INVESTIGATION INTO ENERGY PRICES A REPORT BY THE COUNCIL OF MINISTERS

GR: 041/07 INVESTIGATION INTO ENERGY PRICES A REPORT BY THE COUNCIL OF MINISTERS November 2007 2.00 To: Hon N. Q. Cringle, President of Tynwald, and the Honourable Council and Keys in Tynwald assembled

Background In September 2005 the Council of Ministers agreed that the Isle of Man Office of Fair Trading (OFT) should undertake an investigation under Section 19 of the Fair Trading Act 1996 into the prices being charged for energy on the Island. The period of the investigation was 2001 to 2005. The relevant part of Section 19 of the Fair Trading Act 1996 states that:- (3) On completion of an investigation under this section the Board shall make a report on the investigation to the Council of Ministers - (a) (b) stating its findings of fact which are material to the information which it provides; and containing such additional observations (if any) as it considers should be brought to the attention of the Council of Ministers as a resul t of the investigation. Progress to date This has been the largest investigation of its kind undertaken by the OFT and due to the amount of information gained it was decided to divide the report into four Chapters, each dealing separately with liquid fuels, gas, electricity and solid fuel respectively. Due to the extensive nature and complexity of some of the investigations with regard to Electricity, Gas and Liquid Fuels it was necessary for the OFT to engage consultancy assistance from Oxera Consulting Ltd which was financed by a supplementary vote from Tynwald approved on 14 th December 2005. The investigation into Coal and Solid Fuel was conducted by Officers of the Office of Fair Trading. The Fair Trading Act 1996 requires that Section 19 reports to be laid before Tynwald. The Chapters of the reports covering liquid fuels and gas were laid before Tynwald in February 2007. The Chapter dealing with electricity was laid before Tynwald in June 2007. Council of Ministers has now received the fourth and final chapter covering solid Fuel which follows this forward. The Office of Fair Trading is continuing to investigate aspects of energy prices which have arisen as a result of the investigations to date. These relate to: 1. The Section 19A investigation concerning gas prices will be continued 2. Implementation of the recommendations of the Office s Report into the price of liquid fuels on the Island 3. Implement those recommendations of the Report into electricity prices that concern the fuel cost adjustment and the monitoring of the MEA efficiency performance. Chief Minister

ISLE OF MAN OFFICE OF FAIR TRADING INVESTIGATION INTO COAL AND SOLID FUEL PRICES OCTOBER 2007

Contents 1. Introduction...3 2. History...4 3. Price...9 4. Quality...17 5. Isle of Man Marketplace...21 6. Financial Information...24 7. Findings...25 8. Recommendations...26 APPENDIX 1...27 APPENDIX 2...29 Figures Figure 1 2001 Resident Households by Percentage Share of Main Form of Heating...5 Figure 2 1991 Resident Households by Percentage Share of Main Form of Heating...5 Figure 3 2001 Resident Households that either own outright or are purchasing their property (by mortgage or loan) by main form of heating...6 Figure 4 2001 Resident Households that renting from private landlords by main form of heating...7 Figure 5 2001 Resident Households renting from Government or local authority by main form of heating...7 Figure 6 Time Series of monthly price per 50kg bag observed for coal and solid fuel in Isle of Man Jan 2003 September 2007...13 Figure 7 Index of Coal and Solid Fuel Prices and Retail Price Index Jan 03 August 2007 (Jan 03= 100)...14 Figure 8 Average monthly price of coal for the Isle of Man and the United Kingdom15 Figure 9 Average monthly price of smokeless fuel for the Isle of Man and the United Kingdom...15 Figure 10 Analysis of Volatile Matter and Fixed Carbon content of Coal & Solid Fuel Samples 2005-2007...18 Figure 11 Analysis of Gross Calorific Value of Coal and Solid Fuel Samples 2005-2007...19 Figure 12 Analysis of Total Moisture and Ash content in Coal and Solid Fuel Samples 2005-2007...20 Page 2 of 29

1. Introduction At their meeting in September 2005, the Council of Ministers requested that the Isle of Man Office of Fair Trading (OFT) carry out an investigation under Section 19 of the 1996 Fair Trading Act as amended into the price charged for energy in the Isle of Man. The initial press release advised that the investigation would cover the cost of gas, electricity, heating fuels, diesel and petrol. After a number of members of Tynwald expressed concern, Council agreed that the terms of reference for the investigation should be extended to include the price charged in the Island for coal and solid fuel. Section 19 of the Act states The Board may carry out an investigation into any price, with a view to providing the Council of Ministers with information relating to that price, if it is satisfied that the price in question is one of major public concern. This investigation focuses on the use of coal and solid fuel for the Island s domestic consumers. The industrial use of coal in the Island was considered to have become negligible and is therefore beyond the remit of this report. This document represents the OFT s report to Council of Ministers in accordance with Section 19(3). This report represents the final chapter and completion of the investigation into the price charged for energy in the Isle of Man conducted by the OFT under Section 19 of the Fair Trading Act as amended. Page 3 of 29

