SUMMARY OF COMMENTS RECEIVED
ON POTENTIAL COMPETITIVE
PROCESS FOR
GAS DISTRIBUTION AREAS
26 JULY 2002
CER/02/
Table of Contents
Summary......................................................................................................1
Background ..................................................................................................2
List of Respondents ...................................................................................... 2
Issues for Consultation ................................................................................. 2
Other Issues .................................................................................................9
Summary
The Commission for Energy Regulation (CER) issued a consultation
document entitled “Consultation on Potential Competitive Process for Gas
Distribution Areas” (CER 02/53) on 21 June 2002. Closing date for receipt of
responses was 19 July 2002.
The Consultation Paper considered the approach that may be followed in the
event that the CER considers it appropriate to run a competition for the
granting of an Order(s) under Section 2 (1) of the Gas (Amendment) Act,
1987 (as amended) for the distribution and supply of gas to final customers
in particular geographic areas. The CER published this document with a
view to giving it wide circulation and to elicit views from as many of the
current and potential participants in the gas industry as possible. The
purpose of the consultation document was to consult on the framework for a
potential competitive process. Written responses were received from four
parties.
This document is a summary of all the responses received. It is intended to
give the collective response of all the respondents to the issues raised in the
consultation document.
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Background
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 CER 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 CER, or is the subject of an exemption 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 CER.
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 CER
may conduct a competitive process to determine the award of Section 2(1)
Orders.
List of Respondents
There were four submissions to the consultation process, however, one
respondent wishes to remain anonymous
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BGÉ Corporate Centre and Distribution Unit
BGÉ Energy Supply
Viridian
Issues for Consultation
Comment was invited on:
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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:
multi-criteria 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.
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Whether holding a competitive process to determine the award of
distribution and supply rights in particular geographical areas is
desirable.
Two of the four respondents recommend the idea of holding a competitive
process. One such opinion emphasised that complete separation of the two
functions with a separate supply and distribution licence should be issued
for each of the areas. Both respondents claimed that this would ensure the
best level of service and the supply of competitively priced gas to end users.
One respondent explained that the absence of a competitive process would
send a poor signal on the commitment to introduce competition.
There was an opinion that the consultation document does not specifically
address the importance in the overall competitive process of gaining
customers in new areas with little emphasis on a supplier seeking customers
in an already highly developed fuel market.
One respondent advised post-award of distribution and supply rights no
special rights should be granted to new areas if they deliver eligible Third
Party Access (TPA) customers in the future.
Another respondent was of the opinion that a true test of the competitive
process will only be established when the process commences where no
preliminary fieldwork has been done beforehand.
One respondent opined that the CER has given no indication regarding the
circumstances it believes appropriate to hold a competition, save at the
Minister's request. In the first instance the CER should consider whether it
is necessary to hold a competition and whether its actions/inactions
prevent, distort or restrict competition in all relevant market sectors. One
respondent believes that it is not appropriate in all circumstances to hold a
competition for the franchise rights. Another opinion was that if no applicant
had applied for a Section 2(1) Order and the CER refused an application
then a competition should be run. They also believed that the process would
produce a more efficient outcome than if the applicant were granted the
rights initially.
It was also suggested that sufficient information ought to be made available
to bidders in the various areas of work already done regarding, for example,
market research, pipe routes and wayleaves.
Respondents were of the view that holding a competition could delay the
delivery of gas into the area under the existing Section 2 (1) Order and any
benefits from this exercise would need to be considerable to offset the loss of
expectation from an earlier alternative delivery of gas supply. Also, it is
claimed that the plans of local authorities or local representatives have not
been taken into account.
The issue was also raised as to how the cost of running a competitive would
be recovered.
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The suggestion of requiring a minimum network/pipeline route, speed
of rollout or connection obligation requirements for some or all of the
areas.
Some respondents state that commercial considerations should be the
primary driver for infrastructure implementation. However it is also claimed
that there is a need to ensure key infrastructure is installed and key
customers are on board to meet initial financial returns for all parties.
It is suggested that balance is required in the need to roll out the network as
quickly as possible and the requirement to base network expansions on
economic viability. Agreement should be reached on the minimum roll out
requirements at a level that is manageable from the franchise owner’s point
of view. In the case of organising a competition for a franchise area where no
application for a Section 2(1) Order has been received, then the CER's
technical and economic feasibility studies may identify some criteria;
performance conditions or obligations should be met by the proposals
received from applicants in response to the competition.
