ENERGY MARKET INVESTIGATION - Oil Consultancyoilconsultancy.com/pdf/Guernsey_Final_Report.pdf ·...

Final Report Complete [Revised Section 10] 1 May 07 Page 1 of 77 © James Milne & Consultancy Solutions for the Oil Industry

Commerce and Employment Department Raymond Falla House

P.O.Box 459, Longue Rue St Martin’s

Guernsey, GY1 6AF

AND

ENERGY MARKET INVESTIGATION

March 2007


Table of Contents

Table of Contents ......................................................................................................................... 2 EXECUTIVE SUMMARY............................................................................................................. 4 TERMS OF REFERENCE .............................................................................................................5 1. BACKGROUND..................................................................................................................... 6 2. PETROLEUM PRODUCTS: MARKET STRUCTURE ON GUERNSEY............................7

2.1 Current Market Structure...............................................................................................7 2.2 Size of the Guernsey Petroleum Market ....................................................................... 9

3. PETROLEUM PRODUCTS: DIFFERENCES TO UK MAINLAND MARKET STRUCTURE............................................................................................................................... 11

3.1 Introduction ................................................................................................................. 11 3.2 Primary Distribution .................................................................................................... 11 3.3 Terminals, Storage and Throughput............................................................................12 3.4 Distributor Structure....................................................................................................12 3.5 Secondary Distribution Logistics .................................................................................14

4. PETROLEUM PRODUCTS: GUERNSEY SUPPLY CHAIN COSTS................................16 4.1 Introduction .................................................................................................................16 4.2 Cost Elements of the Supply Chain..............................................................................16 4.3 Primary Distribution Costs .......................................................................................... 17 4.4 Cargo and Harbour Dues .............................................................................................18 4.5 Terminal Costs..............................................................................................................18 4.6 Secondary Distribution Costs.......................................................................................19 4.7 Summary ..................................................................................................................... 20

5. PETROLEUM PRODUCTS: GUERNSEY’S RETAIL PETROL MARKET ......................21 5.1 Introduction .................................................................................................................21 5.2 Market Infrastructure ..................................................................................................21 5.3 Retailers Market Share................................................................................................ 22 5.4 Density of Service Stations on Guernsey .................................................................... 22 5.5 Retail Site Throughputs .............................................................................................. 23 5.6 Site Operating Costs .................................................................................................... 24 5.7 Break-even Fuel Margin and Site Throughput ............................................................25 5.8 Length of Contract between Retailers and Oil Companies......................................... 26

6. PETROLEUM PRODUCTS: PRICE COMPETITION......................................................27 6.1 Comparison of Retail Pump Prices ..............................................................................27 6.2 Netback Analysis ......................................................................................................... 29 6.3 Why should Guernsey’s Retail Margins be so high?....................................................31 6.4 The Effect of Higher Excise Duty on Pump Prices ..................................................... 32 6.5 Price Transparency at the Pumps ............................................................................... 34 6.6 Informed Consumer Choice .........................................................................................35 6.7 Are Petrol Prices important to Guernsey’s inhabitants? ............................................ 36 6.8 Commercial Market Prices & Competition ................................................................. 36 6.9 Marine Fuels Market ....................................................................................................37 6.10 Comparison of Domestic Heating Oil Prices........................................................... 38 6.11 Netback Analysis of Heating Oil Prices....................................................................... 40 6.12 Competition for Heating with other fuels ............................................................... 42 6.13 Mergers & Acquisitions under Competition Law.................................................... 43 6.14 Summary of Recommendations on Price Competition .......................................... 44

7. GAS MARKET: BACKGROUND......................................................................................... 45 7.1 History & Development............................................................................................... 45 7.2 Distribution ................................................................................................................. 46

8. GAS MARKET: CURRENT MARKET STRUCTURE ......................................................47 8.1 Overview .......................................................................................................................47 8.2 Competition from other Fuels..................................................................................... 48

9. GAS MARKET: DIFFERENCES TO UK ......................................................................... 49 9.1 Supply Chain Costs - Shipping.................................................................................... 49

10. GAS MARKET: PRICING ISSUES & COMPARISONS .................................................. 50 10.1 Mains Gas .................................................................................................................... 50 10.2 Mini-Bulk Gas........................................................................................................... 51


10.3 Cylinders ...................................................................................................................52 10.4 Comparison of Typical Guernsey Household Heating Costs...................................53

11. GAS MARKET: FINANCIAL DATA FROM GUERNSEY GAS........................................55 11.1 Background & Introduction .........................................................................................55 11.2 Size & Scope................................................................................................................. 56 11.3 Financial Performance ................................................................................................ 56 11.4 Performance criteria under the new parent company.................................................57 11.5 Supply Chain Costs...................................................................................................... 58 11.6 Areas of Concern ......................................................................................................... 58

12. GAS MARKET: CONSUMER TARIFFS & WHOLESALE PRICES................................ 59 12.1 Tariff Increases – Trends vs. UK Natural Gas Suppliers............................................ 59 12.2 Recent Spot Market Price Trends............................................................................ 60

13. GAS MARKET: BENCHMARKING .................................................................................61 13.1 UK-Based LPG Distributor...........................................................................................61 13.2 Consumer prices vs. supply costs .............................................................................61 13.3 Tariff prices vs. large consumer prices.................................................................... 62

14. GAS MARKET: THE QUESTION OF COMPETITION .................................................. 63 14.1 Market Size .................................................................................................................. 63 14.2 Liberalisation of the gas market .............................................................................. 63 14.3 What keeps the shareholders of Guernsey Gas on the island? ............................... 63

15. GAS MARKET: REGULATION OR COMPETITION LAW? .......................................... 64 15.1 Regulation Regimes............................................................................................ 64 15.2 The Office of Utility Regulation [OUR] ......................................................... 64 15.3 The Office of Gas and Electricity Markets [OFGEM] ................................................. 65 15.4 The Office of the Regulation of Electricity and Gas [OFREG] ................................... 65 15.5 Conclusions – Regulation or Competition Law? ........................................................ 65

16. GAS MARKET: AREAS FOR FORMAL INVESTIGATION.............................................67 APPENDIX GAS MARKET: GUERNSEY GAS’ OWN SUBMISSIONS............................... 68 GLOSSARY ..................................................................................................................................74 ACKNOWLEDGEMENTS ...........................................................................................................77


EXECUTIVE SUMMARY

Petroleum Products Market Guernsey has a slowly declining market demand for petroleum products, worth less

than 0.15 % of the total UK market

States intervention to force introduction of a fourth supplier would destroy fragile critical mass and would drive consumer prices upwards

Additional costs of getting fuel to, and distributed to end users, on Guernsey

calculated to be in order of 3.7 pence per litre

Two separate fuel terminals dramatically increase cost of petroleum products on Guernsey through lack of concentration of infrastructure assets

Retail service station contracts with oil companies should be legislated to last no

longer than 3 years to increase competition at wholesale level

Competition in the retail market on Guernsey lagging behind the evolution seen in Jersey over the past 2 years

Increase in Excise Duty on petrol and diesel in danger of being inflated by dealer

margins added to such increases at the pumps

Retailer margins calculated to be in order of 30% at pump prices

Prescriptive legislation needed to ensure roadside displays of fuel prices

Motoring fuel expenditure lower in percentage terms on Guernsey than UK mainland Marine Fuels market should be more regulated to promote effective competition and

ensure better environmental protection

Domestic Heating Oil prices “drifting out” over past 2 years relative to both Jersey and UK

Merger or acquisition of any one of the current oil distributors must be unequivocally

referred to Competition Law review

Liquefied Petroleum Gas Market

No evidence of differing339 retail prices for gas cylinders. Strongly suggested that recommended retail prices are prohibited to encourage competition

Investigation centred on prepared data and Key Performance Indicators only, as

scope and time frame of this high-level study precluded detail financial analysis

Concern of allocation of central overheads from International Energy Group to Guernsey Gas business and the effect on potential profitability

No evidence to suggest significant abuse of monopoly power, such that gas sector

should be placed under Regulation

Four significant areas within gas sector identified for formal investigation under Competition Law, including delay in passing on decreases in wholesale gas prices in a timely manner to Guernsey consumers


TERMS OF REFERENCE

1. To undertake a high level review of the size, structure and operation of the energy market in Guernsey as it relates to the supply of:

Fuel for motor transport (including marine) Fuel used for heating or other purposes Gas

2. To consider, in particular, the pricing of these fuels to the consumer/end-user and

how this is determined, including:

The role of the different elements of the supply chain, both wholesale and retail, and competition between these elements in determining the consumer price The way in which changes in duties charged on fuels are passed on to customers Comparisons with other jurisdictions, principally Jersey and the UK

3. To present conclusions as to the justification for the prices charged for the above

fuels in Guernsey, including consideration of whether there is any prima facie case for referring the fuel market in general, or any sector of that market, for a formal investigation under the competition legislation currently being developed in Guernsey, or for control under the Regulation of Utilities legislation.

4. To make any other recommendations that, it is felt, would be in the interest of the consumer, in assisting the promotion of an efficient energy market in Guernsey


1. BACKGROUND

This investigative report was commissioned by the States of Guernsey Commerce and Employment Department to review the competition and pricing issues that may be extant on the island of Guernsey, and to assess the degree of competition within each of the energy sectors at all points within the supply chain. Guernsey’s electricity energy sector was excluded from this high level review, as the activities of the generator are already monitored and controlled by the Office of Utility Regulation. The study was not specifically concerned with competition between the energy sectors, although we will draw some broad conclusions within this report based on the relative market shares for oil, electricity and gas in respect of heating homes and commercial premises. A small, and closed island community such as Guernsey surrounded by sea will always draw criticisms about unfair prices and "rip off' traders. Whilst many of these complaints can be anecdotal or sweeping generalisations, the lack of any critical mass, combined with a desire from the population generally to enjoy a traditional lifestyle based on "village" communities will combine to deliver less than optimal supply chain costs. The number of separate supermarkets, village stores, corner shops and Post Offices that manifest themselves so readily to the visitor at every point on the island, suggests a density of retail outlet far in excess of that seen in a mainland town of some 60,000 people, where these facilities would be concentrated in the centre and perhaps one or two out-of-town retail parks. These retailers’ boundaries are not sea-bound, and a bigger catchment area than Guernsey's 25 square miles will be fully exploited to ensure the best possible critical mass for their investment and operating overheads. In contrast businesses on Guernsey have to survive on the natural demand of the island. Competition per se will always diminish the returns for individual operations by the division of the spoils. No organisation has to remain on the island. The energy market in Guernsey is also affected by people making greater efforts in energy savings and what may have been a static market at best, now holds little hope for expansion in the future. There has to be a balance here. More competition may destroy the critical mass status quo. Bigger players may abuse any dominant market power to force out weaker operators and thereby reduce competition. “De Facto” monopoly suppliers may be abusing their situation, yet the market may not be practically big or financially attractive enough to support another competitor. The affluence of the population in general may limit the concern about the lack of competition, if that were proven, in the island's energy markets. The current position may be a willing price to pay, within the whole panoply of island life and culture. We trust that the narrative and analysis of this report balances these counter-arguments within the framework of the Terms of Reference. The investigatory work was carried out by interviews and visits with relevant stakeholders on Guernsey, together with forensic analysis, assisted by benchmarking with industry colleagues on mainland UK. The managing partner's own 33-years experience in the downstream UK petroleum market has enabled the issues pertaining to this study to be readily identified. The subsequent financial analysis has therefore been both accurate and incisive. The recommendations contained in this report are made with conviction and assurance. They are entirely our professional opinion, made with integrity. We would also confirm that we have received no undue pressure or outside influence that threatened our independency, or received representation to reach defined conclusions and recommendations sympathetic to those making any such representations.

Text highlighted and boxed in this manner throughout the report contains our recommendations and conclusions from the studies carried out in October and November 2006


2. PETROLEUM PRODUCTS: MARKET STRUCTURE ON GUERNSEY

2.1 Current Market Structure

Guernsey imports finished petroleum products onto the island to meet indigenous demand. These imports are sourced by two international oil companies – Total and Shell – into their two tank farms, or terminals, on the island at St Sampson. The origins for these imports are usually the ExxonMobil refinery at Fawley, Southampton Water [for Total] and the Texaco refinery at Pembroke, West Wales for Shell. Petroleum products are brought over to Guernsey in relatively small vessels, usually of around 2,600 tonne capacity, but often only partially filled with 1,500 mt of cargo. Cargoes are usually mixed products; both this and the small size of individual shipments are predicated by the small storage on Guernsey and the market size. Historically each oil company – ExxonMobil, Shell and Total – have operated their own dedicated oil terminal on Guernsey, but following some recent investment and upgrading of the Total facilities, ExxonMobil now throughput via the Total terminal and will eventually, we are led to understand, demolish their own tankage at St Sampson. Three marketing companies distribute petroleum products on Guernsey. Fuels Supplies Channel Islands [FSCI] are a wholly owned subsidiary company of Shell UK Oil, with day-to-day operations run autonomously led by their Jersey-based Managing Director. Total Channel Islands [TCI] is a wholly owned subsidiary of Total Oil, the French multinational oil company. Their Director and General Manager is also responsible for their Jersey operation, but in this case is based on Guernsey. Guernsey Petroleum Distributors [GPD] is an independent company with long-term supply arrangements with ExxonMobil, their supplier. Their controlling interest is owned by the Norman family, who also control Petroleum Distributors (Jersey), the ExxonMobil distributor. David Norman is also a non-executive director of CI Traders. Shell and FSCI have a completely separate terminal on Guernsey; ExxonMobil now throughput, almost certainly on an exchange agreement, with Total on Guernsey, so GPD tankers now load petroleum products from the Total terminal on North Side, St Sampson. This arrangement is replicated, albeit in reverse, on Jersey where Total Channel Island trucks load out of the ExxonMobil facility at La Collette. There are two separate tanker berths for receiving vessels to discharge – the more southerly one used to be for Shell and Exxon, the northern berth is used by Total. Both terminals receive a cargo of product about once a fortnight, making a total of around 50 voyages a year. Shell has storage for around 10 million litres of product within their terminal; Total has around 8 million litres of storage. Added together, this is equivalent capacity to that of the single tank farm facility on Jersey, but the critical mass of operation, throughput turnover and stock losses are much diluted on Guernsey. Total have committed, we are given to understand, some £3 million of new investment in the upgrading of their terminal over the past 2 years. In particular, loading onto road tankers is now bottom-loading, providing a safer environment for their workforce. The Shell terminal still retains gantry loading, involving working at heights, albeit with safety devices. Most large terminals in the UK are exclusively bottom-loading.


The ownership of the infrastructure assets on Guernsey is different in each case. Total Channel Islands lease their terminal land, but own their storage tanks. Corporate support given by their parent company, Total Oil, is recharged to TCI. In the case of Shell and FSCI, it is the parent company Shell that owns the fixed assets on Guernsey, whilst the mobile assets – for instance the road tankers – are owned by FSCI. GPD used to occupy the ExxonMobil terminal at no cost, but now pay the outgoings on their office block accommodation and tanker parking compound as well as a nominal rent to ExxonMobil for the offices. The three distributors all have their own offices and truck-parking compounds, and carry out their own marketing programmes to try to establish brand loyalty through a mixture of loyalty cards and cross merchandising between petrol and heating oil sales. All three companies market the same range of products without geographical or demographical limitations. [Except for aviation fuels, which have Shell as the sole supplier on the island] Deliveries to customers and garages are made in 4- and 6-wheeler rigid tankers, with articulated vehicles only used by Shell to bridge aviation products to the airport. Shell has an exclusive contract for the supply of aviation fuel [Jet-A1 and Aviation Spirit] at Guernsey Airport. Of the 33 retail garages on Guernsey, 8 are branded “ExxonMobil”, 11 are “Shell”, and 13 have “Total” signage, whilst 1 garage has different suppliers for his petrol and his derv. There are 3 marine outlets, one at Beaucette marina and two operated by Boatworks+ at Castle Emplacement and the QEII marina. Whilst TCI and FSCI contract directly with retail outlets for the supply of fuels, GPD are paid a haulage contribution for the fuel delivered to ExxonMobil-branded garages. ExxonMobil negotiate direct with the garages and invoice them direct from the mainland; price changes are advised by e-mail directly; GPD take no title to the fuel sold through the ExxonMobil retail outlets. A full range of products is marketed on Guernsey, thereby exacerbating the problems of economies of scale in shipping and storage, but mitigated somewhat by the rebranding and dosing of fuels on the island itself. Ultra-low sulphur grades of Unleaded Petrol and Super Unleaded Petrol are available; and Total have recently introduced their “Excellium” grade which is a 97-octane clean fuel, designed to give better fuel consumption and replacing Super Unleaded on Total forecourts in Guernsey. This enhanced grade is produced on Guernsey by dosing ordinary Super Unleaded with an additive package. Gasoil is not imported to Guernsey as a separate grade, but is downgraded Ultra-low Sulphur Diesel, a higher quality, lower sulphur product than that absolutely required to meet the Gasoil specifications. This is an unnecessary cost burden upon the oil importers, but necessitated by low demand and the need to streamline the supply chain logistics wherever practical. There is an environmental benefit, however, to the population of Guernsey in that noxious emissions are reduced by the use of this lower-sulphur grade.

Based on international product prices from Platt’s, the cost of downgrading would have been in the order of 1.18 ppl, or some £165,000 per annum1. Spreading this cost over the whole of the petroleum product demand [excluding aviation fuels and fuel oil] on Guernsey would add about 0.20 ppl as an inescapable “cost of doing business” on Guernsey.

1 Based upon differential between Platt’s CIF quotes for ULSD and Gasoil between May through November 2006, and multiplied by an extrapolated annual Gasoil consumption on Guernsey of 14 million litres.


Shell is the only importer of aviation fuels into Guernsey, and sells both Aviation Gasoline [Avgas] and Aviation Turbine Fuel [Avtur or Jet-A1]. All kerosine imported into Guernsey will be of the highest specification to meet Jet-A1 standards. Considerable re-branding may occur within the terminal at St Sampson to utilize stocks of Jet-A1 held at this location to meet excess domestic heating oil demand. This makes the use of import statistics to illustrate the demand consumption within Guernsey highly problematical. From information made available to Consultancy Solutions for the Oil Industry, it would appear that the import data for Jet Fuel exceeded the actual sales for 2005 by some 1 million litres. This suggests that the import data for kerosine understated the actual demand for that product by this 1 million-litre figure2.

2.2 Size of the Guernsey Petroleum Market

Imports in the 12 months to September 2006 into Guernsey amounted to some 117,087,000 litres. A comparison with demand in the whole of the United Kingdom3 for only those products marketed on Guernsey shows the island’s demand represents less than 0.15 % of the total, which is higher pro-rata by population, but explained by a greater use of fuel oil for electricity generation on Guernsey. The following table shows the product mix and relativity for Guernsey in the 12 months ending September 2006, with comparative figures for Jersey4. Table 2.1 : Guernsey’s Petroleum Product Mix

VOLUME PROPORTION Jersey

(thousand litres)

Aviation Gasoline 1,571 1.34 % 0.80 %

Petrol 27,807 29.74 % 30.10 %

Jet Fuel 15,105 12.90 % 10.60 %

Kerosine 23,972 20.47 % 28.30 %

Gasoil/Diesel 25,054 21.40 % 24.90 %

Fuel Oil 23,577 20.14 % 5.20 %

All Products 117,087 133,547

Source: Customs & Excise Importation Data At first sight the differences between Guernsey and its immediate neighbour look significant, but remember that the figures are for imports in the case of Guernsey, and for actual demand in the case of Jersey. Re-branding of products after importation, which we have already highlighted in the case of Jet-A1 being used as ordinary Kerosine will “skew” the comparative figures. The considerably lower proportion of Fuel Oil consumed in Jersey is a reflection that all but 5% of the electricity demand on Jersey is met by electricity imports via the interconnectors, rather than the use of fuel oil in turbine generators.