2. History Traditionally coal and solid fuel were the main means of providing domestic heating systems. Historically the British Isles have had plentiful resources of coal and a corresponding flourishing mining industry. Engineering developments in the 20 th century lead to the development of the central heating systems that we know today. The discovery of natural gas and improvements in oil refining techniques during the 20 th century saw the development of central heating systems which were not based on coal and solid fuel. These new systems were preferred by many households as they felt them to be more convenient, with heat available instantly and from more thermally efficient appliances then the previous coal and solid fuel based systems. The Isle of Man correspondingly has also witnessed a decreasing reliance on coal and solid fuel as the main form of heating for domestic households. This can be evidenced by quantitative household information collected during the decennial full Isle of Man census. In 1991 9,654 or 35% of all households used coal or solid fuel as their main source of heating. By 2001 this had decreased to 4,383, a decrease of 5,271 households and the percentage share had dropped to 14%. This is shown by the table and Figure 1 and Figure 2 below which break down the number of resident households recorded in the census by the main type of heating specified. A further possible cause for this decreasing reliance on coal and solid fuel as a main source of heating is the ongoing programme of installation of central heating systems into Local Authority housing stock. Table 1 Isle of Man Resident Households by Main Form of Heating Main form of heating 2001 1991 Gas 13,966 9,398 Oil 11,969 5,915 Coal/solid fuel 4,383 9,654 Electricity 1,158 2,075 Other 45 274 Total 31,521 27,316 Source; 2001 Census, Economic Affairs Division, Isle of Man Government Treasury. Page 4 of 29

Figure 1 2001 Resident Households by Percentage Share of Main Form of Heating Coal/solid fuel 13.9% Electricity 3.7% Other 0.1% Gas 44.3% Oil 38.0% Figure 2 1991 Resident Households by Percentage Share of Main Form of Heating Electricity 7.6% Other 1.0% Gas 34.4% Coal/solid fuel 35.3% Oil 21.7% Further analysis of the 2001 census household data shows notable differences in the use of coal or solid fuel as a main form of heating, depending on the household s status of tenure. Households who own or are purchasing their homes or renting from a private landlord are less likely to use coal or solid fuel as a main source of central heating. Those households who rent from either a Local Authority or the Government are statistically more likely to use coal or solid fuel as their main form of heating, than any other type of household tenure. This is shown in the table and charts below. Page 5 of 29

Table 2 2001 Resident Households by Main Form of Heating and Tenure Main form of heating Tenure Gas Oil Coal & Electricity solid fuel Other Total Own or buying property (mortgage or loan) 9,417 10,036 1,422 424 24 21,323 Renting from government or local authority 1,839 883 2,603 235 7 5,567 Renting from private landlord or employer 2,602 916 333 489 13 4,353 Other 108 134 25 10 1 278 Total 13,966 11,969 4,383 1,158 45 31,521 Source; 2001 Census, Economic Affairs Division, Isle of Man Government Treasury. Figure 3 2001 Resident Households that either own outright or are purchasing their property (by mortgage or loan) by main form of heating Coal & solid fuel 7% Electricity 2% Gas 44% Oil 47% Page 6 of 29

Figure 4 2001 Resident Households that renting from private landlords by main form of heating Electricity 12% Other 0% Coal & solid fuel 8% Oil 19% Gas 61% Figure 5 2001 Resident Households renting from Government or local authority by main form of heating Electricity 4% Gas 33% Coal & solid fuel 47% Oil 16% The analysis above indicates that the effects of changes in coal and solid fuel prices could disproportionately affect those on lower incomes. Social housing provided by the Government or a Local Authority is intended to be for the benefit of those who are less affluent in the Island s society. There are criteria in place for both income and savings levels for those wishing to go on public sector housing waiting lists. The data analysis above shows that coal and solid fuel is the most prevalent form of heating in these properties and therefore the impact of any price rises are most likely to be felt by those on lower incomes. Page 7 of 29

In addition to technological and convenience consideration, a further reason for the move away from coal and solid fuel as a main form of energy in the domestic household could be increasing concerns being voiced regarding the long term effects of the use of fossil fuels on the environment. Coal and solid fuels are generally not considered to be clean fuels. Coal and solid fuel have historically been associated with air pollution such as smog and clean air legislation has aimed to reduce this. The table below details the amount of carbon emissions generated by fuel type according to figures from the UK Department for Environment, Food and Rural Affairs 1. Gas and oil are the lowest emitting fuel types. Coal is second only to electricity in the amount of carbon emitted per kilowatt hour. Therefore a household could dramatically reduce its carbon footprint by changing from a coal or solid fuel fired heating system as their primary heating source, to an oil or gas based system. Table 3 Carbon emissions per kilowatt hour (kwh) by fuel type Fuel Type Grams of CO 2 per kwh Electricity 527 Coal 346 Oil 258 LPG 225 Natural gas 206 Source: UK Department of Environment, Food and Rural Affairs Whilst there has been a decreasing reliance amongst Isle of Man households on coal and solid fuel for use as a main form of heating, many households however, use coal and solid fuel as a secondary source. Some people prefer the aesthetic and comforting or living effect created in the home by the use of a coal or solid fuel fire. There is also the aspect of having a back-up heating system, should there be problems with the main source of heating. There is a tangible stock of the product to be held, ensuring a source of heat for a household even in the most adverse weather conditions. A further factor, espoused by the trader body the Solid Fuel Association on their website 2 is health considerations. They state that solid fuel heating can greatly reduce condensation, eliminating household mould often associated with on/off fires. Medical research has also shown that solid fuel heating can reduce the risk of hay fever, asthma or eczema. They state the reason for this as being that homes with solid fuel heating are better ventilated than those with other forms of heating; the very use of a chimney will induce ventilation into a home drawing in fresh air and removing the polluted air. 1 Guidelines to Defra's GHG conversion factors for company reporting UK Department for Enviroment, Food and Rural Affairs, 2007 2 www.solidfuel.co.uk Page 8 of 29

