three simple and straight-forward questions. Referring back to what my colleague Jim Wells raised earlier, you were asked to attend meetings on 2 September, 5 September and 8 September but did not attend. What were the channels for those invitations and refusals? You are obviously very enthusiastic about your job, but why where you not jumping up and down at this stage and asking for more time on such an important issue, and make the public aware that you were seeking more time? I would like to understand that area.
You have been complimentary to the Minister, but can I confirm that the Minister and her Department have been generally supportive and valued the work of the Consumer Council in the past? Does the Consumer Council regard itself as a complainant in the review?
You have expressed confidence in the regulator’s decision to appoint Mr McIldoon because of his experience. I take it that you regard his bona fides as acceptable and that his experience, competence and independence in this role have been assured?
Ms Gill:
Perhaps I should say a word about whether or not we attended the three meetings in September. In our view a very back-ended system was occurring and the information was coming in very late. I emphasise that the same thing happened with gas, but we had gas licked and signed off by 1 September, even thought it was being brought forward by two weeks. We were working on that point.
Our audit trail of emails will show — and we stand to gain by learning if they do not — is that we were working on the basis that these price rises would come in and would be explained, and we would be in a position — as we have been previously — to say that the process is open, transparent and robust and that we are ready to go.
I do not want to get into a situation where the Committee has to decide who said what, where, and when. The Consumer Council said that it was very concerned; that things had got too close to the wire; and that we could not go to a meeting without information. The key issue was that no one had the information upon which to have a properly informed discussion; NIE did not, the regulator did not, and we did not. To go into the room at that stage, would have been, as we pointed out, nugatory. It was important that we kept moving and got the analysis done.
We made ourselves available, if we had to, by phone. The regulator’s office and NIE came back to us as quickly as they could on everything that we asked them; I have absolutely no problem with that. However, at the heel of the hunt, we expected that things would be explained and we could move on. There is precedence for the Consumer Council asking for a delay and indeed, delays have been granted. The record will show that we were working on the basis that it was all explainable; we had seen the same thing happen with gas, and we were moving on through.
Once we knew that the increase was 33∙3% and we did our overnight analysis, we needed more of an explanation as to why that divergence had occurred. We genuinely expected to get a response on that that day. I had the same telephone conversation with the authority, DETI, and NIE , and by 5.00 pm — yes, it was late in the day, but we were expecting an answer on the need for that to be withdrawn and reviewed — no answer that we could take to the public had come. We can make the audit available to the regulator, and we showed every intent to move as quickly as we could to a resolution.
In all instances, we have found the Minister and DETI to be accessible and very supportive; we have no complaint in that regard. Certain individuals in particular made themselves available to me day and night and indeed were available to me at 5.30 pm on that Tuesday, trying to help me work through the situation. The DETI officials were well aware that we were looking for withdrawal and wanted to work through what that would mean for the public. The Minister’s letter of 22 September showed that she was listening to the issues that we had raised: we felt that in not being included in negotiations or consultations on the terms of reference, our statutory role had been ignored. The Minister, very respectfully, responded; I only wish that we, as a statutory consultee, had a response in writing from NIAUR.
We do not see ourselves as a super-complainant de facto or any other type of complainant. We are a statutory consultee that has not had its questions answered; therefore, we do not accept that as a reason for not being included in discussions or in working through what the terms of the review would be. The pure and simple fact is that the evidence is not there with which to make a judgement on a price review.
The Consumer Council is happy to accept the credentials of Mr McIldoon, and we know his track record. Rest assured that we will not be coming back in a few months to say that that was ridiculous and Mr McIldoon was not independent. Our real concern is to make sure that the terms of reference are such that the right questions are asked in order to get the right answers for the public.
The Chairperson:
At the previous session, I asked what people felt that they were behind the pillar on. Are members more satisfied on any of those issues now? For instance, the issue of divergence between the price increases here and those in GB has been further addressed by Mr Osborne in his letter to the Committee last week. Mr Osborne picked up on some of the Committee’s outstanding questions and explained that there are two different markets; although there may be further increases in the GB market, there may not be further increases here.
Are you in a position to comment on that? Do you have any confidence in or assurances on those indications?
Ms Gill:
The first question that remains unanswered is why the 33·3% increase that was on the table from June 2008 remained unchanged on 10 September 2008 at the conclusion of the negotiations. There is no response to that. The question seeks evidence that the pressure to drive down costs for consumers in Northern Ireland presents a real challenge to the company. Rather than scrutiny to confirm that certain actions were taken, we need evidence that those actions were applied to the system, and perhaps the review will provide that.
The second question was why there was a £19·6 million, or £25·45 per household, discrepancy in the sets of figures given by NIAUR. We consulted some members of NIAUR, and I can now give that answer to the Committee: we were mistaken about the discrepancy because it was based on NIAUR’s figures, and they were incorrect. We drew the authority’s attention to the fact that they remain so on its website and should be corrected. However, the underlying question of why both sets of figures resulted in a 33·3% increase remains unanswered, but we are happy to report that officials from the authority will get back to us.
NIAUR has not given the Consumer Council a response to the question of why the increase for households here is twice as much as in GB. We saw the authority’s response to the Committee, and NIAUR told us yesterday that the answer to our question was contained in that. As a statutory consultee, you can imagine that we find that unacceptable because we have specific questions that require specific answers.
The letter to the Committee contains many attempts to answer the question but none is evidenced-based. They offer speculative explanations, but we need evidence. The fact is that people who started off paying £18 more now pay £114 more, and the question is why. If the answer exists, the authority should release that information because people need to know the reason. We want to hear the answer and any underlying evidence behind it rather than waiting until December.
We analysed the situation over various periods, such as four years and 20 years, rather than concentrating only on this year. I do not want people to think that we are trying to play about with the figures or to mislead by examining only a small window of time. However, the fact remains that, over the past 10 months, the divergence that we spent many years and a lot of money driving out the system, has returned, and consumers need to know why.
It is worth examining this year’s cumulative increase in Northern Ireland compared with GB and the Republic of Ireland. The increase in Northern Ireland is 53%, the Electricity Supply Board (ESB) increased prices by 25% and prices in GB rose by 19% — that is the extent of the divergence. Since the break-up of NIE and the development of the open market, NIE Energy raised prices by 58%, ESB by 11% and prices in GB increased by 29%. We cannot work on the theory that the other suppliers may impose further increases later. It may be a silly question and an immature way of looking at the situation, but people need answers.
Mr Wells:
That is a crucial point, but the regulator seems to have answered that question by saying that Northern Ireland is in a different cycle of price increase to GB or the Irish Republic. The point, therefore, is not that there has been a big hike in Northern Ireland but what each area ends up paying. In his table —
The Chairperson:
Regardless of the price cycles, there was also an interim increase.
Mr Wells:
Between 2004 and 2008, Scottish and Southern Energy increased prices by 83%, NIE Energy by 75% and N-Power by 74% in 2004-08. Although the 33·3% increase is causing huge pain to all our constituents, if others in the rest of the United Kingdom are bearing a similar level of pain, that could, on the face of it, indicate that the price hike is not unfair and, despite being painful and terribly difficult for all of us, it is not out of line with what is happening in the rest of the country.
Ms Gill:
There is no divergence in what Mr Wells and I are saying. The Consumer Council is not here to score points but to give evidence and explain the situation to the Committee.
