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Serious tensions over gas prices a growing concern

By John Simpson

Earlier this year, the Utility Regulator invited operators of the gas network, Phoenix and Firmus, to submit budgetary bids for pricing of the gas distribution network up to 2016.

As would be expected, the Regulator has challenged many of their proposals. In turn, the Regulator will be challenged by the businesses as taking an excessively short-term view of what is needed and prejudicing a stable long-term industry.

The Regulator proposes serious cuts to the commercial plans. For 2016, Phoenix had proposed combined operational and capital spending of £30.3m. The Regulator proposes to allow only £26.1m, an overall cut of 14%. For Firmus, the comparable spending bid was £20.3m, the proposed allowance is £13.4m — a reduction of 34%.

If the Regulator has made sensible and acceptable proposals that would be good news for consumers — a saving of £25 a year for Phoenix customers, and a saving of £51 a year for Firmus customers. If the proposals, after further consideration, lead to a final determination which is unacceptable to the businesses the Competition Commission may be asked to adjudicate.

Northern Ireland has had two recent referrals to the Competition Commission. One, initiated by Phoenix, found that the Regulator had, for some critical conclusions, been judged to have erred. That decision rippled right through to the credit agencies. The second, initiated by Northern Ireland Electricity, is still under way.

The recent regulatory tensions are a concern. Regulation in ideal conditions and with sufficient mutual understanding should mean that disagreements are manageable by debate in a shared dialogue. Referral should be the exception.

Unhappily there are signs of serious tension, again, in the debate about gas distribution charges. Whilst consumers have an obvious interest in tight regulation and the avoidance of price increases, there needs to be recognition that consumers have more than a short-term interest in squeezing avoidable costs. The continuing sustainability of a gas industry with assurance on standards is more than a penny-pinching exercise.

Northern Ireland stakeholders have no wish to incur the costs of paying for further Competition Commission investigations reported to have cost over £3m for the last gas sector referral.

The current draft determination is detailed. Several features stand out. First, there are over 150 pages of statistical analyses to digest. Second, and related to the first, the 150 pages go into a level of detail where, understandably, large costs are itemised and challenged but also there is little averaging or tolerance of smaller cost items where generic RPI allowances might be accepted. Third, the language where the Regulator challenges the bids made by the commercial businesses is both robust but, arguably, also confrontational. Fourth, there has been little (or no) preliminary effort to minimise disputes about the factual basis of disagreements.

The current regulatory process does little credit to the central parties. The integrity of the commercial interests are challenged when responses are extensively dismissed.

The documents published can be used to illustrate the question of credibility. In the response by the Regulator, the draft determination proposes the following adjusted allowances to the cumulative bids for the next three years to 2016:

Phoenix, opex. £39m, cut by 23%

Phoenix, capital £38.3m, cut by 6%

Firmus, opex £14.1m, cut by 46%

Firmus, capital £28.2m, cut by 28%

Is the Regulator asking inquirers to believe that Phoenix and Firmus made excessive bids of £34m above what is needed, or, is the Regulator challenging the integrity of these businesses in the knowledge that an excessive series of disallowances sets the scene for a more realistic final determination or possible further referral to the Competition Commission?

The Regulator is contributing to an adversarial style of regulatory process that does not best suit Northern Ireland.

What is needed is a build-up of confidence and acceptance of mutual integrity between the stakeholders, including consumer voices and investors.The Regulator is contributing to an adversarial style of regulatory process that does not best suit Northern Ireland

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