The Office of Fair Trading (OFT) has commented on the gas tariff increase announced this week as being compliant with the Regulatory Agreement, which aims to provide both long-term security and ensure that profits are not excessive.
Manx Gas consulted with the OFT, which, as Regulator has scrutinised the tariff increase proposals together with the energy provider’s profitability and forward projections.
The OFT Chairman Martyn Perkins MHK said:
“When setting its tariffs, Manx Gas considers a range of data; including, its forward purchasing contracts, customer usage projections, and market pricing assumptions. The aim is to set tariffs which achieve the fair level of profitability set by the Regulatory Agreement.
“The OFT, with support from Treasury colleagues, has closely scrutinised the statutory and management accounts of Manx Gas for 2016, as well as the company’s forecasts for 2017.
“Looking ahead, we can confirm that, based on reasonable assumptions, the changes announced by Manx Gas are aimed at meeting the terms of the Agreement in 2017.”
The OFT estimates that for the typical central heating customer using 10,000 kWh, the changes announced will increase the annual bill by around £25. However, this will be partly offset by the regulatory adjustment which will save the customer around half of that.
The Regulatory Agreement also includes a mechanism for excess profits to be returned to the ‘consumer pot’, should the company earn beyond the set level. This is applied as a regulatory adjustment, which appears as a credit on customer bills.
During 2016, gas tariff prices were reduced on 3 occasions by a total of almost 10% in order to target the set level of profitability. As it turned out, for the year 2016 as a whole, Manx Gas slightly over-earned. As a result, the company is required to return that money to consumers by applying a regulatory adjustment.
Manx Gas will therefore be increasing the regulatory adjustment applied to bills from 0.0891p per kWh to 0.1149p per kWh from 1st April 2017. The new regulatory adjustment will save the typical central heating customer using 10,000 kWh around £12 per year. This is a direct benefit from the Regulatory Agreement.
Martyn Perkins concluded:
“The Regulatory Agreement was intended to ensure that Manx Gas customers get a fair deal on pricing and that Manx Gas cannot exploit its natural monopoly in gas supply. Manx Gas supplies a lot of commercially confidential data to the OFT in order that we can scrutinise its operations on behalf of customers. We are able to look not only at profits, but also the overall efficiency of the business and the forward purchasing strategy. It is light touch regulation which leaves the private sector free to run the business whilst providing a framework of consumer protection. The Agreement was also intended to provide long term security of supply by encouraging necessary investment in the gas supply infrastructure and it is doing exactly that.”
The Regulatory Agreement signed in 2015 is available at https://www.gov.im/oft/gas_reg.xml