ISIN numbers: Northern Ireland Electricity Networks Limited
XS0085211315 and NIE Finance PLC XS0633547087
Northern Ireland Electricity Networks Limited (NIE Networks) has
submitted its response to the Utility Regulator’s draft
determination on NIE Networks’ Transmission and Distribution Price
Controls 2017 – 2024. The draft determination is available on the
Utility Regulator’s website at
http://www.uregni.gov.uk/
The Executive Summary of the response is provided below.
The full response will be available within the next few days on NIE
Networks’ website at
http://www.nienetworks.co.uk/RP6Response
EXECUTIVE SUMMARY
Introduction
NIE Networks is the owner of the electricity transmission and
distribution networks in NI and is the electricity distribution
network operator, serving all 860,000 customers connected to the
network.
NIE Networks is a regulated company and its business activities
are overseen by the UR in NI.
The role of the UR is determined under legislation and its
statutory principal objective in relation to electricity matters
is:
“To protect the interests of
electricity consumers in Northern
Ireland, wherever appropriate by promoting effective
competition between persons engaged in or in commercial activities
connected with the generation, transmission or supply of
electricity.” 1
In carrying out its functions, the UR should act in the manner
best calculated to further the principal objective, having regard
to (among other things):
(i) The need to secure that all reasonable demands for
electricity are met; and
(ii) The need to secure that licence holders are able to
finance the activities which are the subject of obligations imposed
under applicable NI energy legislation.2
[1] Article 12(1) Energy (Northern Ireland) Order 2003.
[2] Article 12 (2) Energy (Northern Ireland) Order 2003.
RP6
Business Plan development
NIE Networks submitted its business plan for RP6 to the UR on 29 June 2016. Extensive
planning, analysis and consultation were carried out to ensure that
the plan for RP6 delivers benefits
for current customers and sets the foundations for the future.
Maintaining and expanding the network to meet customers’ needs, now
and in the future, requires continuous assessment, innovation and
investment.
In developing the plan NIE Networks considered a range of
factors.
- Delivering the required services at least cost.
Throughout the process of developing the plan NIE Networks has
worked hard to ensure that the allowances it is seeking only
include work which is strictly necessary to enable it to carry out
its transmission and distribution functions to an appropriate
standard and to provide a network which is fit for purpose for NIE
Networks' customers.
- Ensuring a safe and reliable network. NIE
Networks' aim is not only to protect customers in respect of the
cost of using its networks but also in respect of the safety and
reliability of supply. The availability of a reliable
electricity supply is important to business as well as domestic
customers and enables NI to compete effectively for inward
investment.
- Balancing the needs of current and future
customers. It is important to balance the interests of
different generations of customers, not to defer works which ought
properly to be undertaken now, invest responsibly in innovation for
the potential benefit of future customers and to balance the
interests of different groups of today’s customer (for example,
rural and urban customers).
- UR guidance. The UR published detailed guidance
on the extensive information it requires from NIE Networks to
enable it to assess NIE Networks' plans and set allowances for its
activities. Following this guidance has been central to NIE
Networks' approach to preparing its business plan.
NIE Networks has taken a detailed and transparent approach to
preparing its RP6 Business
Plan. This has included reviewing the condition of the
electricity network, carrying out detailed engineering studies,
analysing costs, undertaking benchmarking, reviewing industry best
practice, and importantly, considering the long term strategic
issues facing the electricity network. The most important
strategic issues are: ensuring the network is fit for purpose as
the electricity sector faces the challenge of climate change
through decarbonisation and how to manage an ageing network over
the years ahead.
The NIE Networks Board of Directors was fully engaged in the
design, development and preparation of the business plan. It
met regularly during the development of the plan to lead and
provide strategic direction to management, and to scrutinise and
inform NIE Networks' proposals. Directors supplemented formal board
meetings with frequent meetings with the management team and
subject matter experts. The final business plan was reviewed and
approved by the Board for submission to the UR.