2 For the reason of simplicity, movements in opening and closing stock positions for the year have been ignored 3 Source: Digest of UK Energy Statistics [DUKES] 2006, DTi 4 Source: States of Jersey, 2003


It is informative to compare specific product mix between Guernsey and the UK in graphical format. Graph 2.2 : Percentage shares of products compared to UK market

Guernsey Petroleum Products MarketDifferences in Product Mix to UK

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Guernsey UK

Unleaded Petrol Aviation Spirit Kerosine Jet Fuel Gas Oil/Diesel Fuel Oil

Unleaded Petrol demand is down from the UK norm, as would be entirely predictable given the geographical restrictions on driving range and the lack of inner city congestion. Aviation Gasoline commands a greater share in Guernsey than the UK mainland model, explained by both geographical location, the lack of road-routes off the island, and the wealthier populace on Guernsey with a greater degree of light aircraft ownership than would be expected in a similar population sample in the UK. This product does have a significant [in relative terms] share of the total UK market with 2.7% of the total demand situated on Guernsey. This has an interesting comparator with Jersey’s 1.68% share, although once again, we must add a note of caution in comparing import data on products, which may later be re-branded, with actual demand consumption. Jet Fuel will represent a lower share than that seen in the UK, as most demand for Jet-A1 will be sector fuel. Large consumers, such as FlyBe will purchase the majority of their fuel under contract arrangements off-island. The state-ownership of Aurigny may bolster Jet-A1 sales volumes in Guernsey. We would expect to see Gasoil/Diesel as a lower percentage share than the mainland, because the lack of long-road-trunk routes will mitigate against higher derv consumption. The lack of significant available driving distances makes the economic savings achievable through diesel-engined cars less of an incentive than on the mainland. In addition, diesel car ownership on the mainland has been forced through fiscal policies that have heavily taxed company-car motoring, and in turn influenced personal choice decisions in favour of diesel over petrol. Whereas latest demand trends will show that forecourt sales of derv will be around one-third of turnover, many small garages on Guernsey report that just 5% of their sales volume is Derv.

To conclude about relativity and context, Guernsey’s automotive petroleum product market [petrol and diesel] represents the equivalent throughput of about 3 large hypermarket petrol stations seen in the UK operated by either Tesco or Sainsbury’s.


3. PETROLEUM PRODUCTS: DIFFERENCES TO UK MAINLAND MARKET STRUCTURE

3.1 Introduction

This section will compare and contrast the structure of the petroleum products market on Guernsey with that typically found on mainland UK. There are significant differences in the retail petrol market on Guernsey that are worthy of separate discussion later in this report. Differences in the supply chain cost structure associated with the importation, storage and distribution of fuels in Guernsey have been evaluated and these are discussed in the section hereunder. 3.2 Primary Distribution

Primary Distribution is defined as the movement of petroleum products from refineries to storage terminals for onward [secondary] distribution to end users and small distributors. End users will range from petrol filling stations through commercial and industrial consumers to agriculture and domestic heating oil. Petroleum products are often re-delivered to distributors’ own small depots, before final end-user distribution. This specific movement to depot locations is often referred to as “bridging”. It should be noted that all UK refineries also have road-tanker loading facilities that supply secondary distribution facilities for fuels to be delivered to end-users. These will often distribute one-third of the refinery’s total output. On mainland UK, petroleum products not distributed directly from refineries, are moved to inland distribution terminals by either pipeline or trainload movements. Both these methodologies provide greatest economies of scale and are highly cost efficient. Pipeline transfers are unobtrusive in operation and there is a comprehensive network of pipelines that link refineries in England to the major demand centres in the North West, Midlands, London and the major airports at Heathrow, Gatwick and Stansted. It is believed that between 20 and 30 million tonnes of finished petroleum products are distributed by pipeline on the mainland from refinery to primary inland terminal locations each year – this is over 50% of total UK market demand not delivered direct from refineries. About one-quarter of this volume will be supplied direct to airport locations, having never been transhipped onto rail or road. ExxonMobil’s Fawley refinery dispatches over 80% of its finished petroleum products by pipeline. Only a small proportion of the mainland’s petroleum products are now moved by small coastal ships to sea-fed terminals. Plymouth probably remains the most significant sea-fed terminal from UK refineries at both Pembroke [Shell via their exchange contract with Texaco] and Fawley [ExxonMobil]. This normally sees ship freight movements of some 10,000 – 15,000 dwt5 at a time. This is in contrast with typical movements of tankships up to 3,000 dwt into Guernsey, but invariably carrying less than a full cargo. The Isle of Wight benefits from the proximity of its sea-fed terminal at Cowes just across Southampton Water from the ExxonMobil refinery at Fawley.

5 dwt = Deadweight Tonnage – see Glossary


3.3 Terminals, Storage and Throughput

Inland terminals in the UK are owned and operated by the major oil companies. ExxonMobil is alone in operating certain of its inland terminals on an exclusive basis. The other major terminals and distribution points have been developed by joint-venture partnerships to share capital construction costs and to seek the critical mass for unit operating costs, or have been constructed by consortia of 2/3 oil companies. The UK petroleum market operates on extensive exchange, swap and purchase agreements between all the major oil companies, by which means refiners do not have to expensively transport their refinery output across the whole of the UK by dedicated supply logistics. Exchanges between refiners allow access to local markets using other people’s products. For example, Scotland has only one refinery, BP at Grangemouth, but sees ExxonMobil, Shell, ConocoPhillips, Texaco and Total marketing their brands whilst ostensibly using BP products produced at the BP refinery. It is far more cost efficient to exchange products drawn in Scotland by allowing BP to draw similar volumes at others’ refineries in England or Wales. These exchange arrangements are also now present on Guernsey, where Total are supplying ExxonMobil, and hence Guernsey Petroleum Distributors, as a reciprocal arrangement to that which exists on Jersey, where Total Channel Islands draw their products from ExxonMobil. It can also be true that the company operating the terminal does not take title to the product stored in that terminal, until they draw down from the tanks and loading racks. The title to the product itself remains vested in the supplying oil company. This is a form of consignment stockholding, whereby the product price risk and in-tank stock losses are the responsibility of the supplying company. It is believed that this arrangement exists between GPD and ExxonMobil, whereby the title in the product and hence the price, only passes to GPD when they collect the fuel into their road tankers. New entrants to the petroleum market in Guernsey would have a significant financial barrier to entry in that they have to either pay a throughput premium to one of the existing operating companies or build their own storage terminal. It is our firm conviction that the latter course of action would never be financially viable with Guernsey’s limited and static petroleum products market. We have found no evidence to suggest that the existing oil companies on Guernsey would exclude new entrants, although the commercial terms negotiated for any throughput deal may be penurious towards the newcomer. We should remind ourselves that the oil companies have built and maintained their own storage facilities on Guernsey and have a democratic right to use those same facilities and determine their own marketing strategies. However, any future abuse of market dominance, which prevents a new entrant absolutely, would be prima facie evidence that should result in the States activating statutory powers under the Competition & Trading Standards law.

3.4 Distributor Structure

ExxonMobil are alone in having an arms-length relationship with its distributor on the island. Guernsey Petroleum Distributors Limited are ExxonMobil branded distributors but are a separate legal entity. Typical practice is a 5-year exclusive purchasing arrangement structured on a daily net price basis between ExxonMobil and GPD. Both Shell and Total operate as distributors with fully owned subsidiary companies. In these cases, it is difficult to establish precisely the terms of the transfer pricing arrangements between the parent company and the subsidiary. We have established through the honesty and co-operation of Shell that FSCI has purchased product on a daily pricing basis since 1st July 2004, and that prices are formulated on the basis of the actual costs of supply, taking into account the frequency and timing of the product imports to Guernsey.


Total Channel Islands reassess its commercial and domestic prices weekly and its retail petrol stations’ schedule prices as market dictates. This is in contrast to the probable monthly pricing mechanism that will exist between Total and ExxonMobil for the purchase and exchange agreement. It is believed that the existence of two equity-owned distributors by two oil companies does not adversely affect the marketing operations of the ExxonMobil distributor. One can only conclude that cross-subsidisation or predatory pricing has not been practised by either Shell or Total to gain unfair market advantage over ExxonMobil. Indeed, the joint-venture nature of the Consortium Agreement on Jersey between Shell and ExxonMobil, and the newer exchange agreements in place between Total and ExxonMobil are all helpful in maintaining a co-operative balance between the 3 oil companies. Any predatory pricing action in the local marketplace by one of them would have more severe consequences further upstream in their supply chain. On mainland UK, within the hinterland of any given distribution terminal, several differing types of distributor would be found: - Texaco and Total equity-owned distributor companies; branded authorised distributors; independent distributors and smaller resellers. All independent distributors, and the resellers would source their petroleum products from a selection of oil companies; indeed even branded distributors may have a volume-related purchase agreement rather than an exclusive tie to their oil company brand. This structure gives rise to increased competition between the oil companies to sell their products to wholesale distributor customers, and in turn, increases the competition between distributor companies in end-user marketing. In complete contrast, Guernsey’s distributors are inexorably linked to just one supplier, and end users only have three distributor companies from which to make an informed consumer choice. Whilst current market share [excluding fuel oils] between the 3 distributors is assessed as ExxonMobil – 25 %, Shell – 33%, and Total – 42%, the introduction of a fourth distributor, with the aim of reducing the dominance of both the Total and Shell distributors, would destroy further the critical mass currently experienced. The market demand for the mainstream fuels [Gasoline, Gasoil/Diesel and Kerosine] spread evenly over the three current distributors equates to some 26 million litres each per annum – introducing another would reduce this average to a theoretical figure of 19 million litres, too small to retain critical mass. A static and mature market further restricts opportunities for business growth. We would predict consumer prices would rise to compensate for the lack of volume across their operating cost base as a consequence of the States acting in an interventionist manner in a free market to force the inclusion of more competition. A reduced level of sales and turnover may be sustainable on mainland UK, where such an operation could be part of a larger, integrated organisation with a central head office and functional management. It is extremely doubtful whether profitability could be maintained on Guernsey with its associated need for separate management and logistics.

Coupled with the finite boundary of Guernsey’s coastline and the current market demand levels, it is a conclusion of this report that introducing yet more competition in the form of further distributor groups would accrue no consumer benefits. Indeed, unit distribution and throughput costs would necessarily increase because of loss of critical mass in all the distributors. It is not beyond belief that these increases would be passed on and recovered from Guernsey consumers.


3.5 Secondary Distribution Logistics

Secondary Distribution logistics are defined as the movement of petroleum products from distribution terminal to end-users. In the case of Guernsey, the tank farms at St Sampson’s should be regarded as distribution terminals. There are significant differences between both the structure and costs of secondary distribution between Guernsey and the UK. These are most notably marked in the retail petrol station market. Distribution to Retail Garages Automotive fuels are distributed to petrol filling stations in a most cost efficient manner in the UK today. Increases in the maximum permissible gross vehicle weight on the roads now allows all retail distribution to hypermarkets and the oil companies’ own forecourts on 44-tonne articulated tankers, with gasoline payloads of c. 40,000 litres. These 44-tonne tankers are operated on a 24/7 basis, 364 days of a year, thereby maximising utilization and minimising unit distribution costs. The capital standing cost of the tanker is spread over as many deliveries and as maximum a payload as possible. Consultancy Solutions for the Oil Industry’s own logistic cost modelling programme has been used to assess current distribution costs using these parameters, and concludes that typical distribution costs for mainland UK fuel companies would be around 0.50 pence per litre, based on current tanker replacement prices rather than historical costs. Road tankers on Guernsey have restricted carrying capacity due to a combination of weight and vehicle width restrictions, individual site throughputs, garage storage tank capacities, the requirement to interchange the tanker to service other markets and access and manoeuvrability requirements. Logistics modelling results suggest that the capital standing costs of a tanker servicing retail garages on Guernsey would be higher by about two-and-a-half times, in pence-per-litre terms, than typical in UK mainland operations. Running costs per kilometre have been computed to be broadly similar to that of the UK model, as the annual mileage run by Guernsey tankers will be considerably less than in the UK. Fuel economy will be greater on the smaller Guernsey trucks; repairs and maintenance will reflect higher labour rates in Guernsey, but once again, the lower annual mileage mitigates these elements. Typically, the Guernsey tanker delivering to retail sites will be scheduled for five day-shifts per week, as opposed to 14 shifts on a 24/7 basis in the UK. The payload per delivery and the number of deliveries will more than nullify the significantly higher overall manpower costs for the UK tanker. On the assumption that Guernsey trucks carry out 3 deliveries per shift and UK trucks carry out 2 deliveries, the manpower pence per litre cost in Guernsey would be in theory at least 2.5 times that of the UK.

We would speculate, with some conviction, that the smaller retail sites and tankage on Guernsey would combine to dis-optimise the payload on deliveries to retail garages, such that manpower wages would be four times those of the UK in pence-per-litre terms, for this market sector.


Distribution of Domestic Heating Oil The differences between distribution of domestic heating oil on Guernsey and mainland UK are much less marked. Both geographic areas use small 4-wheeled tankers, although potential payloads on mainland could be 20 – 25% greater. Typical load sizes, even at times of peak demand, have been assessed as probably as low as 60% of optimum mainland delivery schedules. From evidence made available to us, Guernsey’s average domestic heating oil drop size is between 60 and 80% of those seen in Jersey. The island’s small geographical area and the use of some very small tankers, where access is a problem, exacerbate this issue. Capital costs of tankers would be very similar to mainland, but with the additional costs of shipping being the main difference. It is payload constraints, therefore, that force Guernsey truck standing costs to double in unit terms over mainland experience. Running costs on Guernsey have been computed by Consultancy Solutions for the Oil Industry’s own logistics modelling to be cheaper in unit pence-per-litre terms through the lower annual mileages evidenced on Guernsey. Manpower requirements are the same for both markets, as domestic delivery tankers operate on a weekday day shift basis. However, driver wage rates do vary considerably, being typically £ 480 per week for a 39-hour week on Guernsey, against £ 388 per week for 40 hours on the mainland. Together with the aforementioned payload differentials, this has the effect of doubling pence per litre manpower costs on Guernsey over mainland UK costs.

Overall, secondary distribution to Guernsey’s domestic heating oil customers has been assessed at costing over 40% more than on UK mainland at nearly 2.20 pence per litre.


4. PETROLEUM PRODUCTS: GUERNSEY SUPPLY CHAIN COSTS

4.1 Introduction

There has been ongoing debate in the Channel Islands about the cost of petrol and whether consumers are really getting value-for-money. The lack of consumer protection legislation allows for a myriad of payment and retail discount schemes and detracts from what should be a transparent price market. In the petroleum products market, the low level of Excise Duty on gasoline and none at all on diesel have meant that the soaring international prices seen during 2005 had a greater impact on Guernsey’s pump prices than those in the UK. This is due to the fact that Excise Duty and VAT can make up as much as 70% of the retail pump price, and therefore increases in the “raw” cost of the product are effectively dampened down at the pump price level. We have set out to investigate the comparable supply chain cost elements associated with Guernsey and to contrast them with typical UK mainland costs. This analysis will focus on the quantum of difference in the supply chain from a pure logistics viewpoint downstream from a UK refinery, through the oil terminals at St Sampson’s and incorporating distribution costs on Guernsey to end-users and garages.

4.2 Cost Elements of the Supply Chain

We shall define these, for the purposes of the following analysis, as:

Primary Distribution shipping and freight costs between refinery and Guernsey

Port & Harbour Dues costs incurred by the importation of fuels

Terminal Costs costs associated with the throughput of fuels

through either the Shell or Total terminals in Guernsey

Secondary Distribution costs associated with the distribution and

delivery to end-users, and retail garages on Guernsey

The costs associated with Guernsey’s supply chain logistics have been obtained through the questioning of oil companies and distributors on Guernsey, together with informed extrapolation and elimination techniques in those cases where direct data was withheld, inexact or unavailable. It should be stressed that certain costs would have been regarded as commercially confidential, despite the willingness to assist in the preparation of this report. Without formal compulsion, the report’s conclusions will have been based, in some areas at least, on interpretation of the data received. Comparative costs of mainland UK operation have been received from trusted and experienced sources within the UK known to Consultancy Solutions for the Oil Industry. These data sources have the added benefit of independence from the organisations trading on Guernsey, but cannot be interpreted by readers of this report to represent the actual costs incurred by ExxonMobil, Shell and Total in their own UK operations. For the purposes of clarity, it is assumed in this comparative study that product stock losses, both in-transit and in-tank, are the same for Guernsey as on mainland UK.


4.3 Primary Distribution Costs

Several sources have indicated that freight rates under long-term charter with independent shippers [as currently used by Total and Shell] would be in a range from £20,000 to £25,000 per voyage, dependent upon the size of vessel used and port of origin. We have used Pembroke in West Wales as the worst-case scenario; product imported from Fawley, Southampton Water would incur lower shipping charges. With typical parcels of petroleum products imported into Guernsey of around 1,500 tonnes at a time, this equates to a cost range of £13.33 to £ 16.50 per tonne from Pembroke. Our researches suggest that fully-laden ships despatched from Fawley would cost between £8.00 and £12.00 per tonne, dependent upon the nature of the cargo. In 2004, we estimated then-current shipping freight costs into Jersey, based on 3,000 tonne movements, ex ExxonMobil at Fawley refinery, to be around £ 7.00 per tonne. It is also interesting to note that shipping rates for larger parcels of 10,000 tonnes from Fawley refinery to Plymouth did not show much savings, being perhaps £1 per tonne cheaper. It is our understanding that shippers of petroleum products have been implementing increases of between 12 and 15% on their rates over the past 4 years. These large increases have reflected the soaring cost of marine bunker fuel. As the market for small sea-going tankships is limited, this lack of liquidity does not contain costs and shipowners’ profit expectations, and it is expected that this coming year will see further increases in shipping costs of the same order. ExxonMobil had previously stated to us in late 2004, that their cost of shipping petroleum products to the Channel Islands was approximately ten times the cost of sending product by pipeline to an inland UK terminal. This is probably based on ExxonMobil’s own cost of pipeline distribution, which is both extensive and heavily utilized. Whilst ExxonMobil’s pipeline distribution cost is commercially confidential, we prudently assumed, at that time, that pipeline distribution cost around £ 1 per tonne, and thus indicated a shipping rate, in 2004, of c. £ 10 per tonne. Applying some inflationary percentages as highlighted above, we would extrapolate shipping costs to some £ 13.50/14.00 per tonne in 2006. For the purposes of this costing analysis, we propose to use £ 15.00 per tonne in the modelling analysis to reflect the sourcing of primary products from both Fawley and Pembroke. This is a relatively high cost per tonne of product, but as ship owners charge pound sums per voyage, the smaller parcels actually imported each time significantly drive up the equivalent £ per mt rate on the offloaded product. We have, therefore, been conservative in using a modelling cost of £15.00 per tonne, but in doing so, trust that it more truly reflects the actual mix of importation routes and the disoptimised ships’ loading. In turn, this rate may better reflect shipping costs for 2007 and beyond. Future concerns include forthcoming legislation on double-hulled vessels younger than 25-years old. Coupled with the lack of demand for small cargoes of petroleum products to be distributed around the coastal waters of the UK, availability of healthy competition in the shipping market is found wanting.


4.4 Cargo and Harbour Dues

Harbour Dues and charges for imports of petroleum products into Guernsey are calculated using several discrete elements. Apart from Cargo Dues based on the tonnage of the actual cargo discharged, there are pilotage and boarding charges levied on the gross tonnage of the vessel. Whenever low-flash products are imported, there is also a cost incurred by the ships’ agents to offset the attendance by Harbour personnel whilst the discharge of this hazardous product takes place. We have estimated and calculated that the elements of cargo and harbour dues account to £ 4.35/4.55 per tonne of cargo, for typical ship movements of petroleum products seen in Guernsey. The Cargo Dues element of this cost is £ 3.67 per tonne. From our enquiries, it is likely that the other elements are billed to the shippers’ agents in Guernsey, and may well be discharged from the shipping rates billed to the importing oil companies. Therefore, for the purposes of clarity and consistency, we shall henceforth just use the Cargo Dues in our analysis. Whilst these rates are somewhat cheaper than those currently levied on Jersey, where the 2006 Port Dues are £ 7.48 per tonne, they are considerably higher than comparables rates in UK ports. For instance, we are given to understand that Thames rates would still be very cheap at 21 pence per tonne, whilst those of Immingham are £1.15 per tonne. As each petroleum product has a different density, equating these per-tonne rates into pence-per-litre becomes complex. In the case of kerosine, which is used as jet fuel or to heat domestic premises, Guernsey’s Cargo Dues work out at 0.294 pence-per-litre, compared to 0.598 ppl in Jersey, or just 0.017 ppl on the Thames. Immingham’s Cargo Dues rates equate to 0.092 pence-per-litre. We are forced to conclude that there is a justifiable and inescapable, premium of over 0.20 pence per litre for all petroleum products imported into Guernsey.

