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 ExecutiveUtility Regulator

29 February 2012

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

What makes up your Electricity and

Gas Bills?

4

Typical Electricity Tariff components

5

Electricity Network

Costs22%

Wholesale Electricity Cost64%

Operating Cost and Margin

6%

Other8% PSO, NIRO, K.

Gas Tariff Components

Network Costs41%

Wholesale Gas Cost

50%

Operating Cost and Margin

9%

Tariff for Domestic & Small I&Cs

Customer Category Network Component

Domestic & Small I&Cs 40%Large I&Cs 25%

How Are Price Components Determined?

• Wholesale Market Prices

• Network Price Controls

• Other Regulated Charges (electricity only)

• Retail Competition

7

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

8

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”

9

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

PNGL Price Control Impact

12

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).

PNGL Asset Base: 2006 to 2011

13

End 2006 End 20110

50

100

150

200

250

300

350

400

450

500

194.1227.0

77.2

67.615.8

13.865.1

57.1

85.2

How the TRV has grown, 2006 to 2011

Profile Adjustment

Outperformance

Deferred capex

Underrecoveries

Net investment

£m,

2010

pri

ces

Commentary

Net investment (from OAV) has depreciated. But PNGL has also continued to build out its network, hence the net increase.

Underrecoveries has reduced over the five years.

Deferred capex has reduced over the five years.

Outperformance has reduced over the five years.

The Profile Adjustment has grown for zero to £85.2m. Why? All of the other components yield a revenue entitlement to PNGL, by way of depreciation and return. Some of these revenues are deferred, and these revenues are added to the TRV via the Profile Adjustment.

0102030405060708090

47.0

18.7

3.8

15.7

Make-up of Profile Ad-justment

Price Outlook for 2012 and beyond for

Business Consumers

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Wholesale Gas Costs Future Curves

Summ

er 2

010

Win

ter 2

010

Summ

er 2

011

Win

ter 2

011

Summ

er 2

012

Win

ter 2

012

Summ

er 2

013

Win

ter 2

013

Summ

er 2

014

Win

ter 2

014

Summ

er 2

015

Win

ter 2

015

20

30

40

50

60

70

80

As at Feb 12As at Feb 11As at Feb 10

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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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