Market Investigation into the Supply of Use Relation to...

Market Investigation into the Supply of Bulk LPG for Domestic Use Technical Advice in Relation to Metered Estates

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Competition Commission Victoria House Southampton Row London WC1B 4AD

Market Investigation into the Supply of Bulk LPG for Domestic Use

Technical Advice in Relation to Metered Estates

Final Report

April 2008 Mott MacDonald St Anne House 20-26 Wellesley Road Croydon Surrey CR9 2UL UK Tel : 44 (0)20 8774 2000 Fax : 44 (0)20 8681 5706


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Market Investigation into the Supply of Bulk LPG for Domestic Use

Technical Advice in Relation to Metered Estates

Final Report

Issue and Revision Record Rev Date Originator

Checker

Approver

Description

A 28 March 2008 L Bernard A Johnson A Shaukat Final Report

B 08 April 2008 L Bernard A Johnson A Shaukat Final Report

This document has been prepared for the titled project or named part thereof and should not be relied upon or used for any other project without an independent check being carried out as to its suitability and prior written authority of Mott MacDonald being obtained. Mott MacDonald accepts no responsibility or liability for the consequence of this document being used for a purpose other than the purposes for which it was commissioned. Any person using or relying on the document for such other purpose agrees, and will by such use or reliance be taken to confirm his agreement to indemnify Mott MacDonald for all loss or damage resulting therefrom. Mott MacDonald accepts no responsibility or liability for this document to any party other than the person by whom it was commissioned. To the extent that this report is based on information supplied by other parties, Mott MacDonald accepts no liability for any loss or damage suffered by the client, whether contractual or tortious, stemming from any conclusions based on data supplied by parties other than Mott MacDonald and used by Mott MacDonald in preparing this report.


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List of Contents Page

Chapters and Appendices

Glossary v

Executive Summary 1

1 Introduction 6

2 Market Analysis 8 2.1 General 8 2.2 The UK Housing Market 8 2.3 The UK Rural Households 9 2.4 The Metered Estates Supplied by LPG Companies 10 2.5 The UK Park Homes Supplied by LPG 12 2.6 The Overall LPG Market 13

3 The LPG Supply Process 15

4 The Types of Transaction Processes Encountered 17 4.1 Type 1 Normal domestic bulk, as considered in Part I of the Inquiry 17 4.2 Type 2 Mini-bulk, supplied to Park Homes Estates 17 4.3 Type 3 Metered estate operated by LPG Company 18 4.4 Type 4 Home Park Estate, central storage & individual customer meter 18 4.5 Type 5 Special Case: [ ] supply to an estate on the Isle of Lewis 19 4.6 Type 6 - Special Case: Not encountered by MM, but hypothetically possible 19

5 Ownership 20 5.1 Tanks and Tank Sites 20 5.2 Underground Pipework 20 5.3 Customer Meter Installation 21 5.4 Switching of Asset Ownership 21 5.5 Types of Ownership 22

5.5.1 Type 1 Ownership - Domestic bulk, as considered in Part I of the Inquiry 22 5.5.2 Type 2 Ownership Mini-bulk, supplied to Park Homes Estates 22 5.5.3 Type 3 Ownership Metered estate operated by LPG Company 23 5.5.4 Type 4 Ownership Park Homes Estate, central storage & individual customer 23 5.5.5 Type 5 Ownership Special Case: [ ] supply to an estate on the Isle of Lewis 24

6 Safety Standards and Regulatory Issues 25 6.1 Safety Standards 25


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6.1.1 Access Limitations 25 6.1.2 Steel Pipes 26 6.1.3 Level of Risk 26

6.2 Regulation 26 6.3 Statutory Considerations 27

7 Valuation Issues 28 7.1 General 28 7.2 Tank Site and Land 28 7.3 Gas Mains and Services 29 7.4 Useful Life 29 7.5 Asset Value Calculation Approach 29

8 Commercial Issues 31 8.1 Standing Charge 31 8.2 Taxes 31 8.3 Contractual Arrangements 32

8.3.1 Introduction 32 8.3.2 Overview of Agreements 32 8.3.3 Switching LPG Suppliers - Contractual Considerations 33

9 Shrinkage and Conversion Factor 35 9.1 Shrinkage 35 9.2 Conversion factor 36

Appendices 37 A.1 LPG Supplier Questionnaire 37

A.1.1 BP LPG Questionnaire 37 A.1.2 Calor Gas Limited Questionnaire 51 A.1.3 Cambrian Gas LPG Questionnaire 69 A.1.4 Carver Questionnaire 73 A.1.5 Shell LGO Questionnaire 87

A.2 LPG Supplier Pricing Questionnaire 101 A.2.1 BP LPG Pricing Questionnaire 101 A.2.2 Calor LPG Pricing Questionnaire 102 A.2.3 Cambrian Gas Pricing Questionnaire 105 A.2.4 Carver Pricing Questionnaire 106 A.2.5 Shell LPG Pricing Questionnaire 108 A.2.6 Flogas Pricing Questionnaire 109

A.3 Minutes of Meetings 112 A.3.1 Minutes of Meeting with BP 112 A.3.2 Minutes of Meeting with Calor 116 A.3.3 Minutes of Meeting with Cambrian Gas 118 A.3.4 Minutes of Meeting with Carver 122 A.3.5 Minutes of Meeting with BH&HPA and NPHC 126 A.3.6 Minutes of Meeting with Shell 127 A.3.7 Minutes of Meeting with UKLPG 131


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A.3.8 Minutes of Meeting with Flogas (Flogas confirmation not received) 132 A.4 Examples of Contracts 137

A.4.1 BP Example Contract 137 A.4.2 Calor Example Contract 137 A.4.3 Flogas Example Contract 137 A.4.4 Shell Example Contract 137 A.4.5 Home Park Owner ([ ]) agreement with LPG Supplier 137

A.5 Examples of Invoices 138 A.5.1 BP Invoices 138 A.5.2 Cambrian Invoice 138 A.5.3 Calor Invoice 138 A.5.4 Carver Gases Invoice 138 A.5.5 Flogas Invoice 138

A.6 Examples of Capital Costs 139 A.6.1 Cambrian Gas Capital Costs 139 A.6.2 Calor Capital Costs 139 A.6.3 Shell Capital Costs 139

A.7 Examples of Land Lease Agreements 140 A.7.1 Calor Example 140 A.7.2 Shell Example 140

A.8 Copy of Guidance Documents 141 A.9 Reference Documents 164

A.9.1 Review of Domestic Gas Safety Report 164 A.9.2 Gas Safety Statistics (Extract) 184


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Glossary

Abbreviation Significance

BGC British Gas Company

BH&HPA British Holiday & Home Parks Association

BP BP LPG UK

Calor Calor Gas Limited

CamGas Cambrian Gas

Carver Carver Gases

CCL Climate Change Levy

CER Commission for Energy Regulation

CC Competition Commission

CoP Codes of Practice

DoE Department of Energy

Flogas Flogas UK Limited

GS (IU) R Gas Safety (Installation & Use) Regulations

IGE Institute of Gas Engineers & Management

LPG Liquefied Petroleum Gas

UKLPG UK Liquefied Petroleum Gas Association

MMC Monopolies and Mergers Commission

MM Mott MacDonald

NHS National Health Service

NPHC National Park Homes Council

OFGEM Office of Gas and Electricity Markets

OPSO Over-pressure Shut Off

PE Polyethylene

PSSR Pressure System Safety Regulations


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Shell Shell Gas Limited

UPSO Under-pressure Shut off

WSOE Written Scheme of Examination


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Executive Summary

Introduction

Following the publication of the Competition Commissions (CC) final report on the supply of bulk liquefied petroleum gas for domestic use on 29th June 2006, the CC was further able to produce a Draft Order identifying a range of remedies. However, a number of parties in their responses to the CCs consultation on this Draft Order questioned the application of the proposed Order to metered estates.

The Order is titled Domestic Bulk Liquefied Petroleum Gas Market Investigation Order 2007 and it applies to any person who supplies bulk LPG for domestic use in the UK. Part I of the Order covers the aspects of supply of LPG to other than metered estates, whereas Part II is specific to supply of domestic bulk LPG to metered estates.