We could play about with this, and, depending on whether I went back three or seven years, I could present you with tables that show different pictures. We must achieve a situation in which we are all working towards removing divergences, whether in the Republic of Ireland market or the GB market.
A simple, evidence-based explanation might clear that matter up. All I can say is that we have received what you received. We did not have those discussions, or hear that evidence, in order to say, as I have today, that we have received answers about that £19·6 million and can move on. We are not here to win on points.
Ms Ciara McKay (The Consumer Council):
The Utility Regulator’s letter to the Committee contains a table that illustrates increases in average bills in GB and Northern Ireland from the end of 2004. In January 2005, Northern Ireland consumers paid £60 a year more than the average GB consumer. At the start of this year, that gap had narrowed to £18 per household, although we are now up to £114 per household.
Mr Wells:
How do you know whether, in two months time, GB consumers will have overtaken us with another price hike? We are unlikely to have another price hike in the next six months, but the rest of GB could, and people’s bills might be more or less level again. It is just a matter of the timing of the increases, rather than the overall quantum.
Ms Gill:
We are attempting to satisfy ourselves that a divergence trend has re-emerged. Moreover, the system must allows for greater increases. For example, we would like to know which company — ESB or NIE — bought best during the purchasing window, and what was the critical success factor that achieved that better deal.
We must get in there, be robust and ensure that everything possible is changed in the rules. However, we must not just say that we will consider such factors; there is a real urgency to make sure that we do everything possible for people. We are happy to be persuaded by the evidence of those various cyclical factors, but we cannot be dealt with in the same manner. In the last review, we were welcomed to sit down, see what was going on and declare that everything was open and transparent and that we were satisfied with the process’s robustness, and we will be expected to do the same now. We had no problem then, and we have approved most of the reasons behind this increase; however, we have an issue with one particular area. With the respect due to a statutory consultee, we would like to have that matter worked through with us. If we agree with the answer, we will say, as we said in reply to the previous answer, that we no longer have an issue; the matter is sorted out.
The Chairperson:
Members, we have the terms of reference and the additional points about which the Consumer Council wish to be assured and have included in the terms of reference. We need not go through each of them now. In the next session, we expect to be told whether those matters will be addressed by the terms of reference in the review.
Ms Gill:
Would the Committee be happy to seek assurances that the points we raised will be considered and, possibly, accommodated within the scope of the review?
The Chairperson:
That is what I am suggesting we do, rather than asking you about each matter. For instance, you mentioned the purchasing window. I find that I am still a bit confused about such matters —
Ms Gill:
Join the club.
The Chairperson:
The meeting a couple of weeks ago ended in confusion about the purchasing period for gas and the electricity purchasing window to which you referred. Therefore, that is a matter that might be addressed.
Before addressing the matter of the day, which Jennifer McCann mentioned, about the confusion and concern being felt by keypad customers, I want to address a matter that is relevant to the Committee on the third page of the Minister’s letter of 17 September 2008. That part of the letter suggests that, in case we undermine investment in the industry, we should be careful about what questions we ask about regulation in general.
It is written in fairly stilted terms, but it seems to suggest that if the Committee asks too much, or raises too many issues, we will somehow jeopardise the energy industry here with regard to investment, especially at a time of such uncertainty in the stock and financial markets. It seems to be saying that none of us should be suggesting that there is anything wrong with the system of regulation here.
I am not sure how, on the one hand, we can be told that the terms of reference that have already been announced by the Utility Regulator and approved by the Minister will be competent to ask all the questions that people will want to ask, while, at the same time, we are being told that whatever we do, we cannot question the system of regulation itself or its quality. How do you interpret the third page of that letter?
Ms Gill:
I am not the author of the letter, and the motivation behind it with regard to trying to show the delicate balance within which we all operate is something for us all to take into account. Even before this letter, the Consumer Council made clear to the Committee and further afield that we recognise that we are a responsible body. It would be perverse of us to wish to do something that would cause the end of the gas industry or harm the economy of Northern Ireland. Nor would we want to say anything that sends out a message that we are all Mickey Mouse around here, or a bit crazy and that this is not a place where a company would want to invest because things are being thrown out right, left and centre.
I hope that our tone and balance prove that that is not the role of the Consumer Council. Our role is to look at this issue through the eyes of the consumer, and we all have different lens. Indeed, there are different lens to be applied and balanced. Competition, choice and the ability to shop around are all parlance of the consumer representative bodies. However, there have for a long time in Northern Ireland been competitive markets in which consumers have lost out, or monopoly markets in which consumers have lost out.
As competition is introduced, there must be the necessary balance between what is required for companies to come in and have confidence to invest, against those who have to pick up the shocks, risks and the costs that need to be in the system. In this situation, therefore, we are sitting with a huge cost and a huge risk because of the rules. We have asked for every aspect of the price-setting system to be examined in order to ensure that if changes need to be made then they are recognised and can be implemented.
That is not throwing everything up in the air. That is responsibly saying that if there are parts of the system that can give better, as opposed to different, regulation then we have a duty to identify them and to ensure that they are worked through by NIAUR and by legislators with regard to what needs to be done.
Therefore, for example, we would not agree that some issues are outside the terms because they were part of previous consultations in August 2007 before everything changed. That needs to be looked at because they are the rules that are driving some of the outcomes of this review. So, what we would say is —
The Chairperson:
The Minister seems to be concerned that if too many questions are asked about those matters it might discourage other competition entering the market.
Ms Gill:
That is where communication and the use of words is really helpful and necessary in order to ensure that people have an understanding of the motivations and the balance as opposed to trying to throw it all out.
Consumers need an effective regulatory system here, and we have confidence and have seen it successfully demonstrated in different spheres. We work very closely, as a statutory body, within that with the Minister and NIE. However, we have a situation here whereby we need not only to restore public trust and confidence, but see if there are measures that must be introduced in order to get better regulation and outcomes, whether that is mutualisation or pass-through purchasing. That issue has to be addressed.
I respectfully accept what the Minister is saying, and ensure that, in our communications, I have a responsibility, and the Consumer Council has a responsibility, to ensure that people always understand our motivation for asking a question.
Mr McFarland:
It strikes me that two issues are at stake here. One involves an examination to determine if the regulator did his job properly within the current rules of engagement or framework. The other issue that has emerged — and it is the most important one — is whether the regulatory system is right. Questions are being asked: does the system work properly and does it defend interests? Given that we have an opportunity to examine the entire area of energy costs, it seems sensible to consider whether the system works properly or whether it works against customers. I would argue that it is not just the Consumer Council that has a duty to consider whether the Department is defending the people of Northern Ireland in that matter; the Committee, too, has a duty to do so.
The Chairperson:
That will be a matter for the Committee to consider rather than the Consumer Council.
Although this is a letter to the Consumer Council, it might reflect the Minister’s note of caution to the Committee about where we go in those matters. I am not passing any judgement, but we should try to understand some of those issues.
I want to return to the issue of the day. Perhaps members should have an opportunity to comment on it first themselves. Jennifer has already touched on the issue. Clearly people are very miffed about the letters that they received, while others have not received a letter at all — the contents of the letter are already by the by. Some customers feel that they are losing out. There is some confusion about when the new tariff kicks in. Even those customers who have prepaid their electricity will, in effect, be charged in accordance with the new tariff. People thought that they had a small window of time in which to buy electricity at the lower rate and thereby shelter themselves a little from the increase, but now they feel that were not properly informed about the new tariff.