3. Price Comparing the cost of different domestic fuel types in the Isle of Man Discounting the practical aspects involved in choosing a source of domestic heating, the main focus is then the price that the household has to pay to heat its property. The OFT provides a monthly comparative heating schedule, which provides all the necessary information to allow direct price comparisons to be made across all Isle of Man energy providers, allowing for differing performance of different heating appliances 3. Tables 3 and 4 below compiled using data from the September 2007 comparative heating schedule show that solid fuel can be considered a relatively inexpensive form of heating. The lowest cost method of heating a domestic property is by using anthracite-large grade in a room heater with back boiler. Analysing the five most inexpensive forms of domestic heating shows three out of the five are forms of solid fuel with the remaining two being heating oil. 3 The formula for the calculation of the cost per useful kilowatt figure is as follows:- Cost per useful kilowatt = (Cost per unit sold/heat content per unit sold)/average thermal efficiency Page 9 of 29

Table 3 Isle of Man domestic fuel prices; by sector Sector Fuel Type Application Sold in Units of Solid Fuel Solid Fuel Solid Fuel Coal - Lionheart Prem Anthracite - Large Phurnacite Open Fire With Back Boiler Room Heater With Back Boiler Room Heater With Back Boiler Cost Per Unit Sold (pence) Heat Content per Unit Sold (KWh) Average Thermal Efficiency Cost per Useful KWh (pence) 50kg 1280.000 423.50 40% 7.56 50kg 1478.000 468.50 75% 4.21 50kg 1648.000 435.70 75% 5.04 Solid Warmacite Room Heater 50kg 1425.000 389.30 65% 5.63 Fuel Electricity Tariff D Electric Fire Or 1 KWh 13.060 1.00 100% 13.06 Radiator Electricity Comfy Heat Storage 1 KWh 7.090 1.00 95% 7.46 Cheap Rate Heaters Gas Calor Meter Gas Boiler 1 KWh 6.875 1.00 90% 7.64 Areas-Star Saver Tariff Gas Natural Gas Gas Boiler 1 KWh 5.187 1.00 90% 5.76 Areas- Star Saver Tariff Gas 47Kg Central Gas Boiler 47Kg 4071.000 650.00 90% 6.96 Heating (Red Or Green) cyl Gas Bulk Gas Gas Boiler 1 litre 41.440 7.00 90% 6.58 Tank Oil Fuel Oil 28 Oil Boiler 1 litre 42.100 10.18 90% 4.60 Sec. 900 Litre Oil Fuel Oil 28 Sec. 2250 Litre Oil Boiler 1 litre 41.230 10.18 90% 4.50 Note: 1. The figures are based on domestic heating only. Standing charges (which may be considerable), discounts, maintenance, size of properties etc. are not included in any of the results. 2. Figures are inclusive of VAT at 5%. Source: Comparative Heating Schedule, September 2007, Isle of Man Office of Fair Trading. Page 10 of 29

Table 4 Isle of Man domestic fuel types ranked by lowest cost per useful KWh Rank Sector Fuel Type Cost per Useful KWh (pence) 1 Solid fuel Anthracite - Large 4.206 2 Oil Fuel Oil 28 Sec. 2250 Litre 4.500 3 Oil Fuel Oil 28 Sec. 900 Litre 4.595 4 Solid fuel Phurnacite 5.043 5 Solid fuel Warmacite 5.631 6 Gas Natural Gas Areas- Star Saver Tariff 5.763 7 Gas Bulk Gas Tank 6.578 8 Gas 47Kg Central Heating (Red Or 6.959 Green) 9 Electricity Comfy Heat Cheap Rate 7.463 10 Solid fuel Coal - Lionheart Prem 7.556 11 Gas Calor Meter Areas-Star Saver Tariff 7.639 12 Electricity Tariff D 13.060 Note: 1. The figures are based on domestic heating only. Standing charges (which may be considerable), discounts, maintenance, size of properties etc. are not included in any of the results. 2. Figures are inclusive of VAT at 5%. Source: Comparative Heating Schedule, May 2007, Isle of Man Office of Fair Trading. The Isle of Man Office of Fair Trading logs all consumer complaints received on to a specialist database which allows statistics to be compiled regarding types, levels and nature of complaints made by consumers against companies trading from both on and off the Island. Analysis of this database provides the OFT with information regarding the levels of public concern regarding the supply of goods and services on the Island. Analysis of the database has provided the following information in relation to complaints received by the OFT regarding the supply of coal and solid fuel in the Isle of Man. As shown in the table below there have been relatively few complaints received by the OFT from consumers in relation to coal and solid fuel supplied in the Island. From 1 st January 2003 to date 19 complaints have been received by the OFT in relation to coal and solid fuel. Just under half of these complaints have been regarding the quality of the product supplied. This issue will be examined in more detail in Section 4. The remaining complaints are split between being about the level of price being charged for the product or Other issues which are mainly billing or customer service related issues. The complaint numbers received by the OFT are relatively low and the number of complaints received in relation to the price charged by the product did not initially concern the OFT that the price charged is one of Page 11 of 29