The CC has appointed Mott MacDonald (MM) to assist in establishing the technical and contractual characteristics of metered estates, by undertaking a study into the bulk domestic LPG market. Based on our experience from similar LPG-related projects and the data collected and analysed from meetings with a number of nominated organisations, MM has produced this final report which is to be utilised by the CC to modify Part II of the Draft Order, where necessary, thus meeting the concerns voiced by the LPG suppliers and other relevant parties.

LPG Market

Following the meetings with the nominated LPG organisations, MM endeavoured to produce an estimate of the metered estate market size. Despite MMs best efforts, availability and access to relevant data were extremely challenging, and as such, MMs analysis was conducted using the best data available. Given this situation, an error factor of +/-25% should be taken into account with respect to MMs analysis/estimations.

At present in the UK, the inland consumption of LPG is between 1.1 and 1.2 million tonnes per annum, 25% of which falls under the domestic/leisure category. Considering the overall energy market, approximately 91.9% of domestic properties are fuelled using natural gas, with 3.7% on oil, 2.8% on electricity, 1% on solid fuels and the remaining 0.7% on LPG. These figures are illustrated in the figure below.


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Energy Use in Domestic Properties in UK (2005)

91.9%

2.8%1.0%

3.7%0.7%

Natural Gas Oil Electricity Solid Fuel LPG

The Final Findings Report on the Market Investigation into Supply of Bulk LPG for Domestic Use published in June 2006 by the CC confirms that domestic bulk LPG is used by approximately 150,000 households in the whole of the UK.

The total number of metered estates, according to the data received from the nominated organisations is approximately 1176. Calor, Flogas, BP and Shell, taken together, serve the vast majority of metered estates ([ ] and Flogas together serve [ ]% and BP and Shell together service [ ]%). The smaller businesses such as Carver Gases and Cambrian Gas contribute to [ ]% of the market. By allowing for an additional 10% which includes other LPG suppliers, the total number of metered estates, excluding park home estates, in the UK is estimated at 1307. With respect to customers and based on the data collected during our meetings with the LPG companies, MM estimates that there are approximately 17,056 LPG metered estates customers within these 1307 metered estates.

According to the Office of the Deputy Prime Ministers report of 2002, Economics of the Park Homes Industry there are some 1,700 home park estates; however, using an approximation based on population, MM estimates the number of estates to be 1,900. Considering that MM estimated 25% of the households on home parks are fuelled using LPG; 475 of the home park estates would be using LPG, which represented approximately 19,470 households.

Ownership

The ownership of tank sites is usually uncertain and in some instances the LPG companies effectively have squatters rights to these sites. The major LPG companies are endeavouring to rectify this situation, especially on new installations. In this regard, an issue of concern for some LPG companies was the possibility of inheriting a contaminated site, which would mean that the company would be obligated to remove the contaminant and make safe and fit for purpose before use.

With respect to the gas mains, MM noted that all the major LPG companies either owned the gas mains or had specifically identified the owner of the gas mains, for example, a home park estate owner. In the home park estates, all the gas mains are owned and managed by the owner. The home park owner is responsible for the maintenance of the gas mains and uses Corgi approved contractors for such maintenance.


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The LPG companies consider the ownership of the tanks as more commercially important than the ownership of the gas mains, as ownership of the tanks usually dictates who exclusively supplies the LPG.

Steel pipes have been used in some of the older estates and should LPG metered estates assets be transferred between LPG companies, then the value of an estate with steel mains may not follow the general valuation mechanism outlined in this report.

The smaller LPG companies install or subcontract the installation of the mains on the basis of a commercial arrangement with the estate developer. On completion of the installation, the ownership of the mains is considered to have passed on to either the developer or residents of the estate. However, it is possible that on some metered estates that the actual owners of the pipes are not aware of their ownership.

Most LPG companies consider ownership of the meter installation as commercially significant, as the metering installation determines the eventual revenue from the supply of LPG. This facility is usually owned by the LPG company or the owner of the metered estate dependent on the contractual arrangement. The supply agreement between a LPG company and the customer stipulates that the meter determines the quantity of gas for which the consumer is to be billed. It also establishes a standing charge, often referred to as a meter rental.

MM considers that in the instance where the tank ownership switches, then it should automatically carry with it the ownership (as such) of the tank site, pipes, the first stage regulator installation, the site gas mains, any existing easements and the metering installations. In other words, all the gas supply assets should be considered as one. However, if there is already an existing ownership regime (clearly defined) for the LPG facilities, then these arrangements should take precedence

Safety

Metered estates, as described and witnessed by MM, are in the opinion of the LPG companies safe, operate within the law and have adequate safety standards.

Underground steel mains and risers are an area of concern because of the potential corrosion hazard. These types of equipment are found in many older metered estates, where the PE service terminated underground and the gas service continued up to the meter box in steel. Generally, these components are not protected from corrosion by using either a plastic sleeve pipe or cathodic protection systems. In the event of the transfer of metered estate gas supply assets, then the issue of underground steel pipework may impact on the valuation process

With respect to assets on LPG metered estate being exchanged between suppliers, the process would be facilitated if the estates were documented and that standard certification was readily available to allow the sale or exchange process between LPG suppliers. There is a standard installation configuration process in place, except for minor modification and selection of different manufacturers equipment, which is supported by UKLPG CoP 22 & 25. There is also a standard operating system in existence, which is based largely on custom and practice; however, encouraged by UKLPG CoPs. Statutory rules, of interest, in this respect are the GS(IU)R and the Pressure System safety regulations (PSSR).


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Valuation

From a developers perspective the land used for the LPG tank sites and pipes would have an appropriate value dependent on the estate being developed. However, this same land is not of high commercial significance to most LPG companies. For these purposes and in the context of asset transfer between LPG suppliers, MM takes the view that the land be deemed to be valueless. As such, the land should be considered to be attached to the tank, in the same manner that the installation pipe from tank to customer was effectively considered to be part of the tank.

Considering the nature and function of the tanks on metered estates, MM suggests that the tank formula in the Draft Order Part 1 Schedules 1, 2 & 3 equally applies to tanks on metered estates, as all tanks on metered estates are similar to those on domestic bulk installations.

After investigations, the decision was taken by the Commission for Energy Regulation (CER) that natural gas distribution PE pipelines, for the purposes of valuation, should have a depreciation life of 60 years. In addition, it would be reasonable to assume that the life of the gas pipelines should be consistent with the commercial life of the metered estate and as such MM considers that a depreciation life of 60 years for all mains and services, in metered estates to be reasonable.

Overall, the value of the metered estates LPG supply assets can be determined from the value of B as calculated below. This value could be utilised by the LPG companies when transferring assets.

60)60()( YNQFPB +=

B = Fall back asset value for all the LPG supply assets located on a metered estate;

FP = Formula price for tank and tank site assets

Q = The cost per customer of installing the first regulator set, gas mains, services and metering sets on a metered estate

N = Number of domestic premises with installed metered estate gas facilities

Y = Remaining useful life of the assets

Contractual Issues

It is not easy for a customer to change LPG suppliers when located on a metered estate. In the case of a park home estates customer supplied via mini-bulk, it is technically possible, in the context of the existing supply model and issues discussed and understood in Part 1 of the Inquiry. However, the park home owner, in the event of a tank exchange, would probably be required to permit this switch to occur. If there is no tank exchange required, then it is possible for the park home estate customer to switch suppliers, with just administrative (contractual) adjustments.


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If contractual issues are ignored, it is possible for a customer to switch from one LPG supplier to another provided the LPG suppliers are willing to participate. The installed technical facilities vary very little from one metered estate to another, and neither do the operational processes differ very much. If a customer decides to switch to another LPG supplier, then technically nothing changes. There is no need to change tank, pipelines or meters. One LPG supplier can read the customers meter and share the information with the other LPG supplier. This meter reading can be used for invoicing the customer and also for the invoicing transaction between the two LPG suppliers.

Contractually the big issues for the incoming LPG supplier to achieve are agreement with the existing LPG supplier for transport through his pipes, etc and availability of product (LPG supplies) at terms that would allow the incoming supplier to compete.

