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Phoenix Natural Gas Limited Price Determination

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Phoenix Natural Gas Limited Price Determination A reference under Article 15 of the Gas (Northern Ireland) Order 1996 Phoenix Natural Gas Limited price determination Presented to Northern Ireland Authority for Utility Regulation 28 November 2012 Competition Commission 2012 Website: www.competition-commission.org.uk Members of the Competition Commission who conducted this inquiry Professor Martin Cave (Chairman of the Group) Stephen Oram John Smith Richard Taylor Chief Executive and Secretary of the Competition Commission David Saunders iii Contents Page Summary .............................................................................................................................. 1 Report ................................................................................................................................ 1-1 Section 1: Introduction ....................................................................................................... 1-1 Section 2: Background ....................................................................................................... 2-1 Section 3: The reference .................................................................................................... 3-1 Section 4: Gas customers .................................................................................................. 4-1 Section 5: Outperformance ................................................................................................ 5-1 Section 6: The 1999/2000 capex deferrals ......................................................................... 6-1 Section 7: Rate of return for PNGL ..................................................................................... 7-1 Section 8: Implications for regulatory certainty and cost of capital ...................................... 8-1 Section 9: Evaluation and findings ..................................................................................... 9-1 Section 10: Adjustments to the financial model and recommendations ............................ 10-1 Appendices A: UR’s notice of reference to the CC ................................................................................ A1 B: UR’s statutory duties ..................................................................................................... B1 C: Evidence on outperformance from submissions ............................................................C1 D: Deferred capex ..............................................................................................................D1 E: Arguments by PNGL and UR regarding the risks faced by PNGL in 1996 ..................... E1 F: Stylized illustration of asymmetric risk ........................................................................... F1 G: PNGL’s arguments on the cost of capital allowed to mature Great Britain utilities and potential comparators in 2006 ...................................................................................... G1 H: Financeability ................................................................................................................H1 I: Third party submissions in response to our provisional decision .................................... I1 Glossary......................................................................................................................... Glos1 iv Contents Page Summary .............................................................................................................................. 4 Report ................................................................................................................................ 1-1 1. Introduction .................................................................................................................. 1-1 2. Background .................................................................................................................. 2-1 Introduction .................................................................................................................. 2-1 PNGL ........................................................................................................................... 2-1 UR ................................................................................................................................ 2-3 Current structure of the natural gas industry in Northern Ireland .................................. 2-5 Background to the Northern Ireland gas industry .......................................................... 2-7 Development of PNGL’s business ............................................................................ 2-8 Background to regulation ........................................................................................ 2-11 PNGL12 ..................................................................................................................... 2-16 3. The reference ............................................................................................................... 3-1 Legal framework ........................................................................................................... 3-1 The Order ................................................................................................................. 3-1 The licence ............................................................................................................... 3-1 Price control reviews ................................................................................................. 3-2 The reference ........................................................................................................... 3-3 The statutory duties .................................................................................................. 3-3 The CC’s approach ...................................................................................................... 3-4 4. Gas customers ............................................................................................................. 4-1 Introduction .................................................................................................................. 4-1 The PNGL Licensed Area ............................................................................................ 4-1 Protecting consumer interests ...................................................................................... 4-4 UR ............................................................................................................................ 4-4 Consumer Council Northern Ireland .......................................................................... 4-4 PNGL’s consumer responsibilities ............................................................................ 4-4 Customer service standards ..................................................................................... 4-4 Safety obligations on consumers and PNGL ............................................................. 4-5 Increasing the availability of natural gas in Northern Ireland ......................................... 4-6 Costs of energy .......................................................................................................... 4-10 Fuel poverty ............................................................................................................ 4-10 The case for switching to natural gas ......................................................................... 4-12 Industrial and commercial customers ...................................................................... 4-15 Converting to natural gas ........................................................................................ 4-16 Fluctuations in the cost of fuel ................................................................................. 4-19 Cost and impact of UR’s price control ..................................................................... 4-20 Questions raised by CCNI .......................................................................................... 4-20 Advertising, marketing and PR ................................................................................ 4-21 PNGL does not operate an asset register ............................................................... 4-21 Service standards ................................................................................................... 4-21 Planning the infill of PNGL’s existing network ......................................................... 4-22 5. Outperformance ........................................................................................................... 5-1 Introduction .................................................................................................................. 5-1 Past treatment of outperformance ................................................................................ 5-2 Treatment of outperformance .................................................................................... 5-2 Sources of historic outperformance .............................................................................. 5-4 Historic outperformance ............................................................................................... 5-6 Opex and capex outperformance .............................................................................. 5-8 Other categories of outperformance.......................................................................... 5-8 Accumulation of outperformance into the TRV ............................................................. 5-9 UR’s proposed decision on historic
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