CONSULTATION ON POTENTIAL COMPETITIVE
PROCESS FOR GAS DISTRIBUTION AREAS
21 JUNE 2002
CER/02/53
CER Consultation Document [CER/02/53]
TABLE OF CONTENTS
1.
INTRODUCTION
2
2.
BACKGROUND
4
3.
GENERAL APPROACH
4
4.
THE NOTICE
4
5.
THE COMPETITIVE PROCESS
5
5.1.
5.2.
5.3.
Stage 1: Pre-Qualification
Stage 2: Selection
Additional Obligations
5
6
9
6.
FRANCHISE DURATION AND GAS SUPPLY RIGHTS
10
7.
COMMENTS
11
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1.
INTRODUCTION
The Commission has a duty to promote competition in the supply of gas for the
benefit of final gas customers. This Consultation Document is concerned with a
particular and important aspect of the Commission’s duty with respect to widening
the part that competitive forces play in the gas market. The following considers the
part that competition might play in the award of franchises for the distribution and
supply of gas to final customers in particular geographic areas.
Under the Gas (Interim) (Regulation) Act, 2002 (the “2002 Act”), the rights relating
to the transmission, distribution and supply of gas are granted to a specific party
by an Order issued by the Commission for Energy Regulation (the “Commission”)
under Section 2(1) of the Gas (Amendment) Act, 1987 (a “Section 2(1) Order”). In
addition to a Section 2(1) Order, any party proposing to construct a gas pipeline
requires the consent of the Commission1, or is the subject of an exemption2 to a
specific consent. At the same time, the 2002 Act requires that parties hold
appropriate licences for transmission, distribution and supply of gas, as issued by
the Commission.
The provisions of section 2A of the Gas (Amendment) Act, 1987 (as amended by
Section 23 of the Gas (Interim) (Regulation) Act, 2002) allow that the Commission
may conduct a competitive process to determine the award of Section 2(1) Orders.
The purpose of this document is to consult on the framework for a potential
competitive process.
This Consultation Document is structured as follows:

Section 1:
Introduction;

Section 2:
Background;

Section 3:
Description of the general approach;

Section 4:
Purpose of Notice;

Section 5:
Outline of the Competitive Process;

Section 6:
Description of the franchise duration and supply rights;

Section 7:
Request for Comments.
All interested parties are invited to comment on the Consultation Document no
later than 5.00pm on Friday 19th July, 2002.
Responses to the Consultation Document, preferably be in electronic format,
should be submitted to:
1
Section 39A, Gas Act, 1976 (as amended).
2
Section 12(2), Gas (Interim) (Regulation) Act, 2002 and/or section 2(6)(b) of the Gas Amendment Act, 1987.
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Catherine O’Hara
Commission for Energy Regulation
Plaza House
Belgard Road
Tallaght
Dublin 24
Tel: +353 (01) 4000800
Fax: +353 (01) 4000850
Email: cohara@cer.ie
Independently of this consultation document the Commission is publishing a notice
to ascertain whether there exists any interest among prospective applicants for a
Section 2(1) Order in respect of those areas for which an application is currently in
existence. The areas are Galway, Tullamore, Ballinasloe, Athlone, and Mullingar.
The responses to that notice will assist the Commission in deciding whether or not
it is appropriate, at this juncture, to run a competitive process in relation to the
areas specified in that notice. The results of the consultation exercise, which is the
subject of this consultation document, will assist the Commission in the
development of any such competitive process.
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2.
BACKGROUND
Under the Gas (Amendment) Act, 1987 (the “1987 Act”), Bord Gáis Éireann’s
(“BGÉ”) functions were extended to include functions corresponding to those of the
town-gas companies. These functions, relating to the supply, transmission,
distribution and sale of gas, were conferred by Ministerial Order on BGÉ for
particular geographic areas under Section 2(1) of the 1987 Act (a Section 2(1)
Order), to ensure the continuation of the services that the town-gas companies had
provided in those areas.
Only one such Order has been made: the Gas Amendment Act, 1987 (Section 2)
Order, 1987 (S.I. 283/1987) (the “Order”). However, while the Order at first related
only to defined areas of Dublin and Kilkenny, it was amended in 1989 by S.I.
162/1989 to include other areas where gas distribution took place, and in 1997 by
S.I. 119/1997, to encompass the whole of each county in which any relevant gas
activity was carried out. The last amendment was made in 1999 by S.I. 338/1999,
which conferred on BGÉ the right to exercise the relevant functions in the counties
of Carlow, Cavan, Clare, Cork, Dublin, Kildare, Kilkenny, Laois, Limerick, Louth,
Meath, Monaghan, Tipperary, Waterford and Wicklow.
It is now possible for any person to apply to the Commission for a Section 2(1)
Order conferring the right to develop and operate a gas distribution network (and,
where appropriate, transmission facilities) and to supply gas to final customers in
any area where none currently exists.
3.
GENERAL APPROACH
The Commission is considering employing a two-stage competitive approach to the
award of a Section 2(1) Order in the event that the Commission considers it
appropriate to run such a competition. This consideration will be assisted by the
publication of a notice, the purpose of which is to ascertain if there is interest in
distribution and/or supply rights in a particular geographical location by entities
other than the initial applicant.
The stages of the competitive process would be:

