Bord Gáis Energy Fuel Variation Tariff (FVT) Fixed Rate Charge Review DOCUMENT TYPE: REFERENCE: Decision Paper CER/11/048 PUBLISHED: 24 th March 2011 The Commission for Energy Regulation, The Exchange, Belgard Square North, Tallaght, Dublin 24. www.cer.ie
CER Information Page Abstract: This paper sets out the Commission for Energy Regulation s (CER) decision following a review (CER/11/035) of the Bord Gáis Energy fixed rate charge and own supply cost charge elements of the Fuel Variation Tariff (FVT) as established in CER/07/097. Target Audience: Gas Customers, Suppliers, Shippers and Producers. Related Documents: CER/11/035 FVT Fixed Rate Charge Review (February 2011) CER/10/137 FVT Review (August 2010) CER/10/143 FVT Fixed Rate Charge Review - March 2010 Decision CER/07/097 Decision on BGES tariff structure for larger NDM Industrial and Commercial customer. (The Fuel Variation Tariff ) For further information on this final decision paper, please contact Stuart Coleman (scoleman@cer.ie) at the CER. 2
Executive Summary This decision paper outlines the CER s final decision with respect to the Fixed Rate Charge and Own Supply Cost Charge of the BG Energy FVT pricing regime. Following consultation with industry, which involved the publication of a consultation paper on 24 th February 2010 (CER/11/035), the CER has decided to retain the fixed rate charge of 0.3847c/kWh, and own supply cost charge of 640 as proposed in the February consultation paper. Summary of Decision No Change to Fixed Rate Charge of 0.3847 c/kwh No Change to Own Supply Cost Charge of 640 per annum 3
1.0 Introduction 1.1 Legal Background Under section 23 of the Gas (Interim) (Regulation) Act, 2002, the Commission for Energy Regulation ( the CER ) is responsible for regulating charges in the natural gas market, including supply tariffs to certain final customers. 1.2 Purpose of this paper The purpose of this paper is to outline to the gas industry and associated stakeholders the CER s decision in respect to the Fixed Rate and Own Cost Supply charges of the Fuel Variation Tariff offered by Bord Gáis Energy (BG Energy). 1.3 Comments Received The CER received one response to the consultation paper (CER/11/035), from FloGas. This response is available to view on the CER website. 1.4 Background Information On the 16 th July 2007 the CER published a decision (CER/07/097) with respect to the implementation of a price regulation regime (a Fuel Variation Tariff) for Non- Daily Metered (NDM) gas consumers of BG Energy with a Supply Point Capacity above 3,750kWh and consumption level above 73,000kWh gas annually. The resulting regime came into effect on the 1 st October 2007. The aim of the FVT regime is to provide a transparent tariff which reflects the underlying cost of procurement and delivery of gas to BG Energy s larger NDM customers. It was also designed to provide the opportunity for customers to choose a tariff that is suited to their individual preference. In CER/09/143 the CER decided given fluctuations in the commodity and currency markets over the course of a gas year, to review the fixed rate charge component of the FVT twice a year. Following this and as part of the twice yearly 4
review the CER published CER/11/035 which outlined no proposed changes to the Fixed rate and Own Supply Cost charges. 5
2.0 FVT Structure The FVT is a price regulated formula consisting of four elements: a gas commodity charge, a fixed rate charge, a site charge and a shrinkage gas charge. The tariff is designed to provide a transparent tariff which reflects the underlying cost of procurement and delivery of gas to those NDM customers with an SPC greater than 3,750kWh. Each customer s monthly invoice consists of four components: The Gas Commodity Charge (c/kwh) reflects the monthly unit cost of wholesale gas at the UK NBP. The level of commodity charge faced by any particular customer for a given month will depend on which pricing option the customer has chosen. Customers may elect to contract for a monthly floating price or fixed price. The monthly floating price is calculated as an arithmetic average of the last five ICE daily settlement prices for month M-1 as published on the European Spot Gas Markets. The fixed price is calculated as the published ICE settlement price for the day immediately prior to the booking window. The Shrinkage Gas Charge (c/kwh) reflects the monthly unit charge for transmission shrinkage gas costs incurred by BG Energy in respect of the FVT volumes. The rate varies each month but it is charged equally to all customers regardless of which gas commodity option the customer has chosen. The Fixed Rate Charge (c/kwh) incorporates those costs which depend on the volume of gas supplied where the appropriate rate of cost recovery (per kwh consumed) remains constant through the gas year and does not vary between customers. This charge consists of transmission commodity tariffs, distribution commodity tariffs, UK transportation costs, swing flexibility and an approved margin on total costs. The Transport Capacity and Own Supply-Cost Charge ( /month) incorporates those costs which are largely independent of the gas volume consumed by a customer. These consist of transmission and distribution capacity tariffs and the administrative cost of running BG Energy s business. The transportation capacity costs are site-specific, being based on the individual capacity booking requirement for each customer. 6
3.0 Comments Received The CER received one response to the consultation paper (CER/11/035) from Flogas. This response is available to view on the CER website. Flogas s Comments: While making no specific comments on the proposal to retain the fixed charge at its current rate, Flogas did note concerns with aspects of the Own Supply Cost, comments are below; It is proposed to leave the Own Supply Cost charge of 640 per customer unchanged. We understand that this figure includes an allowance for bad debts of 0.5% of turnover being the historic trend level. This does not seem consistent with reports of higher bad debts due to the economic downturn. The Own Supply Cost charge should reflect the current bad debt experience. We understand that the Own Supply Cost charge does not include any allowance for Sales and Marketing costs. BGES enjoys the benefit of trading under the same brand as BG Networks. In order to ensure a level playing field, an imputed cost should be included. No cost is included in the Own Supply Cost charge for the cost of providing financial security. This is a real and increasing cost. It appears that as a semistate organisation with a sovereign guarantee, that BG effectively ignores this cost. In the circumstances we believe than an imputed cost should be included. CER Response: The CER can confirm that there is a provision of 0.5% of turnover for bad debt allowance in the calculation for Own Cost Supply. The formula used to set to cost to serve is the same as that used for the NDM I&C and residential customers in the RCF (Revenue control Formula). This formula was set in 2007. While the allowance set at the time may not be entirely suitable to reflect the current level of bad debt, there is no mechanism to redefine the allowance in its current form. Aspects such as bad debt will be examined as part of review of the form of the RCFin the coming months. 7
Sales and marketing costs are not included in the own supply cost as BG Energy does not actively market its gas only products. It is acknowledged that the cost of providing financial security for the supply company is linked to the parent Bord Gáis Eireann. While this may be seen to provide some benefit, in the current economic climate the CER is of the view that this is not a material advantage for a semi state company. 8
4.0 Decision Following a review of the cost inputs into the FVT tariff methodology and a consultation with industry, which involved the publication of a consultation paper in February 2011 (CER/11/035), the CER has decided there will be no change to the fixed rate charge of 0.3847c/kWh, and no change to the own supply cost charge of 640 per annum. Summary of Decision No Change to FVT Fixed Rate Charge of 0.3847 c/kwh No Change to Own Supply Cost Charge of 640 per annum The next review of the Fixed Rate and Own Supply cost charges will be in summer 2011. 9