Peter Matthews has just stepped down after more than six years as chairman of Northern Ireland’s (NI) Utility Regulator. Rather a lot has happened on his watch. In 2007, a year into Matthews’ first term, the watchdog took on water regulation, and has since issued NI Water’s first price control (PC10) and dealt with the freeze and thaw service failure investigation of winter 2010/11. In energy, there have been multiple price controls, the introduction of competition in both the domestic electricity and gas markets, and the formation of the Single Electricity Market.
In taking on water, the Utility Regulator became the UK’s only pan-utility watchdog. I ask Matthews how far pan-utility regulation has progressed in five years. Honestly, he answers “not as far as I would have liked”, noting that the organisation has a “day job” to do – issuing price controls and the like – as well as honing its strategic regulatory direction. He quickly qualifies that there has been “evolutionary progress, big strides” though. He lists among the achievements: lower cost regulation than would have been the case should water and energy have been regulated separately; the transfer of best practices between sub-sectors; and the development of thinking on the future of regulation.
It is on this last point that Matthews would have liked to have seen faster progress. He says the regulator will publish a “statement of principles” in autumn which will set out its stall for the future. He would have liked this “out and being used by now”.
The document will pull together best practice taken from other regulators (adapted to suit the NI situation) and establish more uniformity between the regulation of the different utility subsectors. Matthews explains: “In Great Britain, the process of price reviews varies sector to sector. We want commonality. So water, electricity and gas reviews will look more like each other in the future.” He adds that this will not amount to “a rigid template” but there will be more commonality in terms of principles.
Back to the “day job” and we first discuss water, the industry at the centre of Matthews’ career (see box, overleaf). Undoubtedly the highest-profile incident Matthews has overseen is the Christmas 2010/11 water supply crisis, when thousands were left off supply after pipes and plumbing burst and leaked under the strain of a rapid thaw following a deep freeze. The regulator’s investigation found fault with NI Water’s handling of the crisis – its executive leadership, emergency planning and communications with customers – but not with the condition of the network.
A Recovery Action Plan was drawn up, detailing 53 required actions. As of January, the firm had completed 39 of these and said it was on course to deliver the remainder on time. Matthews says: “I am satisfied the company has done all it can. If this happened again, it would deal with it a lot better.”
Although less in the public glare, PC10, running from 2010-13, has also been controversial. Domestic customers in NI remain unbilled, so 80 per cent of NI Water’s revenue comes from the public purse (70 per cent for water and sewerage services and 10 per cent for road drainage). The remaining c20 per cent is from charges to businesses. Cuts in the funding allocated annually by the Department for Regional Development caused revenue uncertainty and threatened the outputs set out in the three-year plan. Although in the event, funding cuts have not been severe enough to trigger its use, a Memorandum of Understanding had to be produced, allowing reductions in NI Water’s funding to be reflected as necessary.
Now, Matthews explains, NI Water is claiming the budget cuts are creating further uncertainty and impeding its ability to deliver all the efficiencies the regulator has demanded. “We have to look at that,” he says. “However, I would say the company is still some way behind Great Britain on efficiency. For every £1 of operational spend, £1.64 has to be spent in NI to get the same result.”
Clearly, the next price review is on the horizon. Matthews explains there will be a sort of interim review – PC13 – which will run for two years only, followed by “the big one”: PC15 – a six year review. PC13 will be “a lot about preparing for PC15, sorting out a whole variety of issues,” he says. While he cannot pre-empt the reviews, he confirms: “We believe more efficiencies are possible. We will look to continue with the trajectory of improvement initially envisaged to operating costs.”
NI Water’s revenue instability has been a long-standing regulatory concern, and going into the next price reviews, Matthews laments that no progress has been made on addressing this – for example, through either moving away from annual budget allocation or introducing domestic charging: “There is the same potential instability. There has been no change in the funding mechanisms. The current funding model couldn’t be more uncertain.”
The Utility Regulator has called for an open debate on the subject of water charging. “Lots of the debate has been ill-informed and knee-jerk,” says Matthews. “We are not for or against, but believe a decision should be made on the basis of knowledge and open debate.” He expresses disappointment that this hasn’t happened already but believes the “message is getting through”, slowly.
Matthews’ final musing on water is that, should non-domestic retail competition prove successful in the English and Scottish market, it should not be ruled out for Northern Ireland. “There might be a temptation to think the market is small here, who’d want to compete? But I say we should be open-minded.”
Moving on to energy, Matthews is clearly proud of the Single Electricity Market, an all-island wholesale market set up in 2007. “It has worked very well indeed,” he says. “Underlying costs have fallen and underlying security has increased.”
Promoting domestic competition has been less successful: the number of people switching away from incumbent suppliers is growing, but remains small. For this reason the regulator will continue with supply price controls on dominant incumbents and market monitoring. Matthews says it has also done what it can to make switching mechanisms as good as they can be.
He is optimistic, though, about prospects for the expansion of the gas network to the west of Northern Ireland, where the population is low and economics difficult. He confirms there is investor interest and that there has been a lot of stakeholder engagement. “The concept is growing significantly, steadily,” he says. “I look forward to expansion in the coming years.”
At around three times higher than in Great Britain, fuel poverty problems are particularly acute in Northern Ireland. Not only are wages low and energy prices inherently high (the province has no indigenous gas resources and its generation capacity is two-thirds gas fired), but 68 per cent of households use heating oil as their main heating fuel. Heating oil costs have sky-rocketed by 75 per cent over the past three years, taking the average annual energy bill to £2,312. This has led to calls for the Utility Regulator to take on the regulation of the home heating oil industry.
Matthews is against the move, arguing that the nature of oil regulation would necessarily be very different to that of gas and electricity. He says, though, “we would respond if required”. He believes the regulator should focus on keeping gas prices down to make switching away from oil more attractive.
For the oil sector, he advocates a system of self-regulation he dubs Oil Safe – a scheme to register suppliers, agree fair prices, and offer flexible payment terms and conditions, given that one of the issues the Consumer Council has flagged up is the difficulty some encounter meeting the capital cost of filling up their tank.
In light of existing high prices, Matthews admits that delivering the government’s target of supplying 40 per cent of electricity from renewables by 2020 would be “a challenge” (renewables currently contribute around 10 per cent). He stresses renewables policy must be both sustainable and affordable. Aside from wind, he sees opportunities worth exploring in tidal projects and biomass and says the regulator will look to include low carbon innovation funding within price controls.
Pricing is also at the heart of a current wrangle between the regulator and Phoenix Natural Gas. The gas network operator has rejected the watchdog’s plan to cut current prices by £10; it had argued prices need to rise by £15. The matter has been referred to the Competition Commission, and a decision is expected by today (3 August).
Matthews defends the regulator’s sums: “We believe we have done the right thing… I am hopeful the outcome of the Competition Commission determination will be as beneficial to Northern Ireland as our price control would be, delivering a sustainable gas company, not impeding investment in the gas network and lowering costs for customers.”
The regulator will be hoping it will be a smoother ride for RP5, the price control for power network business Northern Ireland Electricity (NIE). Consultation has just closed on the draft determination, with the final numbers due by year-end. The regulator’s proposals include operating cost cuts of 9 per cent; a similar level of investment to RP4; and lower tariffs and a rate of return than NIE wanted. According to Matthews , the watchdog’s sums would enable the electricity company to make “good profits on fair prices”.
Matthews’ replacement as Utility Regulator chairman is Bill Emery, ex-chief executive of the Office of Rail Regulation but probably more familiar to readers for his 15 years in senior positions at Ofwat.
This article first appeared in Utility Week’s print edition of 3 August 2012.
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