Increased socialisation of connection costs in the distribution electricity network

Closes 24 Apr 2025

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Annex 6 – NIE Networks' Regulated Asset Base

    1. NIE Networks funds its capital operations through a structure called the Regulatory Asset Base (RAB).  See the OECD document “The Regulatory Asset Base and Project Finance Models - An Analysis of Incentives for Efficiency” for a discussion of the RAB model[1].
    2. The RAB model is designed to spread the cost to consumers of network assets over the useful lifetime of the assets, rather than requiring them to pay for them upfront.
    3. When NIE Networks purchases or constructs a new asset, such as a transformer, the value of the asset is placed onto the NIE Networks RAB. 
    4. Usually NIE Networks finances these purchases by borrowing (bonds), and incurs an interest bill until the bonds are paid off.
    5. NIE Networks is paid, each year, through electricity charges, two elements in relation to assets which have been placed on its RAB.  The first is an amount for depreciation, and the value of the asset on the RAB is then reduced each year by the amount of depreciation paid to NIE Networks.  Over the useful life of the asset these depreciation payments reduce the value of the asset on the RAB, eventually to zero. 
    6. The depreciation payments are designed to return to NIE Networks the amount of money it paid for the asset.
    7. The second is an amount for a return on NIE Networks’ investment in the asset, and it is paid on the remaining value of the asset in the RAB, until that value has been depreciated to zero and the return thus reaches zero.
    8. The return payments are designed to pay for the cost of interest on the bonds used to fund the purchase, and to provide NIE Networks with a return to run its business and an amount of profit.
    9. Because NIE Networks is a monopoly business, i.e. it is the only network owner and consumers have no choice or competition, the depreciation and the return are set by UR in its Price Control determinations e.g. RP7.  UR sets them to be the most efficient possible for electricity consumers, while still providing NIE Networks with enough funds and profit to run its business.
    10. Where an asset is placed on a RAB, the total cost paid will always be higher than the initial purchase price, because it is paid for over the life of the asset, usually 40 years for network assets.
    11. The total cost of payments on the socialised reinforcement/network assets is given in the tables in this document.  As noted above, they are larger than the initial reinforcement costs because of the delayed payment mechanism of the RAB, which avoids electricity consumers from having to pay for the reinforcements upfront in the year they are built.