Presentation by Shane Lynch, chief executive, Utility Regulator at the CBI NI energy conference. February 2012

1. CBI NI Energy Conference
29th February 2012
Stormont Hotel

2. “Understanding Gas and
Electricity Prices in Northern
Ireland and the likely impacts for
2012 and beyond”
Shane Lynch
Chief Executive
Utility Regulator
29 February 2012
2

3. Contents
1.What makes up your Electricity and Gas
bills?
2.How are these price components
determined?
3.Price Outlook for 2012 and beyond
3

4. What makes up
your Electricity and
Gas Bills?
4

5. Typical Electricity Tariff components
Other
8% PSO, NIRO, K.
Operating Cost
and Margin
6%
Electricity
Network Costs
22%
Wholesale
Electricity Cost
64%
5

6. Gas Tariff Components
Operating
Cost and
Margin
9%
Network
Costs
41%
Wholesale
Gas Cost
50%
Network
Customer Category
Component
Tariff for Domestic & Small I&Cs
Domestic & Small I&Cs 40%
Large I&Cs 25%

7. How Are Price Components
Determined?
• Wholesale Market Prices
• Network Price Controls
• Other Regulated Charges (electricity only)
• Retail Competition
7

8. Price Control and Tariff Timetable
• Network Price Controls
– NIE (T&D): 1st October 2012 – 30th September 2017
– BGE (UK): 1st October 2012 – 30th September 2017
– MEL: None
– PNGL: 1st January 2012 – 31st December 2013
– Firmus: 1st January 2009 – 31st December 2013
• Network Tariff Resets
– NIE (T&D) 1st October 2012
– Postalised Gas Transmission: 1st October 2012
– Firmus and PNGL Gas Distribution 1st January 2012
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9. How do We Regulate Monopolies?
• Regulated company submits proposals for capital
expenditure, cost of capital, and operating costs
• Regulator reviews and proposes “allowances”
• Regulator also sets out expected “outputs” and
“outcomes”
• Incentives to “outperform”
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10. How do Network Price Controls
work?
• Regulator can refer the matter to the Competition
Commission if its proposals are rejected.
• Capex depreciated typically over expected asset life
• Annual revenue entitlement = Depreciation + WACC
(on un-depreciated assets) + Opex
• Tariffs flow from this revenue entitlement
10

11. NIE (T&D) Price Control Impact
11

12. PNGL Price Control Impact
This graph shows the allowed revenues for PNGL in the period 2007 to 2011; the
revenues requested by PNGL for the period 2012 to 2013 (and beyond); and the
Utility Regulator’s decision for allowed revenues in 2012 and 2013 (and beyond).
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13. PNGL Asset Base: 2006 to 2011
Make-up of Profile
How the TRV has grown, 2006 to 2011 Adjustment Commentary
500 100
Net investment (from OAV) has depreciated. But
80 15.7 PNGL has also continued to build out its
3.8
450 60 18.7
network, hence the net increase.
40
400 85.2
47.0
Underrecoveries has reduced over the five years.
20
0 Deferred capex has reduced over the five years.
350
57.1
65.1 Outperformance has reduced over the five years.
£m, 2010 prices
300 13.8
Profile Adjustment
15.8 The Profile Adjustment has grown for zero to
67.6 Outperformance £85.2m. Why? All of the other components yield a
250
77.2 Deferred capex revenue entitlement to PNGL, by way of
depreciation and return. Some of these revenues
200 Underrecoveries are deferred, and these revenues are added to the
TRV via the Profile Adjustment.
Net investment
150
227.0
100 194.1
50
0
End 2006 End 2011
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14. Price Outlook for 2012
and beyond for
Business Consumers
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15. Wholesale Gas Costs Future Curves
80
70
60
50
As at Feb 12
40 As at Feb 11
As at Feb 10
30
20

16. 16

17. Price Drivers
– Commodity forward curves
– Individual contracts: timing, duration, demand
profile
– Network price control determinations
– Demand growth
– Other regulatory and policy decisions
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