major public concern as required by the legislation. However the OFT did receive approaches from a Tynwald member regarding the inclusion of coal and solid fuel into the price investigation for energy announced by the Council of Ministers in September 2005. The Board considered the request made by the Tynwald member and agreed to the inclusion of coal and solid fuel in the investigation under Section 19 of the Fair Trading Act (1996) as amended as the concern of Tynwald members on behalf of their constituents was considered to be evidence of major public concern. This was publicly announced in an answer to a written question from Mr. Cannan MHK at the October 2005 sitting of Tynwald. Table 5 Consumer Complaints received by the Isle of Man Office of Fair Trading regarding the supply of coal and solid fuel in the Isle of Man 2003 2004 2005 2006 2007 Total Level of price 0 1 1 2 1 5 Quality of product 2 1 1 4 0 8 Other 0 0 2 1 3 6 Total 2 2 4 7 4 19 Despite the relatively low number of complaints made by members of the public regarding the price charged for coal and solid fuel in the Island, over the last five years there has been a marked increase in the price charged in the Isle of Man for coal and solid fuel. This is evidenced in the table below which examines annual average prices and the chart which plots the monthly observed price, below from the Comparative Heating Schedule. There are various varieties of grades of coal and smokeless fuel, all with varying properties. All open fireplaces will burn house coal and certain smokeless fuels. Closed appliances (such as room heaters, cookers and boilers) can burn a wide variety of manufactured smokeless fuels and Anthracite large nuts. The different types of fuel vary in their properties, thermal efficiencies and consequently their price. The chart below shows the differing prices of various types of coal and solid fuel, as reported in the Office of Fair Trading s Comparative Heating Schedule. Table 6 shows that marked increases in price have been observed for all types of coal and solid fuel with the largest proportionate increase being shown in the price of Warmacite, which is 43% more expensive in nominal 4 terms then observed in 2003. The use of annual average prices in Table 6 reduces the possibility of any seasonal factor being presently in the monthly prices reported which are charged in Figure 6 below. Table 6 Annual average prices for coal and solid fuel in Isle of Man Annual Average Price ( ) 2003 2004 2005 2006 2007 % Change Coal 9.36 10.10 11.73 11.98 12.84 37.2 Anthracite-Large 12.33 12.90 14.04 14.56 15.33 24.4 Phurnacite 13.13 13.70 14.97 15.65 16.58 26.3 Warmacite 9.98 10.55 11.63 13.44 14.31 43.4 Note: Per 50 kg bag Source: Comparative Heating Schedule, Isle of Man Office of Fair Trading 4 i.e. Not adjusted for the effects of inflation Page 12 of 29

Figure 6 Time Series of monthly price per 50kg bag observed for coal and solid fuel in Isle of Man Jan 2003 September 2007 Price ( ) 18 16 14 12 10 8 6 4 2 0 Jan-03 Mar-03 Coal Anthracite - Large Phurnacite Warmacite May-03 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 As observed in Figure 6 there is a degree of variation in the level of price charged for coal and solid fuel products. Therefore initial analysis of the actual reported prices does not make it possible to instantly compare the rate of increase across all products. It is possible to analyse the rate and proportion of the price increases observed by converting the actual prices observed for the coal and solid fuel products reported in the comparative heating schedule into a series of index numbers 5. By using index numbers it is possible to directly compare the impact of changes in price of the products and also compare the rate of change in price to the rate of inflation, as calculated from the Retail Price Index. Figure 7 below shows how the index numbers have increased since they were based to 100 in January 2003. The chart shows that the prices charged for all grades of coal and solid fuel has increased at a rate in excess of the increase in the Retail Price Index of the same period. Since January 2003 the price of coal has increased by 38.4%, Anthracite-Large by 21.1%, Phurnacite by 26.7% and Warmacite by 44.7%. These increases are all substantially larger than the corresponding increase in the Retail Price Index (All items) during the same period, which is just under 20%. Therefore the price for all products supplied has increased at a rate above the rate of inflation during the previous four years. 5 An index number is defined as the value of a variable expressed as 100 plus or minus its percentage deviation from its base Page 13 of 29

Figure 7 Index of Coal and Solid Fuel Prices and Retail Price Index Jan 03 August 2007 (Jan 03= 100) 160 Coal Anthracite - Large Phurnacite Warmacite RPI 150 Index (Jan 03 = 100) 140 130 120 110 100 90 80 Jan-03 Mar-03 May-03 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 An alternative independent source of price data for coal and solid fuel, to that collected by the OFT, is the price quoted in the Retail Price Index Press Release table Average Retail Prices for Selected Items. The Retail Price Index Press Release is issued by the Economic Affairs Division of Treasury. Two of the items quoted in the table are the price of 50 kg bags of coal and smokeless fuel. Identical information on Average Retail Prices of Selected Items is also produced by the UK Office of National Statistics. This means that Isle of Man and UK monthly report prices collected for the Retail Price Index can be directly compared and analysed. This is shown in Figure 8 and Figure 9 below. To account for the seasonal differentials that occur in the coal and solid fuel markets Tables 7 and 8 below shows the annual average difference between the prices listed for coal for the Isle of Man and the United Kingdom. Page 14 of 29

