Elizabeth House
116 Holywood Road
Belfast
BT4 1NY
Dermot Mccann
Utility Regulator
Queens House
14 Queen Street
Belfast
BT1 6ER
13 December 2011
Dear Dermot,
Re: Network Price Controls: Proposals for a Cross –Utility
approach, September 2011, CCNI ref 010958
The Consumer Council welcomes the opportunity to respond to this
consultation.
The Consumer Council is an independent consumer organisation set
up in legislation to safeguard the interests of Northern Ireland
consumers, particularly the vulnerable and disadvantaged. We work to
promote and protect consumer interest and bring about change to
benefit consumers. Our aim is to make the consumer voice heard and
make it count.
We represent consumers in the areas of transport, water and energy.
We also have responsibility to educate consumers on their rights and
responsibilities and to equip them with the skills they need to make
good decisions about their money and manage it wisely.
With fuel poverty levels in Northern Ireland at 44 per cent, many
households are struggling to adequately heat their home, it is important
that the regulatory structures look to minimise the cost of energy to
consumers. In dealing with network price controls the Utility Regulator,
(the Regulator) must keep in mind that its’ primary objective is to
protect the interests of consumers.
The Consumer Council welcomes the aim of Utility Regulator to
develop a consistent cross utility approach to network price controls
that has the potential to improve the efficiency and effectiveness of the
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process. The regulator should take note of the Principles for Economic
Regulation proposed by the Department for Business Innovation and
Skills1(BIS), which are grouped under the following headings:
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Accountability;
Predictability;
Coherence;
Adaptability;
Efficiency; and
Focus;
To be accountable, BIS considers that it is important that ‘independent
regulation, takes place within a framework of duties and policies set by
a democratically accountable Parliament and Government’. In the
Northern Ireland context the appropriate Government Department must
be involved in designing and supporting the framework and principles
of regulation used by the Regulator.
To have focus, BIS propose that the ‘economic regulators’ duties
should be concentrated on economic considerations (including
protecting the interests of current and future consumers, ensuring the
operation of well-functioning and contestable markets and constraining
the exercise of market power of dominant companies)’.
The Consumer Council believe that for the Regulator to achieve its
stated objectives in carrying out Price Controls it must inform and be
informed by its stakeholders. The Regulator must consult with
consumers, energy companies, other industry parties and provide
transparency on its decision making process.
The majority of consumers are not familiar with the financial and
technical detail that is a necessary part of the price control process, but
they do know what they want from their energy and water supplier. To
enable consumers to understand and influence price controls the
Regulator could:
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Work with the Consumer Council to engage with consumers,
undertake consumer research and seek views and opinions
from consumers on the options under consideration;
Include a concise, ‘Consumer Impact Assessment’, highlighting
the main costs and benefits to consumers in all Price Control
consultation documents.
There are differences between water networks and gas and electricity
networks that will need to be reflected in price controls. Electricity and
Gas networks are part of a supply chain which contains competitive
1
Department for Business, Innovation and Skills, Proposals for Economic Regulation- January 2011.
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elements and the outcome of the network price control will impact on
the competitive parts of the supply chain. In water the whole supply
chain is within one organisation without any competition.
In electricity and gas the consumer of the network companies include
all parties in the supply chain, from generator to end user. The
Consumer Council wishes to see incentives built into price controls that
both benefit the end user directly and by being embedded in the supply
chain. We want to see these incentives across all aspects of the
business.
The Consumer Council wish to see price controls being designed
around outputs and outcomes that benefit consumers. A Consumer
Impact Assessment that we mentioned earlier in this response should
illustrate and evidence these outputs in a manner that can be
understood by consumers and their representatives.
We support Ofgems key points from the RIIO programme. However,
the Regulator needs to be sure that governance issues will not hinder
making changes to outputs if those outputs are contained in the
licence.
As a broad brush the six categories of outputs contained at 5.13 are
satisfactory, but need to include a provision on price.