Shrinkage and Conversion Factor

There is gas shrinkage between the LPG tanks and the outlet of the customers meters, which may become an issue in the event of supplies to a metered estate being jointly supplied by two LPG companies or suppliers, or in the transfer of assets between LPG suppliers.

Losses or shrinkage (real or apparent) may be due to a number of sources. These shrinkages may be divided into administrative and technical. Administrative shrinkages do not involve the loss of gas, but the failure to account for the gas correctly. Technical shrinkages may involve the loss of product; however, there are other technical causes for shrinkage.

The conversion factor used to convert from volume of gas vapour to volume of liquid can be considered to be an issue, as there is wide variation in conversion factors used by the LPG companies. Customers meters read in cubic meters and most LPG companies for their own internal accounting reasons, convert this reading to equivalent litres of liquid LPG, and invoice accordingly, stating a conversion factor on the invoice.


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1 Introduction

Following the publication of the Competition Commissions (CC) final report on the supply of bulk liquefied petroleum gas (LPG) for domestic use on 29th June 2006, the CC was further able to produce a Draft Order identifying a range of remedies. However, a number of parties in their responses to the CCs consultation on this Draft Order questioned the workability of the proposed Order to metered estates.

The Order is titled Domestic Bulk Liquefied Petroleum Gas Market Investigation Order 2007 and it applies to any person who supplies bulk LPG for domestic use in the UK. Part I of the order covers the aspects of supply of LPG to other than metered estates, whereas Part II is specific to supply of domestic bulk LPG to metered estates.

The CC in Part II of the Draft Order, sub-section 23.1, defines a metered estate as:

An estate where more than one residential consumer of domestic bulk LPG is supplied using a tank (or tanks) and pipework which are shared between consumers and where their consumption is

measured by a meter.

The CC has appointed Mott MacDonald (MM) to assist in establishing the technical and contractual characteristics of metered estates, by undertaking a study into the bulk domestic LPG market. MM has already provided technical advice on Part 1 of the Inquiry.

Meetings were held with nine key stakeholders nominated by the CC to obtain a representative view of the current situation facing metered estates in the UK. The visits included the four largest LPG suppliers, two of the independent suppliers, the two trade bodies representing the caravan and parks industry and the LPG industrys representative, UK LP Gas Association (UKLPG), as follows:

BP LPG UK (BP)

Calor Gas Limited (Calor)

Flogas UK Limited (Flogas)

Shell Gas Limited (Shell)

Carver Gases (Carver)

Cambrian Gas (CamGas)

British Holiday & Home Parks Association (BH&HPA)

National Parks Homes Council (NPHC)

UK LP Gas Association (UKLPG)


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The estates considered in this study included metered supply to one or more consumers as well as estates where LPG is supplied to non-residential consumers and estates where no meter may be located but yet have a number of domestic consumers being supplied from a central compound containing one or more LPG bulk tanks. Park homes also fall under the category of metered supply and were taken into account, with leisure homes excluded. The CC determined that the terms of reference for the Inquiry excluded leisure homes but included full time residential homes.

MM concurs with the CCs definition of a metered estate as stated above. In this respect, a mini-bulk estate is very similar to a domestic bulk LPG customer as defined by CC in the Draft Order. The main differences are that the mini-bulk tank is much smaller, usually 450 litres or smaller, and it is a static tank (not portable). The mini-bulk tank is filled via tanker in the same filling process used for filling domestic bulk. These mini-bulk tanks are used extensively in park home estates, and consequently are often included within the category of metered estates because of the transaction process involved. In this instance, the contractual relationship is between the park home owner and the customer and the LPG supplier usually owns the mini-bulk tank. The tanker meter reading is used for invoicing the customer and in determining the commercial transaction between the park home owner and the LPG supplier.

Park homes appear very similar in construction and operation to leisure or holiday homes. However, there is strict legislation involved in the administration of these types of homes. The law differentiates between a holiday home and a full time home in a park home estate. The latter are defined as protected sites, in the Mobile Homes Act 1983. The law gives the park home resident security of tenure, and also dictates the form of agreement to be applied; including charges for services supplied such as gas, water and electricity. So the contract for LPG supplied in a park home is the Written Statement specified by the relevant laws, such as; Caravan Sites and Control of Development Act 1960, Caravan Sites Act 1968 and Mobile Homes Act 1983.

In essence, a park home estate is a park that is privately owned, and on which are located mobile homes within the meaning of the Mobile Homes Act 1983 (Housing Act 2004) and Caravan Sites Act 1968. These parks have planning consent and site licence permitting 12-month residential use (protected sites). There exists in law obligations, rights and responsibilities, of and to, people who purchase a home on a park home estate and use it as their only or main place of residence. These statutory obligations, rights and responsibilities are contained in a written agreement between the park home owner and the park home resident.


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2 Market Analysis

2.1 General

Following the meetings with the nominated LPG organisations, MM endeavoured to produce an estimate of the metered estate market size, which is supplied by LPG companies, in terms of number of estates and number of customers in the UK. Despite MMs best efforts, availability and access to relevant data were extremely challenging, and as such, MMs analysis was conducted using the best data available. Given this situation, an error factor of +/-25% should be taken into account with respect to MMs analysis/estimations.

2.2 The UK Housing Market

The United Kingdom (England, Scotland, Wales and Northern Ireland) is a relatively dense country in terms of population. According to the Housing Statistics 2006 report of the Office for National Statistics, the number of dwellings in the UK reached 26.2 million in 2005. Table 2-1 below shows where the UK households are distributed across the country.

Table 2-1: UK 2005 dwelling stock by location

Location Dwelling Stock Percentage (%) England 21,804,000 83.2 Wales 1,306,000 5.0

Scotland 2,389,000 9.1 N. Ireland 695,000 2.7

UK 26,194,000 100.0

Given that the vast majority of households (83.2%) are located in England and for the purposes of this study, MM has assumed that the remaining households located in Wales, Scotland and Northern Ireland would have a relatively low impact in the overall analysis. As such, the focus of the analysis was on the dwelling stock of England.

The energy sources used as the primary source of heating for the domestic market include natural gas, oil, electricity, solid fuel and LPG, with natural gas holding the dominant share of the market as shown in Table 2-2 below. This data was sourced from the UKLPG and Calor response to The 2006 Energy Review, which is available on the internet.


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Table 2-2: Household energy use in UK

Fuel No. of Households Natural Gas 20,000,000

Oil 800,000 Electricity 600,000 Solid Fuel 220,000

LPG 150,000

According to the respondents, at present in the UK, the inland consumption of LPG is between 1.1 and 1.2 million tonnes per annum, 25% of which falls under the domestic/leisure category. Based on Table 2-2 above, approximately 91.9% of domestic properties are fuelled using natural gas, with 3.7% on oil, 2.8% on electricity, 1% on solid fuels and the remaining 0.7% on LPG.

Energy Use in Domestic Properties in UK (2005)

91.9%

2.8%1.0%

3.7%0.7%


Figure 2-1: Energy use in UK households by percentage

The Final Findings Report on the Market Investigation into Supply of Bulk LPG for Domestic Use published in June 2006 by the CC also confirms that domestic bulk LPG is used by approximately 150,000 households in the whole of the UK.

2.3 The UK Rural Households

In general, the homes which do not have access to natural gas, but would like a gas supply, tend to use LPG as an energy source. The majority of homes in this category are located in rural areas. For the purposes of this study and given this relationship between location of homes and LPG utilisation, MM made the assumption that those households which are not fuelled with natural gas would not be situated in an urban environment.


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Based on the proportions allocated in Table 2-2 above and by assigning 0% to natural gas, 1.8 million households would represent the number homes in the UK utilising energy sources other than natural gas. These 1.8 million households (8.1%) can be classified as rural over the whole of the UK. Of the 1.8 million rural households an estimated 45.2% use oil as their energy source, with 8.5% using LPG and the remaining fraction utilising alternative energy sources. This breakdown is illustrated in Figure 2-2 below.