Stage 1: the pre-qualification stage;

Stage 2: the selection stage.
4.
THE NOTICE
By issuing a notice, the Commission would wish to assess the merit of initiating the twostage competitive process. The Commission might also at this stage consider the merits of
separating the distribution and supply rights and, therefore, whether or not there might be a
competitive process for both.
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Parties responding to the notice may be requested to supply some or all of the following:

The respondent’s corporate profile;

The respondent’s experience in relevant industries;

The respondent’s technical and financial capability pertinent to the natural gas
industry.
After consideration of the responses received, the Commission would take a view as
to whether or not a competitive process for the award of a Section 2(1) Order
should be initiated.
5.
THE COMPETITIVE PROCESS
If, as a result of its assessment at the end of the process outlined above, the
Commission concludes that it would be appropriate to conduct a competitive
process for selecting successful applicants in respect of whom a Section 2(1) Order
may be awarded for distribution and/or supply rights in particular geographical
areas, the Commission would make public its decision and it would develop and
publish the framework for the competitive process.
The Commission proposes to divide the Competitive Process into two stages: (1) a
Pre-qualification Stage and (2) a Selection Stage. We discuss each stage in turn.
5.1. Stage 1: Pre-Qualification
The objective of the pre-qualification phase is to narrow down the number of
prospective applicants to those with the relevant expertise and financial strength to
undertake the construction and operation of the distribution system and arrange
gas supplies as appropriate.
The Commission would call for initial expressions of interest for each distribution
and/or supply area. Based on these expressions of interest, the Commission would
select those parties to be included in a short list of parties, who would be invited to
participate in the Selection Stage.
The Commission would publish regulations relating to the conduct of the prequalification process. The Commission envisages that these regulations would
include information on:
-
The period of time allowed for the submission of expressions of
interest;
-
Information to accompany applications;
-
Form of application; and
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-
The criteria for the pre-qualification of applicants.
At this stage, it is premature for the Commission to specify the detailed
requirements for applications and the criteria against which they will be assessed.
However, the Commission envisages that the prospective applicants would be
required to include the following information in their expressions of interest:
-
Copies of the audited statements of accounts for the last three years;
-
Prospective applicant profile including organisation chart, and (where
applicable) information on parent company and subsidiaries;
-
Information on previous experience in developing natural gas
distribution business, and/or other infrastructure networks;
-
Information on previous experience in operating natural
distribution business, and/or other infrastructure networks;
-
Evidence that the prospective applicant will be able to raise funding
required to construct and operate the distribution network;
-
In the case of prospective applicants with no experience in the gas
industry, the means by which technical expertise capability in gas
industry will be sourced; and
-
Curriculum Vitae of the management team.
gas
Based on this information, the Commission would select the short-listed applicants
that would be invited to participate in the selection phase discussed below.
5.2. Stage 2: Selection
The Commission would issue regulations governing the competitive process for the
Selection Stage. The applicants as short-listed in the pre-qualification phase would
be invited to submit a complete submission for each of the distribution and/or
supply areas to the Commission. In addition, the applicants would receive
information related to the selection stage including the selection guidelines.
The Commission may in the selection guidelines set out certain requirements such
as a minimum pipeline network/route, speed of roll out and connection obligations
for some or all the areas to ensure that the benefits of gas are made available
within all the main population centres thus optimising the benefits of the project.
This may also improve the transparency of the evaluation of the applicants as
appropriate.
These guidelines would contain all the necessary information for the applicants to
prepare their submissions including:
-
Time and place for lodgement;
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-
Information to accompany submissions;
-
Any requirements established by the Commission for example:
o
minimum pipeline route in a specific area;
o
speed of rollout;
o
connection obligations;
-
Form of submission;
-
The criteria for the evaluation and selection of applicants; and
-
Fee to be paid to the Commission to cover for the costs of conducting