4.5 Terminal Costs

Having analysed this segment of the supply chain extensively on behalf of the States of Jersey in late 2004 for the single fuel farm terminal on Jersey, we have the ability to compare closely the different economics of a smaller demand volume being handled through two separate fuel terminals on Guernsey. We will investigate whether the lack of critical mass that appears obvious, actually does feed through into consumer prices that seek to recover higher costs of operation on Guernsey. The Fuel Consortium in Jersey said that there is an annual cost of c. £ 250,000 to operate and maintain the Fuel Farm6. Subsequent investigation by Consultancy Solutions for the Oil Industry has clarified that the annual operating cost quoted in 2003 did not include the lease rental payable to the States of Jersey, Harbour Dues or Cargo Demurrage. We estimated two years ago that the total operating costs incurred by the Consortium at La Collette would be in the order of £ 500,000 per annum. In 2003, the total volume of petroleum products throughput La Collette amounted to some 133.5 million litres of petroleum product, so that the terminal costs equated to around 0.38 pence per litre. Consultancy Solutions for the Oil Industry obtained independent assessment of the costs of operating the tankage and area of the La Collette facility from an independent tank storage organisation based in the UK. On the basis of the facilities at La Collette, the known land rental and Jersey rates, a prudent estimate of the total operating costs, including depreciation, equated to some £ 525,000 per annum, using this “zero-base” methodology, but excluding any allowance for a financial return on the capital construction costs of the assets.

6 Presentation by the Jersey Consortium to the States of Jersey, March 2004


By contrast, Guernsey now has two fuel farms – Total and Shell – which will probably have very similar operating costs, with the exception of depreciation and rental costs. Total Channel Islands lease the land on which their depot is built, but we have not been able to determine the rent payable. In addition they have recently spent a capital sum of some £3 million on upgrading the terminal facilities. We understand this is amortised over 12 years, thereby adding a depreciation charge of some £250,000 per annum if fully written down on a straight-line basis. In the case of the Shell/FSCI terminal, we understand that Shell UK Oil own the land and the tanks; any capital investments in the fuel farm are made by Shell UK and depreciation charged within their accounts. Recovery from FSCI would be made as part of any Head Office management charge levied on FSCI from Shell UK. Without full disclosure, it is impossible to determine locally in Guernsey what depreciation charge for the tank farm assets is being made. We have extrapolated that the total operating costs of the two fuel farms in Guernsey, inclusive of rent, rates and depreciation are in the order of £ 1,150,000. In 2005, the total volume of petroleum products imported into Guernsey [excluding Fuel Oil for electricity generation] amounted to some 98.47 million litres, so that the terminal costs equate to around 1.17 pence per litre. The low demand of the Guernsey market, the need for storage for many grades of petroleum products, and the individual parcel size of each product requiring to be shipped on vessels not exceeding some 3,000 dwt all combine to deliver a very low stock turnover. The two tank farms have a combined physical capacity in all tanks of some 17 million litres, with a 2005 throughput of around 98 million litres. The calculated average stock-turn figure is therefore some 5.9 times a year, or every 61 days. Within this overall average for the island, there is a wide variation between both the Total and the Shell terminals, and between the various product grades imported into Guernsey and stored there before sale to consumers. In comparison, pipeline-fed distribution terminals on mainland UK would typically complete stock turnover every 5 days, and those fed by sea or trainload would normally achieve complete stock-turn between every 7 to 10 days. Therefore, a coastal fuel farm facility, similar in size to the combined Total and Shell tanks on Guernsey, would be expected to show a throughput of between 875 million litres [High case] and 600 million litres [Low case]. On our assessment of operating costs of some £ 525,000 per annum [for one terminal facility only], plus an allowance for ROCE7, the unit pence per litre terminal cost would be under 0.15 pence per litre.

This evaluation assesses the unit pence-per-litre costs of operating the terminals on Guernsey to be inescapable and justifiable at up to 8 times the cost of operating an equivalent terminal, with pipeline supply, on mainland UK.

4.6 Secondary Distribution Costs

As already detailed in Section 3.5, secondary [road] distribution costs on Guernsey have been extensively modelled and compared with those on the UK mainland. It was concluded that deliveries to retail filling stations on Guernsey would incur a unit cost of around 1.90 pence per litre, whilst those for domestic heating oil would be of the order of 2.20 ppl.

7 ROCE = Return on Capital Employed


4.7 Summary

The differences in the Supply Chain Logistics model are summarized in the following table: Table 4.1: Differences in Supply Chain Logistics – Guernsey vs. UK mainland

ELEMENT UK GUERNSEY Delta8 Jersey 2004

Notes:- (ppl) (ppl) (ppl) (ppl)

Primary Distribution UK- pipeline; Guernsey – sea-fed 0.10 1.20 1.10 1.00

Port Dues UK – Immingham; Guernsey – actual 0.09 0.29 0.20 0.60

Terminal Throughput As assessed 0.15 1.17 1.02 0.38

Product Downgrading9 As detailed in previous section Nil 0.20 0.20 0.20

Oil Company net profit CSOI’s own assessment 0.20 0.20 Nil 0.20

Secondary Distribution Based on domestic heating oil 1.53 2.20 0.67 2.20

Distributor net profit Industry knowledge 0.50 1.00 0.50 1.00

TOTAL COSTS

2.57 6.26 3.69 5.58

8 “Delta” = difference between Guernsey and UK 9 Includes downgrading of Ultra Low Sulphur Diesel to Gasoil; Jet A1 kerosine to Domestic Heating Oil; addition of additives in-tank or at rack to “dose” Super Unleaded Petrol to produce either Lead Replacement Petrol or in the case of Total only Excellium 97 petrol.


5. PETROLEUM PRODUCTS: GUERNSEY’S RETAIL PETROL MARKET

5.1 Introduction

The retail petroleum market - that is the supply of automotive fuels [petrol and diesel] to motorists through garages and service stations – is meritorious of an in-depth analysis, as the island market displays significant differences to both those on the UK mainland and, indeed, to Jersey. The additional supply chain costs, inescapable with the importation of fuel onto Guernsey, apply to all the fuel sold through garages. But the nature of ownership of the sites, their numbers relative to population and vehicles, the supply ties between these garages and the oil companies and the pump pricing methodologies create different and somewhat unusual market conditions on Guernsey. These have an impact on garage owners and motorists alike.

5.2 Market Infrastructure

During the months of October and November 2006, we carried out comprehensive studies of pump prices on all Guernsey’s forecourts. These pricing issues will be discussed in the next section of our report, but we confirmed that Guernsey has 33 operating forecourts dispensing at least one grade of automotive fuel to the public, with further retail outlets aimed at the marine trade. All of these, with the exception of one site, are owned and operated by individuals or businesses independent of the oil companies. At the time the garages were surveyed, 8 sites were “Esso” [ExxonMobil] branded, 11 were “Shell” and 13 carried the “Total” brand. One further site shared supply between two of the oil companies. There are 3 marine outlets, two of which are operated by Boatworks+ that sell Total fuels. The Total site at Ville au Roi, St Andrews is the only site on the island owned by its supplying Oil Company. Therefore the percentage of company owned forecourts on Guernsey is just 3%, compared to the UK figure of 37.1%10. The three oil company brands represented on Guernsey have 64% of their UK branded outlets in their own corporate ownership. None of the big 5 supermarkets have a presence on Guernsey. The use of the “Safeway” name by CI Traders follows their acquisition of Wm Morrisons’ Channel Island outlets in the spring of 2005. The 4 large supermarket groups [Tesco, Morrisons, Sainsbury’s and Asda] have some 1,087 service stations, representing some 11% of the locations, which sell about 35%11 of all UK retail fuel.

10 Source: Energy Institute Petroleum Review – Retail Marketing Survey 2006 11 Source: Digest of UK Energy Statistics [DUKES] – DTi; 38% of retail petrol market and 29% of retail diesel market


The overall number of petrol forecourts on Guernsey is surprisingly high when compared to Jersey. Guernsey has 33 as opposed to Jersey’s 36, but has roughly two-thirds the population of its neighbour island and just half the number of registered vehicles12. The conclusion that we have reached from this broad comparison is that Guernsey’s retail petrol market still lags in evolution behind that of Jersey, and both are well behind the rationalisations that have been seen in the UK over the past decade. We will discuss the impact on critical mass, costs and thus consumer prices that a market, with too many outlets for the demand, will obviously manifest with inefficient supply chain logistics. Inefficient markets are not good for consumers, and tend to become more efficient through rationalisation, evolution and mergers between players seeking critical mass. The effects would be to see a reduction in numbers of service stations, and whilst this would not be a technical issue for any Guernsey consumer, it may result in the appearance of lessening consumer choice and, by inference, competition. We will review the over-provision of retail forecourts in the next sections of this report.

5.3 Retailers Market Share

From our analysis of the retail petrol market, there are just two chain, or multi-site, operators on Guernsey – the Channel Islands Co-Operative Society, who operate 2 forecourts, and CI Traders, who operate 5 sites. Both operators have a mixture of supplying brands, but predominately use either Esso or Shell, with only the Safeway-branded site at the Airport supplied by Total. Market Share analysis has estimated that these chain operators, together with the Total-owned site at Ville au Roi control around half the retail market. The following table is Consultancy Solutions for the Oil Industry’s estimate of market share. Table 5.1 : Retail Market Share Estimation

Operator Brand Number of Sites

Estimated Market Share

C.I. Traders Shell, Esso, Total 5 26%

C. I. Co-Operative Shell, Esso 2 17%

TCS Ville au Roi Total 1 9%

Individual Garages 25 48%

5.4 Density of Service Stations on Guernsey

There are 33 retail service stations or garages to serve Guernsey’s population of 60,382; this is the equivalent of 517 outlets per one million population. This is over three-and-one-third times the average for the UK, where there are around 150 sites per one million population13. This density exceeds that seen in both Northern Ireland [300 outlets per 1 million population] and Wales [200 outlets per 1 million population]. Applying the overall UK density, then Guernsey’s population needs could be serviced by just 9 or 10 garages, equivalent to a reduction in numbers of 70%. 12 Sources: Guernsey Environment Department [vehicles taxed for use] and Jersey Driver & Vehicle Standards Department [vehicles registered] 13 Source: United Kingdom Petroleum Industry Association – Statistical Review


Another criteria for benchmarking the density of service stations on the island is the comparison of the numbers of vehicles per petrol station. In the UK, the last analysis showed there to be 3,089 registered vehicles per outlet in 200414. With Guernsey’s 47,876 vehicles taxed for use in 2005, there are just 1,450 vehicles per service station – less than half the UK average, and a figure last seen in the UK in 1994. This analysis suggests that Guernsey’s petrol stations possess around half the critical mass of throughputs that the surviving garages in the UK have, a topic we will deal with shortly. Once again, if we reverse the benchmarking, we would extrapolate from applying the UK averages to Guernsey’s vehicle population that the market could be serviced by just 15 petrol stations. Whilst this would give a sustainable network larger than by using the population method above, it would still mean a reduction in site numbers by over 50% of the current outlets. The Guernsey Motor Trades Association believe that increasing competition over the next 4/5 years, together with the development of forecourts with mini-supermarket shops attached, will see further site closures on a scale that 30% of Guernsey’s current outlets would close.

5.5 Retail Site Throughputs

Using the importation figures for petrol and extrapolating from the import data for Gasoil/Diesel and applying both our own modelling techniques and theories developed with confidence from the UK mainland market, we have estimated the annual volume for gasoline and derv on Guernsey to be around 33 million litres sold through retail garage outlets.

This gives an average annual throughput for a Guernsey service station of 1 million litres per annum, slightly less than that seen in Jersey, but slightly higher than some commentators and politicians on Guernsey have expressed. By our own assessments, the average defines a range of throughputs from a low of 150,000 litres per annum to a high of 4 – 4.5 million litres a year. By contrast with the UK, latest statistics show average site volumes of just fewer than 4 million litres per annum15, or four times that of Guernsey. The average figures do hide wide variations that skew the market. In the UK there are around 1,200 supermarket sites with an average throughput of nearly 11 million litres a year each. Indeed, Tesco’s

and Sainsbury’s average site throughputs are now assessed to be over the 12 million litres a year mark. Excluding the supermarkets from the UK data, the average site throughput on the remaining network of 8,600 outlets is around 2,750,000 litres a year – nearly treble the figures experienced on Guernsey. The salutary fact, reinforced again here, is that the size of Guernsey’s retail petrol and diesel market is the equivalent of just 3 large supermarket sites in the UK.

14 Source: Energy Institute, Petroleum Review – Retail Marketing Survey 2006 15 Source: Energy Institute, Petroleum Review – Retail Marketing Survey 2006


5.6 Site Operating Costs

Despite much lower throughputs, the opportunities for staff savings in comparison with UK mainland petrol stations is non-existent. An element of attended service is still seen on Guernsey, but is virtually extinct on UK forecourts16. Small service stations on Guernsey are already operating with just one member of staff supervising the dispensing of petrol and collecting payment, and whilst they might be utilised on other jobs in slack times, the petroleum licence regulations will mandate that they must remain in place with a full view of the petrol pumps. In the case of larger sites, and especially those with an extensive shop or a convenience store attached, the numbers of cashiers and shop staff seen on our visits to Guernsey are at levels consistent with those found in the UK. The much lower site throughputs, however, make the wages cost element of any forecourt in Guernsey higher in pence-per-litre terms than on the UK mainland. The much higher wages seen payable for forecourt staff on Guernsey adds a “ratchet” effect to the operating costs in per-litre terms. Forecourt cashiers in the UK would be expected to receive the minimum wage level of £5.35 per hour. A maximum of around £7.50 per hour would be seen in exceptional circumstances. On Guernsey, forecourt staff might be expected to command wages in the range of £15,500 to £18,000 a year. From our discussions with retailers, a realistic figure for forecourt staff would be £ 7.95 per hour. The Guernsey Motor Traders’ Association’s own recommendation17 gives a range between £15,594 and £17,264 – some £ 7.50 per hour at the lower end, equivalent to the highest level seen on the UK. On a hypothesis of a service station employing 2 forecourt cashiers and open for 80 hours a week, the wages cost [before any wage-derived overheads] would be around £200 per week more expensive on Guernsey than on mainland UK. Coupled with the large differences in typical average volumes, we have calculated that the effective wage cost on Guernsey would be over three pence-per-litre, whereas that on the UK would be less than one pence-per-litre18. Forecourt lease costs represent another major cost divergence from UK forecourts. It is not perhaps surprising that on a small island, with land at a premium anyway, forecourt rental values are much higher. From information supplied to Consultancy Solutions for the Oil Industry, we have extrapolated that rental costs on Guernsey are between £30,000 and £80,000 per million litres per annum. This is quite a wide range and may be explained by other commercial terms and length of lease, details of which have not been made available to us. This is in comparison with figures between £15,000 and £25,000 per million litres pa on mainland UK. The level of Guernsey rentals would only be seen on prime sites in central London, where alternate development use for apartments would push rentals to the top end of the scale. Once again, we have extrapolated what this differential might mean in pence-per-litre terms, and have concluded that a leasehold site on Guernsey would be paying over 2.0 pence per litre more in rent on its annual throughput, than an equivalent leasehold site in the UK.

16 According to the Energy Institute’s Retail Market Survey 2006, 97.6% of all UK forecourts are self-service 17 Grade 5 with five-years’ experience 18 Uses average UK site throughputs excluding supermarkets to give a more direct comparison


5.7 Break-even Fuel Margin and Site Throughput

Statistics19 published by the United Kingdom Petroleum Industry Association show that the indicative break-even margin for service stations selling 2.75 million litres a year [the UK average excluding supermarket sites] is about 5.3 pence-per-litre, if the garage had to rely on fuel sales alone. The break-even point drops by between 1.5p and 2p at this volume throughput, if profits from a forecourt shop are taken into account. This is explained by the higher margins available on shop sales rather than fuel, where typical margins in the UK for 2005 were about 6%20. Over the last 30 or so years, the number of petrol forecourts in the UK has reduced dramatically by an average of over 600 outlets closing each year. The current strong competition amongst retailers favours larger service stations with the commensurate lower overheads per litre sold. As a result many of the smaller filling stations have been forced out of business. Petrol and diesel margins on UK forecourts are amongst the lowest in Europe21, with only German retailers earning less gross margin per litre. Conversely, Italian garages have been earning profits nearly double those seen in the UK.

The only sector of the retail petroleum market that has been growing recently is large supermarket sites, which continue to show growth in site numbers, sales volumes and hence market share. If we take our assessed average throughput on Guernsey of 1 million litres per annum per site, then the break-even figure, at UK operating cost levels, would be around 8.5 pence-per-litre for fuel sales only, and about one-penny lower when shop sales were taken into account.

When we factor in the higher costs of forecourt labour on Guernsey, then the break-even margin required for an average site would rise to some 10.5 pence-per-litre for a freehold site, based on petrol sales alone. On the surveyed mid-November average Guernsey pump prices of 52.3 pence-per-litre of Unleaded Petrol, this break-even margin would represent a margin of 20% – around three-and-one-third times the level of margins seen in the UK forecourt industry. As will be seen in the analysis in section 6.2, our assessment of the margin, based on average Guernsey pump prices, is another 15 percentage points ahead of this break-even level.

19 Source: KPMG within UKPIA’s Statistical Review 2006 20 Source: United Kingdom Petroleum Industry Association’s Statistical Review 2006 21 Source: Wood MacKenzie/OPAL within UKPIA’s Statistical Review 2006


5.8 Length of Contract between Retailers and Oil Companies

We have commented before22 about the divergence of the length of commercial contracts between the oil companies and petrol retailers on the Channel Islands as opposed to those legally allowed on UK mainland. Under both EU Block Exemption and Memorandum of Undertakings, oil companies on mainland UK cannot offer a “solus” [exclusive] supply agreement to any independent garage owner for a period that is longer than 5 years in duration. Guernsey is bound by neither set of legislation, and historically has seen retail supply agreements concluded for 10 years, with no break possible before this period has elapsed. This longer period, coupled with the low throughputs, has possibly assisted the oil companies to fund, or contribute towards, the upgrading of the service station infrastructure to provide canopies, self service facilities and new pumps, which otherwise may not have been so universally applied to sites throughout the island. We believe that the need for major investment in upgrading facilities on Guernsey’s forecourts has been met, and the immediate future will not require lengthy time periods over which to amortize capital expenditure. From our discussions with the oil companies, two out of the three marketers on Guernsey are adopting best practice principles and are setting a maximum of 5 years as the length of tie on any new retail contracts. This move would appear to have been adopted within the past 2 years. However, there are many contracts still in existence for periods over 5 years in length. From our researches, retailers who are party to such contracts express concern about the lack of competitor activity from the other two oil companies for their business. This inertia can be explained, in our view at least, that the competition know the length of tie and will be aware that the incumbent oil supplier can make an improved offer in the later years before the termination date, and may well believe [erroneously] that a renewed contract will be formalised. We have seen a similar phenomenon on Jersey and are convinced that the competition for the retailer’s business can be, and should be, increased.

It would be our recommendation that the maximum length of contract be limited to 3 years, which is less than that applicable under EU law, but justified by our contention that this will force a greater degree of competition between the oil companies to the benefit of garage owners directly and consumers indirectly, through more price efficient contract terms. When the Competition and Trading Standards Law comes into force it would be our recommendation that statutory powers should be activated to undertake a formal investigation and impose sanctions if necessary, if supply contracts then extant were more than 3 years in length. This effectively gives a notice period from whence it would be illegal to have a longer contract still in place. The effect would be to force fresh commercial negotiations between the relevant parties to conclude new, legal agreements before the deadline. Formal investigation could be avoided if all 3 oil suppliers have given Undertakings to the States that they have complied with this recommendation.