As I understand it, NIE Energy is telling the media that the matter was a glitch, and the attitude seems to be that it did not intend for it to happen. Nonetheless, it has happened. Are there ways in which such matters can be “deglitched”, as it were? When a customer can show that there has been a discrepancy of some sort and that it has been to their cost, the normal practice of any good business is to offer to rectify the situation and restore them to the position that they were meant to be in. Can that happen in this instance?
Perhaps other members would like to comment on that, too.
Ms J McCann:
I just want to confirm that customers have definitely been given a new 40-digit number to use for the new tariff — I had to use a 40-digit number this morning when I bought electricity on my key-pad meter.
Ms Gill:
A number of different strands is involved, and the confusion that is now being played out demonstrates the complexity of the entire matter. The big issue for the Consumer Council is that those rules are yet another set of rules that work against the customer. When a company announces that it intends to increases its prices, there is a window of time in which consumers can “stockpile”, as NIE calls it. However, that provision is not promoted, the reason being that the company has defined the amount of revenue that it expects to receive next year from customers. If any customers buy significant amounts of electricity in advance at the lower rate, then guess what? The shortfall must be made up by the base customer group.
Therefore, if we, as consumers, buy £1,000 of electricity at the current, lower rate to save ourselves from bearing the brunt of the increase next year, the rest of the customer base has to pick up the costs. We raised that issue before, but it has not been addressed. It is another one of the rules. Infuriatingly, when we asked the company whether it has provided customers with clear information on the option to buy in advance or stockpile, for whatever reason, the company has said that it would be irresponsible to promote that practice because it would mean the poor customers paying for the better-off customers who bought electricity in advance.
It is seen as being our fault, but we are giving out the proper information. Rightly or wrongly, the choice is available. On 11 September, we raised that specific issue in great detail with NIE and NIAUR. Customers came to the Consumer Council, ‘Good Morning Ulster’ and elsewhere to ask whether they could buy in advance.
I want to comment on the nature of the system. Oil or gas may be different from electricity, but, if the Chancellor were to say today and that he was raising the price of petrol, customers would all run to fill up their cars. Given that the choice is available to pay for electricity in advance, information on that provision must be supplied to people so that they do not suffer any detriment.
Such provision exists in the gas market; gas can be bought up until 30 September and the gas that is used after that date will be charged at the old rate. That gives the customer a 20% saving. One may have to fill up many times and go back and forward using cards, which is a laborious process, but a 20% saving is worthwhile for a customer who is not finding it easy to make ends meet. Although the provision is not promoted, it is clear and transparent, and everyone who buys gas up to 30 September will be able to avail themselves of that.
When electricity prices are announced, the customer can continue to buy on their keypad meter. On 23 September, customers are supposed to be supplied with a digit, and every credit that is put in after that date after that up until 30 September is charged at the old tariff, but, from 1 October, it is charged at the new tariff. If the customer has not used what they bought at the old rate, they must pay the new rate from 1 October. One may argue that that is right because every other customer has to pay the new rate, but the choice for that type of payment system is available, and the ability to use it is in place.
People will, probably innocently, think that they are able to buy the electricity and put in onto their meter, but £10 worth of credit that remains unused on 1 October will become £7 worth of credit. Do people know that? The system has not been properly explained, and it is left to the Consumer Council to get our head around it. On top of their other work, it was left to one member of our staff who works on electricity and another who works on gas to explain it to the public this morning.
It seems that the energy companies use the media as their proxy for communicating such issues to customers. NIE said that details of its price rises were out in the media, but that is not the way to communicate with customers. Customers cannot shop around, so it is not good enough to communicate with them in that way. When we consider what we are there to do, we must pick that issue up.
On 16 September, the Consumer Council met NIE and was advised that letters had started to go out on 15 September. In fact, the letters had not gone out, but we were not advised of that, and we were not advised when NIE found that out. It was the media that contacted us to find out whether we knew about the issue, despite the fact that we are the statutory body with complainant status and the fact that NIE is required to consult with us. We have asked NIE for a full evidence-based report of the incident to ensure that we know why it happened. It appears that there was a glitch with NIE’s subcontracted mailing company.
We accept that mistakes happen everyday, but the problem is that customers cannot shop around, and they have not been informed of the price increases. What is being done about the fact that the system is stacked against the customer? What can be done about the fact that people have lost vital days because they were budgeting? The people who availed themselves of the system were not all middle-income earners. It might have been worthwhile for people to have gone to a bank or a credit union and taken a loan for £1,000 to save a third on their electricity bill. It cannot be assumed that the rich get richer using the system of buying ahead — poorer people may also be trying to use such a system.
That point reverberates with what we talked about earlier: does the system meet the needs of the customer? Given that a choice is available, is the company fulfilling its requirement to inform its customers of that choice?
The Chairperson:
Is NIE Energy doing anything differently since it introduced the increases?
Ms Gill:
No.
The Chairperson:
When there is a tariff increase, have customers always had to pay the going rate for using the electricity?
Ms Gill:
That provision was built in, which is different from Phoenix Gas. We have been told that there is a technical issue, but customers do not know technical issues. However, if there is a technical issue, there is an onus to be open and transparent and to look at it through the eyes of the customer. We raised the issue before, as we have a specific complaint about it. However, we got an explanation of the system, as opposed to an explanation of the issue.
You talked about restoring to the previous position. Some people have potentially lost out, but the response from NIE was that keypad customers know what they are doing. However, when we explored the issue, we discovered that there are around 14,000 to 15,000 new keypad customers this year, and they will not know what they are doing. Furthermore, thousands of them became customers after the most recent price increase, so how on earth would they know what to do? We must continue to look at the issue through the eyes of the consumers.
We are also concerned that that is a lack of proper consultation and evidence coming to the Consumer Council, but we will try to get that sorted out with NIAUR. However, at the moment, there is no redress.
The Chairperson:
You said that the Consumer Council is awaiting evidence. We would be grateful if you passed that material on to us when you receive it.
Ms Gill:
Yes, I will advise NIE Energy of that.
Mr McFarland:
You have a raft of difficulties, but where does the Department feature? Why are the statutory authorities, that is, the Department and the Minister, not concerned about your worries? Why are they not taking the problems up with NIE Energy?
Ms Gill:
In fairness, the Department and the Minister have also been blanked. They would not really be involved in this type of detail, which is quite explainable. However, on 11 September, we brought the issue to the attention of NIAUR and NIE Energy who were of the opinion that the information should not be promoted, as no other industry would promote it. They also said that the information was available on the telephone line and on the website. No attempt was made to provide the public with clear, transparent public information. We spent a long time trying to craft the words to provide the correct information, because it is difficult for people to get their heads round. We would expect that we would have representations on our behalf from NIAUR to NIE Energy on the handling of the issue.
Mr Butler:
I do not know whether the Committee should raise the matter with NIE Energy, because, when the 33·3% price hike was announced, NIE Energy promoted the keypad as a way of people getting discounts. However, we are being told that there is a limit to the amount of electricity that people can buy. The whole thing seems to be a fiasco.
Ms Gill:
We are a responsible statutory organisation, and we still encourage people to use the system if it works for them, as it is a magnificent budgeting tool. Unlike customers who use meters belonging to other GB companies, NIE Energy’s keypad meters are not used as a tool to address poverty, but rather as a tool to keep their usage under control. However, they are also helpful for the poorer people in society.