Figure 8 Average monthly price of coal for the Isle of Man and the United Kingdom 14 12 IOM UK Difference 10 8 6 4 2 0 Note Source Jan-03 Mar-03 May-03 Jul-03 Sep-03 Nov-03 Jan-04 Price related to 50 kg bag Economic Affairs Division, Treasury Office of National Statistics Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Figure 9 Average monthly price of smokeless fuel for the Isle of Man and the United Kingdom 16 14 UK IOM Difference 12 10 8 6 4 2 0 Note Source Jan-03 Mar-03 May-03 Jul-03 Sep-03 Nov-03 Price related to 50 kg bag Economic Affairs Division, Treasury Office of National Statistics Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Page 15 of 29 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07

Table 7 Annual average price differential between the Isle of Man and the United Kingdom for coal Annual average price 2003 2004 2005 2006 2007 Change IOM 9.15 9.93 11.00 12.05 12.95 41.5% UK 8.33 8.56 9.39 10.16 10.79 29.5% Difference 0.82 1.37 1.61 1.89 2.16 Note Source Price related to 50 kg bags Economic Affairs Division, Treasury Office of National Statistics Table 8 Annual average price differential between the Isle of Man and the United Kingdom for smokeless fuel Annual average price 2003 2004 2005 2006 2007 Change IOM 12.19 12.93 13.98 14.93 15.00 23.0% UK 10.62 11.04 11.84 12.59 13.11 23.5% Difference 1.58 1.89 2.14 2.35 1.89 Note Source Price related to 50 kg bags Economic Affairs Division, Treasury Office of National Statistics Figure 8 and Table 7 shows the widening increase in the differential for the price of coal between the UK and the Isle of Man. The differential has nearly trebled; increasing from 82 pence per bag in 2003 to on average 2.16 per bag in 2007. The average price for a 50kg bag of coal has increased by over 40% to 12.95 in the Isle of Man, yet in the UK the price has increased by 29.5% in the same period. The disparate rate of price increase has caused the widening gap in the reported prices for coal. Figure 9 and Table 8 gives comparable information for smokeless fuel. The differential in UK/Isle of Man prices has increased by nearly 20%; from 1.58 in 2003 to 1.89 in 2007. There has not been such a widening in the price differential as observed in the price of coal, as over the same time period the prices have increased by broadly the same proportion. The annual average price charged for a 50 kg bag of smokeless fuel has increased by 23% between 2003-2007 in the Isle of Man, compared with 23.5% in the UK over the same period. Page 16 of 29

4. Quality An important consideration that sits along side an examination of the price charged for a product is the issue of the quality of the product being paid for. The OFT has upon occasion received complaints about the quality of coal being sold on the Island and has investigated them thoroughly. It is useful at this juncture to give a brief history of how solid fuel has been graded for quality in the past. The term solid fuel is applied to a wide range of fuels including coal, lignite and peat, which occur naturally and to coke and briquettes, which are manufactured. Coal is a fuel which varies considerably both in physical and chemical properties and it will be helpful to define some of the terms used. Coal is classified in terms of rank; a high rank coal has a high rank carbon content. The other major combustible element in coal, hydrogen, occurs in combinations with carbon as hydrocarbons, which are released as volatile combustible gases when the coal is heated. Historically, if the OFT has received a number of complaints from members of the public regarding the quality of the coal and solid fuel purchased on the Island, the OFT has taken numerous product samples from all relevant suppliers and sent them to an independent accredited test house so that the quality of the product sold can be tested. Data on the test results observed from the samples is then provided to the OFT from the test house. Should any of the test results received infer that there was an issue with the quality of the product sampled, the OFT would raise the issue immediately with the supplier concerned to seek an explanation. The OFT has a certain amount of historic data on the results from samples submitted and these may provide an indication as to the consistency of the quality of the product supplied on the Island. An explanation of the terminology used when the samples are tested is given below. A table detailing fully the results of samples tested can be found in Appendix 2. The volatile matter represents the combustible gases which are driven off when fuel is heated and the consumer would refer to this as smoke and gas. It therefore follows that a consumer would benefit most from a fuel which has a low volatile matter. From past experience an average of around 35% is normal. The abbreviation DAF refers to Dry and Free. A main constituent of coal is fixed carbon and as this is the part which creates the heat, this reported figure should be greater than the observed figure for volatile matter. The expected fixed carbon figure should be in the region of 55-60% The calorific value is the amount of heat produced by a given quantity of fuel and is shown as a percentage of the weight of fuel found in our samples. The calorific value of coal of all grades varies greatly but generally what was originally described as Group 1 coal would have a value in excess of 30 000 kj/kg and Group 2 would have a value between 25 000kj/kg and 30 000kj/kg. In the case of anthracite this will generally have a calorific value in excess of that for Group 1 coal i.e. more than 30 000kj/kg. Page 17 of 29