22 Report for the States of Jersey, November 2004


6. PETROLEUM PRODUCTS: PRICE COMPETITION

6.1 Comparison of Retail Pump Prices

Throughout October and November 2006, we carried out comprehensive surveys of actual pump prices on Guernsey by regularly visiting each outlet and noting details of the prices displayed together with any advertised offers. At the same time we were monitoring petrol and diesel prices on Jersey and on mainland UK. We chose the area of Aylesbury in the UK to provide a survey covering similar population and area to that of Guernsey. A typical result of these surveys is shown in the following tables, for the end of November 2006. Table 6.1 : Comparison of Gross and Net Pump Prices – Unleaded Petrol

Guernsey Jersey UK

Lowest Average Lowest Average Pump Price 47.5 52.3 71.9 79.04 87.9 VAT Nil Nil Nil Nil 13.09 Excise Duty/Impôt 6.80 6.80 38.02 38.02 47.10 Net Pump Price 40.70 45.50 33.80 41.02 27.71

Differentials -6.90 -4.45 -12.99 Tax & Duty % of Pump Price 14.3 % 13.0 % 52.9 % 48.1 % 68.5 %

All prices shown in pence-per-litre Table 6.2 : Comparison of Gross and Net Pump Prices – Diesel

Guernsey Jersey UK

Lowest Average Lowest Average Pump Price 45.5 49.1 79.9 85.2 92.9 VAT Nil Nil Nil Nil 13.84 Excise Duty/Impôt Nil Nil 38.02 38.02 47.10 Net Pump Price 45.50 49.10 41.88 47.18 31.96

Differentials -3.62 -1.92 -13.54 Tax & Duty % of Pump Price 0.0 % 0.0 % 47.6 % 44.6 % 65.6%

All prices shown in pence-per-litre Despite the at-first-sight attractiveness of Guernsey’s pump prices, they represent poor value in comparison with its neighbouring island, Jersey. Stripping out the duty element, petrol can be between four-and-a-half to seven pence cheaper on Jersey, derv over two pence cheaper per litre.


It should be noted that of the sample of 9 sites in the Aylesbury area, used as a UK comparator, 8 of them were selling both unleaded petrol and derv at exactly the same pump price. The sample includes 2 Tesco supermarkets, 2 Esso sites, one from Total, Texaco and BP and two independent branded sites. Within an area the size of Guernsey, there was no price differential, yet this would not be interpreted, either by the authorities or members of the public, as a lack of competition or prima facie evidence of a price-fixing cartel. On the contrary, out of the 33 service stations surveyed on Guernsey, we routinely discovered a range of 15 different prices for unleaded petrol, with a maximum of 5 sites displaying the same pump price. Within the Jersey survey of 22 garages, some 17 different pump prices were noted; only occasionally were two garages displaying the same price. From our pump price surveys, we are forced to conclude that we have seen no evidence of price equalisation at the pumps based on illicit practice. There is sufficient differentiation of pump prices, entirely expected and commensurate with a range of service station operators from small family-run business to the larger supermarket owned forecourts. The mix of suppliers, each with their own pricing and imported stock cost triggers and a wide range of garage throughput volumes seen within Guernsey all combine well to naturally force through a wide bandwidth of pump prices. In addition, we noted price variations in mid-November between UK mainland and Sandown, Isle of Wight retail pump prices. The average unleaded petrol price on the Isle of Wight was a halfpenny dearer than the mainland at 86.5 ppl, whereas derv was 1.1 pence more expensive on the island at 92.6 ppl. The bigger question is whether pump prices are actually representative of the true cost of motoring on the island. The lack of complete price transparency at the pumps makes this a vital issue, to which we will return and analyse, after looking at the supply chain costs to explain why the net, of duty and tax, pump prices on Guernsey are some 13 pence higher than those on the UK mainland. Our purpose is to dissemble the build-up of the pump price through the supply chain, justifying sustainable and inescapable costs of bringing fuel to Guernsey, and to highlight those areas which are unjustified and which contribute towards poor value-for-money for Guernsey motorists.


6.2 Netback Analysis

An analytical tool often used in the oil industry is a Netback analysis, where prices are referenced to the international product prices used worldwide as price-market makers. In this study we will “work back” from Guernsey retail pump prices, deducting known costs in the supply chain, against Platt’s international prices. This analysis incorporates the additional costs of importing petroleum products to Guernsey; the costs of storage and distribution on Guernsey leaving the retail margin enjoyed by retailers at pump prices. Comparative analysis is shown for Jersey and for the UK mainland. The following tabular presentation uses data and conclusions already detailed earlier in this report. Table 6.3 : Netback Analysis for Unleaded Petrol

GUERNSEY JERSEY UK [Aylesbury]

Lowest Average Lowest

20 November 2006 22 November 2006 28 November 2006

[ppl] [ppl] [ppl] [ppl]

Pump Price23 47.5 52.3 71.9 87.9

Less VAT Nil Nil Nil 13.09

Less Excise Duty 6.80 6.80 38.02 47.10

Net Price 40.70 45.50 33.80 27.71

Platt’s Reference24 $532.40 $532.40 $532.40 $543.30

Product Premium25 $5.00 $5.00 $5.00 $5.00

FX [£=$]26 $1.8936 $1.8936 $1.8936 $1.9115

Litres/mt27 1,325 1,325 1,325 1,325

“Raw” product price 21.42 21.42 21.42 21.65

Primary Distribution 1.20 1.20 1.00 0.10

Port Dues 0.29 0.29 0.60 0.09

Terminal Costs 1.17 1.17 0.38 0.15

Downgrade Costs 0.20 0.20 0.20 Nil

Oil Company Profit 0.20 0.20 0.20 0.20

Secondary Distribution 1.90 1.90 1.90 0.50

Distributor Profit 1.00 1.00 1.00 0.50

Delivered-in Cost28 27.38 27.38 26.70 23.19

Retailer Margin29 13.32 18.12 7.10 4.52

Margin as a % of Pump Price30

28.0 % 34.6 % 9.9 % 6.0 %

23 As displayed on the pumps; equivalent to gross price 24 Platt’s Marketscan price assessment for the average of the previous week to the date of survey – Cargoes CIF, NWE Basis ARA for Ultra Low Sulphur Petrol 25 Typical, based on industry knowledge & experience 26 Average for previous week to date of survey 27 Litres per metric tonne 28 Derived figure from all available data extrapolations; excludes Excise Duty, Impôt Duty or VAT 29 Difference between “Net Pump Price” and “Delivered-in Cost” 30 Calculated on basis net of VAT


Table 6.4 : Netback Analysis for DERV

GUERNSEY JERSEY UK [Aylesbury]

Lowest Average Lowest

20 November 2006 22 November 2006 28 November 2006

[ppl] [ppl] [ppl] [ppl]

Pump Price 45.5 49.1 79.9 92.9

Less VAT Nil Nil Nil 13.84

Less Excise Duty Nil Nil 38.02 47.10

Net Price 45.50 49.10 41.88 31.96

Platt’s Reference31 $566.30 $566.30 566.30 $572.85

Product Premium32 $2.00 $2.00 $2.00 $2.00

FX [£=$]33 $1.8936 $1.8936 $1.8936 $1.9115

Litres/mt34 1,183 1,183 1,183 1,183

“Raw” product price 25.37 25.37 25.37 25.42

Primary Distribution 1.20 1.20 1.00 0.10

Port Dues 0.29 0.29 0.60 0.09

Terminal Costs 1.17 1.17 0.38 0.15

Downgrade Costs 0.20 0.20 0.20 Nil

Oil Company Profit 0.20 0.20 0.20 0.20

Secondary Distribution 1.90 1.90 1.90 0.50

Distributor Profit 1.00 1.00 1.00 0.50

Delivered-in Cost35 31.33 31.33 30.65 26.96

Retailer Margin36

14.17 17.77 11.23 5.00

Margin as a % of Pump Price37

31.1 % 36.2 % 14.1 % 6.3 %

Verification of the Analysis We have arrived at a determination of Guernsey retail margins by the careful evaluation of all of the elements of the supply chain. We have developed cogent arguments for the additional costs incurred by the oil companies and their distributors in the importation, storage and distribution of fuels on the island. We have proved the quantum of the analysis in two ways – one, by reference to the differentials pertaining in the price of domestic heating oil between Guernsey and the mainland UK, in which very similar differentials have been present for many years; and secondly that our own Netback Analysis of UK retail margins co-incides with the industry-wide assessments made by the United Kingdom Petroleum Industry Association and their own advisers and consultants. The calculations show that in the case of retailers on mainland UK, margins of between 4.5 and 5.0 pence-per-litre could have been expected at the time of the survey, in line with industry experience for 2005.

31 Platt’s Marketscan price assessment for the average of the previous week to the date of survey – Cargoes CIF, NWE Basis ARA for Ultra Low Sulphur Diesel 32 Typical, based on industry knowledge & experience 33 Average for previous week to date of survey 34 Litres per metric tonne 35 Excludes Excise Duty, Impôt Duty or VAT 36 Difference between “Net Pump Price” and “Delivered-in Cost” 37 Calculated on basis net of VAT


In addition, retailers on Guernsey do promote and advertise “discount-off” pump price. Checkers Express cross-merchandise from their supermarket stores onto garage forecourts by offering a 15% discount on fuel with a proof-of-purchase receipt from one of their stores. On the fact that CI Traders are a public company, and not a charity, then they must be generating a margin of more than 15% at pump prices. Our investigations and extrapolations show percentage margins well in excess of 15% at pump prices.

6.3 Why should Guernsey’s Retail Margins be so high?

The answer to this question lies in both historical precedent in the Channel Islands and higher overheads in running a garage in Guernsey. However, do the margins need to be three to four times as high as mainland UK? In Jersey in 1980, a States’ sponsored investigation38 held that “ …[it] did not consider it could be said that the gross margin of 18 per cent of the retail price then obtained was unreasonably high.” In June 1986, the Jersey Motor Trades Association was setting recommended retail pump prices, and hence retailer margins, at a level of 23 % of the retail price equivalent to 5.10 ppl. This should be contrasted with typical UK gross petrol margins at that time of around 1.54 ppl39. In 1986, the pump price of petrol on Jersey was 22.3 ppl. Recommended pump prices used to be set by the Guernsey Motor Trades Association until 2004, when this practice ceased after pressure from Treasury & Resources. We are given to understand by the GMTA that 10 years’ ago, margins of 20/22% were very much the norm, and that in 2005 retail margins were 13 pence-per-litre. We suspect that this quoted figure was net of any discount given. Retailers in the Channel Islands have seen fit to pass on all supply cost increases and all Duty increases straight to the customer. As these increases affected the cost price charged by the fuel supplier, the retailers held onto their principle of maintenance of margin in percentage terms. This is still true in Guernsey in 2006, although there have been significant changes in the Jersey market from our investigations of 2 years ago. The retail market in Guernsey has been insulated from the margin erosion and site attrition seen in the UK due to the rise of the hypermarkets as aggressive marketers of petrol and ExxonMobil’s “Price Watch” campaign launched in 1996 to directly compete with the supermarkets on price. For some considerable time, petrol retailers in the UK were forced to accept margins as low as 2 pence per litre. This led to wholesale closure of marginal sites and development of improved garage convenience stores to shore up meagre returns from the sale of fuel. UKPIA40 statistics show that UK retail gross margins have recovered from that nadir of 1996 to reach just over 5 pence per litre in 2005. Meetings held between the Manx Government’s Office of Fair Trading and petrol retailers on the Isle of Man in the wake of the sharp increase in petrol prices on the island following Hurricane Katrina in September 2005, showed Manx retail profits to be 3.15 ppl41. Undoubtedly the costs of forecourt operations are more expensive in Guernsey because of much higher wage rates for forecourt staff and the extreme level of lease rentals. But how much extra margin can these items justify? The coupling of lower site throughputs but similar staffing levels combine to push Guernsey garage unit costs up above the UK. We have estimated that higher lease costs and staff wages would require an extra 4 pence per litre on the low average site volumes in Guernsey to preserve the profit levels experienced by UK retailers.

38 Committee of Inquiry appointed December 1979, reported to the States on 25th November 1980 39 Fuel Oil Supply & Distribution: Committee of Inquiry Report, presented to the States on 28th October 1986 40 United Kingdom Petroleum Industry Association 41 Can be viewed at http://www.gov.im/lib/news/oft/meetingsheldwith.xml


We commented extensively on this issue 2 years ago, as part of our report into the leasing arrangements for the fuel-farm land at La Collette, Jersey. Politicians in Jersey were concerned over competition levels and wanted to be assured that a new fuel farm lease did not grant the oil companies a “licence to print money”. Our investigations at that time conclusively proved that Jersey petrol retailers were earning margins of around 22 pence per litre at pump prices. With the myriad of discount and loyalty schemes existing at that time, it was impossible to precisely determine the normal unit margin for a retailer after the expenses of these discounts, but the transformation in the past 2 years has been immense. Using the same methodology, we see that greater competition and improved price transparency have delivered better value-for-money motoring by reducing margins at the advertised pump prices by some 14 ppl in the case of petrol. Two years ago, unleaded petrol was selling for 82.0 ppl on Jersey; today that price has declined by around 12 pence, despite Impôt Duty increases and the international price of petrol dearer by 3 pence from that pertaining 2 years ago. At that same time, Guernsey forecourt prices were around one penny per litre dearer than those of Jersey, net of Duty. It appears that unleaded petrol pump prices on Guernsey today are broadly similar to those seen 2 years ago. Jersey margins have trended downwards to achieve levels consistent with their UK counterparts, but allowing for the higher costs of operating petrol forecourts in the island.

It would appear that Consultancy Solutions for the Oil Industry’s report for the States of Jersey in December 2004 highlighted the fact that excessive margins were being made by garage owners. Since our report and recommendations, a more healthy state of competition has emerged, to the benefit of consumers and tourists in Jersey. It is to be hoped that this report into Guernsey’s retail petrol market will have the same stimulating effect, and the next 2 years will see more realistic margin targets by the enlightened and professional garage operators in Guernsey.

6.4 The Effect of Higher Excise Duty on Pump Prices

The UK mainland retail forecourt industry has traditionally looked at margins and profitability in pence-per-litre terms. It has remained focused in this manner ever since the hypermarkets gained a significant share of the market. As the raw product cost of petrol and diesel soared, especially during 2005, the retail industry would still set margin targets in ppl terms, irrespective of the actual product cost. Excise Duty increases would be treated in exactly the same way as product cost increases, in that there would be no retail margin uplift on top of the increase imposed at the Duty Point by the Chancellor of the Exchequer. The retail petrol industry on Guernsey has always operated on a percentage margin basis, and stems from a time when recommended retail pump prices were set by the Guernsey Motor Trades’ Association. As product prices increased over time, percentage margins were maintained, so that retailers tended to increase their pence-per-litre profit on the basis of preserving this percentage margin. In light of recent decisions by the States to dramatically increase the level of Duty on petrol and to introduce it for the first time on Diesel, we have been asked to comment on how such large duty increases will be passed down the supply chain, and their impact on pump prices and consumer’s pockets.


It would be our opinion that, without a great deal of public pressure, the tendency for Guernsey’s retailers to maintain their percentage margins would have seen pump prices increased by more than just the Duty Rate increase itself. This would have been an inflationary trigger, as businesses purchasing fuel would have further recovered this increase in their cost prices of goods and services. In the eyes of some retailers, there would be an argument for increasing pump prices by more than just the Duty increase. In the case of a service station on Guernsey selling [say] 500,000 litres per annum – this is about half the general average volume throughput on the island – as much as 75% of that business may be on an account basis. This is in complete contrast to the UK where payment at the time of purchase, by cash, credit or debit card is the norm. Account facilities are held by Guernsey petrol retailers as a means of retaining custom, but invariably a percentage discount is given to those account customers as part of the deal, upon settlement. From our forensic investigation, most garage accounts are paid at the end of the following month to that in which the fuel has been issued. This would mean that a maximum of 60 days’ credit, or a minimum of 30 days’, would be extended by the garage owner. Taking the average credit period of 45 days, and assuming the garage paid for its petrol deliveries on delivery of the fuel, then the garage owner would argue logically, that he needed extra margin to service the cost of borrowing on these credit accounts. In our discussion with the Guernsey Motor Trades Association, we were told that retailers believe that they may have to add a further 1 to 1½ pence on top of any Duty increases to fund the additional inventory costs. The effect of preserving a 30% margin on the proposed increase in petrol duty of 13.2 ppl [making 20 ppl in all] would be an expected increase in petrol pump prices of 17.2 ppl. This adds a further 4 ppl to the retailer’s margin, when the only overheads that have increased as a direct consequence of the Duty increase are the higher level of borrowing required to service his account custom. The equivalent pump prise rise forecast for diesel, where the Duty will increase from zero currently to 20ppl, would be an increase at the pumps of 26 pence-per-litre. Why should retailers improve their margins by four to six ppl at the expense of Guernsey motorists? Their borrowing costs will rise, but assuming a borrowing rate of even 10% pa, 45 days’ credit extended and an increase in the cost of fuel of 13.2 ppl [the petrol duty increase], these increased costs will amount to under 0.20 ppl! So any increases in posted pump prices that show increases of more than even 0.50ppl following Duty increases planned for January 2008 would be sheer profiteering!

One leading multi-site forecourt operator on Guernsey has pledged that Duty increases will henceforth be passed onto to motorists without any margin uplift. The environmental benefits of increasing petrol and diesel duty would therefore not be compromised, if all retailers followed this policy, by inflationary pressures caused by retailers maintaining their own percentage margins when their overheads have remained the same. The States must give clear signals, through the local media and consumer groups, that pump price increases over and above the Duty Rate are both inflationary and blatant profiteering. In conjunction with other measures we will propose on transparency of price, this pressure will ensure that Guernsey motorists receive better value-for-money in their fuel purchases. If there were any prima facie evidence to show that concerted efforts by petrol retailers have increased pump prices by a consistent amount over and above the Duty increase, then we would recommend that the States should investigate formally under the statutory powers of the Competition and Trading Standards Law, and apply any sanctions retrospectively.