Another respondent opined that the CER should establish its own views on a
minimum network (or coverage of the distribution area) and on the speed of
rollout, but it should not publicise these views. Whether this programme
should be set by the CER or by the successful applicant should be
considered.
Another respondent stated that the connection charge and ongoing
distribution charges need to be transparent, cost reflective and non
discriminatory and be subject to the same connection obligations as existing
ones. In the event that there is a competitive process, it is felt that Bord Gais
Distribution would have to make a stand-alone application for each
franchise area and that the distribution tariff for the franchise area could
not be “rolled-in” to Bord Gais Distribution’s tariff in areas where it currently
holds a franchise.
A respondent proposed a flexible approach to the development of the
infrastructure within a geographic area of a Section 2(1) Order was needed
rather than a mandated prescriptive approach. They went on to say that a
detailed prescriptive approach should be avoided by the CER and thus
allowing the successful applicant flexibility to undertake incremental
rollouts and to develop the infrastructure as economically and efficiently as
possible. This would give the franchisee time to react to economic,
commercial and competitive pressures.
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The structure and content of the criteria for selecting prospective
applicants in the Pre-qualification Stage or possible alternative
criteria
One respondent does not disagree with setting reasonable standards for
applicant competency but would welcome further information on what a prequalified applicant might expect as part of the competition. This respondent
mirrored another view that the criteria must be non-discriminatory.
Another suggested that whilst the criteria for the pre-qualification phase is
appropriate, the CER should also seek other information to establish
prospective bona fide applications and to identify speculative applications,
for example funding commitments. In order to meet market expectations for
delivery of infrastructure it is essential that time scales for
submissions/consents, connection charges to the transmission system and
local authority charges be clearly defined.
One other response was that any potential supplier should be able to
demonstrate skills and resources in the following:
 Supplier with proven financial resources and demonstrable track
record
 Company with experienced personnel
 Knowledge of the necessary Safety and Technical Standards
 Skilled Sales and Technical resources
 Trained Gas Installers and Service Engineers
 Trained Gas Appliance Retailers
 Proven track record in developing new market areas by customer
capture and infrastructure developments e.g. local retailers etc.
 Proven track record in promoting natural gas and its uses.
 Proven Administrative and IT systems in the area of Sales.
Another respondent believed that the CER would wish the applicants to
identify the level of subvention that may be necessary, if the level was not
already identified by the CER.
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The structure and content of the criteria for the Selection Stage:
multi-criteria approach or single-criterion approach or possible
alternative criteria.
Two of the respondents suggested that a multi-criteria approach is
appropriate as long as the weighting for the various criteria is given as part
of the pre-qualification process and that the criteria are transparent and
non-discriminatory.
Some respondents also add that the competition should be as wide as
possible and select a winner that produces a more efficient outcome than the
original applicant’ s proposals. The CER should set the criteria so that it can
support its decisions in awarding, or not awarding the grant.
The criteria for assessment should not be too rigid as to require how towns
might be developed, but should retain sufficient flexibility to enable an
assessment of two distinctly different approaches. If the process were just
based on the tariff for instance, there would be a perception that the playing
field would not be completely level due to the ability of Bord Gais to crosssubsidise the tariff in the short term.
Suggested criteria to encourage new entrants to the market included:
 How the proposal assists the development of competition in the
natural gas market
 The range of services offered by the applicant to meet the energy
requirements of the franchise area
Another respondent suggested that the Transmission Operator should make
available a standard connection contract to all the competitors and the
terms of the transportation agreement should be standard. Also, applicants
need to know where the transmission system is located for each town
One respondent stated that in order to create a level playing field in the
award of the franchise, the CER should take the following approach:
 Publish the ramp-up rate of gas volumes in the franchise area.
 Ensure that Bord Gais Distribution cannot avail of sovereign debt
interest rates or interest rates available to its parent company in
developing the tariff. All applicants should use a commercial lending
interest rate.
One opinion was that customers in those franchised areas ought not be
disadvantaged over others elsewhere regarding the range of services they are
offered.
Another respondent opined that the development of support services
necessary to ensure a full gas service chain to end users in these new areas
is essential.
There was an opinion that after the competition the CER should publish its
reasons for choosing the successful candidate and how the competitive
process produced a more efficient outcome than not holding the competition.
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The suggestion of requiring a performance bond from the successful
applicant for a particular franchise.