Ash and moisture do not produce heat and an excess of either will inhibit combustion. Ash can deaden the fire by restricting the air flow to the fuel and moisture has to be driven off to allow combustion of the fuel. Expectations are that the percentage of ash observed would be in the range of 4-6. If this figure is high, the consumer is paying for something which is of little use to them and inhibits the combustion of the fuel. Moisture content would vary dependent on weather conditions and position within a stockpile. Figure 10 below details the observed values reported for the percentage of volatile matter and fixed carbon found to be present in the samples submitted by the OFT for testing. As expected the amount of fixed carbon was found to be greater than the amount of volatile matter for all samples. As expected with a product of this nature, the Figure shows a small degree of variation in the observations, however no samples show results that would cause the OFT concern. The average amount of fixed carbon per sample was 53.1%, marginally lower than expected but the average will have been affected by the distribution of all the results. The average amount of volatile matter observed in the samples is 33.8%, lower than would be expected. This is of benefit to the consumer, as volatile matter is not of any heating benefit. Figure 10 Analysis of Volatile Matter and Fixed Carbon content of Coal & Solid Fuel Samples 2005-2007 70 60 Volatile Matter % Fixed Carbon % 53.1 50 40 % 33.8 30 20 10 0 Smpl 1 2007 Smpl 2 2007 Smpl 3 2007 Smpl 1 2006 Smpl 2 2006 Smpl 3 2006 Smpl 1 2005 Smpl 2 2005 Smpl 3 2005 Smpl 4 2005 Smpl 5 2005 Average Figure 11 below details the gross calorific value observed in kilojoules per kilogramme in the sampled product. The calorific value is the quantity of heat released by consumption in a calorimeter, of a unit quantity of fuel under given conditions in the testing laboratory. The majority of samples report would appear to relate to Type 2 product as the calorific value observed ranges from 25,000-30,000. Again there are no samples present in the analysis that would cause the OFT cause for concern. Page 18 of 29

Figure 11 Analysis of Gross Calorific Value of Coal and Solid Fuel Samples 2005-2007 32,000 Kj/kg 31,000 30,000 29,000 28,000 27,000 26,000 25,000 Smpl 1 2007 Smpl 2 2007 Smpl 3 2007 Smpl 1 2006 Smpl 2 2006 Smpl 3 2006 Smpl 1 2005 Smpl 2 2005 Smpl 3 2005 Smpl 4 2005 Smpl 5 2005 Average Figure 12 details the observed quantities present of unwanted elements in the samples taken; moisture and ash. The observed ash content of the samples is consistently in the expected range of 4-6%, there are no samples which exceed the 6% upper bound of expected observations. The average ash content observed across all samples present in Figure 12 is 4.6%. The moisture content in the samples is much more variable with range of the content observed in the samples ranging from around 5% to nearer 16%, with the average being around 8%. As previously explained this larger degree of variation is to be expected dependent on weather conditions prevalent when the sample was taken and stored and possibly the position of the sampled product within a stockpile. Page 19 of 29

Figure 12 Analysis of Total Moisture and Ash content in Coal and Solid Fuel Samples 2005-2007 % 16 Total moisture % Ash % 14 12 10 8 8.5 6 4 4.6 2 0 Smpl 1 2007 Smpl 2 2007 Smpl 3 2007 Smpl 1 2006 Smpl 2 2006 Smpl 3 2006 Smpl 1 2005 Smpl 2 2005 Smpl 3 2005 Smpl 4 2005 Smpl 5 2005 Average The analysis of coal and solid fuel samples taken conducted over recent years has shown the quality of coal and solid fuel sampled in the Isle of Man by the OFT to be reasonably consistent in respect of volatile matter, fixed carbon and ash content. The gross calorific value however has shown greater variation and certain samples being markedly below average, but this could be explained by differences in classification of the product sampled. The results of the independent tests carried out on the coal and solid fuel supplied in the Isle of Man have proven to the OFT that the product being supplied is of a reasonable and expected consistent quality. Page 20 of 29

5. Isle of Man Marketplace Historically on the Island there were a larger number of solid fuel distributors in the Isle of Man. There has been a significant amount of consolidation in the industry corresponding to the decreasing domestic market as outlined in Section 2. Presently there are two companies on the Isle of Man; Castletown Fuels Limited and CPL Distribution Limited (CPL) who wholesale imported coal and solid fuel to the Isle of Man. There was a third company (Ramsey Coal and Builders Merchants Limited) but this was taken over by CPL. There are a small number of other retail outlets on the Island, such as Farmers Combine Limited, which supply bagged products brought to the Island by one of the aforementioned suppliers. For the purposes of this investigation conducted into the price charged for the coal and solid fuel in the Isle of Man, the report will focus on the suppliers who import the product directly to the Island. Castletown Fuels Limited Castletown Fuels Limited is based in the Balthane Industrial Estate in Ballasalla in the south of the Island. The company was established in August 2000 and is a wholly owned subsidiary of Rudrum Holdings, the other wholly owned subsidiary being Corralls Coal which operates on the south coast of England. Castletown Fuels Limited advised the Office that our delivery costs have risen substantially due to the Manx Authorities policy of converting Local Government housing to more expensive gas and oil. This means we have to travel further afield to deliver our coal and has resulted in two long established Isle of Man coal merchants selling out to us Quirks of Peel and Jones of Douglas. CPL Distribution Limited CPL Distribution Limited advised that the solid fuel distribution business based on the Isle of Man was acquired by CPL Industries Limited as part of the acquisition of British Fuels Limited in 1998. Since this date the operation on the Isle of Man has continued to run as a solid fuel distribution business. CPL advised the OFT that We are aware historically there have been a number of solid fuel distributors, as well as CPL Distribution, operating on the Isle of Man, including a trader named Jones, Farmers Combine, Collet & Cowley, Quirkes and Ramsey Coal As far as we are aware, and, following the acquisition of the solid fuel distribution business of Quirkes by Castletown Fuels and the acquisition of the solid fuel business of Collett & Cowley by CPL Distribution Limited, there are three other similar businesses, to the Company, operating on the Island, namely Castletown Fuels, Ramsey Coal and Farmers Combine. Existence of price differential with UK Both companies were asked to explain the existence of a differential between the price charged for coal and solid fuel in the Island and in the UK. Castletown Fuels Limited advised that there are many differences in prices for solid fuel within the UK and that regions have their own variance. They advised that This is due to individual delivery costs. The mos t expensive is around London, whose customers are sparse Page 21 of 29