the competitive process.
In addition, the Commission may produce documentation providing appropriate
information to applicants, for example on the Irish gas market, gas regulatory
framework, and demand forecasts.
Given that its proposals are only at the formative stage, it is premature for the
Commission to specify now its detailed requirements for information. However, the
Commission envisages that the selection guidelines may ask for the following
information:
-
The information provided with the expression of interest (e.g.
applicants’ experience, CV of the management team, etc)
-
The coverage of the proposed extension and development of the
distribution system with maps showing location of pipelines and
facilities, the number of premises to be served and rollout plan (speed
for connecting customer premises);
-
The expected volume of gas sales to final customers and numbers of
customers to be supplied (where appropriate);
-
The development and construction program including the key
milestones and the dates for achieving each milestone;
-
The proposed tariffs for gas distribution and (if appropriate) gas
supply;
-
Documents evidencing the applicant’s ability to fund the construction
and operation of the distribution network (e.g. evidence of fully
committed funding or funding proposal);
-
Documents evidencing that the applicant will be able to comply with
the technical and engineering standards required in the relevant
regulatory instruments;
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-
Documents evidencing that the applicant will be able to comply with
the safety standards established in the licences and other regulatory
instruments;
-
(If appropriate) documents evidencing that the applicant will be able
to secure supply of gas to meet the estimated volumes of consumption
for non-eligible customers (e.g. a gas supply agreement); and
-
Documents evidencing that the applicant will be able to comply with
all the requirements for signing a connection contract with the
transmission company and a transportation agreement to enable it to
ship gas to the relevant connection or exit point (or points) from the
existing gas transmission network.
The necessary regulations and selection guidelines would include the selection
criteria to be adopted by the Commission. The selection criteria would be
fundamental in ensuring that the competitive process provides benefits for natural
gas consumers. The Commission is considering different options for the evaluation
criteria.
There are two broad options: a Multi-Criteria Approach and Single-Criterion
Approach.
Under a Multi-Criteria Approach the applicants would be evaluated against a set of
criteria. The selection criteria could contain a mix of several aspects including:
-
The proposed average distribution/supply tariff.
-
Proposed distribution network coverage and rollout program.
-
Expected volume of gas sales to final customers and numbers of
customers to be supplied (if appropriate).
-
Applicants’ experience in constructing and building distribution
networks and/or supplying gas to final customers.
-
The extent to which the applicant, if successful, would contribute to
the promotion of competition in the gas market.
Under this approach the Commission could design a “scoring” system that would
give points to the applicants for each selection criterion, after which a final ranking
would be produced.
In the case of the Single-Criterion Approach, applicants would compete in only one
aspect, for example with respect to proposed gas distribution tariffs. Under this
approach the Commission would need to set minimum standards for issues such
as network coverage or applicant’s experience, that all the applicants would need to
comply with.
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At this stage the Commission makes no recommendation on the issue of the
structure and content of the process, but welcomes comments on the most
appropriate approach.
The Commission is also considering whether a performance bond should be
required from successful applicants to encourage parties to meet certain
requirements such as build out requirements in the event of award of an Section
2(1) Order.
5.3. Additional Obligations
In addition to the award of a Section 2(1) Order, the builder and operator of a
distribution network and/or a gas supplier will also have to meet the other
requirements of the framework for the natural gas industry in Ireland. These
requirements are set out briefly below.
5.3.1. Technical and Safety Guidelines
In compliance with statutory requirements, the Commission will ensure that
minimum technical design and operational requirements are developed for the
connection to the system of natural gas facilities. Holders of a Section 2(1) Order
will be obliged to comply with such requirements.
In particular, a party wishing to construct a distribution network requires, in
addition to a Section 2(1) Order, the consent of the Commission. The Commission
is required to issue technical guidelines covering the award of consents for the
construction of new pipelines. Such guidelines might address a range of issues
including:

