FE CMA Annex 10 Consultation Responses

Published date29 March 2018
Energy SectorGas
Annex 10
Responder No.
Para or Page of
Responder
Summary of Responded Comment UR response
FE General
1
FE Energy Response
General
p1
FE state that the Survey "does not encompass all aspects of the
connection incentive and does not provide statistically robust data to
support the calculation of the non additionality rate."
UR have been directed by the CMA to only consider what is an appropriate non additionally rate and its consequential effects on the GD17 price control.
UR note that FE’s response does not engage with or address the detailed interpretation and analysis of the survey results presented in the consultation paper to any degree. This analysis considered
the wide range of values for non-additionality from the survey and worked through the evidence to arrive at a figure of 25%. FE have not provided us with any reasoning as to why that analysis is
wrong. In addition, FE have not stated what they consider the non-additionality percentage should be, nor have they provided any further evidence to us or even suggested what further work could be
undertaken.
UR undertook a review of the issues and sought the most appropriate evidence and information available. This evidence was used to formulate a judgement, which led to a range of values, before a
single point estimate of non-additionality % was decided upon. UR is of the opinion that data used in the analysis undertaken is statistically robust. The UR engaged a specialist social market research
firm, SMR, to carry out the survey and it was developed with input from FE and used FE customer records. The methodology for the survey is set out in Annex 2 which indicates that the sample
achieved is representative of the overall population. In addition, based on the achieved sample of 1002 complete interviews SMR have calculated that the margin of error is +/- 3.1% (at most) at the
95% confidence level. UR are not aware of any further evidence or work that could have been undertaken in the time available to provide more analysis on this issue.
2
FE Energy Response
General
p2
FE indicate that the four work streams do not provide a robust
conclusion regarding the calculation of the non additionality rate and
conclude that non additionality is not based on sufficient evidence,
substantiation or calculation to satisfy the CMA direction.
UR have considered four work streams, namely, the PNGL IC market for small meters; a case study of the greater Belfast area; a case study of the ROI market and a survey.
UR consider the four work streams selected represent the best available evidence in exploring what an appropriate non additionality rate is. FE have not provided any additional evidence or suggested
anything else that could be considered further.
UR concluded that 3 out of the 4 work streams are inconclusive. However these 3 work streams do suggest that many factors influence consumer behaviours on why they connect to natural gas,
including factors which are not as a result of direct advertising and marketing.
UR used the survey as its primary evidence source to inform its analysis and produce a range of values for non additionality. UR did not attach any weight to the ROI data.
As explained in Chapter 3 of the Final decision document , UR used this evidence to formulate a judgement to calculate an appropriate non additionality figure, which is fully in line with the CMA
direction on the matter.
FE Ground 2A - Connections
3
FE Connection Target
p3
FE have indicated that they have assisted UR with providing information
in relation to properties passed, up to the 31 December 2016.
FE have indicated that the revised connection numbers as presented in
the consultation, have changed due to the issues raised on the
classification of Housing Association.
FE have indicated that the Business Plan submission as submitted in
GD17, had Housing Association separated for the first time, which was
not reflected in the GD17 FD.
FE welcomes the recalculation of owner occupied for the target over the
GD17 period, using the connection model, that now exclude Housing
Association numbers.
UR note the comments of FE, who agree with the revised connection target figure for OO connections for the GD17 period of 19,400, after excluding the Housing Association connections.
FE Ground 2B - Non Additionality
4
Strategic Purpose of
the Connection
Incentive
p4
FE consider the purpose of the connection incentive in general. They
make reference to the term "Non-Additional" and indicate that it is
critical for UR to ascertain that FE has not incurred any cost in relation
to these connections.
The UR supports the efficient, economic and co-ordinated development of the gas industry within Northern Ireland. The connection incentive is an allowance to incentivise all network operators to
attract as many gas connections as possible, which are economic. UR is not prescriptive on how this allowance is used, but it is offered to maximise connections, which the network operator has
control to decide what is the most effective way of attracting customers. The non -additionality concept is premised on the idea that some gas connections will occur over time, without any direct
influence of advertising or marketing activity and deducts an amount from the overall allowance to reflect this. The purpose of this review is to establish what an appropriate non additionality rate is.
The CMA in its FD paragraph 8.39, said " Therefore , whilst we have allowed for the possibility of consequential effects within our directions, our expectation is that any changes would be limited to a
change to the non additionality rate and the direct effect on revenues associated with the connection incentive". UR consider this statement to be clear to focus solely on the non additionality rate.
5
Activities funded by the
Connection Incentive
p5
FE indicates the importance of the connection incentive and cites the
components that are covered under this activity.
UR notes the wide ranging purpose of the connection incentive, but notes that the components are an indication and not exhaustive, on the type of activities that may be related to connection activity
and the allowance is not prescriptive in how or what it pays for. The overall allowance considers the type of activity that would normally be associated with sales related activity. It should be noted that
other functions of the connection process would be covered under more general cost categories, such as call centre support staff, engineers' time of design and implementing a connection, scheduling
work activity and the contractor who lays the service and installs the meter, which is covered in a combination of opex and capital investment programme.
6
Withdrawal of Incentive
for Small I&C
consumers in the PNGL
area
p5
FE note that the UR analysis is based on an assumption of U6 meters,
but then directs the reader to the statement made by the CMA on this
area, stating that no new evidence has been provided and welcomes
the fact that UR do not draw any conclusions from this.
UR did review the I&C connections profile from the PNGL area and sought further information on the size of meters that were connected between 2011- 2016. UR made the assumption that U6 I&C
meters were identical to U6 domestic meters, so that the decision to convert to gas would have been of a similar nature due to size and scale. We note that from 2014 onwards, when the connection
incentive was dropped, we did not observe any noticeable reduction in connection numbers. In the final decision UR has placed no weight on this work stream.

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