There is a major issue around customers self-disconnecting and rationing. We have carried out a great deal of research on the issue, and it is horrendous to think that people take such measures. That is the real problem.
Mr Butler:
The idea of the meter is good from a budgeting point of view, but the controversy surrounding it will not instil much confidence in the system. As you said, some people could have been buying gas, but now NIE has caused this controversy.
The Chairperson:
People have probably heard gas consumers on the radio talking about the measures that they are taking and thinking that they can take similar measures.
Ms Gill:
During the radio programme, ‘On Your Behalf’, a customer told listeners about their cunning plan. The issue is still a problem and people are taking various steps for business-focused reasons. We are talking about customers who cannot shop around.
That should not be confused with the value of keypads.
Ms C McKay:
There is also a 2·3% discount on keypad meters.
Ms J McCann:
The other issue that I have around keypad meters concerns what happens when the clocks are turned back next month for the winter.
Children will be leaving for school at around 8.00 am rather than 9.00 am on a Monday morning. People will send out their children without breakfast rather than use an electric cooker. Many people do that because they have delayed buying their electricity until the last minute, on a Monday morning. That must be factored in. It happens because when the clocks go back people tend to run out of electricity when it is dark. That should not happen on a Monday morning.
Ms Gill:
In our discussions with NIE we can raise that and any other comments that members have on any of the issues.
The Chairperson:
The Committee thanks you all.
Members will now be briefed by the Northern Ireland Authority for Utility Regulation.
Also attending is Douglas McIldoon, who heads the independent review into the NIAUR’s endorsement of the recent price rises.
Mr Iain Osborne ( Northern Ireland Authority for Utility Regulation):
I will make a few opening remarks. Mr McIldoon may want to do the same. It seems sensible that we then both answer questions. I feel it would be artificial to divide our submissions.
The Chairperson:
That is fine. Process is a sensitive matter on the issues that we are discussing.
The Consumer Council has submitted a letter to the Committee in which five significant questions about tariffs are raised. Since members may want to test how far the review will go in addressing those questions, do you have a copy of them?
Mr Osborne:
I do.
The Chairperson:
That is good. Please start when you are ready.
Mr Osborne:
Thank you, Chairperson.
I will be brief. The regulator heard the concerns that were raised two week ago loudly and clearly — from the Committee in particular, but also from the Consumer Council and other stakeholders. The review will address those concerns through a clear and comprehensible process.
My organisation has answered queries that the Consumer Council raised with the regulator when I appeared before the Committee a couple of weeks ago. Since then, the Consumer Council has asked more questions. We could bat to and fro for weeks or months in a process that is not likely to command public confidence. Hence the creation of a process that is clear; one by which we can obtain an agreed set of accurate information from a respected source.
The concerns that have been raised are of three types.
The first set of concerns is about whether we are regulating effectively — whether the scrutiny process was sufficiently tough and transparent. There were also concerns about policy issues, such as whether risk-based sharing between customers and the company is appropriate. Those are legitimate questions to discuss. Actions speak louder than words — I have every confidence in the robustness of my office’s work and am happy for an independent person to review that work. If I had a guilty conscience, I would not have asked for the review.
The second set of concerns relate to the fact that the subject matter is extremely complex. I accept the Chairperson’s assertion that we were not completely successful in explaining some of the dimensions last time we gave evidence to the Committee. The Consumer Council seems to have satisfied itself about some of the issues that it was worried about a couple of weeks ago, but there are other issues. The review is an opportunity to gather and set out all the issues in black and white so that people can get their minds around a tricky issue.
The third category of concerns is based on why we have not raided the profits of Viridian or transferred money from the network profits to address the price increases. Those concerns can only be addressed by examining the wider framework of Northern Ireland energy policy. There are private-sector and profit-driven energy companies in Northern Ireland. That is not the case for all our utilities — we have a publicly-owned water company. The utility regulator operates in the existing framework. Many of the issues that the Consumer Council mentioned can be addressed by NIAUR, such as how we do risk sharing. However, the fundamental point is that there are private-sector companies in our energy sector that will leave if they do not earn profits or, if they are regarded as being subject to a high political risk, will have to pay a lot more to borrow money. Those companies are part of the framework that NIAUR fits into — we are not responsible for that framework, it is set by DETI. NIAUR cuts costs and ensures that only costs are passed onto consumers — we prevent excess profits. However, we cannot create a profit-free industry, and we cannot set prices below costs, because that is not the framework in which we work. The Committee must grapple with that situation.
I want to comment on the relationship between regulation and politics. How Northern Ireland builds a sustainable energy future is an extremely important political question that nobody has warned the Committee about. However, there is a big difference between energy policy and a politicisation of the technical aspects of regulation. There will be problems if investors see issues, such as how the cost of capital and price controls are established, as the subject of ongoing political debate. The NIE request for a price increase was subject to a process that we consulted on last year. Therefore, any problems with that process should have been flagged up last year — retrospectively changing the rules is the type of behaviour that leads to investors not lending money to companies that operate in Northern Ireland or expecting much more interest on their loans, which will cost consumers money. Therefore, we must be careful about a retrospective politicisation of the technical details and processes.
The terms of reference for the review are wide ranging and are intended to cover all the concerns that were raised. They easily cover the points that the Consumer Council raised. We listed five specific issues that want the review to cover, including, as Jennifer McCann correctly said, the central question about whether the 33·3% increase was justified. We have also invited Mr Douglas McIldoon to make wider comments because many there are many related issues. We invited Mr McIldoon because he has a rare combination of knowledge and experience and a track record as a respected defender of the interests of consumers.
No one seriously questions Douglas’s expertise in this job. I am pleased at that, for I want to move forward as quickly as possible and get a report that puts to bed the issues — whether they are based on concern or misunderstanding. We can clear all that out of the way. Douglas is keen to get input from a range of sources: I will let him speak about that.
We want to get the review underway, but we are also looking beyond that. The regulator is central to the delivery of our energy future. This Committee is the place where these issues must be thrashed out and it would be good to have ongoing dialogue, rather than meeting only when something unpleasant is to be discussed. We are happy to return over the course of the next six or 12 months to give a series of more in-depth briefings on how we do price control, where we are going with renewables and various aspects of our work.
Mr McFarland:
I am comfortable with leaving Mr McIldoon to look at whether the regulator has made the right call. We hope the issue is simple to examine.
I am more concerned by the broader questions of whether we have the right system and whether the regulator is allowed to look at the right things.
Let us go back to the sale of Harland and Wolff. I sat on the DRD Committee in the first Assembly when the Port of Belfast was being sold off. We discovered that in 1988 Harland and Wolff had been sold off, almost for a song, for the good reason that no one would take it on at the time. That business was turned around. The sale of the airport at Aldergrove raised questions, but those who bought it sold it within a short time and made a fortune.
The sale of NIE is still bubbling along. There may have been good reasons for the way the sale was handled, but the question is whether it is still a good deal for customers. I worry about things like the keypad meter business, and the shifting and reorganisation of the company structure. The Consumer Council have said that bits of NIE Energy have been moved to another part of the company, so that, instead of making X amount of profit the company trebles or quadruples that. Another question is whether we should be happy about parts of the company being removed from regulation by the authority. The ultimate question is whether the consumers, the people of Northern Ireland, get a fair deal out of it. Is it right that, because it is a monopoly, the regulator’s hand is tied as to what he can and cannot look at?