6.5 Price Transparency at the Pumps

So far, we have used pump prices as the start point for all our analysis and comparisons of retail margins on Guernsey to those in Jersey and the UK mainland. However, the petrol market on Guernsey is strangely different from that now firmly established in the UK insofar as that reliance on pump price alone does not tell the whole story. Whilst loyalty cards and cross-merchandising by the supermarket groups exists on the UK, such that a spend of [say] £50 on groceries in a Tesco supermarket may qualify you for a 5 pence-per-litre discount on your next fuel purchase, the price on the pump is what you pay. Invariably all transactions for fuel must be paid for at the time of purchase, whether by cash, credit or debit card42. However you pay, no matter what volume you fill up with, the price is the same – and it is the pump price! On Guernsey, where many garages have a large majority of their fuel sales to account customers, the actual price paid may depend upon a number of illogical factors. There is no price transparency and consumers cannot make informed purchasing judgements. We believe that garage owners who claim that they can only retain loyalty though the giving of account facilities may use this as a smokescreen to hide price discrimination through discounts offered to their different customers. With no orderly and logical discount structure, based on volume purchased or credit period, garage owners may be relying on customer inertia on switching accounts. A total lack of price transparency also precludes customers from discovering a possible “better deal” available to them. This practice, established custom over many years, is anti-competitive from the motorists’ eye. In the course of our investigations, we have noted several discount schemes advertised on forecourts. Checkers Express offers a 15% discount off pump price, at their forecourts at St Martins and Landes du Marche only, on the production of a proof-of-purchase receipt from their Admiral Park superstore. We are given to understand that this is a long-term promotion, aimed at building “footfall” into this CI Traders flagship store. Anecdotal evidence suggests canny shoppers are buying just a newspaper, in order to get a receipt. This appears not to have an adverse effect on Checkers’ opinion of their promotional scheme. They claim that the alternative of offering a permanent discount on all litres might only reduce their pump prices by one or two pence a litre. The marketing attraction of a large [15%] discount is obvious. This offer also proves our contention that retailer margins, at pump prices, are larger than 15% in order to make this offer in the first place! The Channel Islands Co-Operative Society is giving a dividend of 4p-in-the-pound [4%] on all fuel purchases, although only available to Co-Op shareholders. This dividend is issued at the time of purchase in stamps. Their forecourt signage does display the worth of this offer with unleaded petrol advertised as “less than 50p” with a pump price of 51.9 pence, and diesel “less than 47p” against a pump price of 48.9 pence. The cost to the Society is less than discounting all fuel sales, as both an issuance rate and a redemption rate of the dividend stamps will combine to reduce the actual cost to less than 4% on all litres sold. Some Total sites are offering a fixed discount of 1.5 ppl off pump price with the a TotalCard, a fuel card offering up to 6 week’s credit, but only acceptable at Total-branded outlets. This is equivalent to a discount of less than 3%. The Total/M&S site at St Martin’s offers a 10% discount on fuel purchases after a qualifying £20 purchase within the main store. Total Ville au Roi [the company-owned Total site] have been offering a “Young Drivers Reward Card”, which after 4 previous purchases of fuel then entitles the cardholder to 25% discount off their next purchase. On five equal-sized transactions, this offer is equivalent to 5% discount per fill-up. The potential for manipulation is that the four qualifying purchases are small, with the 25% discount applied to a fifth, much larger, volume of fuel purchased. Holders of Shell Cards enjoy an award of 10 points, worth £1, each time they purchase 25 litres of fuel. These can be saved to reduce the fuel bill, put towards the purchase of Shell domestic heating oil, turned into Air Miles or redeemed in a variety of Guernsey retail outlets. 42 Most UK garages no longer accept cheques as a valid form of payment


Other advertised offers include “Up to 10% off with Shell Card” at Pitstop Garage; “Cut Price Fuel Here” at Trev’s Motorcycles; “Discounted Petrol Here” at San Lorenzo Garage; and “Cheapest Fuel” at Direct 4 Cars in Vale. These signs are permanent in nature, and without any Trading Standards legislation to protect consumers, make blatant and inaccurate claims. Our survey in late November showed the Total/Safeway service station at the Airport offering the cheapest pump price on unleaded and diesel fuel, despite the claim of “Cheapest Fuel” elsewhere. The Safeway outlet appeared to be selling fuel on a completely transparent, one-price-for-all, basis using the same principles enshrined in UK consumer law.

The evidence of large percentage discounts advertised conclusively proves our assessment that retail petrol margins on Guernsey have become established above 25%. Even after deducting 15% discounts, retailers will still be making sufficient profits to meet the greater operating overheads they face in Guernsey, stay in business and produce favourable returns. It is impossible to determine the actual discount rate effectively given across the board. Without doubt the 33,000 business visitors and the 176,000 holidaymakers that visited Guernsey in 2005 were paying excessive retail prices if they bought fuel whilst in Guernsey.

6.6 Informed Consumer Choice

One of the most notable and visible differences about the Guernsey retail petrol market is the general absence of price marker boards on the brand pole sign. We understand that this is a consequence of tight planning restrictions designed to preserve the countryside “feel” of the island. Some retailers have introduced small posters to promote the price of unleaded petrol and diesel, but this is far from universal as would be the case in the UK. The omission of price marking has two effects. Firstly, consumers cannot make an informed choice of buying decision, as they have to visit the petrol station to discover the pump price. Indeed some sites are equipped with pumps where the price display remains hidden until the nozzle is removed from the pump. Secondly, the lack of price transparency from the roadside or passing car helps preserve the regime of discounting from high pump prices. In the UK mainland, Price Marking Orders exist for all retail operations and specifically for Petrol Prices43. This prescribes the detail of information, the manner in which it is presented and where it should be displayed. Motorists can then monitor price levels between different garages and retailers can monitor market activity on an overt basis. Retailers who seek to charge excessive profits will find customers voting with their feet, because consumers will then make an informed choice.

Under the Competition and Trading Standards Law, the States should make it a legal obligation for prices to be shown at the roadside in a manner conducive to the environment but also capable of being clearly read. We would go further. If the site offers a discount, however qualified, the price shown at the roadside should be the lowest available to any customer. If this displayed price can only be obtained subject to minimum purchase or account facilities, then this should be clearly marked both on the pumps and at the point-of-sale. If pump prices are held to be a problem by politicians, then it is our recommendation that consumer power is harnessed to make motorists more sophisticated in their purchases. This may be contrary to the “village” lifestyle of the islanders but will sustain a stronger drive towards driving down pump prices than any form of prescriptive price control imposed by the States.

43 Price Marking (Petrol) Order 1980 and subsequent amendments


6.7 Are Petrol Prices important to Guernsey’s inhabitants?

Several retailers we interviewed believed that there was less sensitivity to petrol prices in Guernsey due to the historically low levels of Duty and zero indirect taxation. Even if forecourts took no margin, it is thought that the resultant pence-per-litre benefit would not encourage a lot of people to change their purchasing habits as the cost of an average “fill-up” is relatively low. National Traffic Surveys indicate that passenger-car fuel consumption averages 30 miles per gallon in the UK. We have taken two-thirds of this figure as the Guernsey average, given the lower speed limits on the island and the reduced-width carriageways. In 2005 the total distance travelled by cars in Britain was 247 billion miles, and with a total number of licensed cars at 26.2 million, we can extrapolate that the average mileage per annum for a car in the UK would be 9,500 miles. We developed analyses based on 4,000 miles a year [low], 6,000 miles [mid] and 10,000 miles [high] for Guernsey-based cars44. Using November 2006 prices for unleaded petrol, the cost of fuel over a typical year’s motoring would be around £ 1,300 in the UK, and between £ 1,114 [high] and £ 445 [low] for Guernsey motorists. Based on earnings data from National Statistics, we would calculate that the average UK motorist spends about 6% of his average earnings on petrol. Even in the high case for Guernsey we have estimated that motoring fuel costs represents less than 4% of average island household income and around 2.5% of income in the case of the mid range annual mileage.

The conclusion is that Guernsey's motorists spend less in percentage of income than their UK mainland colleagues do on fuel. Not only is this expected because of Guernsey’s geographic, but the higher standard of living enjoyed on Guernsey does not suggest that petrol prices are yet a sensitive consumer issue.

6.8 Commercial Market Prices & Competition

We have forensically audited details of supply arrangements and contract purchases from a number of commercial organisations in Guernsey and have interviewed their senior personnel. It is not within the remit of this investigation to reveal such commercially sensitive and confidential information, but we were concerned with discovery as to pricing levels available to commercial consumers and the degree of competition between the 3 oil suppliers. We would report that we are satisfied to a great degree on the pricing levels that pertain to these commercial arrangements we have studied, and that they reflect low-cost premiums over Platt’s international product prices and thus give good value-for-money to Guernsey commercial buyers. On the issue of competition between the 3 oil suppliers for any tranche of business, we are reasonably satisfied from the information and indications made available that healthy competition does exist. It would appear that commercial buyers that switch contract suppliers perhaps receive more competitive prices than those that stay loyal. However, the sample data is not comprehensive and this conclusion is more qualitative than quantitative and should not be relied upon.

44 There estimates are based upon local opinion from a variety of expert sources


6.9 Marine Fuels Market

The marine fuels market is served by two distinct methods of distribution. At St Peter Port Harbour, two marine filling stations are operated on sites leased from the States by Boatworks+. We understand the award of these leases to Boatworks+ was following a tender process. These filling stations are really designed to serve boats only, and Boatworks assure us that this is their primary market at the site. The fuelling point at Beaucette harbour could only practically be used by boats. The Boatworks+ filling stations sell branded Total fuels and we understand this arrangement has been in place for 10 years or so. We noted prices in late November to be towards the top end of retail fuel prices in Guernsey, but understand that their account customers do enjoy pence-per-litre discounts. Alternatively, use of the TotalCard will gain a 1.5p per litre discount. It would be our contention that margins enjoyed by Boatworks+ at pump prices would mirror those seen in the Guernsey market generally. The other method for receiving fuel on board a ship is to accept a direct-from-road tanker delivery. This frequently happens in St Sampson’s Harbour, where we understand States regulations allow “commercial” vessels to be filled from the roadside, on the premise that trained, professional boat staff are on hand overseeing the delivery. We understand that direct filling at St Sampson’s is now frequently the case with pleasure craft. This effectively bypasses the retailer and allows boat owners the ability to buy at wholesale prices. This practice is not being supported by Total Channel Islands, for the twin reasons of safety and to support their own outlet in St Peter Port.

For the purposes of clarity and safety, the States should more closely define the meaning of “commercial” boats and enforce effectively any unauthorised filling of pleasure craft on States Harbour land. In addition, the creation of a second marine filling station at St Sampson’s Harbour, awarded to an operator under a tendering process, would fulfil the need for marine fuels at that location, and create a duplicate facility operating under the same rules, regulations and costs as the existing marine filling station in St Peter Port.

The Guernsey Marine Traders Association appeared satisfied with the price differentials for marine fuels on Guernsey compared to retail fuel prices and those available in Jersey. The GMarineTA have told us that they would support our recommendation that no marine fuels should be sold on the forecourts alongside fully taxed road fuels. Customers would accept the balance between the convenience of collecting full duty fuel from their local garage, or travelling to licensed marine filling stations to collect marine [rebated] fuels.

To assist in the prevention of fraudulent use of rebated fuels for road use [such as using rebated kerosine in lorries as opposed to taxed derv], especially important when Excise Duty is imposed on diesel for the very first time in Guernsey, we would strongly suggest that no rebated fuels are permitted to be sold from service stations. We would suggest a period of consultation with garage owners to debate any issues of real hardship or inconvenience, but feel that a separation in the route to market between road fuels and rebated fuels will be of significant value in tackling potential fraud.


6.10 Comparison of Domestic Heating Oil Prices

Historical Data Since 1988, the Statistics Unit of the States of Jersey’s Policy & Resources Department has been collecting and collating domestic heating oil prices on the islands of Jersey, Guernsey and the Isle of Man. These are also compared with prices obtained by the Department for Trade and Industry for the UK mainland. Unfortunately, this latter data has a preponderance of urban areas45 in their survey, but nevertheless gives a valuable historical benchmark. The average of the monthly differentials between Guernsey domestic heating oil prices and the UK mainland figure are reproduced hereunder. Table 6.5 : The higher cost of Heating Oil on Guernsey vs. mainland UK [pence per litre]

1988 4.07 1996 3.02

1989 3.69 1997 3.12

1990 2.63 1998 3.99

1991 3.58 1999 4.68

1992 2.78 2000 3.91

1993 2.64 2001 4.27

1994 3.04 2002 4.31

1995 3.52 2003 5.09

Source: Statistics Unit, Policy & Resources Department, States of Jersey Another historical reference source is the report produced by Oxera Consulting of Oxford in October 2001 to the Industries Committee of the States of Jersey entitled Fuel Prices in Jersey. They tracked historical performance of heating oil prices against international product prices and concluded that Jersey’s domestic heating oil had fluctuated in line with overall product price movements. Oxera concluded that average differentials between 1988 and 2000 were 2.52 ppl, those for 1999 were 3.00 ppl and for 2000 Jersey prices were 2.96 ppl more expensive than mainland UK. Their summary continued “… the 2.5 to 3 ppl premium would appear to approximate the likely cost differential of the sea transport, the additional storage stage at La Collette; the necessary use of smaller road tankers, and the (possibly) higher general labour costs.” [Consultancy Solutions for the Oil Industry would take issue with their point about smaller road tankers for domestic heating oil, as these are virtually the same size and capacity with those found on the UK mainland]. During October 2004, as part of a study into the fuel-farm lease arrangements in Jersey, Consultancy Solutions for the Oil Industry carried out an analysis of Jersey’s heating oil prices in contrast with those available on mainland UK. The differential was established as 2.96 ppl higher on Jersey, based on hard, irrefutable evidence. All these historical facts lead us to conclude that the differential between mainland domestic heating oil prices and those on Jersey were of the order of 3ppl. The data also shows that Guernsey’s prices are higher than those available on Jersey, and that this gap has widened in more recent years. The following graph charts the price relationship between Guernsey, Jersey and mainland UK prices for 900 litre deliveries of domestic heating oil [kerosine].

45 Barrow, Barnet, Bedford, Hartlepool, Reading, Watford, Worthing and the Isle of Wight


Graph 6.6: Historical prices for domestic heating oil deliveries

Comparison of Domestic Heating Oil Prices

1 0

1 2

1 4

1 6

1 8

20

22

24

26

1988

1989

1990

1991

1992

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1995

1996

1997

1998

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20002001

20022003

2004

Pe

nce

-pe

r-li

tre

UK Jersey Guernsey

We have not been able to update this data beyond 2004, except that we have applied the indexation value for heating oil measured by the States of Jersey for RPI Index calculations and compared this to data available from the States of Guernsey. We have satisfied ourselves that no significant change in the financial relationship between Guernsey and Jersey domestic heating oil prices has occurred in the intervening period. Current Pricing We have assembled data and prices to cover a period of the past 18 months or so, and within this time period have established sample points at which to compare domestic heating oil prices on Guernsey with those on the UK mainland. With our extensive network of contacts within the UK oil industry, we have obtained data from a variety of sources, thereby ensuring their veracity. In order to preserve commercial confidences, we shall merely quote typical prices for the given sample months in this analysis. We have uncovered evidence of an increasing trend on widening the differentials between prices paid by domestic consumers of heating oil on Guernsey to those of the UK. The following graph plots the pence-per-litre differentials, based on the forensic analysis of data referred to in the previous paragraph, back to 1988. All the differentials have been calculated on the basis of quoted customer prices for 900-litre orders, paid for at the time of delivery.


Graph 6.7: Differentials in Domestic Heating Oil Prices

Differentials between Guernsey and UK Domestic Heating Oil Prices

0

1

2

3

4

5

6

1988

1989

1990

1991

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20002001

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Sep-0

5

Dec-0

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-06

Jun-06

Sep-0

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Oct-0

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The red trendline indicates that the historical differential in the order of 3 pence-per-litre is now becoming 5 pence-per-litre. In the following sections, we shall endeavour to explain the possible reasons for a widening differential, and the inescapable additional costs associated with providing Guernsey with heating by the use of an oil industry modelling technique, known as “Netback Analysis”.

6.11 Netback Analysis of Heating Oil Prices

An analytical technique often used in commodity-based industries is a Netback Analysis, whereby end-user prices are referenced back to the internationally traded commodity prices. At every stage in the supply chain model we can determine, using this technique, the netback at any point and ultimately compare this figure with known and commonly determined netbacks in the market place. Such analysis enables the determination within the supply chain, of those areas where higher than expected revenue streams have been recovered from the marketplace, by inflated price levels. In this analysis we will “work back” from Guernsey domestic heating oil prices, deducting known costs in the supply chain, against Platt’s international prices. The analysis will incorporate the additional costs of importing kerosine to Guernsey, the costs of storage and distribution on Guernsey leaving the distributor margin enjoyed by the three marketing oil companies on the island. Comparative analysis is shown for the UK mainland.


The following tabular presentation uses data and conclusions already established earlier in this report.

Table 6.8: Netback Analysis for Domestic Heating Oil [Kerosine]

Guernsey UK mainland

(ppl) (ppl)

Consumer Price46 35.17 31.24

VAT/GST Nil 1.49

Duty Nil Nil

Net Consumer Price 35.17 29.75

Platt’s Price47 25.22 25.22

Netback above Platt’s 9.95 4.53

Product Premia48 0.75 0.75

Primary Distribution 1.20 0.10

Port Dues 0.29 0.09

Terminal Costs 1.17 0.15

Downgrade Costs 0.20 Nil

Oil Company Profit 0.20 0.20

Secondary Distribution49 2.20 1.53

Operating Costs 6.01 2.82

Distributor Netback 3.94 1.71

From this analysis, we can clearly see a differential in the selling price on Guernsey to that on the mainland of 5.42 ppl, as shown in the line “Netback above Platt’s”. The cost differentials of getting kerosine onto Guernsey and delivered to consumers are of the order of 3.19 ppl greater in the Guernsey supply chain. It must be stressed that the Distributor Netback is equivalent to their operating income, and is not a bottom-line profit figure. Out of these earnings levels must come office costs, staff costs, overheads and a return for shareholders of the companies.

Therefore, we are forced to conclude that distributors operating on Guernsey are now recovering around 2 pence-per-litre from their customers more than they need to recoup the higher operating costs associated with the island’s supply of heating oil.

46 Average of prices available from all 3 distributors on Guernsey for 900 litre order, settlement upon delivery 47 Platt’s Marketscan price assessment for October 2006 – Cargoes C.I.F. NWE Basis ARA for Jet-A1 Kerosine 48 Industry Knowledge & Experience and benchmark studies 49 From Consultancy Solutions for the Oil Industry’s own modelling


6.12 Competition for Heating with other fuels

In the heating market, oil will compete against electricity, gas and even wood for space heating and domestic hot water. This cross-sector competition will act as a form of control brake on all industries, such that a big price differential over time would see consumers switching away from the higher-priced fuel. The soaring oil prices of 2005/06 fed fairly immediately into domestic heating oil prices, and as these international prices became established at higher levels, gas and electricity price increases followed. There is an intrinsic link between oil and gas, but electricity prices can depend upon the method of generation, and how exposed that method is to oil price movements. Commentators on Guernsey estimate that oil has a 60% share of the heating market, with electricity on 30% and gas heating accounting for just 10% of the marketplace. It would appear that oil is gaining large commercial consumers for heating away from mains or bottled gas, but that it may be losing out to both gas and electricity on new housing developments. Domestic oil storage tanks on much of Guernsey [about 90% of the land mass] require secondary containment. This was first achieved by placing a single skin steel tank over a fibreglass or concreted catch pit. This provided the homeowner with an added responsibility of ensuring the catch pit did not become full of rainwater, and thus required frequent emptying and cleaning. More up-to-date methods now involve the use of double-skinned plastic tanks, but these are necessarily larger than a single-skinned tank of equal capacity. Mainland UK regulations require that only domestic installations over 2,500 litre capacity require a bunded tank, so most installations are single-skinned. Typical domestic oil storage on Guernsey is a 1,000 litre bunded tank, which has probably replaced a 1,200 litre single-skinned tank over a catch pit. The cost penalties of specifying double-skinned tanks in preference to a single skinned mild-steel tank may be £400/500 per installation. In addition, Guernsey’s oil storage regulations may also bee seen as discrimination against oil, in that the “footprint” of an oil tank may take up too much of the garden or amenity space of new housing developments, where space is at a premium on a small island. Competition is strong from Guernsey Gas who offer a £ 536 saving on the cost of a replacement boiler, or one installed with a new central heating system, together with five years interest free credit. This is also being promoted as a saving of 50% of the cost of a replacement boiler. There has been plenty of comment from the oil industry in the Channel Islands that the gas companies on Jersey and Guernsey are very effective at incentivising builders of new housing developments by offering free boilers in return for a non-negotiated tariff imposed on the purchaser of the house. Guernsey Electricity offer a free design service and claim in their promotional material that electricity is a 100% efficient form of heating, and that more oil or gas would be burnt to produce the same heat as with an electric heater. The various claims and offers across the energy sectors is perhaps less intense than currently seen in the UK, with numerous suppliers, a liberalised marketplace and the ability to use web sites such as uSwitch to check the competitiveness of the various available gas and electricity tariffs. However, from our observations of the heating market, there appears to be healthy competition within Guernsey between the three major fuels – oil, gas and electricity. Oil may feel discriminated against through the more onerous storage tank regulations, but still commands the majority share of the available market. We will re-visit the competition issues surrounding the availability of free boilers to builders from Guernsey Gas in the gas section of our report.


