From January 2015 onwards, the financial return made by the gas supply business of Manx Gas is being regulated through an Agreement with the OFT, Treasury and Department for Enterprise (DFE).
In 2008, the Council of Ministers published an OFT Report under the Fair Trading Act 1996 into gas prices. Based on specialist economic advice, the report defined an acceptable range of profitability and concluded that the profits of Manx Gas were not excessive. Since then, Manx Gas has adopted the mid-point of that acceptable range and has been providing the OFT with confidential data, which has confirmed that the company has been complying with its voluntary policy. The 2015 Agreement is a formal voluntary system of regulation which contractually commits Manx Gas to a level of profitability which is below their previous target, and ultimately that means a better deal for consumers.
The 2008 Report concluded that the most appropriate way of measuring profitability in an industry requiring a high level of capital investment, such as gas supply, is the relationship between profits and the capital cost of the assets used to produce those profits. This concept (which is referred to by accountants and economists as Return on Capital Employed or ROCE) is widely used by utilities regulators. It is emphasised that ROCE is a measure of profitability - it is not the profit margin. The business will set its prices and margins to achieve 9.99% ROCE, which is below the mid-point of the acceptable range. As and when it is appropriate to do so, this target ROCE will be amended.
In the event that Manx Gas achieves higher than 9.99% ROCE in any given year, the balance will be repaid to consumers in the form of standing charge reductions in the subsequent 3 years. Likewise, if Manx achieve less than the 9.99% ROCE in one year, the balance will be recouped by increasing the standing charge over the following 3 years.
The Agreement will run for an initial 4 year period. If the Agreement is as successful as we hope it will be, it will continue into subsequent years.