It is an opportunity to see whether the terms of reference allow Mr McIldoon to see whether — in the bigger picture, and now that local politicians are back in control — more attention should be paid as to whether that is good for Northern Ireland in the long term.
The Chairperson:
I want to bring in Douglas soon; but first, I want to allow a round of questions on what Iain has said.
Ms J McCann:
Thank you, Iain, for coming before the Committee again.
I know what you mean with regard to energy policy in general. We need a sustainable energy market and we must push for that and include renewables in it. However, what people want to know are the reasons for the price increase. In the absence of competition from other suppliers of electricity, consumers look to the Authority for Utility Regulation to act on their behalf. Consumers need to be assured that everything possible was done, and will be done, to keep prices at a minimum. There is so much muddy water at the moment. However you consider Viridian shareholders or the big companies, it is the consumer who must pay for the day-to-day running costs of this large energy company.
They are not taking any hits on their profits. Money is going into the pockets of their stakeholders on a monthly basis. It is the people out there who fit the bill. Last year, 500 people died from cold-related illnesses. The reality is that people will suffer health problems. The educational attainment of children will suffer because they will be cold in their homes this winter.
Do you think that the terms of reference that are now set will enable you to conduct the review in a clear and transparent way? People out there need answers to those questions. I know that you talked about the prices in England, Scotland and Wales compared to here, but it is still not clear why the price increase here was almost double the increases in those other countries.
People must be assured that the review terms of reference will go far enough. Will we need to consider those terms of reference again to see whether there are other issues that need to be explored and addressed? People want and need answers.
The Chairperson:
The question has been clearly put at this stage.
Ms J McCann:
I am just trying to emphasise the issue from that point of view. It is important.
The Chairperson:
I know, but I am conscious of the time for other members. The question very clearly covers whether the terms of reference will answer the questions that people want answered.
Mr Neeson:
I went through some old files last week and came across an Ofcom document from either 2001 or 2002. It examined how competition could be created in the electricity market. Is the lack of competition at the core of the problem for electricity consumers in Northern Ireland?
Iain made the very valid point of whether we now need to consider the entire energy picture in Northern Ireland and Ireland, bearing in mind that the Committee was very hopeful that the development of the single electricity market would benefit consumers here in Northern Ireland.
Mr Wells:
As you might have heard, there was a debate about who said and did what around the period of 2, 5 and 8 September 2008. You heard the Consumer Council’s explanation and view of what happened. I had a formal discussion with you before the announcement, and you realised that what you were about to announce was a very serious matter. Could some effort not have been made to accommodate the Consumer Council by delaying the decision or giving it more time to discuss the matter?
It struck me that the Consumer Council received information very late, and sometimes not at all. Perhaps that was because of legitimate reasons, but did it not occur to the regulator at any stage that the statutory body that is charged with looking after the interests of consumers was not getting a fair crack of the whip?
Mr Cree:
I wondered why you did not float the idea of a review when you briefed the Committee on 11 September 2008. Was it a subsequent decision that was affected by factors outside of the obvious?
The Chairperson:
Some of those points will recur in other questions and observations.
Mr Osborne:
DETI will undertake a strategic energy framework review, which is sensible and timely. Northern Ireland cannot change the laws of physics and it cannot change how the European Union works, so there is only limited room for manoeuvre. There is a standard European model of how regulation works, which is already embedded in the 2003 directives. It has developed quite a lot since then and it will be further clarified in the package that will go to the council and Parliament.
Good practice exists for some aspects of regulation, and we should aspire to copy that. Many issues must be examined about how the strategic framework works for energy and how it can deliver a more sustainable energy future that will create a buffer from dependence on fossil fuels, ensure that vulnerable consumers are looked after and take competitiveness seriously.
Previous comments on metering may have caused some confusion. We have not stopped regulating it. On the contrary, we moved metering into the network business to ensure that we have proper control of it. In Britain, the suppliers’ ownership of the meters has been a major barrier to the introduction of smart metering. The discussion on prepaid metering and the exact timing of its introduction is fundamentally about dealing with the consequences of not having two-way smart meters whereby an electronic message can be sent to reprogram remotely. We are running a trial with NIE Energy to determine how quickly Northern Ireland can move to that kind of metering. However, we are able to do that only because the meters are in the network and under proper regulatory control.
Jennifer asked whether the terms of reference would be sufficient to reassure people. I will allow Douglas to talk about the extent of questions that he can address. We drafted the terms of reference with the intention of their being wide enough to reassure people. People at home, who do not spend hours poring over such documents, are deeply confused by much of the recent public comment.
The last time that I was here, someone commented that NIE Energy will make more money from the increase, and that message will, no doubt, have gone out to households. People will have that in their minds but, as all stakeholders recognise, it is not true. Reassurance, to a significant extent, comes from the process of the review in which we take time to quash some of the misinformation and reach an agreed fact base. That, I hope, will ensure that all stakeholders start from the same base and result in a calmer and more informed discussion. I consider that the scope of the terms of reference is sufficient. No point has been raised that Douglas cannot address, but I will let him speak for himself about what are his priorities.
Sean asked a question about competition. The price increase is driven by higher wholesale costs that a competitive market would also pass on in the same way as a regulated market. The same debate is happening in Britain, where the regulator is also getting it in the neck because people cannot believe that the price increase can be the correct outcome. Everyone can see that it is a shocking outcome, but that does not mean that competition is not worth having.
The single electricity market (SEM) performed extremely well during its first winter, and a queue of people are now talking to both regulators, North and South, about building new power stations. As far as building the future is concerned, a more transparent market must be created in which people know that the wholesale price is set according to the fair to and fro in the market. However, that is not a solution for the short term, and it is not a panacea when faced with a change in the underlying conditions.
It is not easy to create retail competition in Northern Ireland, in part because it is a small market. To build a retail business requires investment of at least £1 million or £2 million, and with not many customers, profit must be made from each customer and, therefore, it is difficult to get payback. In a small market, it is, undoubtedly, more challenging. Also, given that the wholesale market is completely non-transparent and controlled by the incumbent, it is not surprising that, until November 2007, competitors were rather scared of Northern Ireland. It is enormously important to set a clear trajectory towards achieving greater consumer choice. The SEM is an important part of that, but more must be done. We recently concluded a consultation on the next steps, and that is high on our agenda.
Mr Well asked a question on whether we could or should have delayed the review. We could have delayed it. Indeed, we delayed the spring review of electricity prices by a fortnight so as to give the Consumer Council more time.
There is a risk of an unseemly tit and tat match developing in relation to who should have attended what meetings et cetera. It does not help consumers to have the two bodies that are sticking up for them, fighting in public. The more one needs information, the more useful it is to meet, sit down and talk to people. The Consumer Council has been involved in many of the reviews that we have conducted previously and this one is no different.
However, a review process dealing with electricity prices is always much more complex than one dealing with gas prices where one spirals in towards the final number. With an electricity review one begins several months in advance with some sense of where it is going to land, but many factors such as regulatory issues and continually shifting markets play their part until the price can be properly nailed down
As the Consumer Council has recognised, a percentage increase for electricity somewhere in the low thirties was expected for quite a number of weeks before its announcement. The idea that none of us had any sense of what was coming until a few days before the increase strikes me as a somewhat difficult to understand. However, the last pieces of the jigsaw only slotted in towards the end. If we had had more opportunities to sit down and talk about which bits were clear and which bits remained to be finalised, then we may have had a more harmonious consultation process.