Environmental compliance;

Engineering Design compliance;

Construction compliance;

Operation and Emergency compliance; and

Decommissions.
The Commission will issue regulations on classes of pipelines requiring consents
and conditions attaching to the construction of all pipelines whether requiring a
consent or not. The regulations will take account of existing technical guidelines
for the natural gas industry.
5.3.2. Licensing and Price Control
Operation of a gas distribution system and the supply of gas are both activities
requiring a licence under the Gas (Interim) (Regulation) Act, 2002. The holder of a
Section 2(1) Order will therefore be required to obtain a distribution and/or a
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supply licence, as appropriate. The distribution and supply licences are likely to
address issues such as:

General Service Obligations
-
Covering connections and the obligation to offer and publish terms of
service and gas supply;

Economic Regulation
-
Including regulatory accounting obligations, restrictions on certain
activities and the use of certain information and disposal of assets,
prohibition of cross-subsidies between relevant businesses;

Industry Arrangements (see also below)
-
Involving compliance with relevant Codes of Operation (including
industry settlement arrangements), compliance with technical, performance
and environmental standards, provision of emergency and enquiry services,
any social obligations; and

Miscellaneous Provisions.
Any framework for price controls applying to the charges permitted for distribution
service and for gas supply will be established by the Commission.
5.3.3. Industry Arrangements
Holders of a Section 2(1) Order (by virtue of a distribution licence) may be required
to produce a Code of Operations for the distribution system.
In addition,
arrangements would need to be made for connection of the distribution system to
the transmission system. This implies that the Code of Operations for the
transmission system will also be binding. Where the holder of a Section 2(1) Order
will supply gas to final customers, arrangements will need to be made to procure
such gas and arrange for shipping through the gas transmission system.
6.
FRANCHISE DURATION AND GAS SUPPLY RIGHTS
The Commission does not propose that either a Section 2(1) Order or an individual
consent would itself be time-limited. Indeed, there is a case for making provision
for both to remain in effect for so long as key technical, safety, and licensing
requirements continue to be met. However, it would be a condition of any Section
2(1) Order or individual consent or exemption that the relevant person’s operating
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licence continued in full force and effect.3 This would therefore set the ultimate
limit on the duration of the Order or consent.
The Commission is considering whether to retain the existing practice of awarding
Section 2(1) Orders that include both distribution and supply franchises or whether
to award separate a supply franchise in a particular area alongside a distribution
franchise.
As regards the first option, the Commission notes that the granting of an effective
supply and distribution monopoly under a Section 2(1) Order could be justified as a
means to encourage the rapid extension of the existing gas network. For the same
reason the Commission might also include build-out obligations on distribution
franchisees through conditions in their operating licences.
As regards the second option, the Commission believes that there are may well be
areas and/or prospective applicants where the issuing of separate Section 2(1)
Orders in specific circumstances would be equally appropriate as a means for
meeting its overall objectives of promoting competition in the gas market.
In any case, it is anticipated that any successful applicant for a Section 2(1) Order
which included the right to supply gas would only have a short-term supply
franchise relating to non-eligible customers until 2005.
7.
COMMENTS
Comment is invited on:

Whether holding a competitive process to determine the award of
distribution and supply rights in particular geographical areas is desirable.

The suggestion of requiring a minimum network/pipeline route, speed of
rollout or connection obligation requirements for some or all of the areas.

The structure and content of the criteria for selecting prospective applicants
in the Pre-qualification Stage or possible alternative criteria

The structure and content of the criteria for the Selection Stage: multicriteria approach or single-criterion approach or possible alternative criteria.

The suggestion of requiring a performance bond from the successful
applicant for a particular franchise.

The possibility of separate gas supply and gas distribution rights in a given
geographical area.
3
Gas (Interim) (Regulation) Act, 2002, Section 16.
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