The UR's DD
The overall level of engagement with the UR since NIE Networks
submitted its plan in June 2016 has
been positive, and a significant improvement from RP5. The UR established a process to lodge
new queries with NIE Networks on a weekly basis, with the
expectation of a ten working day turnaround for response by the
company. More than 300 individual queries were raised across the
eight month duration following the submission of NIE Networks'
RP6 Business Plan in June 2016.
Where the UR did not fully understand NIE Networks' submission,
NIE Networks sought to clarify, provide further information and
explanations, often by means of face to face workshops, so that the
UR is in a position to make a balanced judgement on the appropriate
allowance or approach.
The UR published its DD for RP6 on
24 March 2017.
Notwithstanding the good level of engagement leading up to the
DD, there are significant unjustified shortfalls in the DD
allowances compared to NIE Networks’ RP6 Business Plan.
The scale of these shortfalls is such as to give cause for very
significant concern on the part of NIE Networks’ Board of
Directors. Under the DD, NIE Networks would be compelled to
expend more than the allowances the DD envisages for the same
scope, with resultant unfair detriment to NIE Networks’ financial
position and credit rating and adverse impact on the financial
position of the shareholder. The aim of the Response therefore is
to explain where these shortfalls arise and the errors in the DD
which have led to these shortfalls. NIE Networks also identify
areas where further engagement is required to clarify the
allowances and price control mechanisms that will apply.
NIE Networks hopes that it can work closely with the UR as it
prepares the Final Determination so that these issues are addressed
by way of a mutually acceptable outcome.
The UR's revised timetable for the RP6 price control provides for the UR to publish
its Final Determination on 28 June
2017, less than six weeks after the deadline for receipt of
comments on the DD. It is important that the UR gives full
consideration to the very significant concerns raised in this
response within the tight timescale prior to the publication of the
Final Determination.
In Summary – NIE Networks’
concerns with the DD
The DD follows the same basic building blocks used by Ofgem in
setting Great Britain
("GB") electricity price controls, except for market
operations, an activity that is not carried on by the GB
Distribution Network Operators ("DNOs"). The core
building blocks are:
- Direct capex
- Indirect Costs and Inspections, Maintenance, Faults & Tree
Cutting ("IMFT")
- Non-Network IT
- Market Operations
- Real Price Effects ("RPEs") and productivity
- Pensions and Rates
- Financeability and WACC
There are significant shortfalls in the DD allowances compared
to NIE Networks’ RP6 Business
Plan.
A high level summary of the key issues is provided in the
remainder of this Executive Summary. The detail is provided
in Chapters 3 to 12 below.
1. Direct capex (Chapter 3)
There has been significant engagement with the UR on direct
capex. There is agreement on many aspects of the plan, including on
the need for major transmission asset replacement and the majority
of the distribution asset replacement. However, there are
shortfalls in the allowances proposed by the UR in the DD. These
are primarily in the unit costs allowed for the work. The UR's
errors in its approach to unit costs allowances arise from its
failure to give sufficient consideration, across a number of capex
areas, to the nature and scope of the work and the latest available
RP5 outturn information as well as
its reliance on inappropriate data sources. Further, there are
errors related to UR’s approach to setting allowances related to
Electricity Safety, Quality and Continuity (Northern Ireland) Regulations 2012. The
aggregate value of these shortfalls is £21.1 million compared to
NIE Networks' revised proposals put forward in this Response. There
is also a shortfall of £2.5 million in respect of the proposed
allowance for severe weather events. The detailed explanation
of these shortfalls is within Chapter 3 below and accompanying
Annex 3.1 which should be read together. In summary, NIE
Networks considers that the UR has no proper basis for these
disallowances.
NIE Networks also addresses a number of issues relating to the
structure of the price control and other issues associated with the
UR's approach to provisionally determining direct capex allowances.