Fuel Type in UK Rural Households in 2005

0.0%

45.2%

33.9%

12.4%

8.5%


Figure 2-2: Energy use in UK rural households by percentage

2.4 The Metered Estates Supplied by LPG Companies

In order to distinguish between the two types of metered estates considered, the following definitions were used to describe metered estates supplied by LPG companies and home park estates respectively:

An estate where more than one residential consumer of domestic bulk LPG is supplied using a tank (or tanks) and pipework which are shared between consumers and where their consumption is

measured by a meter.

A residential mobile home, installed on a site or home park. The Mobile Homes Act 1983 governs this tenure and guarantees certain rights for both the park owner and the resident, including security of tenure for the resident, with only limited specified grounds upon which the agreement between the

resident and park owner can be terminated

MM has assumed that the large LPG companies interviewed represented about 90% of the supplied market. This assumption was based on the Final Findings Report on the Market Investigation into Supply of Bulk LPG for Domestic Use of the CC, which considered the four major suppliers (BP, Calor, Flogas and Shell) as constituting about 90% of domestic bulk LPG in Great Britain. Consequently, in sizing the total LPG metered estate market; MM has modified the data received from the LPG companies to accommodate an additional 10% from Other LPG suppliers. The CC has actually identified more than 20 other supply companies overall in their report.


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The total number of metered estates, according to the data received from the nominated organisations is approximately 1176. Calor, Flogas, BP and Shell, taken together, serve the vast majority of metered estates ([ ] and Flogas together serve [ ]% and BP and Shell together serve [ ]%). The smaller businesses of Carver Gases and Cambrian Gas contribute to [ ]% of the market. By allowing for an additional 10% which includes other LPG suppliers, the total number of metered estates (excluding home park estates) in the UK can be estimated at 1307. The distribution of LPG company supplied metered estates is illustrated in Figure 2-3 below

Figure 2-3: Number of LPG Company supplied metered estates excluding home parks

MM estimates that there are approximately 17,056 LPG metered estates customers in the UK. This is based on the data collected during our meetings with the LPG companies and includes an additional 10% to represent other LPG suppliers. In our estimation, MM has assumed that the number of customers is equal to the number of meters and hence, the total number of households on metered estates. Accordingly, [ ] and Flogas provide LPG for the largest portion of customers ([ ]%), with Shell and BP supplying to [ ]% of customers, and Carver Gases and Cambrian Gas servicing the remaining [ ]%. The distribution of customers supplied on metered estate is shown in Figure 2-4 below.

Number of Metered Estates in UK

[ ]

0

100

200

300

400

500

600

LPG Company


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Figure 2-4: Customers supplied by LPG Companies on metered estates (excluding home parks)

2.5 The UK Park Homes Supplied by LPG

According to the Office of the Deputy Prime Ministers report of 2002, Economics of the Park Homes Industry, the number of home parks in England and Wales vary considerably. Some 1,700 parks were identified, however, MM understands that the actual number of home parks approaches or even exceeds 2,000. For the purpose of grossing-up survey sample values to market totals, the report quotes a total of 1,683 home parks, containing an estimated 69,000 households in England and Wales. Furthermore, in order to take into consideration home parks located in Scotland and Northern Ireland, MM applied an approximation based on population to estimate the total number of households and subsequently, customers, in home parks in the whole of the UK. Given that England and Wales represented 88.6% of the total UK population in 2003 (taken from the UK 2005 National Statistics report) and this translated to 69,000 customers in home parks, then Scotland and Northern Ireland could potentially add another 8,878 customers in approximately 1,900 home parks throughout the UK.

However, based on feedback and estimates from the industry, MM has estimated that 25% of the households on home parks are fuelled using LPG. In terms of home parks, it was decided to estimate the number of customers, rather than the number of home park estates, since MM has encountered situations where different types of energy; including LPG, natural gas and electricity, being used within the same home park. Consequently, the total number of LPG fuelled households in home parks throughout the UK was estimated at 19,470 and the total number of home park estates on LPG was estimated at 475. The LPG companies regard a supply to a home park as being a supply to a commercial customer. Accordingly, MM has assumed that there is little or no double counting between the number supplied directly by LPG companies and homes supplied via a home park owner.

Number of Customers Supplied on Metered Estates in UK

[ ]

0

1000

2000

3000

4000

5000

6000

7000

LPG Company


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2.6 The Overall LPG Market

The LPG market can be divided into the one-off domestic bulk LPG as considered in Part I of the Draft Order; the metered estates supplied by the LPG companies and the LPG-supplied home park estates. Given that an estimate of 150,000 (100%) households in the UK use domestic bulk LPG overall and out of those, around 17,000 (11.4%) are homes on metered estates supplied by LPG companies and nearly 19,500 (13.0%) are LPG-supplied households in home parks, then the remaining 113,500 (75.6%) are the one-off domestic bulk LPG households. Figure 2-5 and Table 2-3 illustrate the relative market share.

Total Domestic Bulk LPG Households

75.6%

13.0%

11.4%

One-off domestic bulk LPG householdsHouseholds on Metered Estates supplied by LPG CompaniesLPG-supplied Park Homes

Figure 2-5: The market fractions of the various domestic bulk LPG supplies

Table 2-3: Number of Households using supplied by domestic bulk LPG

Total Domestic Bulk LPG No. of Households One-off domestic LPG households 113,500

Households on metered estates supplied by LPG Companies 17,000

Households on Residential Home Park Estates 19,500 Total 150,000

Table 2-4 below summarises the number of estates which include residential Home parks and metered estates on bulk LPG.

Table 2-4: Number of estates supplied by LPG Companies and in residential Home parks

Total Domestic Bulk LPG No. of Estates Metered Estates supplied by LPG Companies 1,307

Residential Home Park Estates 475 Total 1,782


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Despite the publicly reported decline of the national residential market, most of the various stakeholders MM interviewed indicated that overall market, in terms of both the LPG company estates and the home park estates, is expected to grow. Suggestions are that high prices in the residential market are one of the main contributors to this growth. Those LPG companies estimate an expected growth of 10% per annum for the LPG Company-owned estates. In terms of the home park estates, national planning restrictions seem to be a constraint to growth at present.

In the case of LPG company estates, the market is buoyant because developers at the outskirts of large cities have a demand for large houses on large plots. These consumers are more affluent and demand a gas supply. The natural gas regulated regime appears not to favour the laying of natural gas infrastructure to service this market. Consequently, LPG is the next alternative, and initially these consumers are not as price sensitive as the remainder of the market. Considering home parks, there is a significant demand for new properties; however, the planning restrictions have a subdued effect on growth in this area. The market price for homes and plots on home park estates has seen a significant price increase, which is reflective of the demand. Should the planning issues be resolved then it is likely that this segment will also experience a similar market growth. Discussions with individual home park owners have confirmed MMs opinion.


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3 The LPG Supply Process

Based on our meetings with the various LPG supplying companies, we were able to identify the most common procedure followed in terms of supplying customers with LPG.

Once the LPG storage vessels are sited on the estate, the main distribution mains made of Polyethylene (PE) are laid. PE is corrosion-resistant, lightweight and flexible, resulting in this material being the major pipe choice for the distribution of LPG gas in the mains. The pressure reducing station and the strategic valves are installed, followed by the addition of service and meter boxes. Eventually, the service isolation valves and flow limiters are installed.

Figure 3-1: The process of supplying LPG to an estate (Source: Calor Website)

Liquid LPG is delivered to the central LPG tanks from a road tanker using its own engine-driven pump. An on-board meter records the amount of LPG in litres of liquid pumped. As the liquid LPG vaporises within the tank, the pressure is reduced at the first stage regulator and delivered to the underground mains.

The first stage regulator set consists of twin parallel streams of gas with one regulator operating at a slightly higher output pressure than the adjacent one, effectively one is monitor and the other is standby. These regulators have isolation valves and upper and lower flow limiters, to guard against over and under pressurisation. This regulator set reduces the pressure from tank pressure (about 4 bar), to the usual pipe distribution pressure of about 0.7 bar.

On the metered estates the underground pipe network is generally made of PE and the PE service to each house terminates at an external meter box containing valves and the meter. The pipe exiting the meter box is made of copper and contains the gas vapour supply which reaches the household. Individual house meters are read a number of times throughout the year and a bill is issued to the customer, stating the amount of gas used in either gas volume or equivalent liquid volume. In addition, a standing charge is typically applied to the bill.


