Gas Standing Charges – OFT Response

NEWS FROM THE CELTIC LEAGUE

The OFT have responded to my query about standing charges (SC) and you will see from the attached that they differentiate between MUA and Manx Gas.

In paragraph two they set out the view that as Tynwald/Government already have an oversight role for the MUA it would in their view be a duplication of effort to look at that.

In relation to Manx Gas whilst acknowledging part of the infrastructure was government funded they assert that Manx Gas pays for this.

Despite their conclusions that customers are only really concerned about energy price a great deal of feedback to us expressed concern about the standing charge issue.

OFT say they are satisfied that Manx Gas use the SC for the purpose it is intended for if this is the case given the recent hike to it major gas infrastructure renewal should be underway all around us(?).

Obviously we do not share the conclusions of OFT but nonetheless would thank Mr Ball for setting out clearly and in an unambiguous fashion the OFT position.

The Chief Minister did not respond to the call for a standing charge moratorium (other than to acknowledge receipt) so the only way the issue might possibly be pursued is if a Tynwald member raised the matter. Sadly although Tynwald members can get animated over everything from the ‘Santa Train’ to the Horse Trams bread and butter issues like this seem further down their agenda.

The OFT letter is set out in full below:

“Dear Bernard,

Thank you for your email of 14th January regarding the level of standing charges levied by both public and private sector utilities.

In relation to the Manx Utilities Authority (and its predecessor the Manx Electricity Authority) the OFT has taken the view that whilst it could investigate prices the MUA is, through its Board, accountable both to Government and Tynwald. Given that level of accountability it seems that any investigation into prices under Part 2 of the Fair Trading Act 1996 would represent a duplication of effort. Equally, however, if Government or Tynwald required any assistance in this oversight role we would happily assist within our limited resources.

In relation to Manx Gas the OFT has, in the context of the Regulatory Agreement and the earlier price investigations, a much clearer understanding of the standing charge issue. The underlying theory is that the standing charges represent the cost of providing the service (in this case the cost of the gas network and its operation); and that customers should then buy the product (gas) at cost plus profit. In relation to Manx Gas the new standing charge is designed to recover from central heating customers around 66% of the total cost of providing the network; and domestic central heating accounts for around 66% of the total market. On that basis the overall level of the recovery appears to make sense.

You make the very valid point that much of the infrastructure improvements for utilities have been Government (taxpayer) funded. In relation to Manx Gas that means the all-Island network extension. Although this was Government funded it was not “gifted” to Manx Gas and the company is paying Government annual charges. From an accounting perspective the payments to Government represent part of the cost of operating the gas network. Furthermore since these assets are Government owned they are not included in the calculation of the assets deployed by Manx Gas; which is the base from which the fair profit level is calculated under the Regulatory Agreement

I would wholeheartedly agree with you that it would not be acceptable for Manx Gas to levy standing charges on the pretext that they are for costs and infrastructure renewal and then “trouser” the money; BUT since their accounts demonstrate clearly that they are doing no such thing it is really an academic point.

At the end of the day what matters to customers is the amount which they have to pay for the gas that they need. Whilst appreciating the emotive arguments around standing charges they are only part of the cost and it is the total bill that matters to customers. The OFT, and the signatory Departments, with support from the Council of Ministers, entered into the Regulatory Agreement to protect and benefit consumers by fixing the level of profits which Manx Gas can generate. The reduction of 3.5% in gas prices from 1st January 2016 was the first tangible benefit from the Regulatory Agreement. Whilst I have heard all sorts of opinions as to why that reduction came about, the fact is that the price was reduced, following discussions under the Regulatory Agreement, because Manx Gas needed to do so to keep within the acceptable profit fixed by that Agreement.

Best wishes

Mike
Mike Ball,
Chief Officer,
Office of Fair Trading,
Government Building,
Lord Street,
Douglas,
Isle of Man,
IM1 1LE”

BERNARD MOFFATT

Issued by: The Celtic News

27/01/16

THE CELTIC LEAGUE INFORMATION SERVICE.

The Celtic League established in 1961 has branches in the six Celtic Countries. It promotes cooperation between the countries and campaigns on a range of political, cultural and environmental matters. It highlights human rights abuse, military activity and socio-economic issues

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