In particular, the UR has agreed in principle that investment is
required to address the low carbon transition and innovation, which
are new cost categories. Unfortunately, the allowances proposed by
the UR are inadequate and will not allow NIE Networks to address
the changing demands customers are placing on the network. In
addition, the requirements and conditions attached to proposed
innovation projects are unreasonable and there is an inadequate
allowance and price control mechanism to cater for low carbon
technology growth.
NIE Networks hopes that the remaining issues identified in this
Response can be resolved so that it has fair and reasonable
allowances to complete the programme of work required.
2. Optional Investments and Stakeholder Engagement
(Chapter 4)
As part of the development of its RP6 Business Plan, NIE Networks sought to
understand the views and opinions of its stakeholders regarding the
type and level of service they expect, and the prioritisation of
delivery of these services within reasonable funding limits.
This included establishing the Consumer Engagement Advisory Panel
which comprised NIE Networks and representatives from the UR, the
Consumer Council for Northern
Ireland and the Department for the Economy.
Arising from the customer and stakeholder engagement exercise, a
number of investment options were identified which would enhance
the resilience of the network to severe weather and improve the
quality of service for worst served customers. The options
include:
- investment to strengthen the 11 kV overhead line network,
costing £25.6 million;
- additional investment to increase flood defences, costing
£2.6 million;
- accelerated tree cutting, costing £0.7 million; and
- investment to reduce the frequency and duration of unplanned
power cuts with an emphasis on worst served customers, costing
£16.5 million.
NIE Networks is disappointed that, in the DD, the UR has not
considered these projects in any detail. In particular, NIE
Networks' RP6 Business Plan
highlighted the vulnerability of the 11 kV overhead line
network to ice accretion when weather conditions are extreme.
The impact of ice accretion events on homes and businesses can be
significant. For example, the time required to restore supplies to
all affected customers after such an event may be of the order of a
week or longer depending on the area affected. The impact of
widespread power cuts like these is often felt not just by domestic
customers but also by businesses in the worst affected areas.
This can have a knock-on effect on the local economy.
The most vulnerable parts of the network are the high ground
areas in South Down, on the Antrim Plateau and in the Sperrin
Mountains. NIE Networks' RP6 Business
Plan proposed strengthening the network in these vulnerable areas
over a 15 year period. Exclusion of this investment, as
proposed in the DD, would not allow NIE Networks to improve the
resilience of network in these rural areas. Appropriate
investment would be required to address the reliability of the
network to severe weather in advance of the introduction of any
changes to the Guaranteed Standards of Service ("GSS")
regime for severe weather.
In addition, the UR has failed to propose an adequate allowance
to fund the enhanced programme of stakeholder engagement put
forward by NIE Networks to seek to satisfy the UR's requirement
that NIE Networks adopt a stakeholder engagement programme in line
with GB DNOs. NIE Networks submits that such an allowance should be
made during RP6 (or, alternatively, a
lesser programme of stakeholder engagement should be agreed that
can be funded from NIE Networks' existing allowances).
3. Indirects and IMFT (Chapter 5)
In preparing its RP6 Business
Plan, NIE Networks commissioned economic advisors, NERA, to
complete cost benchmarking studies using the approach adopted by
Ofgem for the most recent price control for GB DNOs. NERA
also benchmarked NIE Networks using the models selected by the
Competition Commission, now the Competition and Markets Authority
("CMA") for RP5. Those
studies demonstrate that NIE Networks is among the most efficient
DNOs in the UK.
In its DD, the UR has departed from the benchmarking approach
adopted by Ofgem and uses bespoke benchmarking models to determine
a 2% efficiency gap. There is no basis in principle for the UR to
adopt this approach and the outcome for NIE Networks is irrational.