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Figure 3-2: The process of supplying LPG to the customer

The design and construction of these LPG metered estate networks are governed by UKLPG Codes of Practice (CoP) and also the standards included in the Institute of Gas Engineers and Management (IGE) codes. Once constructed, the gas supplier is obligated by law to provide an emergency response service in accordance with Gas Safety (Installation and Use) Regulations, GS (IU) R.


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4 The Types of Transaction Processes Encountered

Following MM visits on selected metered estates chosen by the LPG companies, we were able to categorise the different transaction processes which describe the LPG metered estate market into six types. Assets ownership is discussed in section 5 below.

4.1 Type 1 Normal domestic bulk, as considered in Part I of the Inquiry

This type of transaction is representative of the majority of cases encountered. The LPG company supplies the bulk gas to the domestic customer and bills the customer directly. This is the one-off domestic bulk customer, considered in Part I of the CC investigation into the LPG market.

4.2 Type 2 Mini-bulk, supplied to Park Homes Estates

An example of this transaction arrangement would be the home park estates supplied using mini-bulk LPG. In this case the LPG company owns and supplies the mini bulk tank which is located beside each residence of the park home estate. The LPG company invoices the home park estate owner based on the tanker meter reading for deliveries to each of the residents tanks. Subsequently, the home park estate owner invoices each customer on the basis of the tanker meter reading already provided by the LPG company. Both providers use the same tanker meter reading to calculate their invoices.

The home park owner charges a mark up on the price invoiced by the LPG supplier. This is not strictly a metered estate within the CCs definition of a metered estate, but is named as such within the terms of reference.


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4.3 Type 3 Metered estate operated by LPG Company

These estates are fully owned by the LPG companies. The specific company delivers fuel into its own storage tank and subsequently reads each customer meter. An invoice is then issued to the customer directly. The customer meter reading is in cubic meters of gas. The LPG company includes these readings on its invoice and also shows a conversion factor for converting the volume of gas supplied into equivalent litres of liquid LPG. The unit price on the invoice is usually stated in pence per litre of liquid LPG.

4.4 Type 4 Home Park Estate, central storage & individual customer meter

The typical example of this type of transaction is the home park estates. In this case, the LPG company supplies the home parks central LPG storage with fuel and invoices the home park owner based on the tanker meter reading. Subsequently, the home park owner reads the customers meter and issues a second bill to the home park resident.

This specific type of transaction would also form the model for supplies to a commercial customer, such as hotels which have an attached block of apartments. Although none of the latter was encountered during this investigation, MM believes that they certainly exist. Other examples fulfilling this configuration could be live-in situations of the Department of Defence, religious communities and National Health Service (NHS) sheltered homes projects. Hence, the model illustrated below, covers all these aforementioned possibilities.


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4.5 Type 5 Special Case: [ ] supply to an estate on the Isle of Lewis

[ ]

[ ]

[ ]

4.6 Type 6 - Special Case: Not encountered by MM, but hypothetically possible

This situation is theoretical and may or may not exist. In this case a LPG supplier invoices for liquid LPG supplied into the tank and then a pipe owner, like a home park estate owner, invoices an intermediate seller. This seller then sells to the customer using the customer meter reading, to determine the amount of gas supplied. This situation envisages a number of sellers of gas to different customers on a metered estate, on which the sellers do not own any gas supply assets. The customer meter reading is also used as the method of calculating the invoice from the pipe owner (MM suggest calling this person, the transporter) to the seller. MM did not encounter this situation, but believe that it may exist.

By including these six types of transaction processes, MM is confident that these illustrations define completely the possible arrangements currently present in the UK domestic bulk LPG market.


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5 Ownership

5.1 Tanks and Tank Sites

The ownership of tank sites is usually uncertain and in some instances the LPG companies effectively have squatters rights to these sites. The major LPG companies are endeavouring to rectify this situation, especially on new installations. In these cases, the model most favoured is a lease of about 20 years. The smaller LPG companies adopt a more relaxed approach to the land ownership issue and in most instances do not bother with leases or outright ownership of the land. An issue of concern for some LPG companies was the possibility of inheriting a contaminated site, which would mean that the company would be obligated to remove the contaminant and make safe and fit for purpose before use. From the tank site owners perspective, this situation is of even more concern if the site is to be sold. Another concern, which was expressed strongly by Shell, was the possibility of taking possession of another LPG companys facilities that may have some inherited legal or technical problems.

Consideration should be given to the instances where LPG use is discontinued on a metered estate. This can occur where a natural gas supply to the estate is made available. Recently constructed metered estates are usually supplied via underground tanks; hence, the space required is less than that for above ground tanks at older installations. If the LPG supply is discontinued, the tanks would be removed and the tank site would become part of the estates open space or in the rare instance, the estates owner would use the previous tank site for further development. [ ]

5.2 Underground Pipework

The distribution pipes from the tank site are usually located in the grass verge at the edge of the estates roads and follow the road network. There are road crossings. Tee-off points are located opposite each house. The pipework is in most cases made of medium density polyethylene pipe (PE). This is the same pipe used for natural gas distribution pipework.

Steel pipes have been used in some of the older estates and should LPG metered estates assets be transferred between LPG companies, then the value of an estate with steel mains may not follow the general valuation mechanism outlined in this report.

[ ] These pipes have cathodic protection to protect the pipes against corrosion. There may be more steel mains in use elsewhere on other estates supplied by other companies and LPG companies consider it important that these pipes are identified and examined to ensure that their integrity is carefully monitored on an ongoing basis. Based on MMs experience, there is a higher possibility of gas tightness issues from these steel mains.

Most LPG companies do not have records or drawings for the gas mains, except in cases of more recent installations. With these newer installations, most of the major LPG companies are undertaking detailed surveys of the metered estates and documenting the acquired information.

With respect to the gas mains, MM noted that all the major LPG companies either owned the gas mains or had specifically identified the owner of the gas mains, for example, a home park estate owner.


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In the home park estates, all the gas mains are owned and managed by the owner. Of the home parks that MM visited, the gas mains were all PE and records were in existence; however, we can not confirm if similar records are kept on all home park estates. The home park owner is responsible for the maintenance of the gas mains and uses Corgi approved contractors for such maintenance.

The smaller LPG companies install or subcontract the installation of the mains on the basis of a commercial arrangement with the estate developer. On completion of the installation, the ownership of the mains is considered to have passed on to either the developer or residents of the estate. Of the sites MM visited and companies interviewed, MM did not encounter any record of this transfer of ownership. As a consequence, it is possible that on some metered estates that the actual owners of the pipes are not aware of their ownership.

The LPG companies do not appear to attach significant value to the gas main, other than its usefulness in distributing gas to each of its consumers. MM considers that all metered estates being supplied by each LPG company should be documented. The ownership of facilities should be clearly stated and accepted. The consumers on each estate should have available to them a detailed map showing the tank location, layout of the mains and a schematic indicating ownership. This should be displayed on the LPG company or suppliers website and should also be displayed on the estate, at the tank compound.

Pipeline easements are generally not available. These provide rights to locate a pipe in that particular piece of ground or to excavate the ground to repair or replace the pipe. Of the LPG companies interviewed, [ ] and [ ] would appear to have the most complete records in this regard. The easement strip in the case of [ ] is three meters from the pipe; two meters in the case of [ ] and one meter in the case of Shell.

5.3 Customer Meter Installation

The customer meter installation contains flow limiting and over pressure devices, usually UPSO/ OPSO, second stage regulator, a meter to record the gas delivered to the customer and a customer isolation valve. These components are enclosed in a meter cabinet to protect it from the weather, and mechanical damage.

Ownership of this facility is commercially significant to most LPG companies as the metering installation determines the eventual revenue from the supply of LPG. This facility is usually owned by the LPG company or the owner of the metered estate dependent on the contractual arrangement. The supply agreement between a LPG company and the customer stipulates that the meter determines the quantity of gas for which the consumer is to be billed. It also establishes a standing charge, often referred to as a meter rental. In most cases, these meter installations are owned by the supplying LPG company, except in home park estates, where the home park owner owns them.

