Posted on Wednesday 26 September 2012 by Ulster Business

John Simpson

Northern Ireland is a relatively small administrative region with a top-heavy hierarchy of administrative structures.

The nature of the governance relationships is well illustrated in the delivery of services by the main public utilities: electricity, gas, water, public sector housing and public transport. The formulation and delivery of policy for 1.8 million people in each of these areas combines a spectrum of the Executive, Ministers, civil servants, quangos, and private sector providers. Across the spectrum, they engage in policy making, public sector spending, operational delivery, public accountability and commercial trading.

The delivery of services by public utilities is complex and politically fraught. Whilst there are no agreed firm proposals for change, there are known to be senior policy officials dealing ideas on the reform of Translink, the Housing Executive and NI Water which are all 100% Government owned. For each of these organisations there is the potential for improvement through governance changes and the introduction of forms of commercial incentives.

For electricity and natural gas, the ownership rests in the private (or semi-state) sector but the operational outcomes are significantly influenced by official regulation through the NI Authority for Utility Regulation (NIAUR: the Regulator).

The Regulator has a formal legal remit within Northern Ireland. However, in an example of cross-border co-operation, the Regulator is now a working partner with Irish equivalents in developing the still imperfect all-island Single Electricity Market (SEM) and Common Arrangements for Gas (CAG).

These all-island institutions have produced some decisions that are having a useful impact. If there is a criticism it is that their decision making is inadequately explained. Press statements and news reviews from (or on behalf of) each are rare. For example, the SEM does not publish contemporary information on the all-island wholesale price setting as a feature of competition between the electricity generators.

Within Northern Ireland the Regulator plays an active role in a range of issues helping to determine gas and electricity prices and the financial structure of the several businesses.

The role of the Regulator is less straightforward than is sometimes assumed. The deceptive statement, that the Regulator must ensure – through price controls and approving capital investment and operational costs – that customers' bills are kept to a minimum, needs to be qualified. The judgement on least cost to customers must be against a background of a sustainable, secure industry earning an acceptable profit or rate of return that attracts continuing investment. Least cost is a constrained concept.

Just to point to the inter-related variables affecting customer prices is enough to demonstrate the implicit tensions. Customers might benefit in the immediate short-term if capital investment is severely restricted. They might be more concerned if inadequate investment increased the risk and probability that there would be more frequent power outages in the future.

The Regulator's assessment is further compounded when there are other policy determinants as well as the continuing least costs to customers. Government policy for electricity supply is that, by various dates in the future, stated percentages of electricity consumption should be electricity from renewable sources. This gives the Regulator a challenge to consider the additional investment costs necessary to ensure that renewable generators can have acceptable unconstrained access to the electricity grid.

For the electricity sector, the economics and financing of the grid is now a serious challenge. Since official policy for an increase of electricity from renewables is in place and since that policy decision interacts with aspects of regulation, the remit for the Regulator now needs to be assessed in that wider context. Least cost is constrained to allow incentives for renewables.

The trade-off between competing objectives is a challenge to the Regulator. The challenge adds to the obligation on the Regulator not only to make determinations on prices, investment and allowable costs but critically to demonstrate the main features of the regulatory decision making. The Regulator is an independent decision maker. However, that process needs to be founded on explicable evidence presented with enough detail to persuade the stakeholders and customers rather than be presented as a bald decision.

The recent and continuing review of the performance and costs of NIE, as the owner of the transmission and distribution grid in Northern Ireland is proving contentious. A final regulatory determination is now not expected until 23 October 2012. At that stage, if NIE does not accept the outcome, a referral to the Competition Commission might be made.

The final determination is now made more complex by a recent challenge to NIE on the implications of changes in its accounting policies for current and capital spending since 2006.

This short note is not the place for a digression to comment on detailed questions. However, one general question on expectations does emerge. How far should the Regulator adopt an aggressive and adversarial approach? Alternatively, to what extent should a Regulator's determination be built on a shared and agreed evidence base?

The current review may be read as leaning to the former (although the Regulator would disagree). That leads into the unanswered question: who regulates the Regulator?

Since the Regulator has responsibilities for the long-term sustainability and security of the electricity and gas industries, how are these responsibilities affected by wider apparently non-regulated investments. Two major investment and operational features are currently, in different ways, operating to the cost disadvantage of electricity customers and another potential development merits scrutiny as a support for the gas industry.

The Regulator takes a passive stance on these issues. Indeed, there would be concerns about his legal jurisdiction.

Electricity customers are at present paying extra because the all-island grid is incomplete. A critical new section between Tyrone and Cavan has been planned for several years but has been stalled, more than once, in terms of seeking planning permission. This is costing Northern Ireland customers more than £20m a year. The Regulator, correctly, says that NIE has the licence obligation to plan the grid efficiently and economically. He then adds somewhat passively that the Regulator will support the planning application at the enquiry.

Should the Regulator and/or the Minister take a more pro-active stance to influence the processes? This link is also relevant to making the all-island grid more adaptable to increased generation of renewable energy, much from western counties including Donegal.

The unexpected failures in the Moyle Interconnector to Scotland are now costing customers an extra £14m each year as a consequence of a guarantee signed with other Northern Ireland suppliers to make up any deficit in the Interconnector debt repayment obligations if the system is loss-making.

This is unexpected and restricts at least the flexibility to import or export energy to best balance the interests of customers and renewable generators. Could the Regulator be asked to take a supervisory role on the decisions of Mutual Energy in the interest of local customers? If not, why not, and what other recourse can be used?

Finally, there is the still unquantified prospect of natural gas to be tapped in Fermanagh or Leitrim. Should the Regulator take a positive stance to encourage this assessment and confirm the best interests of customers?

The Northern Ireland regulatory regime is under challenge. Is the Minister willing to reconsider the width of the regulatory remit? And should it be reassessed and the operational philosophy re-examined?

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