Therefore we have answered all of the questions. The Consumer Council clearly has some more questions and the review is a good vehicle to put all of that together. That, I believe would be more constructive than having a public slanging match.
Mr Cree asked why we did not suggest a review the last time that we this Committee. I would answer that, at that stage, we had not thought of it. It is unusual for an independent body like us to undertake such a process of review. In doing so, we are reflecting the depth of feeling and extent of concern amongst the general public in relation to the electricity price increase.
Our starting point was that people have questions and we will answer them. However, as time progressed, it became clear that approach was not likely to rebuild confidence; confidence amongst households and businesses that they are being treated fairly and confidence for investors that Northern Ireland is a normal place to invest in. Confidence is enormously important and that is why we have gone to the review.
The Chairperson:
Did the Minister write to your chairman and suggested a review.
Mr Osborne:
Yes she did. That was a very helpful outcome after a discussion process.
The Chairperson:
Was it coincidence that the both the regulator and Minister thought that a review would help? Was it a case of great minds thinking alike?
Mr Osborne:
Ministerial letters rarely precede conversations. Having been a Minister yourself Mark you will know that there is usually a conversation in the run-up to a Ministerial letter being sent.
The Chairperson:
Was there just one conversation?
Mr Osborne:
There were a series of conversations and official letters.
The Chairperson:
OK. Was it perhaps significant that that communication transpired ahead of the last meeting of this Committee? Indeed, there are references in your correspondence relating to things being done in time for the meeting.
The objectives of the review are as follows: to establish where the process and outcome were robust; to identify where improvements could be made; to explain the role of regulation in the context of wider energy policy; and to ensure that these findings are understood by a wide stakeholder group. Those objectives seem to be orientated in a presentational manner. Furthermore, they seem to be very much about PR and about making people generally assured about the process. Should the review objectives not be more concerned with fundamentally assuring consumers et cetera?
The stated objectives of the review are very much to send out the message that this was OK and the regulation process in general is OK.
Mr Osborne:
I think that the objectives set out two things. One of those is that they think that we can do better to learn about them. We are a mature organisation, always trying to improve, but people have said repeatedly that it is enormously important to confirm consumer confidence in this process. I have not heard any of the stakeholders saying that this is what we did wrong, and the Consumer Council has not said this is wrong. They have asked a lot of questions, and I do not apologise for the fact that, as well as reviewing the substance, we have set up a process as intended to create clarity and confidence.
The Chairperson:
Although the very first objective of the review is to establish where the process might become more robust, maybe it should establish whether the process might become more robust.
Mr Osborne:
If you would rather replace the semi-colon with an and, and say where it was robust and where improvements could be made, I would be quite happy to take that as an amendment — those first two clearly go together, where it worked and where it did not.
The Chairperson:
The Committee will have questions for Douglas about the bullet points in the Utility Regulator’s submission which deal with the scope of the review. The submission states that:
“The scope of the Review does not include the wide variety of related policy matters which have been the subject of public consultation (e.g., the NIE Energy supply price controls, or the operation of the SEM).”
You are stating that that is because those matters were the subject of previous consultation. People might have been happy with previous consultation, but people are not content to the same extent now that they were. Sean asked a question about the single electricity market, and we reflected on this earlier in the sense that more concern is being expressed that the single electricity market is still too much a market in theory; its benefits are not yet apparent to consumers, although some wholesalers might have benefited from it. Is it right to say that all of those things should be screened out of the review because, even in our own questions about price increases, some of these questions naturally arise. How do you exclude questions about NIE energy supply-price control? Is that relevant to the price outcome?
Mr Osborne:
The way the scope section of the terms of reference works is that there are five bullet points which we are asking Douglas to cover in some detail. The second paragraph states that if there are other observations about how the interests of consumers can be promoted, then we want to hear them. Matters which have already been —
The Chairperson:
Can observations be recommendations?
Mr Osborne:
Yes, of course they can. The matters that have already been thoroughly covered in other consultations did not seem to us to have great value added in having a longer review that covered more material in detail. There are issues relating to, for example, risk management — which is covered in the fifth bullet point — which pop up in the supply-price controls. Those are clearly within the scope.
The Chairperson:
So, if the observations on how the short and long-term interests of customers in the electricity market might be promoted with regard to the price of electricity — if those observations can extend to recommendations, who can those recommendations be made to? Could they be made solely to the regulator, or would you understand that the scope of this review allows those recommendations to be referred to Ministers, the Assembly, this Committee or whomever?
Mr Osborne:
The report is to the regulator, then it will come to us and we will publish it un-amended. It seems appropriate that Douglas can make clear recommendations that the regulator should do this and that. There may be matters on which the Department should do something differently, the Assembly should pass different legislation, the Committee should be doing something or we should go to Westminster or the EU. Observations seem to us to be a reasonable word to capture something which might appear slightly jumped-up if it were expressed as a direct recommendation.
There is scope for those points to be made.
The Chairperson:
Douglas , do you want to address your fan club in the Committee. Although people raised questions about the situation — and some experiences might be recruited to support you in this review — there was a widely expressed esteem for your independence and thoroughness.
Mr Douglas McIldoon ( Northern Ireland Authority for Utility Regulation):
It is gratifying to hear that. At the end of the process, I will be happy if people feel the same way. It is a lonely road for the regulator; he or she is always hung out to dry. If the current situation arose under direct rule, there would have been three days of screaming headlines in newspapers, and that would have been the end of the matter. However, it is good that the elected representatives are beginning to engage in the problem. That is unprecedented.
I was a lonely regulator. The only time that I had a Minister who understood what was happening was when Reg Empey was the Minister. The rest of them had a hour a week to deal with energy, and they did not understand the issues. Their civil servants were hamstrung by the fact that they had to go along with GB orthodoxy, regardless of whether they liked it.
We are in a dreadful situation, but it could be the beginning of a great opportunity for us to fully repatriate energy policy to Northern Ireland. I am sure that you will want to take advantage of that. The regulator can only be as good as the system that is given to him by the politicians. If the system is flawed, do not shoot the regulator; he is only doing his job within a context, to the best of his ability.
Although I have met Mr Osborne several times in the two or three years that he has been here, he and I have never had a discussion about regulatory policy or practice. He is, frankly, taking a hell of a chance — I apologise that that is not Hansard language — he is taking a considerable chance. He does not know exactly what he is getting in respect of the policy. People are saying that they are trusting my integrity, but he certainly is.
As the Committee knows, I have been concerned about a number of issues in the past. Mr McFarland mentioned the selling of airports, for instance. In the past, the industry has been run for the benefit of those who owned assets. This is a poverty-stricken community, in EU terms, and we have particular and peculiar problems. However, people have made a lot of money out of energy, despite our heavy energy prices — or, possibly, because of them. Every time that assets are sold, value is sucked out of Northern Ireland. Some people have got rich on it, but everybody else ends up paying more, because there is less scope for manoeuvre in the next round of energy policy making.