6.13 Mergers & Acquisitions under Competition Law

Under the Enabling Provisions of The Competition and Trading Standards Law, 2006 the States, by Ordinance, may make such provisions in relation to the merger and acquisition of undertakings, insofar as this may affect competition in the marketplace. In our review of the structure of Guernsey’s retail fuel market we have showed that there is very little vertical integration from the supplying oil companies through their distributors onto ownership of retail outlets. In this respect, Guernsey is much less vertically integrated than the UK and thus the diversity of ownership, and hence control, throughout the supply chain leads to increased competition across all levels. This diversity could be challenged if significant ownership changes were allowed to happen unchecked. It is thought that at the service station level, with the numbers and diverse ownership and operation of these outlets, there exists sufficient and sustainable competition to preclude price cartels or prevent a dominant position prevailing. Two of the three supplying oil companies own their distributor in Guernsey, whilst the third [ExxonMobil] has a commercial, but arms-length, financial relationship with Guernsey Petroleum Distributors. In view of recent trends and rationalisations within the downstream UK oil industry, it would be prudent to assume that Total Oil are committed to the concept of equity ownership of their larger distributors and that conversely, ExxonMobil are committed to having no equity-owned business selling their products, but to enfranchise third-party organisations to do so on their behalf. The case of Shell is very much different. In 2004, Shell divested itself of all equity interest in ShellDirect, its fully-owned distributor arm. This leaves Fuels Supplies Channel Islands as one of two anomalous equity-owned distributors in the Shell business. It is not inconceivable, therefore, to consider a likely possibility that Shell could sell its stake in FSCI in the future. The consequences for Guernsey [and Jersey for that matter] will depend very much on who might acquire the assets of FSCI. If it were one of the existing oil companies or distributors, this would reduce the level of competition on the island to between just 2 oil suppliers. Assuming either Total or ExxonMobil acquired the assets of FSCI, then Total would become a party to the Consortium Agreement on Jersey, and become inextricably enmeshed with ExxonMobil on both Guernsey and Jersey on exchange supply positions. If the possible acquirer were a supermarket group, then the potential for either using part of the wholesale margin to subsidise retail profitability or to raise wholesale prices to other retailers would be tantamount to an abuse of dominant position. In either scenario above, the level of competition for Guernsey consumers becomes significantly reduced. Retaining Shell as a supplier to the island [or indeed Total and ExxonMobil] is a paramount and key objective for the States to guarantee the maximum competition for petroleum products possible.

It is our recommendation that any potential merger or acquisition of any oil distributor engaged in business on Guernsey is automatically and unequivocally referred to the Office of the Director General of Competition for review and approval. The Director General can then consider whether such a merger or acquisition is either anti-competitive or in the best interests of the public of Guernsey, taking into account all the various issues, good and bad, for the consumer.


6.14 Summary of Recommendations on Price Competition

Encourage competition and greater consumer awareness through the publication of garage pump prices for petrol and diesel each week in the Guernsey Press and Star. Ensure that increases in Excise Duty/Impôt are passed through the supply chain at cost. Strong leadership from the States and media coverage must send a clear message that adding on a further 20-30% margin on top of tax increases is sheer profiteering from garage owners. Any such move will be inflationary and whilst adding to the stated environmental policy of discouraging car journeys through petrol price increases, only achieves a clouding of the issues and the arguments used by the States of Guernsey. Seek further commitments from other garage operators to follow the lead set by a multi-site operator of not adding margin on top of Duty increases. Mandate compulsory roadside price displays, in a prescribed manner and size consistent with the island’s atmosphere. Trading Standards legislation must protect the consumer and ensure they can make informed buying decisions. Prices displayed must be the lowest available, which will force out arbitrary discounting. The strategic goal must be that the displayed pump price becomes the lowest possible, consistent with the additional costs in Guernsey’s supply chain, and that this must be transparent at all times. Better regulation of marine fuel sales to pleasure craft to ensure safety to people and the environment. Creation of a marine filling station on States land at St Sampson desirable to meet demand and create an equitable cost base in the supply chain. Enact legislation to ban the sale of rebated fuels at roadside filling stations to prevent their fraudulent use in on-road vehicles. Consult with the garage trade and only authorise specific exceptions in cases of proven hardship and where competition is hindered by such a restriction. Refer any change in ownership of oil distributors operating on Guernsey unequivocally to the Director General for Competition.


7. GAS MARKET: BACKGROUND

7.1 History & Development

From the early 1820’s gas has been used in Guernsey to light the streets and later as a convenient fuel for cooking and heating. Up until 1960, all local gas was generated from coal at a production plant in St Peter Port. In 1959 the Guernsey Gas Light Company started to market Liquefied Petroleum Gas [LPG] throughout Guernsey, and subsequently ceased production of gas from coal. The Guernsey Gas Light Company became known as the International Energy Group [IEG], which increased its size substantially in June 1992 by the acquisition of Jersey Gas, and then an LPG distribution business in Portugal in 1993. These takeovers were followed by the acquisition in July 1996 of Douglas Gas, a mains gas and LPG company in the Isle of Man. The Group expanded into selling LPG into new houses in the UK, and in late 1996 it obtained licences to supply and transport natural gas on the mainland, trading as The Gas Transportation Co Limited. During 1999, further expansion in the Isle of Man continued with the acquisition of Calor Manx Limited. In June 1995, International Energy Group obtained a full listing on the London Stock Exchange, and became the first commercial members to be admitted to the Channel Islands Stock Exchange in December 1998. Announcing its 2004 full-year results in April 2005, the International Energy Group revealed a recommended cash offer for the whole of its issued share capital; the transaction was completed in June 2005 for a consideration of around £200 million, and now sees the International Energy Group’s businesses incorporated into Babcock and Brown Infrastructure [BBI] an Australian-based specialist entity which provides investors access to a diversified portfolio of quality infrastructure assets. BBI’s portfolios of operating assets fall into one of three classes: Energy Transmission and Distribution, Transport Infrastructure and Power Generation. The former IEG businesses contributed around 10% of BBI’s EBITDA50 in the full-year ending 30th June 2006, generating earnings of A$63.1 million [£ 25 million] out of a revenue stream of A$183.1 million [£ 73 million]. There is no further segmental analysis in BBI’s accounts, but the Channel Islands and the Isle of Man combined to deliver around 63% of IEG’s turnover and 45% of its PBIT51 in the last full year of independent trading before being sold to BBI. We will return to an analysis of the comparative returns made by the various LPG businesses within IEG later in this report.

50 Earnings Before Interest, Taxation, Depreciation and Amortisation – used as a comparison over time of the profitability of a company's operations without the potentially distorting effects of changes of the excluded cost categories 51 Profit Before Interest and Taxation


7.2 Distribution

There is no natural gas on Guernsey; the gas used is collectively known as LPG but is either Butane or Propane. LPG is a natural resource that is found worldwide in oil fields and produced during the refining process of crude oil. After production, it is transported to Guernsey from the ExxonMobil refinery at Fawley, Southampton Water in specially constructed bulk gas tankships to storage facilities located at St Sampson Harbour.

LPG is also stored at a Kosangas facility before being filled into gas cylinders or canisters, distributed to retail outlets, or loaded into bulk road tankers to provide a service to more remote parts of the island for delivery into customer’s own bulk tanks. Mains gas customers are serviced through a network of underground mains pipes via a production plant, where the gas is processed, constantly monitored and checked for quality and purity.

All gas appliances imported into Guernsey for use on the island’s main gas distribution system require converting for use on the specific gas/air mixture. The mains gas found on Guernsey has a Calorific Value52 of 27.21 MJ/m3 [716 Bthu/ft3]53. It is important to understand that mains gas found on Guernsey is not the same as the natural gas supplied through mains pipes in the UK. For instance, the Calorific Value of the natural gas passing through the Transco54 pipeline system will be in a range between 37.5 and 43.0 MJ/m3.

52 Calorific Value (CV) is a measure of heating power and is dependent upon the composition of the gas. CV refers to the amount of energy released when a known volume of gas is completely combusted under specified conditions. 53 MJ= mega joules or 1 million joules; Btu = British Thermal Units 54 The gas transportation company formed out of British Gas


8. GAS MARKET: CURRENT MARKET STRUCTURE

8.1 Overview

Guernsey Gas is the “de facto” monopolistic gas [LPG] supplier on the island, whether or not the gas is bought in cylinders, stored in customers’ own tanks or supplied through mains pipes. ExxonMobil supplies LPG, in the form of both Butane and Propane, under long-term contractual arrangements, from their refinery in Fawley, Southampton Water. Guernsey Gas charter special LPG tankships to bring cargoes across to the island, typically in 1,000 dwt movements; the voyage is normally shared with a delivery to Jersey. About 20 cargoes of LPG are delivered to Guernsey in the course of a year, although the frequency in the winter season will increase to a ship delivery every 10 days. The tankship discharges into storage facilities at St Sampson Harbour; additional storage tanks are located at the Energy Centre, Admiral Park. In total Guernsey Gas can store 1,145 tonnes of Propane and 1,634 tonnes of Butane. Guernsey Gas has two production plants – one at St Sampson Harbour, and one in St Peter Port. Propane has a lower boiling point (conversion from liquid to gas) than butane and is stored at a higher pressure so it is more suited for storage outside. Butane’s boiling point is around 0˚C so in colder conditions around this temperature it will not work. For Butane cylinders, satisfactory service might not be obtained at a temperature of less than 10°C; the most suitable temperature range is from 13 to 30°C. For temperatures less than 13°C, the use of propane is recommended. Auto LPG has been introduced onto Guernsey, and some 20 vehicles of Guernsey Gas’ own fleet have been converted to run on this fuel. There is only one retail outlet for Auto LPG at the Esso-branded Doyle’s Garage in St Peter Port. The high initial cost of conversion, together with the natural geographical boundaries of the island preclude the higher mileages required to make the use of LPG in cars a viable option. Sales of Auto LPG represent under one-quarter percent of Guernsey’s total gas demand. No wonder then, that we understand Guernsey Gas will not be specifying any more new vehicles to run on LPG. It is estimated that Guernsey Gas has a 10% share of the non-transport55 energy market on the island in third place behind electricity with 30% and oil, the dominant sector, with 60%. Some 10,000 tonnes of LPG are sold on the island each year, of which 80% is mains gas, with the remainder split evenly between cylinder sales and mini-bulk deliveries to customers’ tanks. Sales are reported to be static, with new demand load from smaller units on new house build developments replacing larger customers switching to oil. Guernsey Gas’ customer base numbers approximately 10,000. Around two-thirds of the island, geographically, is capable of taking mains gas.

55 Meaning heating and cooking predominately


Guernsey Gas does not possess any formal complaints procedure nor does it set and publish service criteria levels. It does have a defined Health and Safety response criteria for gas escapes. Unresolved complaints do not have an official route to arbitration; it is likely that disgruntled customers may complain through their elected Deputy as a last resort.

8.2 Competition from other Fuels

Oil Oil has by far the dominant share of the heating market on Guernsey. Boiler efficiency, whether a new, condensing type, or an older model, will be of a similar rating to that of an equivalent LPG model. The convenience of LPG through mains pipes will, of course, outweigh the vigilance required in monitoring oil storage tank levels. Heating oil is not sold by published tariff, so has a lower profile perception from customers who have to be advised, in advance by Guernsey Gas of price rises. This can attract headlines and comment from politicians. Oil price increases occur steadily and imperceptibly by comparison, being applied on a customer-by-customer basis. From the consumers’ viewpoint, oil alone [as opposed to gas or electricity] does have the advantage of choice, albeit limited to just the 3 suppliers on Guernsey. Electricity The average system efficiency of electric heating systems will be significantly better than LPG [or oil], and electric panel radiators in bedrooms will be close to, if not exactly on, 100% efficiency. Immersion heaters can be as much as twice as efficient for domestic hot water as either LPG or oil systems. The lack of controllability of electric storage radiators, plus the space they take up in living rooms, can put consumers off electricity as a fuel of choice. Generally, it is expected that consumers beyond Guernsey’s LPG gas mains would place electricity in second place, behind oil, but ahead of mini-bulk LPG supplies, on cost grounds. Electricity on Guernsey remains a monopolistic market, with no choice of supplier available to the consumer.


9. GAS MARKET: DIFFERENCES TO UK

9.1 Supply Chain Costs - Shipping

Aside from the general higher costs of doing business in Guernsey, such as labour rates, the significant supply chain cost differences would be noticed in the shipping costs associated with moving LPG from Fawley to St Sampson. This and the lack of potential for increasing the size of the business, thereby limiting critical mass, are assessed as the main differences in the cost base of the gas business on Guernsey as opposed to an equivalent sized business on the mainland. We contacted a leading London shipbroker, with experience in the LPG tankship market, to gain their opinion of freight rates between Fawley and Guernsey for small cargoes. Their professional opinion was that there was only one realistic LPG ship-owner with vessels of a small enough size to service this market. They felt 3 years ago, when they understood the affreightment contract to have been concluded, that charter rates of some $70 per tonne may have been agreed, but that a more realistic rate, assuming greater competition in this niche market, ought to have been in the order of $40 per tonne. The shipbroker’s opinion was that the affreightment rate would have only been increased by RPI indexation over the life of the contract, whereas spot charter rates have increased between 12 and 15% p.a. for the past 4 years. Their conclusion was that spot rates in late 2006 would be in the order of $70 per tonne, but that the affreightment contract may have reached a quantum of $79 per tonne under indexation. A brief check of spot contract rates as published by the Argus Media Group show prices of $48 per tonne56 for 1,800 dwt in March 2006, but that these had dropped to $33 per tonne in October 2006. The higher levels seen in March reflected as lack of tonnage availability, and very little trading activity. Clearly, reliance on spot charters to maintain continuity of supply, especially during winter months, would not be the correct strategic option for Guernsey. These charter rates are good indicators, but the vessel size is about double that used for Guernsey, so there is no direct comparison. The conclusion of an affreightment contract, at albeit higher costs, shows a strong moral responsibility by Guernsey Gas to provide uninterrupted LPG supplies to the island. Using the advised $70 per tonne contract price assessment, and the exchange rate pertaining in December 200657, this extrapolates in shipping costs of between 1.86 and 2.12 pence-per-litre, dependent upon the mix of propane and butane on each cargo. We will use this benchmarked figure of additional supply chain costs when we review the price of LPG on Guernsey compared to that on UK mainland later in this report.

56 Basis of voyage between Teesport and ARA [Amsterdam, Rotterdam, Antwerp] 57 Basis £1 = £ 1.914 from HM Customs & Revenue official exchange rate database


10. GAS MARKET: PRICING ISSUES & COMPARISONS

10.1 Mains Gas

Guernsey Gas customers have the choice of two tariffs – Standard or Super Economy 24 [SE24] – the latter being for customers who use gas for central heating, water heating or fires. We would estimate that 85% of domestic customers would be on the SE24 tariff. Both tariffs are available to either customers connected to the mains or to those beyond the mains who wish to have gas bottles connected through meters to their boiler and cooker. Meters at customers’ premises measure the volume of gas used in either cubic feet or cubic metres. The volume in cubic metres is multiplied by the Calorific Value [27.21 MJ/m3] of the mains gas produced on Guernsey and then divided by 3.6 to convert mega joules [MJ] into kilowatt-hours. The consumer is charged in pence-per-unit terms, equivalent to pence per kWh58. Standard tariff customers are charged at a rate of 11.06 per unit, whereas on the Super Economy 24 tariff, this charge drops to 6.97p per unit, but with the addition of a daily standing charge. Suffice to say the charges for mains gas on Jersey are ever so slightly more expensive at 7.06 p per unit on the Super Economy 24 tariff. Direct comparisons with UK prices are not available because of the peculiar nature of the mains gas on Guernsey, which is produced on the island from a mixture of butane, propane and air59. These production processes add to the cost of the raw materials, and would render any direct comparison illogical, even if we were able to accurately assess the proportions of propane and butane used in the production of Guernsey’s mains gas. However, this does not preclude us from using UK mainland natural gas prices as a “bottom floor” benchmark to compare all energy and heating prices available to consumers on Guernsey. A better means of comparison would be to calculate the total annual costs of providing central heating and domestic hot water to a typical house on Guernsey. In this manner, the comparative heating costs between LPG, oil and electricity could be compared both with each other, and to our UK natural gas benchmark. In order to achieve this comparison, we would need to apply various efficiency factors based on the fuel used, the application and the appliance used.

58 Kilowatt Hours 59 See Appendix for description of the production process and associated technical issues


10.2 Mini-Bulk Gas

In those areas remote from mains gas, an alternative is for consumers to have a pressurised tank installed, which is then topped up from a road tanker delivering LPG. This methodology is very similar to that seen with domestic heating oil. It is normal on Guernsey for the consumers to pay a rental charge for the tank, and therefore Guernsey Gas retains ownership of the tank and the responsibility for its maintenance, testing and replacement. This aligns with current normal practice on the UK mainland. It should be noted that Calor Gas tank rental for a 2,000 litre underground storage tank is £ 22.00 per quarter compared with Guernsey Gas’ standard rental charge of £ 13.43. The standard rate for Kosangas mini-bulk deliveries of propane during the winter season of 2006/07 is 42.50 pence-per-litre60 and given the Gross Calorific Value we can calculate that the cost of mini-bulk deliveries of LPG is 6.10 pence per kWh. There are direct comparisons with UK mainland prices in the case of mini-bulk deliveries. From our researches we have found that typical fixed price “preferential” rates from Calor Gas are advised to customers at 32.15 pence-per-litre, or 4.61 pence per kWh. Calor’s standard rate as at January 2007 is 35.65 pence-per-litre, equivalent to 5.11 pence per kWh. It may also be possible to obtain discounts of up to 2.5 pence-per-litre from these lower preferential rates to entice new customers, or those converting from oil, in their first year of LPG usage. On the basis of the preferential rates seen in the UK, the Guernsey Gas/Kosangas standard rate is some 10 pence-per-litre higher – a premium of 32% above UK prices. If we allow for the fact that additional shipping costs within the supply chain incur an additional 2 pence-per-litre for Guernsey consumers, and that road distribution of LPG mini-bulk is subject to the same dis-optimised efficiencies as those expressed and evaluated in the petroleum products section of this report, thereby adding a further 0.75 pence-per-litre to typical UK costs, that leaves a “gap” in comparable prices of some 7 pence-per-litre [or 1.004 pence per kWh]. This represents the focus of our further investigations as to the reasons behind such a large differential, and endeavouring to discover whether these reasons are justifiable.

60 Current at January 2007 and applicable from 1st September 2006


10.3 Cylinders

LPG cylinders are sold in a myriad of sizes to suit different applications and appliances. Butane – for outside applications in barbeques, for instance – can be generally found in 45.kg, 7kg and 15kg sizes. Propane sizes range from 3.9kg up to 47kg. The following table compares Guernsey retail prices, as found on garage forecourts, with those in the UK, either observed on forecourts in Buckinghamshire or via direct trade sites on the internet. All comparatives are equalised to pence per kilogram prices. We have deliberately excluded UK VAT from our analysis as we were seeking a direct comparison of the wholesaler/retailer price relationship. Table 10.1: Comparison of Bottled Gas prices - Propane

Guernsey Flogas Calor Others UK Garage

Cylinder size Application

3.9 kg blowtorch £ 2.35 £ 2.49 £ 2.93 4.7 kg £ 2.57 6 kg caravan £ 2.33 £ 2.07 £ 2.22 £ 2.55 11 kg boats £ 1.75 £ 1.47 £ 1.56 12 kg heaters £ 0.9461 13 kg mobile

heater £ 1.65 £ 1.28 £ 1.22 to £ 1.39

18.5 kg fork-lifts £ 1.56 £ 1.06 19 kg catering £ 1.56 £ 1.17 £ 1.26 47 kg home

heating £ 0.96 £ 0.85

Notes: Prices researched during November 2006 All cylinders subject to a deposit charge, varying between supplier and not interchangeable All prices exclude VAT Delivery charges apply in the case of direct Internet sites This data would suggest a premium of some 28% ahead of UK prices for the popular 13kg cylinder, although the very smallest size [3.9 kg] sells for cheaper in Guernsey than direct from the two major LPG suppliers in the UK. Table 10.2: Comparison of Bottled Gas prices - Butane

Guernsey Flogas Calor Others UK Garage

Cylinder size Application

4.5 kg Portable heating

£ 2.80 £ 2.28 £ 2.43

7 kg Caravans £ 2.24 £ 1.80 £ 2.04 £ 2.08

13 kg Mobile heating BBQ

£ 1.69 £ 1.27 £ 1.30 £ 1.41 £ 1.30 to £ 1.64

Notes: Prices researched during November 2006 All cylinders subject to a deposit charge, varying between supplier and not interchangeable All prices exclude VAT Delivery charges apply in the case of direct Internet sites

61 CPL Distribution Limited : Subject to a minimum order value


The evidence collated shows about a 30% premium over UK web direct prices for the 13kg cylinder, most popular for outdoor barbeque ranges, although those UK garages charging higher prices for 24-hour opening and convenience approach the Guernsey price. In all cases with cylinder prices observed on Guernsey, retail garage owners were consistent with each other on retail prices. This suggests that both Guernsey Gas set recommended retail prices, and all retail outlets slavishly follow this recommendation. Under UK competition law, the setting of a recommended retail price per se is not illegal. What is prohibited is for a wholesaler to refuse to supply a retailer that did not comply with this recommendation and discounted his prices.

