Gas Tariffs: reduction

STATES OF JERSEY

GAS TARIFFS: REDUCTION

Lodged au Greffe on 17th February 2015 by Deputy G.P. Southern of St. Helier

STATES GREFFE

2015   Price code: B  P.18

PROPOSITION

THE STATES are asked to decide whether they are of opinion

to  request  the  Minister  for  Treasury  and  Resources  to  bring  forward Regulations  for  approval  by  the  States,  under  the  powers  assigned  by Article 89(1)  of the Jersey  Gas  Company  (Jersey) Law  1989, in  order to reduce the Jersey Gas Company's domestic tariffs by 5% with immediate effect.

DEPUTY G.P. SOUTHERN OF ST. HELIER

REPORT

The past few years have seen significant growth in the price of oil on international energy markets. This has led inevitably to increases in the price of oil derivatives, petroleum,  domestic  heating  oil,  natural  and  liquid  petroleum  (LPG)  gas.  These increases have had a major impact on the cost of living for communities across the world, not the least of which is Jersey, where the size of the market is a severe limitation on the ability of competition to bring energy prices down.

The rampant growth in the costs of heating has had the greatest impact on the elderly, who are most vulnerable to succumb to hypothermia during the winter months.

Age Concern Jersey was warning back in November that many pensioners will have to choose between heating and eating this winter. They pointed out that statistics show that more Islanders over the age of 75 die during the colder winter months than at other times of year.

"It is when they have not got the money that they have to decide whether to heat or eat. I don't think anyone should be in that position, certainly not old people."

– Daphne Minihane, Head of Age Concern, Jersey

This  inflationary  growth  in  energy  costs  is  perhaps  most  clearly  illustrated  by examining the media coverage of the costs in the domestic gas market over recent years:

25th July 2011

"Jersey gas prices to rise in August

Price s for gas will be going up by about 7% from the start of next month. It is the second time the cost of gas has increased this year in Jersey. Customers will be paying about 15% more than at the start of the year, depending on their tariff.

Rising gas prices mean you could pay about £190 more each year to heat your home in Jersey. Jersey Gas said the increases were necessary because of continued high world energy prices.

Back in February when it rose, there were a number of complaints about rising energy  bills  so  the  Treasury  Minister,  Senator  Philip   Ozouf ,  asked  Jersey's Consumer Council to investigate. Senator Alan Breckon who heads it up said given the current economic climate, rising gas prices were making life difficult for many families."

January 2012

"Gas  prices  in  Jersey  will  not  be  reducing  in  the  coming  months –  despite suppliers in the UK slashing bills following a fall in wholesale costs.

EDF Energy, British Gas and Scott ish and Southern have all recently reduced prices by about five per cent after wholesale costs dropped to their lowest point in almost a year. However, Jersey Gas, which has increased its prices three times in

less  than  18 months,  has  today  said  that  it  has  no  plans  to  cut  bills,  as  the wholesale cost of the type of gas used in the Island has remained high."

May 2012

"Gas prices will rise by about 5% in Jersey from 10 May. Gas prices will rise by roughly five per cent next week – the fourth increase in less than two years. Jersey Gas announced that they were reluctantly' changing fuel tariffs on 10 May in response to increased wholesale prices.

Commercial director John Davies warned that prices were expected to stay high for the foreseeable future and that if the cost of crude oil continued to rise, so would customers' bills."

January 2013

"Guernsey and Jersey gas prices to rise by 3%

A 3% rise in gas prices in Guernsey and Jersey is being blamed on rising global prices.

John Davies, commercial director of Guernsey and Jersey Gas and Kosangas, claimed the move had been "forced" on the company by wholesale energy costs.

Mr Davies said prices were expected to remain high "for the foreseeable future"." August 2013

"Channel Islands gas prices to rise by 3.5%

Channel Island gas prices will rise by 3.5%, the International Energy Group has announced.

Both standing charges and tariffs will increase from 16 August, with unit prices in Guernsey rising from 12.4p to 12.83p and 12.76p to 13.21 in Jersey."

August 2014

"Jersey Gas announces a further 2.9% rise in Jersey Gas domestic tariffs.

In total we have seen an increase in domestic gas tariffs of 32.4% over the 4-year period,  an  average  of  8%  annually;  a  figure  that  far  outstripped  inflation  as measured by the RPI which averaged only 3.3% over the same period."

What goes up

In this brief survey of prices, it is interesting to note two of the statements from Jersey Gas, namely –

1. if the cost of crude oil continued to rise, so would customers' bills, and
2. prices were expected to remain high "for the foreseeable future".

The first establishes the link between the cost of oil and the price of our own LP gas (a mixture of propane and butane derived from oil).

The second brings us to the unforeseen – the price of oil has gone down, and logically with it, the Jersey consumer can reasonably expect that the price of gas will follow.

We have already seen a significant reduction in the cost of petrol on Jersey forecourts, along with a reduction in the cost of domestic heating oil in recent months. They are a reflection of the recent halving of crude oil prices seen here.