There are other valves located on the distribution network. These would include main isolation valves used to segregate legs and important sections of pipelines; however, these are found on larger systems. These valves are usually of steel construction, but more recently plastic valve are being used.

5.4 Switching of Asset Ownership

Ownership of the tank site was not an issue raised by any of the LPG companies in MMs survey. However, the location of the LPG tank site on an estate was of concern to both the estate developer and the LPG company. Consequently, the tanks are usually underground, reflecting the high premium placed by the developer on the land occupied.


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Legal title (in terms of documentation) to LPG supply facilities on a metered estate is not very clear. Some LPG suppliers have none and are entirely satisfied that such a situation is adequate for their purposes. In other cases, considerable effort is being made to ensure that all aspects of the supply network have relevant and executed legal documentation. These documents would include, tank site lease, easement for pipelines, and signed customer contracts

The LPG companies consider the ownership of the tanks as more commercially important than the ownership of the gas mains, as ownership of the tanks usually dictates who exclusively supplies the LPG.

The customer isolation valve at the outlet of the meter is usually the boundary between the customers pipe installation and the LPG company pipe facilities.

MM considers that in the instance where the tank ownership switches, then it should automatically carry with it the ownership (as such) of the tank site, pipes, the first stage regulator installation, the site gas mains, any existing easements and the metering installations. In other words, all the gas supply assets should be considered as one. However, if there is already an existing ownership regime (clearly defined) for the LPG facilities, then these arrangements should take precedence. Such cases would include [ ] and Type 4 installations below.

5.5 Types of Ownership

5.5.1 Type 1 Ownership - Domestic bulk, as considered in Part I of the Inquiry

The ownership boundary in bulk domestic situations may be at the outlet of the first stage regulators or at the customer isolation valve located immediately external to the customers home. This type does not fall under the metered estate category.

5.5.2 Type 2 Ownership Mini-bulk, supplied to Park Homes Estates

The ownership boundary in mini-bulk home park estates is at the outlet of the regulators on the tank. The customer owns the installation pipework from there into the house. The home park owner does not own any part of the installation.


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TANKER

LIQUID METER

LPG TANK

DOMESTIC CUSTOMER

TYPE 2 OWNERSHIP MINI BULK IN PARK HOMES ESTATES

BILL 2PARK HOME OWNER -

CUSTOMER

PIPES

INVOICE

GAS USED

STANDING CHARGE

VAT RATE

BILL 1LPG Co - PARK HOME

OWNER

INVOICE

GAS USED

STANDING CHARGE

VAT RATE

LPG SUPPLIER CUSTOMER

5.5.3 Type 3 Ownership Metered estate operated by LPG Company

The LPG supplier ownership varies according to supplier. In most estates the LPG supplier owns all the metered estate facilities from tank to the outlet of the customer meter. However, in some cases the LPG suppliers do not own the pipework between the tank site and the meter inlet. These suppliers claim ownership of the meter set from its inlet to its outlet, at the customer isolation valve. This means the pipes may be owned by the customer or someone else, who may be unaware of the ownership of these facilities. In the diagram below, the pipes are shown as being the customers property. The LPG companies with this ownership situation indicated that the requirement in Gas Safety (Installation & Use) Regulations (GS(IU)R) to provide an emergency call out service, was being provided by them, for the whole metered estate gas network.

5.5.4 Type 4 Ownership Park Homes Estate, central storage & individual customer

In this type of ownership the LPG supplier owns the tank. The home park owner ownership commences at the outlet of the first stage regulator set. The pipes in the estate are owned by the home park owner, including the meters up to the customer isolation valves at the outlet of the meters. The tank site and the road network are owned by the home park owner.

.


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5.5.5 Type 5 Ownership Special Case: [ ] supply to an estate on the Isle of Lewis

[ ]

[ ]


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6 Safety Standards and Regulatory Issues

6.1 Safety Standards

Metered estates, as described and witnessed by MM, are in the opinion of the LPG companies safe, operate within the law and have adequate safety standards. Following MMs survey, MM has no reason to disagree with this view. The principal codes applying to metered estates are those of the UKLPG, namely CoP 22 and CoP 25. The positioning of LPG vessels is covered in CoP 1 and is not considered here as it was dealt with in MMs previous study conducted on behalf of the CC, Provision of expert advice for the market inquiry into the supply of domestic bulk liquefied petroleum gas.

A Review of Domestic Gas Safety commenced in February 2006, which was launched by Lord Hunt of Kings Heath, the Minister responsible for Health and Safety. The review is being undertaken under the auspices of Health and Safety Executive (HSE) and is yet to be concluded. As part of this project, Frontline Consultants undertook a Review of Domestic Gas Safety for HSE. Frontlines overview is useful in the context of gas safety and this report. The official figures show that gas can be regarded as a very safe fuel. The number of incidents in 2006/07 was 150 and of these 11 were fatal, the majority (8) from Carbon Monoxide poisoning. The priority safety areas identified are Carbon Monoxide poisoning, unsatisfactory work undertaken mainly, by unregistered installers and CORGI related issues. These figures and comments relate to natural gas and LPG (all applications). See Appendix A.9 for the relevant safety statistics.

Only more recent installations on metered estates by LPG companies are documented. Currently, most LPG companies are rectifying this situation, as surveys and documentation of all their metered estates are becoming common practice.

6.1.1 Access Limitations

Access to pipes, meters, etc may pose a problem in the event of repair and renewal. LPG companies do not have a statutory right of access, similar to natural gas companies which have the benefit of Gas Safety (Rights of Entry) Regulations 1996, and must rely on access clauses contained within. Further, should a householder in the estate decide not to take an LPG supply then the portion of the gas main passing through that customers property is not covered by an agreement allowing access, unless the developer has included this provision in the original deeds for each home sold on the estate. This also arises should a customer discontinues its LPG supply. The form of words that should appear in the customer agreement is set out in UKLPG CoP 25, Appendix C, page 29.

The supplier, and any person authorised by the supplier to act on his behalf, should have the power to enter into (details of the premises to be supplied) at any time, where, in the opinion of the supplier or the person authorised to act on his behalf, it is necessary to do so for the purpose of averting danger to life and property.

In the current ongoing HSE review of domestic gas safety, MM expected that this issue of access would have arisen, having been raised in Part 1 of the Inquiry by LPG companies. It is not apparent that the LPG suppliers have made a case for their inclusion under the Gas Safety (Rights of Entry) Regulations 1996, so as to allow LPG companies access to customers premises to make safe gas installations.


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Private roads not under the responsibility of local councils may also be an issue, in the event of access to gas main. In the case of public roads taken in care by a local council, permission under the terms of the New Roads and Streetworks Act 1991, will be required, should access to street mains be necessary.

In the context of the original LPG supplier being displaced by another, these access issues may become a concern should access to underground LPG supply facilities be required on a metered estate.

6.1.2 Steel Pipes

Underground steel mains and risers are an area of concern because of the potential corrosion hazard. These types of equipment are found in many older metered estates, where the PE service terminated underground and the gas service continued up to the meter box in steel. Generally, these components are not protected from corrosion by using either a plastic sleeve pipe or cathodic protection systems. MM was made aware of two estates being supplied via steel mains; both have cathodic protection.

In more recent estates, the PE is used up into the meter box and is protected from ultra violet light degradation by using a plastic over sleeve protective pipe. It may be necessary to replace the steel risers with this more recent PE system. However, this replacement depends on the soil conditions in a particular estate; i.e. where the soil and environmental conditions may be greater or less conducive to corrosion of the steel.

In the event of the transfer of metered estate gas supply assets, then the issue of underground steel pipework may impact on the valuation process.

6.1.3 Level of Risk The areas of risk are the LPG vessels located in the tank compound, the underground pipes and the customer metering installations. The risk to the tanks, at the tank sites, whether the tanks are located above or below ground were dealt with in MMs previous study conducted on behalf of the CC, Provision of expert advice for the market inquiry into the supply of domestic bulk liquefied petroleum gas.