The DD fails to give due consideration to NIE Networks’
benchmarking submission. Specific errors in UR’s modelling
include:
- the incorrect inclusion of indirects costs for connections,
incorrect treatment of wayleave payments and an inappropriate
regional wage adjustment;
- a failure to account for any change in efficient Indirects and
IMFT costs due to changes in the volume of required work, for
reasons such as growth in NIE Networks' allowed capital programme,
new regulations or the cost of meeting higher standards; and
- basing the RP6 allowances on
forecast data for 2015/16 rather than actual data. NIE
Networks proposes the baseline should be set by reference to the
average of four years’ historical data.
NIE Networks also seeks clarification regarding the treatment of
indirect costs for D5 projects.
The aggregate value of the shortfall on Indirects and IMFT is
£49.3 million.
The UR’s analysis excludes the indirect costs associated with
innovation projects which forms part of the shortfall in the direct
capex allowance referred to above.
4. Non-network IT (Chapter 6 and Chapter 5, Section 5)
The DD proposes to disallow a number of IT projects set to
deliver benefits during RP6 and
future price controls. The projects which have been
disallowed include:
- a robust IT system for Regulatory Instructions and Guidance
("RIGs") reporting, which would have clear benefits for customers
to improve transparency and robustness of reporting;
- a condition-based risk management system which would be used to
optimise asset investment decisions over the long term. This system
has become the industry standard in GB for reporting health and
criticality indices which the DD now requires from NIE Networks
during RP6; and
- basic time recording systems that would help us to optimise the
planning of staff to deliver an efficient service for
customers.
In disallowing these projects in the DD, the UR is
systematically and irrationally disadvantaging NIE Networks when
compared to GB DNOs, the companies NIE Networks is benchmarked
against. The UR should adopt a balanced approach and allow these
projects in the Final Determination, enabling NIE Networks to
deliver value for customers and providing a level playing field
between NIE Networks and the GB DNOs. The aggregate value of the
shortfalls in non-network IT capex is £8.9 million.
The UR also proposes to include non-network IT opex within the
scope of aggregate benchmarking for Indirects and IMFT costs.
In adopting this approach, the UR has effectively failed to provide
a discrete ex-ante allowance for some cost line items that are not
included in the benchmarking analysis.
As regards metering data and registration services costs, the UR
has failed to take into account the insourcing of business process
outsourcing staff from Capita during RP5 when assessing manpower levels for
RP6. This results in a
shortfall in the proposed allowances of £1.7 million. There
is also an incorrect assumption that £1.7 million of IT savings
will be achieved with the managed service re-procurement. The
actual costs from the procurement process are now available and
were provided to UR. NIE Networks expects that the UR will correct
these errors in the Final Determination.
5. Market Operations (Chapter 7)
NIE Networks’ market operations activities relate to meter
installation and certification services, meter reading and the
provision of metering data and registration services to support the
operation of the retail and wholesale electricity markets. This
includes operation and management of major IT systems that are
central to enabling wholesale and retail market competition.
The allowances proposed in the DD are insufficient to finance
these activities. The UR has failed to recognise relevant trends in
historic costs and market developments and has disallowed new
costs. In particular:
- as regards direct metering capex, the UR has failed to
recognise that RP6 recertification
unit costs are directly comparable with RP5 certification unit costs;
- in addition, the UR has failed to have regard to the challenges
NIE Networks faces in satisfying the unique meter type demands of
the NI market and the associated impact that this has on its costs;
and
- as regards indirect metering costs, the UR’s comparison of data
is not on a ‘like for like’ basis and no allowance has been made
for new costs including incremental meter reading due to annual
customer growth, the requirement for meter inspectors and
incremental IT costs associated with RP6 IT capex projects.
The UR also does not take into account the significant benefits
that would accrue to customers as a result of NIE Networks'
proposed enhanced revenue protection incentive. In addition, as
noted above in Section 4, there is also a shortfall in the proposed
IT allowances for metering data and registration services
costs.
The aggregate value of the shortfall in market operations costs
is £14.0 million (including £3.4 million in respect of metering
data and registration services costs).
