The Northern Ireland Authority for Energy Regulation (NIAER) restates position on Phoenix

18 August 2005

The Authority is not in a position at present to comment on the announcement made on 17 August 2005 by East Surrey Holdings Plc that Terra Firma Investments is to apply to the Takeover Panel to enable it to allow its offer for East Surrey Holdings to lapse.

In light of recent press comment following the announcement that Terra Firma Investments is to apply to the Takeover Panel to enable it to allow its offer for East Surrey Holdings to lapse the Authority wishes to confirm its position in relation to the proposed regulatory agreement with Phoenix Natural Gas Limited (“Phoenix”) which was arrived at as a set of principles and objectives in August 2004 (“proposed regulatory agreement”).

In both its May consultation paper and June statement, the Authority made clear that discussions with Phoenix concerning the proposed regulatory agreement were predicated (at least in part) by concerns expressed by Phoenix that the 20 year recovery period agreed in 1996 might be insufficient to recover its initial investment and uncertainty as to how the balance of the investment would be recovered.

The ‘in principle’ agreement of August 2004 on changes to the asset base and rate of return on distribution assets, together with a move to a 40 year recovery period, would have represented a substantial transfer of value to shareholders.

At the time, the arrangement was perceived by the Authority as appropriate in view of the information then available to it and the proposed changes affecting Phoenix’s rate of return on transmission, the principle of an agreed return on equity and mutualisation of the transmission pipeline.

However as stated in the June statement, discussions over the detailed terms and implementation of the proposed regulatory agreement continued during the Autumn of 2004 and into the Spring of 2005 and at the time of the offer for East Surrey Holdings were still continuing. Limited progress had been made on developing the two components of the agreement which might have benefited customers.

The proposed regulatory agreement had not, at the time of the offer been subject to any form of public consultation as it had not been sufficiently developed at that stage.
As was made clear in the June statement even if the proposed agreement had been in a form suitable for implementation, it could not have been implemented without first being subject to the Authority’s duty of public consultation under the terms of the Gas (Northern Ireland) Order 1996.

The offer advanced the timing of the consultation on the principles and objectives underpinning the proposed regulatory agreement both because it provided new information to the Authority and raised issues which the Authority believed required consultation.

In its June statement the Authority noted the concerns of a number of respondents that the proposed regulatory agreement may no longer reflect an appropriate balance of interests, a concern which the Authority shares.

The Authority remains open to exploring appropriate arrangements with Phoenix and any other interested parties for its future regulation that meet the Authority’s principal duty to adequately protect the interests of consumers and strike the right balance between all stakeholders including investors.

NOTES