We would prefer to see evidence of different pricing levels and discounting in the market place, as evidence that no price-fixing cartel exists. We strongly urge that the establishment of recommended retail prices for gas cylinders be prohibited by Ordinance under the Competition and Trading Standards Law.

10.4 Comparison of Typical Guernsey Household Heating Costs

Sutherland Associates, and Salkent Limited have produced various analyses of comparative heating costs in the UK. These have been partially funded by OFTEC [The Oil Firing Technical Association] and could be accused, therefore, of not being truly impartial. A source that is independent and based on current building recommendations is the SEDBUK [Seasonal Efficiencies Database UK] report produced by the government. SEDBUK is the average annual efficiency achieved in typical domestic conditions, making reasonable assumptions about pattern of usage, climate, control, and other influences. The SEDBUK database can be used to determine annual fuel costs for a particular make of boiler, and thereby derive comparative boiler efficiency grading to enable consumers to make purchasing choices based on energy savings. The Salkent/Sutherland tables start from an assumed space heating output, which is then “ramped up” to energy consumed by applying an average boiler efficiency factor. There are discrepancies between the two sets of data, which are not synchronous. For instance, the SEDBUK tables assume 14,300 kWh per annum for a 100% efficient boiler in a typical semi-detached house; the Salkent/Sutherland data is determined on a space heating output of 13,000 kWh from a 70% efficient boiler, which translates into an energy consumption of 18,571 kWh. [To confuse matters further, EnergyWatch – the UK gas and electricity watchdog – quotes average natural gas consumption per household of 20,500 kWh per annum62, a figure often used when comparing tariff differences between suppliers. This will include cooking by gas as well as factoring in the higher consumption in the colder north of the UK] As none of the above averages are Channel Island specific, and in view of the warmer average temperatures than mainland UK, we will use an effective useful output figure of 10,000 kWh per annum to represent the typical heat output required in our cost comparison tables. This figures is slightly in excess of Salkent and Sutherland Associate’s assessments of required useful heating kWh for a terraced 2-bedroom house63 . We feel that using this figure will take into account the warmer all-year-round ambient temperature in Guernsey, relative to the average for the whole of the UK. This assessment is designed to show the relationship between the costs of fuel on Guernsey and is not warranted to be an accurate calculation of the actual fuel costs for an average Guernsey household.

62 Average electricity consumption is 3,300 kWh per annum for lighting and ancillary heating 63 9,500 kWh for space heating, plus a further 2,000 kWh for domestic hot water


In this comparison, we have also included UK Natural Gas64 as a Baseline, in order to compare our assessments with those relativities contained in the SEDBUK database for annual fuel costs that use the SAP65 2005 data table.

Table 10.3: Comparative Heating Cost Factors

0 5010

015

0 .. 250

Natural Gas

Mains Gas

LPG Mini-Bulk

Oil

Electricity

Comparative Heating Cost FactorsBaseline: UK Natural Gas

The graph shows that Oil [based on Shell’s domestic cash-only price for 27th October 2006] costs 4% more than the Natural Gas Baseline; Guernsey Electricity 20% more; and Guernsey Gas’ LPG, either 123% more expensive on mains gas or 8% dearer by mini-bulk delivery66. Using the SAP 2005 database for a Terraced House, the SEDBUK data shows oil as 19% more expensive than natural gas for a 70% efficient boiler. In the case of LPG heating, the SEDBUK data returns a factor of 123% for the same boiler efficiency. [The SAP2005 fuel price for electricity does not reflect a two-tier tariff with a cheaper night rate, so is excluded here]. A further cross-check reveals that the heat output required for this typical Guernsey property would consume some 1,450 litres of kerosine for heating only, or some 2,050 litres of mini-bulk propane each year. This can be verified by comparison with typical UK mainland demand modelling that might use a budget figure of three 900-litre deliveries to each domestic account in a year with normal weather conditions. Therefore, both the SEDBUK dataset and our own comparison modelling support the quantum of our assessment of comparative factors for Guernsey, so the issue still remains whether the monopoly supply of LPG into Guernsey allows Guernsey Gas to overcharge its customers and thus abuse its monopolistic powers.

64 Based on Scottish Gas’ IGT Domestic Tariff, correct winter 2006/07 including VAT at the lower, 5% rate 65 SAP is the Government’s Standard Assessment Procedure of the energy rating of dwellings. SAP 2005 is adopted by government as part of the UK national methodology for calculation of the energy performance of buildings. It is used to demonstrate compliance for dwellings with Part L of the Building Regulations. 66 All calculations have assumed conventional boilers with a 70% efficiency in the case of natural gas, oil and LPG. Condensing boilers would improve this efficiency rating to 85%, and thereby reduce heating costs. Electric storage radiators are assumed to be 90% energy efficient. In all cases, with the exception of electricity, we have allowed for the standing costs of the particular tariff, the LPG tank rental costs and the cost of a circulation pump.


11. GAS MARKET: FINANCIAL DATA FROM GUERNSEY GAS

11.1 Background & Introduction

As part of our investigations, we formally requested information from Guernsey Gas on shipping costs; supply contractual information, gross margin and ROCE67 at the end of October 2006. The Parent Board of Guernsey Gas was unwilling to disclose this commercially sensitive information, unless a defined circulation list could be agreed. We felt this approach to carry undue risk of disclosure and sought another route to obtaining information not available in enough detail from the published accounts of Guernsey Gas’ parent – BBI. We did extract the Final Accounts for the period ended 31st December 2004 for the International Energy Group Limited via the Channel Island Stock Exchange web site, but as far as segmental analysis was concerned, all island operations [Guernsey, Jersey, Isle of Man] were combined and not useful for our purpose. Consultancy Solutions for the Oil Industry therefore offered in mid-November 2006 to enter into a Non Disclosure Agreement with Guernsey Gas to access the commercially sensitive information required, making redundant a need to independently assess the cost burdens borne by Guernsey Gas. In turn, this would lead us to make conclusions whether the LPG prices charged by Guernsey Gas were justifiable and sustainable, being solely as a consequence of the freighting of small parcels of LPG onto Guernsey and the lack of critical mass in their operations on Guernsey. We believed this approach would circumvent the need to establish benchmarked performances for what is an unusual operation [the supply of LPG as a “mains gas”], and would thus save considerable investigative time and effort. In anticipation of the fullest co-operation from Guernsey Gas, the methodology chosen would evidence and analyse the true costs and profits of the operation on the island. This Non-Disclosure Agreement was concluded on 15th December 2006 and a request for specific data and comparables was sent to Guernsey Gas on 19th December 2006. We do not propose to reveal the exact details requested, but only say that we were endeavouring to discover any evidence as to over-recovery of costs within higher margins or prices on Guernsey that were unjustified, or way beyond “normal” commercial considerations. We visited Guernsey on 24th and 25th January 2007 to view and discuss the commercially sensitive information requested, at the Guernsey Gas offices. We must acknowledge the degree of co-operation we received from Guernsey Gas staff in presenting almost all of the information we requested. Unfortunately, we were not provided with comparative data on International Energy Group’s UK mainland LPG business performance, as this operation was sold to Calor Gas in December 2006, and there was not a meaningful comparison as there was an overlap in these accounts with the UK gas transportation business. We were disappointed at this outcome, but we do have access to other mainland LPG business data for similar-size operations, which we will use as a benchmark. We must highlight the fact that we were presented with prepared data against our request for information, and therefore our findings and conclusions have been based on this prepared data only. We did not inspect audited accounts or management accounts at source, as the informal nature and high-level aspect of this review did not insist that we requested such comprehensive access from Guernsey Gas.

67 Return on Capital Employed


In addition, Guernsey Gas provided some narrative on the differences between their operation and (a) a UK gas business and (b) a heating oil business. We attach these submissions, completely as supplied, in the form of an appendix to our report.

11.2 Size & Scope

International Energy Group makes up about 22% of its parent company [BBI] turnover, and contributes 10% to EBITDA, but represents 16% of BBI’s operating cashflow – not surprising for a predominately retail business. In 2006, Guernsey Gas and Kosangas (Guernsey) together contributed about 10% of IEG’s EBITDA, so in context of its ultimate parent company, Guernsey Gas’ operation is not material. The Guernsey operation contributes less than 10% towards IEG’s offshore operations’ EBIT68 but from a 25% share of the offshore customer database. With just over 10,000 customers, Guernsey Gas has slightly more than its sister operation on Jersey, but this figure represents less than 3% of the total number of customers in the IEG portfolio overall. The figures for Guernsey are swamped by the fact that the UK gas transportation business has over a quarter of a million customers. The various estimates, extrapolations and assessments of the Guernsey non-transport and end-use energy market would put LPG’s share at around 10%, with heating oil the dominant player with over 50% of this market sector. The split of LPG’s share between domestic and commercial consumers would be assessed at 65%/35%. Customer numbers have been largely static for the last 5 years, with an average of around 300 new customers added each year mainly from new building developments. These are counterbalanced by losses to other forms of heating, on which data is not available.

11.3 Financial Performance

We requested and received financial data for the past 6 years, together with comparable information from the other IEG LPG businesses. We can report that in the past 6 years, Guernsey Gas’ turnover has grown by 36%, but much of this has been due to increases in international oil and gas prices, which have been passed on to consumers in tariff increases. This is evidenced by the fact that the cost of sales in this same period rocketed by 69%. Gross margin in percentage terms decreased by just over 7 percentage points, therefore indicative of a growth in gross profit in £’s that did not match the turnover increases, as nearly 60% of the increase in turnover was accounted for by higher product price inputs. In Kosangas (Guernsey), turnover was up 25%, cost of sales up by 48%, and gross margins squeezed by 7 percentage points, as the increase in cost of sales accounted for 73% of the higher turnover level. It has not been possible in the time available and within the scope of this Assignment to make a direct comparison with other island operations in the IEG group. There are significant market differences between the islands in terms of commercial and domestic customer shares, and in the case of the Isle of Man only, a natural gas distribution network as well as the LPG operation. But as all 3 operate in closed island markets and are monopolistic suppliers, any such comparison would still not answer the question of whether profits or shareholder returns are higher than would otherwise be the case in a more liquid market, or whether consumers were paying too much for their gas, as an abuse of power has been, or is, taking place. We are better to compare the Guernsey results from those obtained in a benchmarking operation against a UK-based LPG distributor.

68 Earnings Before Interest & Taxation


11.4 Performance criteria under the new parent company

The International Energy Group was acquired mid-year in 2005 by BBI as we have already mentioned. It is therefore pertinent to consider what this change of ownership has meant for Guernsey gas consumers, and whether there has been any material change to the financial performance, contrasting the last year [2004] of IEG ownership with that made available to us for the full year 2006. Firstly, we have been assured that BBI has set no EBIT or ROCE targets for Guernsey Gas during its short ownership, consistent with the approach for other businesses in the IEG grouping. Whilst we understand that BBI do not impose reporting criteria on Guernsey Gas’ management, they do seek certainty and formally approve their Business Plan. The one financial criteria used is to maintain earnings, in real terms, with the level established over recent years. The business is assumed to be mature, with no organic growth. Business overheads may have increased due to additional health and safety regulation. We are given to understand that BBI’s predominate interest in the IEG group is the business growth opportunity within the UK energy transportation business. There has been a significant increase in the capital employed in the Guernsey business, but around 70% of this will be due to the development costs associated with the building of The Energy Centre at Admiral Park. In addition, the soaring costs of wholesale LPG prices over these 2 years will require greater capital employed to service the much higher inventory costs. There is evidence that the capital employed in Kosangas decreased by 25% due to the repayment of an inter-company loan. BBI’s acquisition of IEG has reduced central costs, and therefore that proportion allocated to the Guernsey operation. The saving of remuneration costs of a Chief Executive and expenses attributable to shareholder costs and listings on stock markets have been made possible, as these are now paid centrally by BBI in Australia. From the data presented to us, we have evidenced a decline of nearly 6 percentage points in the ROCE obtained from the Guernsey operations between 2004 and 2006. Gross profits have grown by 10.5% over these 2 years, but earnings have declined slightly, suggesting from our forensic analysis that overheads [that we have extrapolated from Gross Profit less Depreciation less EBIT] have increased by 12%. From this brief and superficial analysis, it appears that the stated aim of maintaining profit levels in real terms with the historical trend has been largely achieved, with the increase in overheads being recovered by an increase in margin. The gas industry in general, and on Guernsey in particular, are neither alone nor unusual in seeking to maintain earnings at times of soaring international prices, on which domestic consumption tariffs are nowadays based. Where there is competition, such as in Guernsey’s heating oil market, each of the 3 competitors can strive for greater market share by discounting prices in a commodity-based product market. The monopolies in Electricity and Gas do not engender such competition and buffer these companies from rising inventory costs and overheads, allowing their profits in £’s to be maintained through largely preserving percentage gross margins. We shall examine the Gas tariff increases against those experienced on the UK mainland later in this report, to assess the frequency of the moves and the trend in percentage increases against natural gas on the mainland.


11.5 Supply Chain Costs

We were advised of the actual shipping rates paid by Guernsey Gas for their cargoes of LPG from Fawley to the island, and would state that the low end of our own assessment at 1.86 pence-per-litre is of the right quantum. The details of the contract between ExxonMobil and Guernsey Gas are extremely commercially sensitive and we will not comment further here. We have been advised that the offloading and storage costs associated with the importation and storage of LPG are shared between Guernsey Gas and Kosangas (Guernsey) on a percentage allocation basis, broadly in line with the actual split of sales tonnages between the two operations, and thus worthy of neither criticism nor comment. Product imported by Guernsey Gas under contract from ExxonMobil and supplied to Kosangas for bottling or distributed in bulk tankers is transferred at cost price with no uplift or margin. We have no reason to doubt the efficacy of this statement, but have seen no evidence to prove this.

11.6 Areas of Concern

Following the study of the data made available to us under the Non-Disclosure Agreement with Guernsey Gas, we have two issues that still give cause for concern within the scope of this investigation, and which we have not been able to satisfactorily resolve or reconcile. The first issue surrounds the allocation of central overheads [what used to be the IEG corporate office and support staff costs] to Guernsey Gas’ business. We have been presented at different times with differing allocations of this cost based on a variety of criteria. Group holding companies do have the ability to determine the allocation of their central costs over the companies under their control. When this also occurs across international boundaries and tax regimes, there can often be a case for efficient tax planning and optimisation of the burdens of taxation and borrowings. Any allocation based on these criteria may not accurately reflect the true management-time burden of the central staff, or accurately reflect the percentage turnover share of Guernsey relative to the group. The precise methodology of the allocation will not concern IEG’s parent shareholders, but in the context of turnover and net earnings, the figures we have evidenced for Guernsey’s allocation are significant and should be examined further. Secondly, we have not been able to truly reflect on the sheer amount of data that has been made available to us, as we have only been given access in a carefully controlled and monitored manner. We would have liked to have studied the figures in greater depth and given a greater consideration to their meaning, in particular to the various methods of central cost allocation. Coupled with the aforementioned statement that we did not access audited accounts directly, we must necessarily base our judgements on the presented data from a monopoly supplier. The lack of objectivity in this process is a concern.


12. GAS MARKET: CONSUMER TARIFFS & WHOLESALE PRICES

12.1 Tariff Increases – Trends vs. UK Natural Gas Suppliers

We have analysed the tariff increase imposed by the leading UK gas supplying companies for the 2-year period ending January 2007, and compared the frequency of tariff increases and the cumulative effect in percentage terms with that experienced by Guernsey consumers at the hands of Guernsey Gas. The soaring international oil and gas prices of the past few years have led to massive percentage increase for UK consumers of both natural gas and mains electricity. In September 2006, the last increase announced by British Gas for its customers meant that it had raised natural gas tariff prices by 91.1% since 2003. Since February 2005, Guernsey Gas consumers on the Super Economy 24 tariff have faced a total of 3 increases – in April and September 2005, and then again in September 2006. These 3 increases have had a cumulative effect of raising per unit prices by 23.4%. Over the same period UK suppliers EDF Energy, Powergen, Scottish Power, nPower, British Gas and Scottish & Southern Power raised their tariffs a similar 3 times. The following table summarises the tariff increases seen by gas customers since February 2005. Table 12.1: Natural Gas Tariff Increases vs. Guernsey Gas SE24 Guernsey

Gas EDF Powergen Scottish Power nPower

British Gas

Scottish & Southern

Number of Increases 3 3 2 2 4 2 3

Cumulative % 23 % 58 % 39 % 51 % 81 % 37 % 52 %

Notes: Tariff Price increases obtained from Energywatch.com website Once again, we must re-iterate that we are not comparing on a like-for-like product basis, in that we are contrasting Guernsey Gas’ LPG tariff increases against the background in the UK, where gas and electricity tariff increases came in for widespread criticism from politicians. The fact remains that Britain is no longer completely self-sufficient in North Sea natural gas production, and it now has to import an increasing proportion of natural gas to meet indigenous demand. That, in turn, exposes the utility companies to the fluctuations in internationally traded market prices, and when the cost of crude oil soared from $25 a barrel to $40 in 2004, then hit $60 in 2005 and peaked out at $78.32 in mid-August 2006, they had no real choice but to impose some swingeing tariff increases. By contrast, Guernsey Gas customers have experienced the same number of tariff increases, but the effect in percentage terms has been noticeably less. However, when applied to a high-cost heating product in LPG, the effect of such increases on disposable household incomes should not be underestimated.


12.2 Recent Spot Market Price Trends

Analysis of spot market prices for Propane and Butane as reported by Argus International for the BP Agreed Price index [BPAP] show that between November 2005 and October 2006, Propane prices fell by $87 per tonne, and Butane by $79 a tonne. Using an exchange rate of £1 = $ 1.8008, these decreases translate into falls in product prices of the order of 2.4 pence-per-litre for Propane and 2.5 pence-per-litre for Butane. Whilst acknowledging that Guernsey Gas have bought gas on a forward contract price or hedge against product price movements, these falls in the BPAP index away from the highs reached in January 2006 for Propane and February 2006 for Butane suggest that the next price movements should be decreases. However, the forward purchase agreed by Guernsey Gas in 2006 does not expire until the end of May 2007. It is likely at that point, and on the basis that the wholesale market has maintained these price falls, that Guernsey Gas will revise their tariff downwards. After the peak winter demand period for Propane has passed, we shall be looking for these SE24 tariff decreases in line with market movements, otherwise the current pricing levels will over-recover excess profits from the marketplace. Without competition and in a captive market, the call for a tariff decrease is solely in the hands of Guernsey Gas. Unlike oil, where one of three competitors could seek to gain market share by more immediately passing on savings in the lower cost of the products sold and marketed, LPG customers have a less-than-transparent access to product price fluctuations. Guernsey Gas has the option of maintaining higher prices than they need, thereby abusing their market dominance, or to adopt a greater philanthropic approach to the benefit of Guernsey consumers, as well as their own shareholders. Average power bills in the UK have doubled in the past three years on the back of rising wholesale costs and dwindling North Sea natural gas reserves. However, no supplier has yet cut bills, despite wholesale natural gas prices falling by more than 60% since June 200669.

