Determining the appropriate margin

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Client Power NI
Dates 2013
Service(s)Policy & Economics, Regulation & Competition
 CEPA advised Northern Ireland’s price regulated electricity retailer (Power NI) as part of its 2014 price review process with the regulator. Power NI’s business is different to typical regulated companies as the company is asset-light i.e. operates with a small asset base.
We supported the company during its engagement with the regulator, its responses to price review consultation and the development of its technical arguments which accompany its price control revenue submission.
In terms of issues, we were asked to consider the impacts of retail price controls in a retail market that is now fully open to competition. We had also been asked to consider the design/form of the price control and its cost efficiency incentive properties, as well as financial aspects of the price control including the required profit margin that is necessary to support the capital employed within in the business.
In determining the required profit margin we considered how the regulator should approach financeability in a retail electricity context, the return that is needed given the businesses capital requirements and how the allowed margin compares to profit margins in other retail sectors. CEPA developed a report on financeability that was submitted to regulator as part of the price review consultation process.