Osborne: going for simpler price controls

Iain Osborne is trying to build a regulatory system in Northern Ireland that takes the best bits from regulation elsewhere in the UK - and puts something back. Steve Hobson talks to him.

The Northern Ireland Authority for Utility Regulation (NIAUR) is unique among UK utility regulators in that it oversees gas, electricity and water and is developing cross-border energy markets with its counterpart in the Republic of Ireland.

Northern Ireland is coming late to the utility liberalisation party, but it is quickly catching up ground to make its energy markets more competitive, improve the efficiency of its water and sewerage services and extend the natural gas network to the majority of the population.

Because of the different approaches taken to utility regulation by various UK authorities, NIAUR chief executive Iain Osborne believes the regulators can learn lessons from each other's experiences.

Wics' innovation

"We have different models around the country and there is something of a 'not invented here' attitude that seems to mean no-one wants to learn from the different ways we all do things," he says. "This is most striking in water. In my opinion, [Scottish water regulator] Wics has been by far the most innovative of the three water regulators, but in the Cave Review [of water competition in England and Wales] there was no sense of looking at what works in Scotland and trying to transfer it. Rather it was a case of sitting in London [or Warwick] and starting with a blank sheet of paper."

In NIAUR's case, the unique problems it faces have encouraged innovative thinking, which Osborne believes could be applied to the rest of the UK. "Adversity breeds invention," he says, "and there are some things we do differently that are worth looking at."

One of these things is the use of a reporter - an independent consultant employed by the company but working on behalf of the regulator - to monitor developments by Northern Ireland Electricity (NIE). While this approach is well established in the English and Welsh water industry, it has not been widely used in energy.

Simpler price controls

Osborne is also looking to make price controls for regulated utilities simpler and easier, starting with the first three-year price control starting in 2010 (PC10) for Northern Ireland Water. "It is a personal goal of mine to see if we can simplify water price reviews," he says. "Our draft determination for PC10 [published in September - see box on page 18] has been a much simpler and less resource-intensive exercise than the equivalents in England and Wales."

This, Osborne admits, is partly because PC10 will not have to tackle key issues such as customer bills, because Northern Ireland Water will remain directly funded by central government until politicians can agree an alternative.

However, he maintains that water regulators generally could learn from the way energy networks are regulated. "We are actively looking for ways to make things simpler and more like what we do in energy," he says. "In energy, we don't track outputs to the same level of detail as we do in water. In particular, we can simplify scrutiny as the company improves its management systems, as Wics has proposed in its latest determination."

The role of government

Particularly thorny issues that all regulators are still wrestling with include affordability and sustainability, and there is much debate about what roles government and economic regulators should play in driving behaviour by companies. "Government sets policy, and in water there has been a long tradition of ministers using statutory powers to give guidance to the regulator," says Osborne. "That hasn't worked so well in energy, though I don't fully understand why, because that statutory power exists and I think all players recognise we need an energy policy that has democratic legitimacy."

The danger, however, is that the boundaries between the roles of government and regulators begin to blur, sending confusing signals to consumers and companies about the direction of travel and how costs will be recovered. Osborne warns that if relationships begin to break down between government and regulators there is a danger of ministers imposing "quasi-regulatory systems" that leave everyone confused.

Lighter retail burden

On energy retail, Osborne is going for simplicity. "In energy retail we are a long way behind Great Britain and our householders currently do not have a choice [of supplier]," he says. "As we grow retail competition we are going to make sure we don't overload the market with essentially political, social and environmental goals. For a small supplier starting up it is already difficult enough to buy power and bill customers efficiently, and we need to get new people coming in to do that. If you place too many burdens on retail, you end up with a market that is closed to entry."

For one thing, the burden of addressing fuel poverty will not be placed on competitive energy retailers. In Northern Ireland, energy efficiency is being tackled via a central fund created from network charges and distributed by the regulator.

"This is more politically legitimate. Ultimately all these interventions are about cross subsidies, and to my mind if some customers are paying extra to enable energy efficiency you should have people representing consumers and not companies deciding who is to benefit from that money," Osborne says. "Our approach is also more efficient. Under our Energy Efficiency Levy it costs roughly £54 per tonne of carbon saved, which is materially cheaper than Cert [the GB Carbon Emissions Reduction Target], even though we have sharper targeting on vulnerable households."

Fuel poverty

Last winter, the Northern Ireland Executive also provided public funds to subsidise the fuel bills of the poorest consumers, and NIAUR will consult on whether people think this is the right approach to alleviating fuel poverty.

"That was very creditable, because Northern Ireland has a tremendous fuel poverty problem," says Osborne. "But public budgets are tight and the question is, will the Executive have money to do that into the future? An alternative is that we regulate network charges so that some customers pay more and some pay less. Identifying the fuel poor is a major problem and we are keen not to place the burden on suppliers to find the people who should be getting financial support. One idea we will be looking at is a rising block network tariff because very frequently vulnerable customers are low volume energy users."

Smart metering

Although it is early days, smart metering too will be network rather than retailer-led, and energy metering was transferred back to the networks from suppliers at the last price control to prepare for this.

"This was done first because we could see smart metering was going to be a key issue. It was also very clear at that point that metering had to be under the regulatory control of a single decision maker," says Osborne. "The energy department is in the lead on whether we do it, and on what 'it' is. They are still consulting on the issue."

Asset mutualisation

Northern Ireland has also successfully piloted another innovation - mutual ownership of energy transmission assets. Mutual company Northern Ireland Energy Holdings owns the gas and electricity interconnectors between Scotland and Northern Ireland, and recently took over the high-pressure gas transmission pipeline serving the Greater Belfast and Larne areas from Phoenix. It is a structure that it has been suggested could be suitable for Northern Ireland Water as well.

"The two relatively small assets that have been mutualised so far have led to savings of £80 million, which for Northern Ireland is a lot of money," says Osborne. "In principle, it is an attractive model and it has run for five years now without any major problems emerging.

"The next step will be to look at how we would apply it to different assets. It's one thing mutualising a simple asset that has already been built - mutualising a complex meshed network that is more exposed to demand risk is a trickier proposition."

One solution could be to split the ownership and operation into separate vehicles that are regulated differently. "In the world that we are in it is even more important that utility policy makers both in Northern Ireland and Great Britain think hard about these ownership and financing questions," Osborne says.

NIAUR's draft determinations for NI Water 2010-13

• Revenue: in its draft determinations for April 2010-March 2013, NIAUR has demanded a revenue saving of 11 per cent from Northern Ireland Water. The £1,190 million revenue projected by the company in its business plan was cut by £136 million to £1,054 million by the regulator, based on a central subsidy down from £852 million to £757 million and on business charges down from £338 million to £297 million. Although it has been assumed there will be no household charging before 2013, NIAUR points out the efficiency demands would hypothetically cut annual bills from the £391 to £369 over the three year period.
• Cost of capital: was set at 4.8 per cent, reflecting a 7.1 per cent cost of equity and a 2.88 per cent cost of debt.
• Capex: Northern Ireland Water's planned capital investment of £586 million was cut to £520 million, a figure that includes an additional £38 million of priority outputs - namely, more wastewater treatment works improvements to address environmental issues and development restrictions.
• Opex: the regulator scaled back planned operating expenditure of £629 million to £531 million. This contributes £98 million of savings to the overall revenue saving of £136 million.

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