NIE Networks believes that there is no objective justification
for these proposed cost reductions and requests that they are
allowed in full to enable NIE Networks to recover the costs of
operating this part of the business.
6. RPEs and Productivity (Chapter 8)
In relation to RPEs, contrary to the approach adopted by Ofgem,
the UR fails to take proper account of evidence that specialist
electrical engineering staff, an important element of NIE Networks’
workforce, have experienced wage inflation markedly higher than the
economy as a whole. This is driven by high demand for
specialist labour combined with a shortage of supply.
At RP5 the CMA’s decision not to
make a distinction between specialist and general labour followed
its concerns regarding the accuracy of the distinction between the
two categories. The CMA did not question evidence submitted both by
NIE Networks and the UR that certain specialist labour indices for
the electrical engineering sector grow faster than average wages in
the private sector as a whole.
Since the CMA’s RP5 Final
Determination, NIE Networks has undertaken a detailed review of its
workforce, assessing person by person and role by role whether they
meet the criteria necessary to belong to the specialised indices
relevant to the electrical engineering segment of the labour
market. Based on this detailed assessment, NIE Networks found that
77% of its workforce can be classified as “specialist”. This
evidence was submitted to the UR on 10 March
2017 and should be considered by the UR in the preparation
of its Final Determination.
In addition to NIE Networks' own work since the RP5 determination, Ofgem has completed its own
RIIO-ED1 review, and concluded it is appropriate to place a 77%
weight on these specialised electrical engineering wage indices
when setting labour RPEs.
Based on the above, the UR should review the economic case for a
premium when setting an allowed RPE for electrical engineering
labour at RP6, in light of new
evidence that has come to light since the conclusion of the
RP5 process. Essentially, there is
now clear evidence that wages relevant to NIE Networks’ workforce
have been rising more quickly that the economy-wide average relied
on by the UR.
The UR’s analysis in respect of materials and plant and
equipment RPEs is also unjustified and inconsistent with the
approach adopted by Ofgem at RIIO-ED1. The aggregate value of this
shortfall in relation to RPEs is circa.£30 million.
The DD proposes a productivity factor of 1% per annum whereas
the evidence points to long term productivity trends of 0.7% per
annum. These long term trends have been widely used by
regulators when setting efficiency targets for utilities, including
the CMA at RP5 and Ofgem at
RIIO-GD1/T1.
NIE Networks considers that it would be able to deliver on a
0.7% productivity factor if the Final Determination provided a
balanced and reasonable outcome on allowances for the
efficiency-driving projects proposed in its RP6 business plan. That would mean a 5.6%
productivity improvement by the end of RP6 (31 March 2024)
compared to the 2015/16 base year. However, NIE Networks cannot
deliver this very challenging productivity improvement absent
investment in efficiency-driving projects (which the UR has
provisionally disallowed).
7. Reliability Incentive and GSS (Chapter 9)
The UR has proposed an incentive / penalty regime for network
performance that would reward the company with c.£2.6 million per
annum (plus or minus 1.5% of annual revenue) if a stretching target
was achieved in full. Achieving a portion of this incentive
would be very challenging to achieve and would require investment
by NIE Networks. The calibration of this incentive is important to
ensure that it is symmetric. It is still under discussion with UR
and our detailed comments are set out in Chapter 9.
The UR has recently proposed a convergence with GB GSS for
customers. The timing of the UR's review is problematic and is out
of step with the RP6 price control
process. NIE Networks developed its business plan for
RP6 with regard to the existing GSS
regime. There was no mention in the UR's Final Overall
Approach document to RP6 of a review
of GSS and the potential impact it might have during the price
control. Therefore, NIE Networks has not been given the
opportunity, in preparing and submitting its business plan, to take
account of this potential material change to the GSS
regime.
The GSS in NI and GB are broadly the same except for the length
of time allowed to restore supplies after a fault (during normal
weather conditions and during severe weather conditions). Out
of a total of 14 standards, 11 are the same.