The Government have a tremendous impact on the cost of energy. It will not have escaped your notice that the price increase means that the British Treasury will take another £9 million in VAT from the hard-pressed Northern Ireland customers. The least that the Treasury can do is return that £9 million to offset the energy efficiency levy, for instance. Issues such as that will come up in the examination.
Alan McFarland hit the nail on the head: this is a question of asking whether the regulator got it right on this occasion. I would not want to reopen the other price controls, for instance; they are done and dusted. To attempt to reopen those issues would create regulatory instability. If the regulator finds some reason to reopen them, he may do so. However it would be a mistake and, potentially, destabilising, for anyone else to invite that outcome.
The examination is related to this one event, but it should look also at what is wrong with the system. It should ask whether we can give the regulator a better system. The present energy system is based on a number of contradictions. It was intended that its privatisation and liberalisation would drive down costs. Regulation is about driving down costs; that is what I have spent years trying to do, and that is what Iain is trying to do.
As soon as all that was done, however, the world was seized with a need to deal with carbon policy. Paradoxically, what government does is to drive costs back into the industry without creating the momentum that will deliver the new industry of the future — the sustainable energy industry.
We have not cracked the problem. At least, the British Government has not cracked that problem; perhaps the Committee will. That, however, is the issue that we need to begin to examine. You asked if I would make observations to this Committee. Obviously, I will make a report to the Utility Regulator, but that will be a public document. The Committee may want me to come and talk about it when I complete it. At that stage, it will be up to policymakers to decide whether there is anything in the report that merits further examination.
The Chairperson:
Will the Committee be able to talk to you before you complete the report?
Mr McIldoon:
I have been appointed by the Utility Regulator, so you had better ask him because he owns me at this stage. [Laughter.]
Mr Osborne:
To be honest, my answer would be no. The Committee can call people whenever it wants, but we are trying to clear away the brushwood and then we will know what we are talking about. To get a report on the table that clears the brushwood before we have the next conversation seems to be a sensible, orderly way in which to take this matter forward.
The Chairperson:
There may be other angles on that given that some of the process questions and sequence of communications and understandings have been an issue.
Mr Osborne:
Eleanor made a concrete suggestion with regard to the sequencing of the questions that were examined. That is an issue on which we might wish to reflect, and whether the report can be in stages, for example. It would not be fair to ask us to respond to that immediately, but that seemed to be a good suggestion and worth considering.
Mr McIldoon:
I have catching up to do. The authority set up an e-mail address for me which I can access and which beams messages to my computer at home. Therefore, if anyone wants to say anything to me, whether a company or a consumer organisation, is welcome to do so, and I will have to take into account everything that is said to me.
I see the process of catching up on how regulation works these days — because a great deal has happened since I left — and examining that process working in tandem. I frankly do not know whether I will be able to separate them clearly in time and say that I am going to do this stage first, and it is a discreet stage, and then move on to the second stage. I will have a better idea in a week or two’s time.
What I am clear about is that the present system cannot deliver an energy policy system that delivers all the things that we want. I came here this morning from a National Energy Action (NEA) workshop on fuel poverty. It is a mathematical impossibility to eliminate fuel poverty with the present system. We had acute fuel poverty when the price of gas was 10p a therm and oil was $15 to $18 a barrel. That was before the Government started stuffing things such as carbon costs into the price of fuel. There is no way, under the present system, that fuel poverty will be eliminated. That requires additional policy measures.
Policymakers must wake up to those harsh realities. The system can deliver energy, but it cannot deliver everything. Those are the sort of issues that I would like to examine, and on which I will be coming back to Iain, possibly as a second stage, but certainly in the report that I will make to him.
Mr Neeson:
Would now be an opportune time for this Committee once again to review the energy industry in Northern Ireland? I realise that the industry cannot be examined just internally but with all the external issues, too.
Mr McIldoon:
There are issues that I will not be examining. For example, 70% of households in Northern Ireland rely on oil; that is totally outside my terms of reference and experience. Fuel poverty this winter will be about electricity and gas, but it is overwhelmingly an issue about how does one heat one’s house, and 70% of us heat our houses with oil. That is an issue in which this Committee, and certainly the Committee for Social Development, might well want to take an interest. However, that is an issue about which I will not be saying anything.
Mr Osborne:
I will offer a more bureaucratic answer. DETI has already said that it will review the policy process framework; I am unsure whether the Committee or the Minister will take the lead on that issue. The Committee must gather evidence in order to develop a strategic view that can influence ministerial policy. The two aspects must mesh somehow.
The Chairperson:
You refer to the review of the strategic energy framework. The Committee requires clarification; Douglas said that there could be a risk of destabilisation due to a review of the regulatory process.
Mr McIldoon:
I said that reopening specific price controls could cause a risk. For example, when a company settles on a price control, it operates on the basis of certainty for the next five years or for whatever period is covered. Reopening that price is legitimate if — and this is an extreme example — there is evidence that the company withheld information from the regulator. However, in general, if the process was above board, reopening will create uncertainty and instability, which will affect investor confidence, the cost of capital and so on. There is no point examining reviews that have been completed recently.
The Chairperson:
The role of regulation here is to deliver the same outcomes, in effect, as competition does in other markets. If that is not happening, the Committee must consider whether the role of regulation here is equipped properly.
Mr McIldoon:
At its most effective, regulation should covers areas to which competition cannot apply, such as the monopoly aspects of the business, training and development and so on. Northern Ireland has always had a supply price control. England abandoned that control, because they believed that competition would exist without it. It seems to me that it was a mistake to abandon that, because, interestingly, nobody to whom I have spoken considered that prices would have been better held down in England if supply price controls still existed.
In the electricity industry, competition is extraordinarily difficult because the main investment is in generation. Generation investment is lumpy; its effects are such that the investment decision is made for the private interests of the investor. However, the consequence is a public effect that impacts on network development. Private-sector investment in generation must be facilitated cautiously to ensure that the market delivers the best possible outcome. It is less significant in a large country, where there are 50 or 60 generators and one is replaced annually. However, it is more difficult for smaller entities — which have two or three generators only — to find replacements. My predecessor recognised that issue a long time ago. That single investment decision affects the profitability of all other investment decisions and the price of electricity, and, furthermore, it may be in the wrong location. Therefore, classic, textbook competition can deliver the best outcome if it is harnessed properly to a social end. However, that may not always be easy to achieve in a market as small as ours.
The Chairperson:
Do you have sufficient scope to explore those issues without destabilising the situation to such an extent that the sky falls in on us?
Mr McIldoon:
The argument about upsetting investment confidence was always thrown at me. Ironically, I was hung out to dry because the shareholder interests felt that they were being attacked. In reality, most of the capital investment is always here anyway. No one will remove the wires and power stations; ownership may change, but they are still here.
The regulatory environment that is created will determine the new investment that is won. I had two fascinating sessions with investors when the Moyle inter-connector was mutualized and when the gas pipeline was mutualized. I was asked many probing questions by banks, which were advising investors about the stability of that framework. Those projects were financed at a low capital cost because they were linked to long term bonds and long term price controls.
The regulator creates the confidence for people to invest. Being radical does not mean that investor confidence is destroyed. The two are compatible. The notion that the issues must be tiptoed around is ill advised. Radical solutions may be perfectly compatible with long term investment confidence and the security of those investments.
