|30th July 2021
FIFTH ELECTRICITY PRICE
CHANGE THIS YEAR
On 22nd July 2021, the Electricity Price Control Commissioner (PCC), Anthony White, announced yet another electricity pricing change. The increase will be effective across August billing, and, like the previous fluctuations in both April and May, the changes are being applied with little notice. This year, there has already been five changes to Sark Electricity Ltd’s (SEL) unit pricing. This month’s increment has been attributed to increased fuel costs. Do the goal posts that White uses to set unit pricing move so fast and so frequently that pricing must be manipulated on a monthly basis? Are these very frequent changes corrective and the result of either Mr White getting it wrong or SEL failing to supply information? Projected Island-wide electricity usage for 2021 was detailed in the most recent variation document as 1,150,000 kWh, whilst each penny increase on unit cost equates to an annual £11,500 increase, or effectively £958 each month, in the electricity company’s revenues. In light of such frequent and relatively minor adjustments, is it possible that Anthony White is just trying to cut it all too fine?
It is nearly four years since the Price Control Commissioner was sworn into office and nearly a decade since price regulation was first mentioned in Chief Pleas. Should we now finally conclude that due to very low consumption, electricity pricing on Sark was always actually fair and reasonable? In June 2021 Chief Pleas made the decision to progress purchasing the company; if true, such inference needs to be acted upon quickly.
Although White first set a Price Control Order (PCO) in August 2018 because of costly legal action resulting in the Island paying SEL £115,000 in an out-of-court settlement, it was only in January 2020 that the first PCO was implemented. In January 2020 the PCO was set at 54p/kWh and, until January 2021, this unit pricing remained constant. As the year has progressed, it has become clear that, under the 54p pricing regime, SEL was losing money. As early as October 2020, White was proposing changing the PCO to 58p/kWh. Finally, on 20th November 2020, 11 months after pricing controls were first implemented, White published a ‘Proposed Variation’ that detailed SEL’s annual losses at circa £85,000. The losses were caused by both the pricing cap and lower than anticipated consumption. Within this ‘Proposed Variation’, White forecasts 2021 electricity usage on Sark at 1,150,000 kWh. In his July letter, White confirms that:
“Island-wide electricity consumption, so far this year, is in line with the forecast adopted in the Variation.”
All things being equal, in order to recoup 2020’s £85,000 loss over the succeeding year, revenues must be increased by 2 x £85,000 = £170,000. Using Anthony Whites’ forecast of 1.15MkWh as a numerator, a price increase of 14.7p per unit would be required to raise this amount of cash, and, such an increase, would create a new unit charge of 54p + 15p = 69p/kWh. In an attempt to avoid such an unpopular price hike, a rise that would raise questions about the need for either an expensive Price Control Commissioner or expensive price regulation, White seizes on SEL’s proposal of a new minimum charge tariff structure. Restructuring and complicating tariffs will obscure pricing comparisons between prices before and after regulation.
Minimum charging was sold to Sark’s community as a method of increasing revenue via the owners of second homes, without therefore impacting on bona fide Sark residents and without increasing the unit charge. As always however, the devil is in the detail, and a little investigation revealed, outlined within the variation order’s revenue projections, the majority of the extra revenues would actually be coming from Sark residents. As can be seen from Anthony White’s table overleaf, only £1,788 (25.9%) of the projected £6,896 extra monthly revenues derived from minimum charging are actually channelled through second homes. The 50p/kWh set in January 2021 was supposed to be subsidised by minimum charging, but it lasted precisely three months. In April 2021 prices were increased from 50p/kWh to 55p/kWh. The Price Commissioner produces a vast array of material to justify and explain his position. To date, there have been 66 documents published on the EPC website, many of them tens of pages long and containing both complex formulae and industry specific jargon. The documents are difficult and time-consuming to digest and there will be few Islanders who have read all, or even any of them. The Commissioner’s mandate as set out in The Control of Electricity Prices (Sark) Law, 2016, is to set a fair and reasonable price for the supply of electricity on Sark. This fair price should be determined by the revenues that need to be raised to cover costs and deliver a reasonable return. The statement is simple and supporting documentation should also be simple. None of Anthony Whites’ publications are simple and neither do they appear objective. In the October 2020 variation White explains that:
“I interpret the 2016 Law to imply that I must consider the costs that a reasonably efficient and cost-conscious supplier would incur in providing the supply of electricity in Sark. I have made estimates of the costs of annual labour, services, operations, administration and the profit that would be fair for investors, based on the value of the assets employed to deliver the supply.”
Such an “interpretation” of the 2016 Law leaves the Commissioner with much latitude. The Price Commissioner’s reports, peppered with subjective rhetoric, are torturous to navigate and very difficult to understand. The goalposts frequently change between one variation document and the next. Undoubtedly the Commissioner is an intelligent man, with formidable experience in both the energy markets and matters of finance; however, what he should be able to explain simply and clearly, is presented in long and complicated reports that aren’t merely unnecessary but also seemingly contrived. If we compare Anthony White’s very first ‘Price Control Consultation’ document published in December 2017 to his most recent proposed variation document published in October 2020, there are glaring inconsistencies. ‘Figure 1’ can be found in White’s 2017 determination along with the following statements:
“Figure 1 shows the “reasonable price” SEL could charge for a 5-10% return on RAB, depending on the demand forecast.”
“Only were demand to fall to 1,250,000 kWh would a price of 70p/kWh be required to provide SEL with a “reasonable return.”
Demand is significantly below 1,250,000 kWh so why is the PCO not set at 70p? When the Commissioner wrote his initial determination, he was under the misapprehension that annual electricity consumption on Sark was in the region of 1.5 million kWh. It has since come to light that, due to an administrative error on the part of SEL, combined with a further slump in consumption, actual consumption on Sark is in fact nearer to 1 million kWh. The most recent PCO is based on a consumption figure of 1.15 million kWh. It is therefore hard to understand in the face of these hugely changed variables how the outcome figures continue sitting at around 55p/kWh?
In light of SEL’s recent threats to close the company and cease production, the Island is making plans to purchase the company. Sark has very limited resources and it is imperative that such negotiations are conducted properly and based on true and fair data. The Price Commissioner’s tenure has never run smoothly and, before such momentous decisions are taken, perhaps a second opinion, a new set of eyes and a new Price Commissioner, without baggage or bad faith should be sought.