OFREG and Phoenix agree in principle on long term gas network regulation

Ofreg has reached an in-principle agreement with Phoenix Natural Gas to reform regulation of its transmission and distribution network.

The proposed agreement extends the revenue recovery period from 2016 to 2046, so that the costs of network investment will now be recovered over the economic lives of the assets, in line with other utilities. The rate of return on investment has been reduced from 8.5% to 7.5%, reflecting the changed risk profile of the network business going forward. This package will save customers up to £25m.

Welcoming the proposed agreement, Iain Osborne, the Chief Executive of Ofreg, said,

”These proposals are a significant milestone in building customer confidence and competition in the Greater Belfast and Larne natural gas industry.

“Subject to the results of consultation, the proposed agreement will remove the possibility of a substantial hike in gas network costs. This should boost customer confidence and particularly reassure those considering switching to gas. It will also provide necessary stability for companies considering entering the Belfast gas market as competing suppliers.

“These proposals offer a win-win for customers and Phoenix. The total amount payable by customers has been reduced and for the company it creates a stable basis for future investment and growth.”

Notes for Editors

OFREG (the Office for the Regulation of Electricity and Gas) supports the Northern Ireland Authority for Energy Regulation (NIAER) the regulator of the Electrcity and Gas industries in Northern Ireland. NIAER’s powers are derived from the Electricity (Northern Ireland) Order 1992, the Gas (Northern Ireland) Order 1996 both as amended by the Energy (Northern Ireland) Order 2003.

The new arrangements will be subject to consultation in early 2007 before being implemented through licence modifications. Subject to this consultation it is intended they be effective from January 2007, although the modifications will not be in place until March 2007.

The proposals relate to gas network costs (22% of the average domestic bill which is £138 out of £628). Under the existing licence, the whole network investment was to be recovered over just 10 more years. To achieve this Phoenix would have had to double network prices. Because it has not hiked these prices, it is under-recovering every year and these under-recoveries would (under the existing licence) have allowed it to raise network charges still further: a vicious circle. Extending the recovery period means network charges can continue at broadly the current level.

The total value to customers is up to £25m compared to the 2004 proposals.

The agreement on recovery periods clears the ground for a new network price control from April 2007. This will set precise network charges in the light of the newly defined regulatory asset base and the latest information about network costs and volume forecasts.

The agreement also provides for the transmission pipeline operated by Phoenix to be sold. Ofreg hopes this will lead to a simplification of Northern Ireland’s transmission arrangements.

For further information contact:-

Conall McDevitt, Weber Shandwick Tel: 028 90764911, 07770 886933