The Chairperson:
The Committee has discussed investors’ confidence and the issue was touched upon in the Minister’s letter to the Consumer Council. If that level of confidence is considered alongside moves to auction off parts of Viridian, it is possible to conclude that the current price rise is an attempt to make the NIE assets that are for sale more attractive. I do not believe that people have made that assumption but, given those two developments, it is a possibility.
When referring to “investor confidence”, Mr Muldoon, do you have in mind potential buyers of parts of the electricity business, or are you thinking of investment by competitors?
Mr McIldoon:
Existing assets may change ownership — many of them have — but those assets remain in place.
It does not much matter to customers whether there is a change in who owns the network carrying electricity. It was owned by Viridian, which was subsequently bought by external investors. Phoenix has changed ownership a couple of times. That is of no concern because it does not affect electricity or gas that comes into houses.
Of more concern is whether a framework exists that encourages investors to support new industries, and new renewable industries in particular. It is extremely questionable whether the present framework is capable of delivering that. About four years ago, when I was doing the job that Iain Osborne now does, people in various renewable sectors stated clearly that the framework was not adequate. The framework demanded a high capital input, but it failed to provide the stable revenues that investors sought or low prices to customers.
The Chairperson:
By framework, are you referring to the regulatory framework?
Mr McIldoon:
I am talking about a framework that is set by politicians rather than one that is drawn up by regulators. The political framework is unsatisfactory for the industry’s development, not the regulatory framework.
The Chairperson:
Therefore, is it time to move beyond the strategy of having no strategy?
Mr Osborne:
I very strongly agree with that. The regulator will react pretty ferociously to suggestions that it should change how it conducts price control or tariff approval. As Mr McIldoon has said, the process that NIAUR employs is invariant to ownership.
It is a case in point about the dos and don’ts of politicisation. When we come to reset price controls, it is perfectly reasonable to have a conversation about who bears what risk, the cost of capital, and so forth. However, if you had that conversation in 2007, and consulted about the matter in public, the Consumer Council and all other stakeholders have had their say, the rules have been set. You cannot change them retrospectively because you are in a tight corner and looking at a big price increase. If that type of action is taken once, people’s confidence is shed; if it is done with any kind of frequency, investors start to comment that Northern Ireland looks like Venezuela and, therefore, they will not spend money here.
Mr Hamilton:
You would be Caracas to do that. [Laughter.]
The Chairperson:
I want to ask specifically about the five points. You said that the five points that were identified by the Consumer Council can all be embraced in the scope of review. Are there issues with any of them, or any particular points that you want to make about them at present?
Mr Osborne:
There is nothing to add. We have already given answers to the Consumer Council, which came back with further questions. The review is a good way to sketch in the details.
Mr McIldoon:
It says that the five fundamental questions do not feature in the terms of reference. I expect that my report will provide comments on and answer each of those questions. The fact that they are not explicitly mentioned in the terms of reference does not mean that they will not be dealt with.
The Chairperson:
Therefore we can assume that they will be dealt with.
Mr McIldoon:
You may take it that way.
The Chairperson:
Thank you. That is helpful. The final bullet point on the scope of the review states that Mr McIldoon has been asked to examine:
“Any regulatory policy areas that should be addressed to improve effectiveness and fairness of risk management in the NI energy industry.”
I am conscious that there appears to be tension between being able to look at some regulatory policy areas and yet, at the same time, not do injury or raise fundamental questions about the regulatory regime in general.
Mr Osborne:
I do not believe that that should be a concern.
The Chairperson:
I am just worried that, later on, the impression will be that they are “now you see it, now you don’t” terms of reference.
Mr Osborne:
Two weeks ago, there was discussion about the way that the NIE procures its power through wholesale auctions and the fact that, on the back of that, there is path through to customers and a low cost to capital in return. The Consumer Council, perfectly reasonably, pointed out that that could be done differently. The company could be given some of the wholesale risk; that is not a new idea. The regulator has already undertaken work to review the ways in which risk is shared and the process of evening that out from one year to the next. The review is being conducted. Consultation has already covered the returns that the company can make. We have developed a strategy. That is exactly the type of question that can be addressed through open, transparent consultation. We can cover those issues in the review. If there is a case for change, it can be carried out through an orderly process. That is fine.
The Chairperson:
Can the questions that were raised about the purchasing window be dealt with?
Mr Osborne:
Yes.
Mr McIldoon:
Obviously, the principle can be addressed. However, you will not get a firm recommendation that a particular form of gas or coal purchasing should be pursed. I do not have the expertise to do it —
Mr Osborne:
The point that is being made is not about whether, if we had been buying, we would have bought a particular contract on a particular date and the outcome would have been better; but more about the structure by which the company is incentivised and whether it carries any risk if it screws up — excuse me, Hansard — or if it makes mistakes.
The Chairperson:
The previous suggestion that was made to the Committee was how the purchasing window operated on electricity, which — à la the football transfer window — in effect, meant that people ended up paying inflated prices.
Do you want to comment further on that? Can the review make recommendations as to whether there should be relaxation of that measure? Is the measure imposed in the way that we were told it would be?
Mr Osborne:
It does exist: that is now the structure. It is definitely worth looking at. Those matters are regulated by the Subsidies and Countervailing Measures Committee now that we sit jointly with the South. We have had a discussion with that committee looking about that. They are clearly within the terms of reference, and if Douglas were to make observations on that point, that would be constructive.
The Chairperson:
Which specific point, with respect to the terms of reference?
Mr Osborne:
The transfer window point or perhaps:
“effectiveness and fairness of risk management”:
Wholesale procurement is basically about risk management.
The Chairperson:
Does anyone else want to make points?
Mr Newton:
I want to make two basic points about consumer confidence.
Iain opened his remarks by saying that he had listened to this Committee and others as he set up the independent review. I take some credit for having raised with you on a couple of occasions the transparency issue.
I want to clarify a point that the Chairperson touched on earlier. It was your decision to set up the independent review. Will you confirm that?
I refer to the last point of the “Scope” section of the annex:
“Any regulatory policy areas that should be addressed to improve effectiveness and fairness…”
Is your regulatory process comparable with best practice anywhere else in Europe? Is it as robust as that which exists in other European countries?
Mr Osborne:
The first question was about our decision to set it up: we drafted the terms of reference, we wrote to people and we will be paying for the review. As I made clear in response to Mark’s question, we took that decision following helpful discussions with DETI. The Minister wrote to us and made clear that she thought it a helpful step.
As to whether Northern Ireland regulation is comparable to best practice, “best practice” means taking account of the particular circumstances of the market in the detail of regulation. For all sorts or reasons, Northern Ireland is pretty unusual in Europe. We take a robust approach to driving out costs and we are well up with best practice. I speak partly from my experience of sitting in European Commission and observing national regulators. Without naming names, some national regulators are sometimes a bit soft on state-owned companies. The degree of cost that we take out through price controls stands up well to scrutiny.
The Chairperson:
There are no further points. Thank you, Mr Osborne. The Committee may be in touch with you again, depending on how well we can track the course of the review. You have said that you would prefer that the Committee talk to Douglas directly in this sort of format only after the conclusion of the review. We might want to consider further how we can continue to engage or be kept apprised of things. Other issues will arise. No doubt, members will read reports that the review might look at this or that, so the Committee will have to have some sort of contact with what is happening, in that sort of situation.
Mr Osborne:
I understand that, and I reiterate my offer to come in and brief the Committee more closely on the complexities of what we do.
The Chairperson:
Thank you.