The risk for the underground pipe work mainly arises from interference via mechanical damage by third parties. The issue of underground steel gas mains as a risk has been discussed in section 6.1.2 above and is an area requiring attention.

[ ] has undertaken a detailed risk analysis of potential risks in its metered estates. [ ] does have some steel gas mains but has a replacement programme to replace them with polyethylene. [ ] has also identified the steel risers from PE services into meter boxes as being its primary risk on metered estates requiring attention (particularly those operating at medium pressure). MM concurs with this conclusion.

6.2 Regulation

The construction, development and operation of LPG metered estates are not regulated activities. The sale and supply of natural gas is a regulated activity, principally governed by legislation mainly Gas Act 1986 (1995 and Utilities Act 2000), and regulated by OFGEM. A similar situation applies to the delivery and sale of electricity.

With respect to the regulation of LPG metered estates in a similar manner as that applying to natural gas supply, the safety record of LPG metered estates, indicates that this is not a high priority. Natural gas is regulated, not only for safety reasons, but also for adequacy of supply and orderly development


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6.3 Statutory Considerations

In the context of assets on LPG metered estate being exchanged between suppliers, the process would be facilitated if the estates were documented and that standard certification was readily available to allow the sale or exchange process between LPG suppliers. There is a standard installation configuration process in place, except for minor modification and selection of different manufacturers equipment, which is supported by UKLPG CoP 22 & 25. There is also a standard operating system in existence, which is based largely on custom and practice; however, encouraged by UKLPG CoPs. Statutory rules, of interest, in this respect are the GS(IU)R and the Pressure System safety regulations (PSSR).

The PSSR is primarily a statutory requirement designed to prevent accidents arising from pressure systems, in the work place. PSSR requires a written scheme of examination (WSOE) to be prepared for qualifying pressure systems. The WSOE, if used in the context of LPG metered estates, would be very helpful in ensuring that all estates were documented and reviewed periodically in a standard format by a competent person.

The PSSR applies to all pressure systems and pipelines operating at pressures greater than 0.5 bar (LPG metered estates usually operate at pressure in excess of this). However for pipelines, the minimum pressure is 2 bar, which is above the operating pressure of LPG metered estates. Further, the issue of whether it is an at work situation also arises, as the pipelines will traverse and supply domestic properties. The at work issue was discussed at length in Part 1 of the Inquiry, in relation to filling domestic bulk tanks at persons homes. The consensus was that it was only an at work situation, while the tank was being filled. It would appear that the PSSR may not encourage LPG companies to implement a standard format that would facilitate exchange of assets.

GS(IU)R requires, that no person shall carry out any work in relation to a gas fitting or gas storage vessel unless he is competent to do so. Further, in Section 36 of the GS(IU)R; the supplier of the gas shall within 12 hours of being informed of a gas escape prevent the gas escaping. All LPG companies encountered by MM during the study, stated that they provide this service, even in situations where they do not own the pipelines and that only LPG qualified Corgi installers undertake their LPG metered estate work.


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7 Valuation Issues

7.1 General

Giving consideration to the prospect of switching from one LPG supplier to another on a metered estate, it may become necessary to have a fall back price formula to value the on site components, in the absence of any agreement between the parties. MM suggests that the valuation of the assets should be on the basis of the current cost of installation and depreciated to determine its residual value. The current cost would be the actual cost, which will be indexed forward to the current date. MM does not consider valuing the assets on the basis of any future revenue expectations to be reasonable. The valuation approach adopted by MM is consistent with the tank valuation formula determined by the CC in its Inquiry for Part 1 of the Bulk Domestic LPG Inquiry.

The assets on a metered estate may be divided into three parts.

The tank site installation including LPG tanks, ownership or lease of land, first stage regulators and other control valves and fencing surrounding the site,

The underground pipes or gas mains and services feeding each house. These are largely made of PE and occasionally in large systems there are strategic steel (or plastic) isolation valves;

At each house, a meter box is installed which contains the meter, control valves, regulator and isolation valve. This equipment is largely made of steel components.

TANKER

LIQUID METER

LPG TANK DOMESTIC CUSTOMER

PRINCIPLE LPG SUPPLY ASSETS IN A METERED ESTATE

INVOICE

GAS USED

STANDING CHARGE

VAT RATE

BILL 1LPG Co - CUSTOMER

VAPOUR METER

PIPES

7.2 Tank Site and Land

From a developers perspective the land used for the LPG tank sites and pipes would have an appropriate value dependent on the estate being developed. However, as discussed in section 5.1, the same land is not given high commercial regard by most LPG companies. Generally, the LPG companies sole concern is a site for their tanks. This is negotiated with the site developer who, should he require LPG gas, must find a suitable site for the tanks. MM takes the view that, for these purposes and in the context of asset transfer between LPG suppliers, the land be deemed to be valueless. As such, the land should be considered to be attached to the tank, in the same manner that the installation pipe from tank to customer was effectively considered to be part of the tank. This was determined by the CC in its Inquiry for Part 1 of the Bulk Domestic LPG Inquiry

Considering the nature and function of the tanks on metered estates, MM suggests that the tank formula in the Draft Order Part 1 Schedules 1, 2 & 3 equally applies to tanks on metered estates, as all tanks on metered estates are similar to those on domestic bulk installations.


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7.3 Gas Mains and Services

Based on MMs experience, all the metered estate supply system, including first stage regulator set (isolation valves, pressure gauges and control valves like UPSO and OPSO and tank site pipework), control valves, pipework and meter sets should be priced on a unit cost per installed customer basis, which is considered as Q in the formula in section 7.5 below. In order to determine the fall back transfer value for the metered estate, the number of installed customers on the estate; the remaining economic life of the estate and the expanded tank valuation formula should be utilised.

7.4 Useful Life

The life and value of installed gas infrastructures have been investigated by many Natural Gas Regulators. The Monopolies and Mergers Commission (MMC) conducted investigation in 1997, and more recently in 2007, the Commission for Energy Regulation (CER) in Ireland also looked at the depreciation of gas infrastructures. These regulators invariably refer to similar decisions by their peers elsewhere in Europe. The decision was taken by CER that natural gas distribution PE pipelines, for the purposes of valuation, should have a depreciation life of 60 years. This acknowledges that PE pipes may have useful operating lives of at least this period. In addition, it would be reasonable to assume that the life of the gas pipelines should be consistent with the commercial life of the metered estate and as such MM considers that a depreciation life of 60 years for all mains and services, in metered estates to be reasonable. However, further investigation is required to ascertain a more accurate depreciation period and valuation mechanism.

MM understands that when LPG companies are initially evaluating the installation of LPG supply facilities in new metered estates, the economic payback period considered is usually a maximum of 5 years. No documents to support this payback period were noted by MM nor were any post evaluation exercises (after 5 years supply). In the context of the facilities being transferred from one LPG supplier to another, it is possible that the facilities may already have been depreciated.

7.5 Asset Value Calculation Approach

In this section, MM provides an approach to estimating the asset value of an LPG system.

Firstly, in order to establish the age of the LPG network on the metered estate, the date of construction of the estate should be taken as the date first gas supplies were made to the first gas consumer on the estate. If it is not possible to determine this date, then the earliest date on the nameplate of any of the LPG tanks located on the tank site should be used.

The value of the assets, excluding tank site value, on the metered estate should be divided by 60, which is the full depreciation period suggested by MM for the gas network assets and discussed above in sections 7.4. For the purposes of valuation, the resultant figure can be considered as the annual depreciation charge for the assets. The remaining useful life Y of the assets can be determined by subtracting the age of the estate from 60. Then by multiplying the annual depreciation charge for the assets by the remaining useful life (in years), a value for the fall back asset value of the gas network assets can be obtained. This value, however, excludes the value of the tank.

Overall, the value of the metered estates LPG supply assets can be determined from the value of B, as calculated below. This value could be utilised by the LPG companies as a fall back price when transferring assets.


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60)60()( YNQFPB +=

B = Fall back asset value for all the LPG supply assets located on a metered estate;

FP = Formula price for tank and tank site assets

Q = The cost per customer of installing the first stage regulator set, gas mains, services and metering sets on a metered estate

N = Number of domestic premises with installed metered estate gas facilities

Y = Remaining useful life of the assets

Examples of the costs involved are provided in Appendix A.6.


