Manx Gas - retail margin percentage

Summary

The request sought details on the retail margin percentage set by CURA for Manx Gas, including calculation methods, benchmarking parameters, and correspondence regarding potential windfalls. The authority responded by disclosing the margin rate and directing the requester to publicly available consultation documents that detail the methodology and considered parameters.

Key Facts

• CURA set the retail margin percentage for Manx Gas at 2.1% for a 5-year regulatory period.
• The authority conducted a benchmarking exercise to determine the appropriate margin.
• Key documents referenced include the August 2021 Consultation and the March 2022 Consultation Response.
• Reports from Frontier Economics, the Northern Ireland Utility Regulator, and New South Wales were considered during the process.
• New South Wales was ultimately deemed unsuitable as a comparator for benchmarking purposes.

Data Disclosed

• 2.1%
• 5 years
• 2022/23
• 29 March 2022
• 29 April 2022
• 11th March 2022
• August 2021
• 13 July 2021
• December 2009

Original Request

Under the new price regulations, CURA are the body responsible for setting the "retail margin percentage" used by Manx Gas to set their gas tariffs. I therefore request the following: * details of this retail margin percentage for 2022/23 and details of how this retail margin percentage was calculated; * documents held by CURA illustrating which parameters the authority considered in order to set this retail margin percentage; * all documents held by CURA which illustrate if the authority considered or chose not to consider whether a retail margin percentage based on retail costs will provide Manx Gas and/or Ancala Partners with a "windfall" in times of high retail costs; * documents held by CURA illustrating which parameters the authority considered before setting the retail margin percentage; * all correspondence between CURA, Manx Gas and/or Ancala Partners LLP regarding how this retail margin percentage should be set.

Data Tables (1)

Full Response Text

Chief Executive: Ivan Kiely Ground Floor, Murray House, Mount Havelock, Douglas Isle Of Man, IM1 2SF Tel: +44(0)1624 677022 Fax: +44(0)1624 626499

Our ref: 2357926 29 April 2022

Dear ###

I write further to your request which was received on 29 March 2022, which states:

"Under the new price regulations, CURA are the body responsible for setting the "retail margin percentage" used by Manx Gas to set their gas tariffs. I therefore request the following: * details of this retail margin percentage for 2022/23 and details of how this retail margin percentage was calculated; * documents held by CURA illustrating which parameters the authority considered in order to set this retail margin percentage; * all documents held by CURA which illustrate if the authority considered or chose not to consider whether a retail margin percentage based on retail costs will provide Manx Gas and/or Ancala Partners with a "windfall" in times of high retail costs; * documents held by CURA illustrating which parameters the authority considered before setting the retail margin percentage; * all correspondence between CURA, Manx Gas and/or Ancala Partners LLP regarding how this retail margin percentage should be set."

I have split out the request into five parts and will answer each in turn below. Much of the information requested is already available in the public domain as it has been published as part of the public consultation process. The two documents that will be of most relevance are: • The Consultation on the Implementation of Price Controls published in August 20211 (‘the Consultation’); and • The Response to Consultation & the Implementation of Price Controls published on 11th March 20222 (‘Consultation Response’). 1 https://www.cura.im/media/1482/20210810-price-control-consultation-publication-version.pdf 2 https://www.cura.im/media/1592/20220311_13-22-response-to-consultation_publication- version.pdf

1. Details of this retail margin percentage for 2022/23 and details of how this retail margin percentage was calculated; The retail margin has been set for the entire regulatory period of 5 years at 2.1%. Section 4 of the Consultation sets out the proposals and rationale for how the retail margin is set and Section 5 of the Consultation Response provides the final determinations on the retail margin.