and coal merchan t s delivery and property costs are immense. The south coast has a similar problem. Castletown Fuels Limited also advised the OFT that their delivery costs have risen substantially due to the local authorities in the Island having a policy of introducing gas and oil based central heating systems in their properties. Consequently the company has stated that they have to travel further afield to deliver coal and that this has resulted in two long established coal merchants selling out to them. When asked to state possible reasons for the existence of the price differential between the Island and the UK, CPL also stated that there are price differentials throughout regions in the UK and they list the following factors as causing the price differentials:- the geographical location in which the company s distribution depo t operates; the purchase cost of the product and the related transport cost for delivery to the depot; the price being charged by competitors in the geographical area; the cos t of labour, and the cos t o f delivery from the depo t to the customer s premises Transport Costs Figures provided to the OFT by the coal and solid fuel importers would estimate that the transport costs involved with bringing the product to the Isle of Man is between 1.80 to 1.85 per 50kg bag. The OFT understands that this level of costs is around three times that which would on average be observed in the UK (approximately 60 pence per 50kg bag). Therefore approximately up to 1.25 of the observed price differential between the UK and the Isle of Man could be attributed to the additional cost in transporting the product to the Island. Any amount above 1.25 in the Isle of Man/UK price differential would have to be attributed to different factors; increased operating costs, lack of economies of scale in the marketplace over which to spread fixed costs and/or increased profit levels being generated by operators. Procurement policy Both suppliers were asked to provide information to the Office on how they procure the coal and solid fuel they supply. CPL state that their procurement policy is based upon the type and range of solid fuel products requested by the customer; subsequently they will source and supply the product at the required quality, quantity and price. Therefore this price will also incorporate the cost of the product and the related cost of transportation into the Company s operating depot. CPL advised the OFT that historically the company was able to store loose product for onward sale at the depot but due to imposed restrictions the company now state t hey predominately store pre-packed produc t. Castletown Fuels purchase their wholesale product from three different sources. The suppliers are chosen on the basis of best consistent quality. They did consider purchasing house coal from other suppliers but this would have to come in loose by ship and any savings would be wiped out by degradation. Page 22 of 29

Ramsey Coal and Builders Merchants Limited When the initial requests were sent to the coal wholesalers in the Island during 2006, there was a third wholesaler in existence; Ramsey Coal and Builders Merchants Limited. Ramsey Coal were unable to submit the full amount of requested financial information as the OFT was advised that the company was at the time being ran by a sole director. They did however forward as much as they were able. They advised the OFT that in the early 1980 s the company was formed in its previous incarnation as Mannin Fuels which in 1993 became Ramsey Coal and Builders Merchants Limited. Ramsey Coal advised that in the 26 years that they had been in the solid fuel industry the retail price had increased by an average of 3.06% per annum. Ramsey Coal advised that they purchased their products on a value/price basis and purchased from two independent suppliers to ensure best quality versus cost and alternate sourcing. They advised that their tonnage had fallen dramatically over recent years; mainly due to the conversion of housing stock to oil and gas central heating systems. The following predictions made by a Director of Ramsey Coal regarding the Isle of Man solid fuel market turned out to be somewhat prophetic:- Coal volumes will shrink to levels unprofitable for existing merchants Within in the next ten years there will be only one small merchant based on the Island. It is likely that this merchant will only retail solid fuels as only part of its business, or will rely on Government funding Within the next 15 years oil and gas will become too expensive for heating use Dependant on no new energy sources being available within 15 years solid fuels are likely to be biomass based, this will be the source of future domestic heating. The OFT became aware in early 2007 that the business of Ramsey Coal had been taken over by CPL. Page 23 of 29

6. Financial Information The Fair Trading Act 1996 as amended includes provisions for process of investigations at Schedule 3. Whilst this is relevant to the general carrying out of any investigation, Section 3(1) specifically requires the OFT, in its role as a commission, to have regard to the need to exclude from a report any matter which relates specifically to the affairs of a particular body of persons where publication of that matter would or might, in the opinion of the commission, seriously and prejudicially affect the interests of that body. The OFT considered on advice that the publication of detailed analysis of unpublished financial statements would be an unnecessary breach of commercial confidentiality and that anonymising the data would be inappropriate with such a small number of operators. The OFT has therefore decided to base its conclusions on the full data available to it but to report the information on the basis of summarising the main conclusions on analysis of data obtained. The OFT believes that the impact of commercial confidentiality on this report has not affected the validity of the conclusions which were made on data that has been obtained but is not reported. The OFT accepts that this issue would be more significant when reporting under Section 19A and wishes to make it clear that its decision on commercial confidentiality in this matter is the result of the application of the legal test contained in the 1996 Act to the coal and solid fuel market in the Isle of Man at present and not one of binding policy. Both Castletown Fuels Limited and CPL Distribution were asked to provide detailed financial information to allow the analysis of the financial performance of the business to be appraised. A copy of the information request is included at Appendix 1. This information was independently assessed by a professionally qualified accountant. The accounting professional observed that both companies experienced problems with keeping the gross profit generated per tonne sold up to budgeted levels. The opinion was that neither business was making what would be normally considered to be a commercial return. They also seem to struggle with the financial burden of investing in the required capital and appear to be operating in a market that is reducing in overall terms. This is backed up by the reducing numbers of households using coal or solid fuel for heating purposes and the consolidation witnessed in the wholesale supply market. In the accounting professional s opinion, it would be difficult to claim that either firm was profiteering. This analysis was conducted upon the information supplied by Castletown Fuels and CPL during 2006. The consolidation of the Ramsey Coal business into CPL is likely to have impacted on the performance of both companies in the Isle of Man marketplace. It would be too early at present to assess the impact of the consolidation in the relevant company s financial statistics due to the time lag present in the preparation of financial data and the fact that the assessment of the impact of the changes in the market would need at least a full twelve months worth of data. Page 24 of 29