The Consumer Council has long called for incentives and outputs to
reflect customer service in energy network price controls. In electricity
and gas the end user should not be seen as the only consumer. The
generators and supply companies are also consumers, as the service
they provide the end user is affected by the performance of the
network company.
The Consumer Council welcomes the new Guaranteed Service
Standards in gas. We would support any further developments that tie
the performance of companies with direct redress for consumers.
The Consumer Council agrees that governance and incentive arrangements
are central to incentive regulation and central to the interests of consumers. A
strong incentive regime relies on the interests of management being aligned
with the interests of consumers. For privately owned, profit seekingbusinesses, incentive regulation provides profit incentives for shareholders
and rely on corporate governance arrangements to align those owner’s
interests with management’s. In water, without a profit incentive, the
regulatory objectives are more directly dependent on management incentives.
Both financial and reputational incentives rely on clear public reporting of
performance.
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We would expect an incentive regime to take account of:
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Economic performance – economic incentives need to be placed on
the company, however we recognise there are limitations to these
incentives for a publicly owned company without a strong profit
objective. The Consumer Council would in principle support the
provision for a consumer reserve to be established to account for
outperformance and provide a mechanism for the benefits to be
returned to consumers;
Service performance – performance must be publicly reported in an
accessible and understandable way, for example the overall
performance assessment;
Management incentives - incentives provided to management
should be linked to the out-performance of targets. There must be
transparency in how any link is structured and what incentives are
offered;
Data management – the quality of data impacts on the incentive
regime as poor information makes for poor decision making and
poor monitoring of performance.
Reputational incentives within all the network price controls will have a
limited impact as there is no alternative network company for
consumers to switch to if the reputation fails. It may be possible to
create reputational incentives that promote the industry, to the benefit
of consumers, and are linked to financial incentives. For example,
increasing new connections to natural gas. Overall, the Consumer
Council agrees that where possible financial incentives remain the
primary focus for encouraging efficiency. This should not undermine
the importance of reputational incentives if employed in the correct
way.
The Consumer Council recognise that the allocation of risk within a
price control requires a balance between the companies requirements
to finance its business and the consumers need to get the best
possible deal.
In deciding how to allocate risk between the company and the
consumer, the Regulator must keep in mind its commitment to ‘protect
the interest of consumers’ and its requirement to have regard to the
interests of vulnerable consumers (including those on low incomes).
The network utility companies are able to use their resources to plan
and organise their business to avoid, mitigate and deal with the
consequences of risk. In comparison consumers are a nonhomogenous group with none of the resources, skills or knowledge
with which to anticipate, mitigate or deal with the consequences of risk.
Electricity, gas and water are essential services to consumers. If
consumers cannot afford their energy costs they will fall into fuel
poverty, or in the worst case will be disconnected. The Regulator must
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consider therefore the potential consequences for both consumers and
industry when balancing risk and ensure that consumers are protected.
Regarding deferred capex, the Consumer Council believe that in
principle the consumer should only be expected to pay for an asset if it
exists and they are receiving a benefit from it. Any deviation from this
principle must be scrutinised and justification provided in an open and
transparent way. The intention of all parties and the process to be
followed must be set out clearly to avoid later changes that could
create regulatory uncertainty. The key to deferred capex will be the
close monitoring of submissions by the Regulator. If the Regulator
becomes aware that a project is not in the interest of consumers and
should be deferred, it should remove it, and with it the unearned
benefit.
The ‘Reporter’ plays an important role in the regulation and
performance scrutiny of NI Water. However, this role is being
performed in a regulatory environment that was only formed in 2007
and within a company that is still subject to data improvement
undertakings. While not ruling out the benefits of a ‘Reporter’ in
energy network companies, the dynamics of this would need careful
consideration. The benefits to consumers would need to outweigh the
costs and the additional regulatory burden placed on the companies.
If you wish to discuss the attached in more detail, please do not
hesitate to contact Richard Williams on 028 9067 47895, or email to
rwilliams@consumercouncil.org.uk.
Yours sincerely
Richard Williams
Senior Consumer Affairs Officer
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