All respondents were not in favour of a performance bond. One respondent
claimed that a performance bond is typical in many undertakings of this
nature but would caution against high bond values.
Another stated that having a performance bond places an unnecessary
financial burden on a new entrant and is a potential barrier to entry. They
suggest that a mechanism be derived that incentivises the franchisee to meet
agreed targets on a sliding scale of reward basis, for instance.
A further view was that if a performance bond is to be used, the cost of this
bond should not be part of the tariff that is submitted in the competition, as
it is believed that the current distribution operator could raise this bond at a
lower cost than other applicants. Once an applicant has been successful
however the costs of the bond should be included in the final agreed tariff.
The application of a bond to a supplier is not appropriate as the supplier
faces the risks in gas procurement and cash flows should expected market
forecasts not materialise. Where a supplier is involved licence obligations
should clearly address the Supplier of Last Resort (SOLR) position for any of
these franchised areas and that any SOLR is appropriately compensated.
Another respondent stated that it would reserve its right to seek suitable and
appropriate forms of payment and security in respect of the connection
assets and any reinforcement works it would put in place to facilitate the
connection of the applicant's pipeline to the transmission network.
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The possibility of separate gas supply and gas distribution rights in a
given geographical area.
Two respondents support the idea of separate gas supply and gas
distribution licences in a given geographical area. However, one stated that it
is unclear in the CER’s proposals as to the rules the CER would apply to this
type of development, for example, would ring fencing and separation for a
multi functional applicant be required?
One respondent has not as yet reached a clear view on this particular issue.
Another suggested that on the available evidence there seems no logical
reason why they should not be separate and welcomes the CER’s comment
that any successful applicant for a Section 2(1) Order which included the
right to supply would only have a short-term supply franchise relating to
non-eligible customers until 2005.
However, one believed that there are obvious benefits in having the
distribution and supply franchises competed for, and allocated, to the same
corporate entity and supports the existing practice of awarding of a Section
2(1) Order that includes both the distribution and supply rights. It would
also support a longer term of exclusivity to the franchise holder for
particular geographically limited area(s) where implementation of the
Directive would cause substantial problems. It is not clear from the
legislation whether or not there can be separation of the gas supply and gas
distribution franchise rights. The respondent would favour such an
approach only if satisfied that there could be a more efficient and economic
outcome from the separation than awarding both distribution and supply
rights jointly to a successful applicant.
If there are two separate franchises, the pipeline owner and operator would
wish to ensure that any non-performance on behalf of the supplier would
not expose the pipeline operator to unnecessary and preventative risks from
the potential of stranded or under-utilised assets.
The pipeline operator would require certain obligations/conditions to be
undertaken by the supply franchisee to mitigate against the non-alignment
of objectives, for example, customers connected efficiently and expediently,
supply terms and conditions not providing a barrier to connection, sales
targets aligned with the pipeline operator’ s targets and rollout plan and
close co-ordination between the two entities to resolve disputes.
Given the interdependability and cooperation between the suppliers and
pipeline operator, it would also be critical that the pipeline operator would be
able to assess the plans and risk associated with the supplier’ s plans.
Pipeline operators may wish to reserve the right to revise the criteria on
which it based its forecasts if the CER decided to award separate franchises
to ensure that the rate of return outlined in its own application was
sufficient to adequately cover/reward the additional risks taken.
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Other Issues
Other issues raised by the respondents include:
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The Consultation Document concentrates largely on the Distribution
aspects of the Competitive Process and is lacking in details on the
Supply side.
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There is a need to have detailed criteria that outlines the full role
expected of a supplier.
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The CER should also consider:
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That this geographical area is not a true example of the
competitive process.
The impact that full deregulation of the gas market in 2005
may have on successful applicant
Identification of new arrangements for trading gas on the
system and new market operating systems required to
enable this form of initiative to operate
That significant costs and time in assessing and creating a
market for natural gas in the area of this Section 2 (1) Order
having already being spent.
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The competitive process should not incur additional costs on
participants.
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The CER when awarding a Section 2(1) Order would also give its
consent to the applicant to construct pipelines in that geographic
area.
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The CER would ensure that the reasons for refusing to grant the
Order to the applicant would be:
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Objective and non-discriminatory
Given to the applicant
Forwarded to the EU Commission for information pursuant
to the provisions of the EU Gas Directive and relevant Irish
energy legislation.
There should be a procedure enabling the applicant appeal the refusal
in keeping with the provisions European and Irish legislation.
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