In relation to the supply restoration standards, it is important
to note that over the last two price control periods the GB DNOs
have had funding available to them of around £1.1bn to invest in
improving network performance. No such funding has been
provided historically in NI. By way of comparison, on a per
customer basis, the £1.1bn figure in GB would equate to around £32
million of funding in NI.
NIE Networks has proposed an improved restoration time for
customers in the event of a fault under normal weather
conditions. This will tighten the restoration time from 24
hours to 18 hours. NIE Networks will continue to work with
the UR on the timing of the implementation of this improvement.
In the case of severe weather, NIE Networks does not consider it
reasonable to impose a GB standard without allowing appropriate
levels of additional investment on the network and without allowing
a reasonable lead time in advance of the change to allow this
investment to take place. Investment in the 11 kV network,
which was included as an Optional Investment, is considered in
Section 2 above.
8. Pensions and Rates (Chapter 11)
The proposed allowance in respect of pensions is in line with
NIE Networks' RP6 submission and is
therefore acceptable to NIE Networks. Further discussion is
required with the UR to address the concerns identified by NIE
Networks relating to the Pension Monitoring Framework within which
the RP6 pension allowances may be
reviewed in line with principles adopted by Ofgem.
As regards rates, the UR has advised that it has not completed
its analysis of rates and will require further information before
the Final Determination. NIE Networks’ rates currently
account for c.10% of NIE Networks costs and, based on current
charges, could amount to over £120 million during RP6.
NIE Networks’ view is that the appropriate regulatory treatment
is that rates should be allowed as pass-through on the basis that
the rates liability is uncontrollable, in line with the approach
adopted by Ofgem. The CMA RP5
Determination stated that the Ofgem approach would not be suitable
for NIE Networks because of the "unique nature of NIE's rates
revaluation process". However, this is no longer the case. The
basis for setting NIE Networks’ rates has changed since the CMA’s
RP5 Determination. The Land and
Property Services changed its approach in the 2015 valuation from
one specified by the Department of Finance and Personnel to a
“conventional” assessment based on forecast income and expenditure.
This change in approach followed the GB DNOs and National Grid, the
transmission network operator who moved to conventional assessment
in 2005. Therefore, since the valuation approach is now the same in
GB and NI, there is no reason therefore why the regulatory
treatment should be different in NI.
Given the materiality of NIE Networks' rates liabilities, small
percentage changes in the rates charges can make a very material
difference and it is important that an appropriate regulatory
mechanism is adopted. NIE Networks is not seeking to gain
from a different treatment of this cost – NIE Networks is simply
seeking to avoid an unjustified economic loss or gain.
9. Financeability (Chapter 12)
NIE Networks has serious concerns with the UR’s approach to
assessing financeability, because it is inadequate and is not fit
for the purpose of assessing financeability.
NIE Networks proposes funding the RP6 plan through a combination of operating cash
flows from revenue receipts, issue of new debt and retention of
earnings as required. NIE Networks estimates that borrowings
will increase to £950m by the end of RP6 and it will require £500m of new debt.
The UR is required under legislation to have regard to the need
to secure that licence holders are able to finance their licence
obligations and NIE Networks has a Licence Condition to maintain an
investment grade rating which is a rating of BBB- or above (Fitch
or Standard and Poor’s).
GB and European regulatory precedent indicates that a strong
investment grade credit rating of A- to BBB+ is appropriate for a
high performing network operator. NIE Networks is currently rated
BBB by Fitch and A- by Standard & Poor’s on a standalone
basis. Achievement of at least a standalone BBB+ credit
rating with both Fitch and Standard & Poor’s is important
to:
- enable NIE Networks to compete effectively for new funding in
the market;
- ensure NIE Networks has ongoing access to debt capital markets
to efficiently finance infrastructure investment at interest rates
that are competitive compared to those of its UK network peer
companies; and
- create a buffer above the minimum investment grade rating to
ensure that NIE Networks’ access to finance is resilient from
adverse macroeconomic and market shocks.
