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ESB Networks Ltd PR3 conclusion Feb/Mar 2011 www.esb.ie/em 15 Sustainable Future ESB Telecoms, pages 17 8Successful conclusion to the ESB Networks’ Five-Year Price Review for 2011 to 2015 (Price Review 3) PR3 Process: The PR3 process involved detailed preparation and ongoing detailed engagement with CER over a two-year period. This engagement involved the timely preparation and presentation of multiple submissions (totalling 50) by ESB Networks to the CER, together with many bi-lateral meetings. In preparation for the PR3 review, a formal PR3 project team was established by ESB Networks within the asset management area and with a significant level of input from the various business activities. A key role of the PR3 team was to ensure that all relevant staff within Networks were fully informed and engaged in the review process so that focussed submissions were made to the CER in a timely and effective manner. CER’s Distribution and Transmission Determinations The total approved revenues for the five year period from 2011 to 2015 were set at €3.8 billion for the distribution networks business and €0.9 billion for transmission networks business. After lengthy engagement, and taking account of increased borrowing costs for the Irish government, a rate of return of 5.95% was agreed. This is an increase from a 5.63% rate of return that was set for PR2. Despite the significant reduction in the number of new connections assumed in PR3 versus PR2, there is still a substantial level of approved investment to develop the network and replace old plant. In addition, there is a further provision of €500m approved for the SMART metering project. In total, a capital investment in the distribution programme of €2.7bn has been approved following extensive technical investigation and review by the CER’s consultants. This compares with a spend in this area of €2.5bn in Price Review 2 (PR2), however, the mix of work programmes has changed considerably. There is also a considerable ramp up in transmission spend proposed from €470m in PR2 to €1.4bn in PR3 in line with Grid25 and the 40% renewables targets set by the CER for 2020. Within the CER’s determination, a significant capital efficiency factor has been included. This means that on a like-for-like basis with PR2, Networks must deliver the capital programme for €175m less. Delivering a programme of this scale within the approved amount will be a significant challenge for ESB Networks. Networks Approved PR3 Capital Programme (€m) There are also a number of performance incentives in relation to continuity of supply, callcentre response, meter readings, line losses, renewable generation and delivery of the capital programme. Finally, there are considerable challenges imposed on Networks in respect of operating cost efficiencies, with a €20m reduction in Opex required in 2011 versus 2010, increasing to a €40m reduction by 2015. The rationale for the reduction included deemed inefficiencies in both Networks internal costs as well as those of the internal service providers (ESB Supply, ESBI, ICT, Shared Services and Corporate Centre). (see figure 1) PR3 Operating Cost Challenge (€m) Key Challenges for Networks: The key challenges for ESB Networks to focus on over the next five years are: • Ensuring, above all, the safety of our staff and the public • Reducing operating costs by €40m by 2015. • Delivering on the planned capital expenditure programme at lower cost. • Maintaining and improving, where possible, on the level of customer service provided. • Engaging to achieve maximum delivery of all performance incentives. (see figure 2) In summary, the price review outcome is positive in terms of the scale of investment proposed, which will ensure an infrastructure to meet Ireland’s future needs. Noting the difficult external funding environment, borrowing for this investment will present major challenges for ESB. CER has set extremely stretching, challenging and stringent efficiency and cost reduction targets, which must be achieved The recent reorganisation of ESB Networks implemented before Christmas provides a vehicle for flexible and accountable programme delivery of the PR3 Capital Programme. It aligns the organisation closely to the changed investment programme in PR3 with less new connections but with significantly more high-voltage project delivery required. These are challenging times for ESB Networks, but we have the confidence that, working together, we can deliver on the targets set out above with continued focus on reducing costs while maintaining a relentless effort on safety and quality improvement. n ESB Networks areas of responsibility: ESB Networks operates as a regulated monopoly and it’s distribution and transmission activities have been subject to regulation by the Commission for Energy Regulation (CER) since 2000. Networks provides services on a non-discriminatory basis to all suppliers in the electricity market and collects its revenue from all supply companies for the quantity of electricity supplied to their customers during each billing period. The distribution system consists of the electricity network that connects homes and businesses to the transmission system. It is built, owned, maintained and operated by ESB Networks under licence from CER. The transmission system is the national grid. ESB Networks is licensed by the CER as transmission asset owner (TAO) and is required to build, own and maintain the transmission system. EirGrid is the licensed transmission system operator (TSO). Regulatory process Every five years, the CER carries out a price review that sets out the framework for ESB Networks activities (both capital and maintenance, for both distribution and transmission activities). The price review also determines the amount of money that ESB Networks can charge electricity suppliers for its services during the period. The final decision on the third price review (referred to as ‘PR3’), which covers the period 2011–2015 was published in November 2010. There are two separate decisions - one covering distribution activities and revenues and the other covering TAO activities and revenues. Included in the revenues that Networks is allowed charge suppliers are amounts of money to cover Networks operating costs, depreciation and return on assets and incentive payments for achieving network performance targets. Through this five-yearly review process Networks is incentivised to operate within its licence, to function in an efficient manner, and to provide high levels of customer service. Figure 1 - Networks Approved PR3 Capital Programme (€m) Figure 2 - PR3 Operating Cost Challenge (€m) http://www.esb.ie/em

Table of Contents for the Digital Edition of EM - February/March 2011

EM - February/March 2011
In This Issue
Services & ESB Electric Ireland
ESB Networks Ltd
ESB Energy International
Health & Habitat

EM - February/March 2011