20th January 2015, 1:03 p.m.

15th January 2015 headlines

"Wholesale oil prices drop... but no change for gas and electricity

Gas and electricity prices in Jersey will not drop in the coming months – despite a significant decrease in the wholesale cost of oil across the globe.

Oil prices have fallen sharply over the past few months, with the cost of a barrel now almost half of what it was in June 2014. But both Jersey Gas and Jersey Electricity  say  they  have  no  plans  to  change  their  prices –  despite  power companies lowering rates in the UK.

The Jersey Consumer Council in its February 2015 Newsletter "What is going on with  oil  prices"  points  out  the  discrepancies  between  prices  for  oil  derived products thus:

"Whist oil prices have come down by 55% in the past 7 months, the price of unleaded and diesel in Jersey has reduced by only 16%, but the fall in heating oil has been more commensurate, falling by over 30%." "

The JCC examines the reasons for these differences, but does not question the absence of any reduction in the price of gas. As can be seen below, there has been a significant drop in the price of propane in the US (by over 60%). One has to assume that there has been a similar fall in the UK and across Europe. If this is the case, then we should be seeing a fall in the price of gas to Jersey households.

Propane Monthly Price – US Dollars per Gallon

Price control

Ministers seem powerless in the face of price rises year after year, but to their credit, the Council of Ministers has tried to ensure that these recent reductions in the price of raw materials is passed on to the consumer. The Minister for Economic Development has taken the lead, and was reported thus –

"Firms told to pass on drop in oil price to consumers.

Economic Development Minister Lyndon Farnham wants companies, including ferry operator Condor on its passenger routes, to take advantage of the lower cost of fuel and pass the reduction on to customers as a way to boost trade and the economy.

While Condor has reduced costs for its freight services following the fuel price drop the minister wants third party operators importing goods to the Island to pass on the savings to consumers and reduce prices – particularly for food.

Meanwhile, Assistant Minister to Economic Development, Senator Ozouf ,  has offered a CICRA investigation into the widening gap between pre-tax and pre- duty  fuel  prices  in  Jersey,  but  that  brings  no  comfort  those  struggling  with increased living costs in the short term."

In short, the Ministers seem unable to act effectively on energy prices. The discussion paper containing the Council of Ministers' priorities for the Strategic Plan contains only one statement on prices and the cost of living –

"Cost  of  living  pressures  are  a  growing  concern  to  many  Islanders. Government can play a key role in helping relieve these pressures by ensuring that markets and competition work in the interests of consumers, businesses and our economy."

As ever, the Ministers are reliant on competition to control prices, but in a monopoly market (there is only one gas provider) there is clear evidence presented here of market failure. The market responds quite readily to wholesale price rises, but seems incapable of a response to falling costs.

In the face of market failure, the government must act in the interests of the consumer. Fortunately,  the  States  has  reserved  the  power  to  intervene  on  gas  prices.  This proposition asks the States to do so.

"89  Power of States in connection with gas tariffs

(1)  Where it appears to the States to be necessary to do so in the public interest, the States may by Regulations –

1. determine the tariffs to be made by the Company in respect of gas which it supplies; and
2. specify the manner in which the tariffs are to be assessed and make provisions incidental thereto."

Financial and manpower implications

There  are  no  direct financial  or  manpower  costs  for  the  States  arising  from  this proposition.

APPENDIX

EXTRACT FROM

JERSEY GAS COMPANY (JERSEY) LAW 1989

89  Power of States in connection with gas tariffs

1. Where it appears to the States to be necessary to do so in the public interest, the States may by Regulations –

1. determine the tariffs to be made by the Company in respect of gas which it supplies; and
2. specify the manner in which the tariffs are to be assessed and make provisions incidental thereto.

2. In determining the tariffs, the States shall have regard to the following or any other relevant matters –

1. the present needs of the Company and the future expansion of services provided by the Company;
2. the ability of the Company so long as its business is managed efficiently to pay –

1. interest on and reimbursement of money borrowed, raised or owing by the Company,
2. a dividend on the preference shares issued by it at the rate fixed under the terms of issue of those shares, and
3. a reasonable dividend on the ordinary shares issued by it;

3. any capital expenditure which the Company may reasonably be expected to incur during the next 5 years and the desirability of the Company's charging that expenditure, or part thereof, to revenue;
4. the  ability  of  the  Company  to pay  all  proper  expenses  of  and connected with the working, management and maintenance of the Company;
5. the provision of any contributions, whether set apart out of revenue or otherwise, which the Company may lawfully carry to a reserve, contingency or amortisation fund;
6. the ability of the Company to make good depreciation, whether or not provision therefor is made by a reserve or contingency fund; and
7. the ability of the Company to meet all other costs, charges and expenses, if any, properly chargeable to revenue.

3. Regulations made under this Article, unless previously renewed by the States, shall lapse after 12 months from the date on which they come into force.