Gas prices could be set to rise again.
The energy regulator is consulting on a move that would see tariffs increase by 0.2p per unit, equal to £16 a year per customer, based on current gas consumption.
Isle of Man Energy’s tariffs fell from a record high of 22.21p per unit to 16.67p per unit in November last year following a regulator’s review after a big drop in wholesale gas prices. Tariffs were cut again to 13.98p from March 1,
Under the current framework the gas supplier may generate a level of return that ensures the business is financeable.
This is mainly based on the weighted average cost of capital (WACC), of which the cost of debt comprises 50% and so is a key component in determining the permitted return the company can earn.
The Communications and Utilities Regulatory Authority is consulting on whether Isle of Man Energy should be permitted to increase its costs of debt – and so also increase the maximum return it is allowed to generate.
CURA said the cost of debt incurred by the company is higher than the 4.30% currently allowed in its permitted return.
It said the allowed cost of debt should be increased to 6.35% to reflect the increase in UK interest rates between March 2022 when the original cost of debt allowance was set and November 2022 when the business completed its refinancing.
This would mean that the WACC, the return allowed on the network business, will increase from its current level of 5.45% to 6.48%. It is envisaged that this increase will take effect from January 1 next year.
This would increase tariffs by 0.2p per unit.
CURA said: ‘The authority has been consistent in its view that the public gas supplier should be financeable and being able to recover all costs, including the cost of debt, is a key part of the regulatory regime.’
It said it had the option not to update the assumed cost of debt and maintain the WACC at its current level but that this would be contrary to the regulatory commitment on the recovery of costs being central to a fair tariff.
And it claimed it is in the overall interest of the consumer that the cost of debt is increased to reflect the actual cost accrued.
CURA said: ‘It is clear that in the short-term there would be a detrimental impact on consumers as the tariffs they are charged would marginally increase. However, this must be weighed against the cost of not allowing the increased cost of debt.
‘By not allowing for the increased cost of debt the authority would not only be undermining its own credibility, it would incentivise Manx Gas to reduce the level of investment in its network over time which would also be detrimental to consumers.’
CURA is accepting responses to its consultation by October 13, but it warned that the purpose of it ‘is not to be a referendum, but an exercise to gather sufficient evidence with which to make the most informed decision possible’.
The regulator had given a commitment to review the cost of debt assumption and review it if required.
This was to address concerns the cost of debt had been under-estimated as a result of assuming a credit rating higher than the business would achieve.
CURA calculated that the true cost to the company would have been 2.05 percentage points higher than the current allowance through to the end of the agreement in 2027 had it fully hedged the cost of its debt.