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8 Commercial Issues

8.1 Standing Charge

LPG consumers on metered estates are invoiced for a standing charge, in addition to LPG delivered through their meters. MM encountered three methods for determining this charge depending on the supplier involved.

The first method was a cost of service approach, where the different elements to be provided by the LPG supplier on the estate on an ongoing basis was valued and aggregated to determine the cost of supplying each customer on the estate. Secondly, a charge related to the domestic bulk customers tank rental for single tank installations, which may give rise to proportionally higher charges for customers on metered estates versus bulk domestic one-off customers. The third method was a contribution to offset the capital cost for the initial installation of LPG facilities on the estate.

Applying this standing charge as a mechanism for rewarding or repaying the initial capital cost might be considered as double payment in cases where the facilities have already been paid for by the home park owners or housing developers. Further, it may impact on the valuation of the metered estate should the assets be transferred from one LPG supplier to another.

8.2 Taxes

Of the nominated LPG companies that MM interviewed it was noted that the manner in which the companies charged VAT varied to some extent. All consumers considered in this study are domestic consumers and 5% is the relevant VAT that should be applied to their fuel bills including standing charges.

The problem arises when a customer falls into the definition of commercial within an LPG suppliers accounting system. In this case the relevant VAT is 17.5%. In addition, the Climate Change Levy (CCL) of 0.49 pence per litre is automatically applied plus 17.5% VAT. There are claw backs /discounts applying to CCL, but these are not relevant here.

A home park estate is an example of a commercial customer for an LPG supplier. The home park owner is charged VAT at 17.5%. The home park owner should then invoice his customers at 5% VAT. There may be cases similar to this where 17.5% VAT is being applied. The principle problem arises with CCL, which is a non-recoverable tax. In this case the customer may be levied with the CCL plus 17.5% VAT thereon, whereas CCL does not apply to domestic customers. There may also be cases where an LPG supplier traditionally applied a VAT rate of 17.5% to all tank rentals, and perhaps has inadvertently allowed all tank rentals and standing charges to be at a VAT rate of 17.5%. This may include domestic bulk and metered estates customers.

MM understands that the HM Revenue and Customs (HMRC) has a ruling that should a customer be a domestic consumer and the size of the installed tank is less than 2 tonnes, then a 5% VAT rate applies to the fuel and tank rental.

Variation in the application of taxes may result in inconsistencies with customer invoicing.

Appendix A.5 contains sample copies of invoices.


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8.3 Contractual Arrangements

8.3.1 Introduction

Based on the nominated organisations MM interviewed, three main types of contractual arrangements were encountered, as indicated below. MM also noted that one LPG supplier had no contracts as such, just terms and conditions issued to the customer.

LPG company and metered estate owner (e.g. home park owner); a commercial contract.

LPG company and customer (end-user) on metered estate; a domestic metered estate contract

Metered estate owner (e.g. home park owner) and customer (end-user) on metered estate; usually legislated agreement, referred to as the Written Statement for protected sites.

A fourth contract type between a LPG company and a ResidentsAssociation has been reported to exist; however, MM did not encounter this type in our survey.

In the first case above, a contract between a home park owner and a LPG company is a commercial contract for supplies. The other two cases, LPG company with domestic customer and home park owner with domestic customer, are considered to be domestic agreements.

The home park owner supply contract with a customer is one defined in law, the Mobile Homes Act 1983. The contract or Written Statement is between the occupier and the owner (home park estate owner). Under clause 22 of the Written Statement, the owner shall if requested by the occupier provide (free of charge) documentary evidence in support and explanation of any charges for gas, electricity, etc or other services payable by the occupier to the owner under the agreement. This Act provides the customer with the opportunity to force the supplier to justify any price adjustments. MM is of the opinion that in general this is a considerable advantage over the LPG company agreements with customers.

8.3.2 Overview of Agreements

LPG company agreements with metered estate customers have no price clause or price variation clauses. In general, these clauses may be implemented at the LPG suppliers discretion. In the case of [ ], there is no price stated in the agreement. Flogas had a price per cubic meter. Some LPG companies may have fixed introductory offers, which are usually time bound for one year while other companies may not have this initial offer. In some agreements, price adjustment clauses have limitations on the magnitude of price increases within certain timeframes and in one case a maximum or ceiling price is determined by reference to the price movements of Platts Oilgram price index for LPG prices. Flogas allows the customer to terminate the agreement, if Flogas increases the price higher than the Retail Price Index.

The Term or duration of these agreements varied from no time period to five years. Flogas metered estate contracts typically have an initial term of three years which is automatically renewed thereafter on one year terms. In most cases they continued in force in perpetuity (evergreen), unless cancelled. A termination notice period of one to three months is considered common with most LPG companies interviewed.


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The right or ability to switch was limited in most LPG company supply agreements. In addition, some easements/land agreements also constrained the customer in his/her ability to switch LPG suppliers. The home park agreements do not appear to restrict the ability of customers to switch LPG suppliers. It could easily be done in a mini-bulk estate. However, there is a clause preventing residents from undertaking building type work without the home park owners permission. Flogas has a straight exclusion clause preventing a customer from entering into another agreement for the supply of LPG while the Flogas agreement is in force.

Restrictions on switching LPG supplier also exist in agreements other than supply contracts. Agreements in relation to leases and easements should also be examined. MM received a very limited number of examples of these agreements. These largely dealt with land issues such as title value and other related items. However a few contained restrictive clauses relating to alternative fuel and LPG supplier switching.

The home park type of agreement would probably be the most widespread given that there are far more of these consumers as a homogeneous group. Further, there is a greater need for this group to have its administrative aspects more complete and up to date. Their agreements are required by law and cover additional aspects, such as, the rights and ownership of the residents properties.

The number of agreements in existence could be considered as being the total number of metered estate customers, given that all home park customers have agreements. In addition, many LPG suppliers consider anyone to whom they supply LPG and from whom they receive payment is an implied contractually tied customer. MM considers that this matter requires legal review. The four majors are very keen to have customer signed contracts and in their case many of their customers have such agreements.

8.3.3 Switching LPG Suppliers - Contractual Considerations

It is not easy for a customer to change supplier when located on a metered estate. In the case of a park home estates customer supplied via mini-bulk, it is technically possible, in the context of the existing supply model and issues discussed and understood in Part 1 of the Inquiry (tank switching). However, as already described, the park home owner, in the event of a tank exchange, would probably be required to permit this switch to occur. If there is no tank exchange required, then it is possible for the park home estate customer to switch suppliers, with just administrative (contractual) adjustments.

If contractual issues are ignored, it is possible for a customer to switch from one LPG supplier to another provided the LPG suppliers are willing to participate. The installed technical facilities vary very little from one metered estate to another, and neither do the operational processes differ very much. If a customer decides to switch to another LPG supplier, then technically nothing changes. There is no need to change tank, pipelines or meters. One LPG supplier can read the customers meter and share the information with the other LPG supplier. This meter reading can be used for invoicing the customer, and also for the invoicing transaction between the two LPG suppliers. This reflects transaction model 5 outlined in section 4.5 above ([ ]).

Shrinkage will be an issue to be agreed between LPG suppliers. A concern to the incumbent LPG supplier would be a worse case scenario where s/he will have no domestic customers on the metered estate (all lost to competition). This LPG supplier will have to deal with possibly a number of LPG suppliers, who have persuaded domestic customers to switch supply to them.


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The original LPG supplier will continue to be responsible for safety and maintenance of the LPG supply facilities on the metered estate. Section 36 of the GS(IU)R, the supplier of the gas shall, within 12 hours of being so informed of the escape, prevent the gas escaping. In Section 2 of the GS(IU)R, a retailer shall not be deemed to be a supplier when he sells a brand of gas other than his own.

Contractually the big issues for the incoming LPG supplier to achieve are agreement with the existing LPG supplier for transport through his pipes, etc and availability of product (LPG supplies) at terms that would allow the incoming supplier to compete.

Competition already exists within metered estates, but not strictly head to head. Some LPG companies allow higher users a more competitive price than others on the s

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