2. Documents held by CURA illustrating which parameters the authority considered in order to set this retail margin percentage; The Authority carried out a benchmarking exercise when considering an appropriate retail margin. The information considered as part of that benchmarking exercise is published within Section 4 of the Consultation3. The Consultation includes footnotes to reference other reports which were considered as part of the process, including: • A Note compiled by Frontier Economics on Behalf of Manx Gas, dated 13 July 2021. This is available to view within Annex 8 of the Consultation4; • ‘Implementation of the retail energy market monitoring (REMM) framework’ published by the Utility Regulator in Northern Ireland5; and • A published report on the ‘Estimation of the regulated profit margin for electricity retailers in New South Wales’6 put forward by Manx Gas. The issue of how appropriate comparators were selected for the benchmarking exercise is covered in Section 4.3 of the Consultation7 and Section 5.3 of the Consultation Response8; this includes the rationale for why New South Wales was not found to be a suitable comparator for benchmarking purposes. 3 https://www.cura.im/media/1482/20210810-price-control-consultation-publication- version.pdf#page=26 4 https://www.cura.im/media/1482/20210810-price-control-consultation-publication- version.pdf#page=128 5 https://www.uregni.gov.uk/files/uregni/media- files/REMM%20Retail%20Margin%20Methodology.pdf 6 https://www.ipart.nsw.gov.au/sites/default/files/documents/consultant_report_-sfg- estimation_of_regulated_profit_margin_for_electricity_retailers_in_new_south_wales- december_2009-_website_document.pdf 7 https://www.cura.im/media/1482/20210810-price-control-consultation-publication- version.pdf#page=129 8 https://www.cura.im/media/1592/20220311_13-22-response-to-consultation_publication- version.pdf#page=43

3. All documents held by CURA which illustrate if the Authority considered or chose not to consider whether a retail margin percentage based on retail costs will provide Manx Gas and/or Ancala Partners with a "windfall" in times of high retail costs; The Authority was particularly mindful of setting all regulatory parameters in such a way that Manx Gas would not benefit from windfall gains at the expense of consumers. There is discussion on this topic in terms of the initial Regulatory Asset Base (RAB) valuation. The Authority was clear from the outset that returns must be fair and determined in accordance with a RAB that was reflective of actual costs incurred by Manx Gas and as part of this, the Authority rejected a proposal put forward by Manx Gas which would have resulted in a windfall gain to the company. Further detail with regards to this can be found in Section 6.2 of the Consultation9 and 7.3 of the Response to Consultation10.

4. Documents held by CURA illustrating which parameters the Authority considered before setting the retail margin percentage; The answer to questions 2 and 3 above refer.
5. All correspondence between CURA, Manx Gas and/or Ancala Partners LLP regarding how this retail margin percentage should be set. There is already detailed information published which summarises the discussions that took place between the Authority and Manx Gas. Annex 8 of the Consultation11 is a note supplied by Manx Gas which provides an overview of Manx Gas’ proposals in relation to the retail margin. Issue 7 within Annex 11 also highlights the key concerns of Manx Gas on this topic12. The Authority has identified the following correspondence between Manx Gas (or Ancala Partners LLP) regarding how the retail margin percentage should be set. Below is an extract from a meeting note from 18 June 2021 between the Authority and Manx Gas which contained one reference, but no further detail on the topic of retail margin, as per the below. In attendance at this meeting were representatives from the Authority (executives from the Authority, the Authority’s consultant and KPMG) as well as Manx Gas and its consultant Frontier Economics. However, the topic was not discussed and was rolled over to the following meeting as an outstanding item. Extract from meeting note of 18 June 2021: “Issue 7: retail margin – how would this be determined? What margin is reasonable?” 9 https://www.cura.im/media/1482/20210810-price-control-consultation-publication- version.pdf#page=37 10 https://www.cura.im/media/1592/20220311_13-22-response-to-consultation_publication- version.pdf#page=63 11 https://www.cura.im/media/1482/20210810-price-control-consultation-publication- version.pdf#page=128 12 https://www.cura.im/media/1482/20210810-price-control-consultation-publication- version.pdf#page=155

There is also a meeting note from 28 June 2021 which refers to a discussion on the retail margin. In attendance at this meeting were representatives from the Authority, (executives from the Authority, the Authority’s consultant and KPMG) as well as Manx Gas and its consultant Frontier Economics. Extract of meeting note of 28 June 2021: Item 4: Issue 7 – how should retail margin be determined? “IK queried what factors would be included in a retail margin, as proposed he also pointed out they would need to be reasonable and workable. DR pointed out that he believed there would need to be a decent number of benchmarks, jurisdictions and sectors. It was suggested that the Authority could look at parallels of retail margin and competitive markets using a sensible approach and judgement. It was suggested that other factors the Authority could look could be the cash flow timings (billing in arrears), retail tariffs volatility, retail vs wholesale risks, etc. IK observed that taking into account customers’ needs, and what is being proposed, it could lead to a de facto wholesale price plus a margin for each set of customer category. DR agreed, and pointed out that it did interact with issue 2 (should all customers be subject to all regulation?). He observed that there is some flexibility e.g. set a minimum price + retail margin would give the customer protection against cross subsidisation.”

Please quote the reference number 2357926 in any future communications.

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I will now close your request as of this date.