7. Findings 7.1 There is a greater reliance on coal and solid fuel as a main form of heating for those in public sector rental accommodation. Therefore the impact of any increase in the retail price of the product is greatest for this group. 7.2 Certain grades of solid fuel are inexpensive when compared to other available forms of domestic heating in the Isle of Man. However, this does not seem to have impacted upon the consumer s choice of main heating fuel as other factors are taken into consideration; convenience, environmental concerns and the efficient thermal performance of appliances. 7.3 The price charged for coal and solid fuel has increased at a rate greater than the increase in the rate of inflation measured by the Retail Price Index in the Isle of Man over the same period (January 2003 September 2007). 7.4 There has been a substantial widening in the price differential observed between the UK and the Isle of Man for coal. The difference in the prices charged has nearly trebled: 82 pence per 50kg bag in 2003 to on average 2.16 per bag in 2007. The average price for a 50kg bag of coal has increased by over 40% to 12.95 in the Isle of Man, yet in the UK the price has increased by 29.5% in the same period. The disparate rate of price increase has caused the widening gap in the reported prices for coal. Prices for smokeless fuel in the UK and Isle of Man have increased in broadly the same proportions over the same period 23%. This has meant that there has been only a very small increase (31 pence) in the observed UK/Isle of Man differential in price charged for smokeless fuel. 7.5 Independent testing of samples of products retailed on the Isle of Man has shown no cause for concern regarding the quality of coal and solid fuel products supplied in the Island. 7.6 It is estimated that up to 1.25 (per 50kg bag) of the differential between UK and Isle of Man prices can be attributed to the increased transport costs faced by suppliers in bringing the product to the Island. Any amount above 1.25 in the Isle of Man/UK price differential would have to be attributed to different factors; increased operating costs, lack of economies of scale in the marketplace over which to spread fixed costs and/or increased profit levels being generated by operators. 7.7 After examination of financial information submitted by both suppliers, there was no evidence of either company earning level of profits which could be considered to give a cause for concern when financial information was examined in 2006. Page 25 of 29

8. Recommendations 8.1 The OFT notes with concern the widening price differential between the observed retail prices in the Isle of Man and the United Kingdom. The OFT appreciates that there will be a decreasing ability for suppliers to benefit from economies of scale as the market size decreases. However, the OFT would like to seek a reassurance from both companies that they remain committed to supplying the Isle of Man with consistently good quality products for the best achievable price. 8.2 A reassessment of the financial performance of both companies should be undertaken during 2008 to ensure that the market is continuing to function for the benefit of Isle of Man consumers. Should the price charged become of major public concern to Isle of Man consumers once more, the OFT will reassess the need to carry out further investigation into the price charged under the Fair Trading Act 1996 as amended. Page 26 of 29

APPENDIX 1 ISLE OF MAN OFFICE OF FAIR TRADING INQUIRY INTO THE PRICE OF ENERGY IN THE ISLE OF MAN INFORMATION REQUEST FOR SUPPLIERS OF SOLID FUEL 1 Please provide a brief history of your Isle of Man business, together with a chronology of significant events since 1 January 2000. 2 Please provide an organisation chart of your business, including a list of subsidiary companies owned, joint ventures etc. and details of shareholders who hold more than 15% of the equity share capital. 3 Please provide an overview of the structure of the solid fuel industry within which you operate identifying the main activities in the supply chain and the companies active at each stage. 4 What explanation is there for the price differential with the UK for solid fuel? Please provide evidence to support these explanations. 5 Please provide details of all wholesale and retail prices charged by your company since 1 st January 2000 for all forms of solid fuel. Please include explanations of why significant (i.e. greater than 5%) retail price changes have occurred. 6 Please provide information relating to any discounts offered on the above (e.g., negotiated terms, wholesale discounts, volume discounts, etc). What % of each customer segment (i.e. wholesale, commercial) has such negotiated discounts? 7 Please provide details of wholesale prices paid for all inputs since 1 st January 200. Please provide details of shipping costs, where appropriate. 8 Please describe your company s strategy for procuring and contracting solid fuel and explain why this strategy has been adopted. 9 Please provide a monthly breakdown of your customer numbers (wholesale/retail) and volumes (tonnage of each type of fuel) supplied by your company since January 1 st 2000. Where appropriate, please divide the types of customers into relevant categories, e.g., domestic and non-domestic customers. Page 27 of 29