This is further supported by evidence from the current credit
ratings of electricity network operators in the rest of the UK, the
majority of which have comfortable investment grade credit ratings
of A- to BBB+ or equivalent on a standalone basis.
The financeability test in the DD suggests that the UR is
targeting a company credit rating of BBB+. We agree that a
strong credit rating is very important to enable future efficient
investment during RP6. However, the
net result of UR’s financeability assessment is that the proposed
RP6 cash flows are inadequate to
maintain the necessary credit metrics consistent with achieving a
BBB+ credit rating from Fitch (who currently rate NIE Networks).
For the credit rating metrics outlined in the UR’s financeability
test to be achieved, UR is making an unrealistic assumption that a
significant equity injection would be required and no dividends
could be paid during the RP6 period.
In order to meet the financeability tests, the UR assumed a gearing
level of 40% without proper justification. It has not considered
the significantly higher gearing used by UK networks’ regulators,
nor NIE Networks’ projected gearing level for RP6. The level of gearing assumed in the RIIO-ED1
price controls for GB DNOs was 65%, which is consistent with the
expected efficient capital structure of a regulated network
infrastructure company.
NIE Networks views this outcome as entirely unreasonable and
that the UR has objectively failed to secure that NIE Networks is
able to finance its licence obligations.
10. Weighted Average Cost of Capital ("WACC")
(Chapter 12)
NIE Networks’ WACC proposal of 4.08% (real, vanilla) is the
weighted average of the cost of debt and the cost of equity that
debt investors and equity investors expect from NIE Networks based
on returns earned by comparable entities with similar business and
financial risk profiles. It is a key driver of the
financeability and credit rating of NIE Networks.
In the DD, the UR proposes a WACC of 3.29% (real, vanilla)
compared to NIE Networks proposal of 4.08% (real, vanilla),
resulting in a revenue and earnings shortfall of circa £105 million
over the RP6 period.
NIE Networks, supported by Frontier Economics, has identified a
number of serious deficiencies in the UR’s approach to setting
WACC, including:
- factual errors in interpretation of regulatory precedent;
- the use of selective market evidence and lack of consistency
with relevant regulatory precedent, most notably that of the CMA
RP5 Final Determination; and
- cherry picking proposals made by NIE Networks.
In particular, the UR’s assumptions in respect of the risk
parameters (asset and debt betas) and gearing which feed into the
cost of equity are not supported by the consistent application of
regulatory precedent and the latest market evidence.
There appears to be a trend in the draft WACC determination that
regulatory precedent or the latest market evidence is followed when
that leads to a reduction in allowed WACC but ignored or side-lined
when it has the opposite effect.
Conclusion
The overall package proposed by the UR in the DD would result in
very significant and unjustifiable shortfalls in the RP6 allowances. Under the proposals set out in
the DD, NIE Networks would be compelled to expend more than the DD
envisages, with resultant unfair detriment to NIE Networks’
financial position and credit rating and adverse impact on the
financial position of the shareholder.
A theme NIE Networks has identified throughout the DD is that
regulatory precedent or the latest market evidence is followed when
that leads to a reduction in allowances but ignored or side-lined
when it has the opposite effect. The net result of this
approach is an imbalanced and irrational application of regulatory
precedent and the latest market evidence which has a significant
detrimental and unacceptable impact on NIE Networks’ financial
position.
Given that the UR intends to publish its Final Determination on
28 June 2017, NIE Networks would
welcome further engagement with the UR so as to reach a balanced
final outcome which protects the interests of electricity customers
and secures that NIE Networks is able to competitively and
efficiently finance its regulated activities.
Contact for enquiries -
NIE Networks Corporate Communications
Telephone 0845 300 3556