69 This statement was correct at the time of the first drafting of this report


13. GAS MARKET: BENCHMARKING

13.1 UK-Based LPG Distributor

We have been able to obtain data from a UK mainland LPG distributor that owned its own storage and invested in a cylinder-filling plant. To preserve anonymity, we shall not reveal its location, but its volume was of the order of 6,000 tonnes a year. This was shared between mini-bulk deliveries and cylinder sales in a ratio of 65%/35%. Percentage margins across the business before operating costs were in the region of 45%, and this figure is thought typical of the LPG industry sector in the UK. Therefore we recommend that such a percentage figure should be used as a benchmark for the performance in Guernsey. Gross margins on cylinder sales were approaching 55%, whereas those on mini-bulk deliveries were below 40%. Margins on cylinder sales showed a positive differential from those mini-bulk deliveries by some 7.50 pence-per-litre. Gross profit per tonne figures were seen of £ 165 per tonne on mini-bulk and over £300 per tonne on cylinder sales. Overall this company generated a gross profit of over £200 per tonne, contrasted with gross profits on Guernsey of just over £500 per tonne, with little variation between Guernsey Gas [mains] and Kosangas [mini-bulk and cylinders]. Return on capital employed in this benchmark company was between 10 and 12%, which we feel will mirror that obtained by BBI from the Guernsey operation; but this will be generating significantly greater gross profit in £’s as the capital employed in our benchmark operation was less than £2 million, but, of course, did not contain any gas mains nor a retail outlet and office block.

13.2 Consumer prices vs. supply costs

The monthly average BP Agreed Price for October 2006 was $447.00 per tonne of Propane, and the exchange rate average was £ 1 = $ 1.8892. Our estimate of shipping and product premium costs added to the BPAP “raw” price would suggest a landed-in-Guernsey figure of between 15 and 16 pence-per-litre for propane. If we compare this to the mini-bulk LPG selling price of 42.50 pence-per-litre, we derive a gross margin of around 26/27 pence or 65%. Compared with our UK mainland benchmark, this would be acceptable for cylinder sales, but not for mini-bulk. If we benchmark mini-bulk deliveries at a gross margin “target” of 40% plus an adjustment for the higher costs of doing business on Guernsey, we would redefine a more sustainable and justifiable mini-bulk selling price at a level of around 36 pence-per-litre or, at current supply prices, a gross margin of about 55%. By another route we have re-confirmed this “gap” of around 6 to 7 pence-per litre between the justifiable costs of mini-bulk propane in Guernsey and the equivalent UK mainland pricing levels.


We are also of the opinion that both mini-bulk and mains gas tariff prices have been largely cost-equalised up to cylinder prices on Guernsey. Despite our reservations about the lack of price competition in the retail price of cylinders, the differentials to UK prices are justifiable on the evidence we have been able to glean. Purchasing the same products in bulk should gain consumers better value. We have found this hard to discover in the price tariffs for these supply methods, and are forced to conclude that both mains gas and mini-bulk deliveries do not represent true value-for-money, and need a more formal investigation.

13.3 Tariff prices vs. large consumer prices

Commercial confidence prevents us from full disclosure here, but discovery was made of contract prices available in both the mains gas and mini-bulk sectors. These show significant savings, as they should, against the SE 24 and mini-bulk tariffs, and even more so versus standard tariff prices. We can only observe here that the level of discounts seen for large consumptions prove our assertion that mini-bulk and mains gas prices are worthy of more detailed investigation.


14. GAS MARKET: THE QUESTION OF COMPETITION

14.1 Market Size

The market for LPG in Guernsey is small – there can be no dispute over this fact. Guernsey’s sales volume represents just 0.75% of the total UK market for the energy uses of propane and butane based on 2006 figures70. We have evidenced direct data that shows customers numbers for gas to be largely static. There can be no justification for reducing the LPG storage volume capability on Guernsey for strategic supply reasons, and even if this were to be contemplated, it would be unlikely to reduce operating costs significantly. Any critical mass would be lost if another competitor was introduced and had to compete in the 10% market share that exists for gas heating. We have demonstrated that the AUTO LPG market has stalled due to the fact that motorcars do not run sufficient miles in a year to justify the savings against the high initial capital costs of conversion.

14.2 Liberalisation of the gas market

This happened in the UK in the 1990s, whereby the retail supply of gas to consumers [British Gas] was split off from gas transportation [Transco]. New marketers were encouraged by a 2-year period in which British Gas had to conform to a fixed tariff, thereby allowing these entrants to gain market share by discounting, and debarring British Gas from responding. Since this honeymoon period has expired, a degree of normality has returned, with many new start-ups merged or sold-out. The fact remains that large utility companies, selling both gas and electricity, can compete in geographical regions far removed from their one-time statutory territory. This provides for a great deal of competition, but the myriad of companies and their tariffs can be complicated, such that web-based enterprises, such as uSwitch, have now been formed to help guide consumers through the maze of changing suppliers to get the best deal. It would not be economic to build a second gas import terminal in Guernsey, so the only form of liberalisation that could be envisaged would see legal powers taken by the States to remove the monopoly of supply to consumers away from Guernsey Gas. This would require further control and regulation to ensure that Guernsey Gas, who would retain the gas transportation de facto monopoly, supplied any new entrants on fair commercial terms. The question would remain, however, as to how much interest would there be in competing for a static market of some 10,000 tonnes, when more attractive and growing markets are opening up in Eastern Europe, the Far East and the former Communist States.

14.3 What keeps the shareholders of Guernsey Gas on the island?

The short answer is returns on its shareholding and capital employed. A retail-orientated utility business should normally prove cash-generative, so the balance must be to find the equilibrium between lower prices in favour of consumers and high enough returns to prevent BBI from withdrawal. We believe that we have proven that current price levels are not at that equilibrium, but that this high-level informal assessment of energy market prices on Guernsey cannot definitively determine where this equilibrium should exist.

70 DTi Digest of UK Energy Statistics


15. GAS MARKET: REGULATION OR COMPETITION LAW?

15.1 Regulation Regimes

The alternative, also one easy to recommend, is to argue that Guernsey Gas is placed under the auspices of the Office of Utility Regulation, alongside Guernsey’s electricity generation and supply, postal and telecoms industries. In view of the incontrovertible fact that Guernsey Gas are a monopoly supplier, albeit not a protected one, there is a simple basis for this informal, high-level review to recommend that a formal investigation be carried out under the Competition and Trading Standards Law. It is therefore appropriate to consider the terms of reference for regulatory regimes in the UK as well as those of Guernsey as part of our evaluation within the given Terms of Reference of this study.

15.2 The Office of Utility Regulation [OUR]

This was established in Guernsey in 2001, and headed up by a States-appointed Director General. OUR’s functions are governed by legislation on each of the 3 different industry sectors it oversees. The two strategic aims of OUR are stated as:

• To ensure that consumers receive the best value, choice and access to high quality utility services, and

• To ensure that the Bailiwick of Guernsey has vibrant, sustainable utility sectors capable of maintaining pace with global developments and thereby contributing to the economic and social well being of the islands.

In respect of the electricity utility, the OUR has power to license operators and oversee the introduction of competition within the electricity market. The regulated activities include generation, conveyance and supply of electricity. The office will ensure that where the market is opened up there is a level playing field for new entrants, and will be emphasising the need for continuously improved power supplies that deliver sustainability, reliability, quality and cost effectiveness. A review of the OUR Annual Report for 2005 reveals that as far as the electricity sector [the analogous sector to the gas market] was concerned, the majority of the OUR focus was on price regulation and tariff setting. In addition, after requesting the Director General to investigate the impact of the introduction of competition into the electricity supply market, the States subsequently resolved to give a direction to the Director General to issue an exclusive licence to Guernsey Electricity for supply activities until 31st January 2012. Having bestowed this 7-year period of monopolistic supply, it would be Consultancy Solutions for the Oil Industry’s contention that the OUR can only become involved with price regulation of Guernsey Electricity as it becomes commercialised from a State-run department. We are also concerned about wisdom of embracing a privately-owned [Gas] company under the same regulatory umbrella as a state-owned department [Electricity] within a small island community, and where the Director General of the OUR is a States-influenced appointment. This dichotomy is not insurmountable, but would require, in our opinion, some legally enforceable terms and conditions to prevent unintentional transposition of pricing and margin information between these two energy sectors, thereby inhibiting free-market competition for the same heating market.


15.3 The Office of Gas and Electricity Markets [OFGEM]

Ofgem is governed by an Authority, which includes non-executive members, who bring a range of expertise and experience from work in industry and social policy to the environment, finance and Europe. Ofgem is funded by the energy companies who are licensed to run the gas and electricity infrastructure, and operated under an RPI-minus 3% cost control regime that will reduce its costs by more than £5 million in real terms by 2010. Protecting consumers is Ofgem’s first priority, which is achieved by:

• Promoting effective competition, wherever appropriate, and • Regulating effectively the monopoly companies which run the gas pipes and the

electricity wires Ofgem have other priorities, in that they help secure Britain’s energy supplies by promoting competitive gas and electricity markets – and regulating so that there is adequate investment in the networks. They help gas and electricity markets and industry achieve environmental improvements as efficiently as possible, and take account of the needs of vulnerable customers, particularly older people, those with disabilities and on low incomes.

15.4 The Office of the Regulation of Electricity and Gas [OFREG]

This is the working name of the administration team who support the Northern Ireland Authority for Energy Regulation [NIAER], an independent public body set up to ensure the effective regulation of the Electricity and Gas industries in Northern Ireland. In terms of the gas market, Ofreg’s role is to promote the development and maintenance of an efficient economic and co-ordinated gas industry and to protect the interest of gas consumers with regard to price and quality of service. The Northern Ireland Government has granted an exclusive licence to one supplier – Phoenix Gas – in order to allow them time to develop the network. However, larger gas customers will be able to choose their natural gas supplier within 3 years and domestic customers within 8 years.

15.5 Conclusions – Regulation or Competition Law?

We have discussed regulation of the Gas energy sector in the broadest terms with the Director General of the OUR, and expressed our reservations about the mix of state-controlled and private businesses under regulation, if Guernsey Gas was subjected to regulation. We were told that the OUR’s objective as far as post and electricity were concerned, was to drive these former States trading boards into commercialism so as to make them more efficient businesses, leading to either consumer price reductions or to increase the contributions they would make to States’ finances. The OUR had no opinion on which other business sectors came under their control in the future, believing this matter of referral to be for the States alone to decide. The case for Regulation over action under the Competition and Trading Standards Law would seem to turn on whether Regulation could achieve additional savings [for the consumer] than those that could be achieved under any Ordinances passed under the Competition Law.


A common theme for all utility regulatory bodies was the protection of consumer interests. The fact that Guernsey Gas has no formal customer complaints procedure or stated arbitration method makes a strong case for bringing into Regulation, but we would want to see evidence that customer dissatisfaction with Guernsey Gas’s service and price was rife, and that genuine disputes were being ignored rather than settled. Whilst our investigation did not specifically require us to investigate customer service issues, our feeling from our time spent in Guernsey, that this is not a current contentious issue. The cost of regulation may be an issue to consider, especially if the OUR licence fees were passed onto consumers through tariff charges. In 2005, the Electricity licence fee for OUR was £180,000. If we divide that figure by the number of Guernsey households, from the 2001 census, then the cost of regulation amounts to less than £8 per household. The cost to the consumer may be more than this figure, however, if one includes the internal cost of compliance as another incremental cost associated with the regime of Regulation. This should be contrasted with the earnings and profit levels per customer generated by Guernsey Gas operations, as accurately determined by a detailed investigation. All regulatory bodies have a secondary objective [after that of protecting the consumer] of encouraging and promoting network development in line with global trends and technological advances. It is our conclusion that the acquisition of Guernsey Gas/IEG by Babcock and Brown Infrastructure gives Guernsey inhabitants a greater assurance that this aim will be achieved than under local, and therefore somewhat insular, ownership.

Our overall and final conclusion is that we cannot say with certainty that their position of monopoly supplier is being abused by Guernsey Gas in its pricing of LPG to such an extent that we would insist that the gas sector be immediately placed by the States under Regulation. The unresolved issues are significant, however, and it would appear appropriate to investigate these further, with more time and in greater depth under the Competition Law legislation. Our recommendation to the States is that such a formal investigation is carried out. Our hope is that this can be achieved within a spirit of co-operation from Guernsey Gas management and its international owners.


16. GAS MARKET: AREAS FOR FORMAL INVESTIGATION

We would identify 4 main areas of concern in gas prices and value-for-money, as worthy of a more formal investigation under the auspices of the Competition Law. These are:

Segregation of revenue streams and profits of retail activities from gas supply

Preservation of percentage gross margin

Allocation basis of central overheads to Guernsey operation

Lack of price competition in gas cylinder market Whilst we have seen and discovered Guernsey Gas’ financial information under the Non-Disclosure Agreement, we have not been able to identify and separate out sufficiently within the time-line of the project assignment, the revenues and earnings attributable to activities not relating to the supply of gas. These will include, for instance, the sales turnover, profits and operating costs associated with The Energy Centre at Admiral Park. We would wish to remove from our forensic analysis any distortion in our benchmarking comparisons, by excluding [for instance] the sale of televisions and radios from The Energy Centre. We have discovered evidence that percentage Gross Margins have been largely preserved over the past 6 years, in spite of the soaring costs of oil and gas on the international market. For instance the high-low differential of propane prices as evidenced by the BP Agreed Price Index in the 12 months ending October 2006 has been $164 per tonne. As operating costs would be largely fixed over this period, maintenance of the gross profit margin percentage would have earned a “windfall” profit of around 3 pence on every litre at the high end of the market. Lack of competition in the gas sector would probably explain why this phenomenon has persisted. We are also concerned with the methodology of allocation of central costs of the IEG group onto Guernsey’s operation. As this is not transparent, there may be a dichotomy between efficient taxation planning for BBI/IEG and artificially depressing the profits earned in Guernsey by overloading the operation with its share of the burden of central costs. We would like to suggest a formal discovery into the setting of recommended retail prices for propane and butane cylinders, and the methodology behind the communication of these to the retailers, together with any evidence that discounts are available for bulk purchase, to ensure that a degree of competition can be made prevalent. We have also stated that the next tariff moves should be downwards, in line with falling international prices on Propane and Butane, and that perhaps tariff moves should become more frequent and transparent. We would quote the example of BOC Gases who publish a monthly update to their Propane Surcharge71, which has seen adjustments as high as £100 per tonne [January 2006] to no surcharge at all [October & November 2006]. We are told that the next Guernsey Gas tariff review is planned for July 2007, which was announced in September 2006 at the same time as the last tariff increase. Plunging international gas prices have overtaken the anticipation of even higher prices held at that time. It is disappointing to note that Guernsey Gas are preparing to adhere to their original timetable, even though wholesale gas prices have fallen significantly since last September.

71 View at: http://www.bocindustrial.co.uk/propane_prices.asp


APPENDIX GAS MARKET: GUERNSEY GAS’ OWN SUBMISSIONS

These following 6 pages have been extracted verbatim from information provided by, and written by, Guernsey Gas. This information is outside of the data provided under the Non-Disclosure Agreement and we have permission from Guernsey Gas to include herein.


A. An explanation of the differences between operating a gas business in Guernsey compared to the UK We have included the following commentary to highlight how Guernsey Gas and Kosangas (Guernsey) incur risks and costs above and beyond those experienced by a UK LPG Supplier and/or network operator. We believe that these costs are valid and efficient; they reflect the additional burdens of operating in Guernsey. A.1 Commodity Costs

A.1.1 Product Costs

LPG product costs are higher than natural gas. The cost of connecting Guernsey to the European or UK natural gas grid system is prohibitive.

A.1.2 Shipping Costs

Guernsey Gas and Kosangas (Guernsey) incur shipping costs that are over and above those of a UK based LPG supplier. The costs incurred go beyond the contracted cost of shipping the product. There are other costs to the company associated with resource to monitor stock levels, liaise and co-ordinate with the LPG supplier, shippers, the shipping agents and harbour authorities and to optimise purchases. A full time member of the Senior Management Team in Guernsey is almost solely devoted to this activity.

With regard to the contract cost of shipping, there are significant physical constraints imposed that limit the type of vessel that we can use. We can only take relatively small cargo parcels (circa 500 tonnes) and we need to use ships that can cope with dry harbour conditions. For security of supply purposes we enter into long-term contracts with shippers, typically 5 years, and we take a conservative view with regard to the capabilities and capacity of any proposed shipper.

A.2 Storage Guernsey Gas and Kosangas (Guernsey) have significant strategic LPG storage, circa 1,600 tonnes, this represents approximately 17% of our annual sales. This level of storage is necessary for our companies to provide security of supply and to manage shipping costs. We are confident that similar UK LPG suppliers do not carry this level of LPG storage. They are not exposed to the same level of supply risk as ourselves. Not only is their probability of a run-out less than ours, the consequences of a run-out are not as significant. See section A.7 where security of supply is discussed in detail. Not only do Guernsey Gas and Kosangas (Guernsey) incur the direct costs of providing and maintaining the storage itself, but because of the inventory required, the site is classified and operated as a top tier COMAH installation at the request of the Island’s Health & Safety Inspectors. As such we incur significant safety compliance costs above and beyond those of a similar sized UK LPG supplier. For example the site has facilities such as firewater deluge systems, gas alarms and emergency shutdown systems. We also incur the cost of producing and maintaining a COMAH safety case. Also we provide a 24-hour a day, 7 day a week emergency response for the site, which of course impacts upon on our operating costs. A.3 Gas Delivery and Distribution Costs

A.3.1 LPG Cylinder Gas

A UK LPG supplier would have the opportunity of outsourcing cylinder filling and/or deliveries. Kosangas (Guernsey) has no such opportunities hence cylinder filling and deliveries are performed in-house for a relatively small number of customers. As a consequence they are likely to incur higher costs than UK LPG suppliers. Approximately 1,000 tonnes of gas per annum is filled into cylinders.

A.3.2 Road Tanker Operations

A UK operator would have the opportunity of outsourcing the delivery of LPG to mini and semi-bulk tank customers. Kosangas (Guernsey) has no such opportunities hence road tanker operations are undertaken in-house for a relatively small number of customers. As a consequence they are likely to incur higher costs that UK LPG suppliers. Approximately 1,000 tonnes of gas per annum is supplied to mini and semi-bulk tank customers.

A.3.3. Production of Mains Gas – LPG/Air Mixture

Guernsey Gas incurs production costs that are above and beyond those of a UK gas network operator or UK LPG supplier.

Guernsey Gas supplies a mains gas, which is a mixture of LPG (propane or butane) and air. Guernsey Gas does not have the opportunity to supply either neat propane or butane as a mains gas neat butane could not be used due to the potential for it to condense in cold conditions. Neat propane is rejected on safety grounds due to the increased pressure requirement.

Predominantly propane is a more expensive product than butane. The distribution network would have to operate at a higher pressure to enable the use of unmodified propane appliances;


this would result in greater shrinkage (lost gas). There would also be safety issues with regard to the operation of the distribution network, if we ran neat propane there would be an increased risk of incidents (gas in buildings, fire, explosion), the distribution network would be carrying a heavier gas in higher concentrations at higher pressures. Hence Guernsey Gas need to produce an LPG/air mixture for use as a mains gas which in turn results in additional costs.

The production process employs significant hardware, for example boilers, vaporisers, gas/air mixers, back-up electrical power generators, control systems, alarm systems, emergency shutdown system, buildings to house the gas mixers, boilers, control equipment etc. For security of supply reasons we provide contingency for breakdown and maintenance within the main production plant. Also to cover for a complete failure of the main plant we have a secondary production plant, which is on hot standby all of the time. The production of gas is yet another operation that requires 24 hour a day 7 days a week cover, this again impacts upon our salary costs.

Unlike UK operators we are not able to share or out-source back up and monitoring facilities. Furthermore, the additional costs incurred have to be recovered through a smaller customer base.

A.3.4 Distribution Network

As stated Guernsey Gas distribute an LPG/air mixture as a mains gas. The LPG/air mixture is of a lower calorific value than natural gas. Hence the energy carrying capacity of Guernsey Gas’s distribution network is below that of an identical UK network operator. This impacts upon the replacement costs of the network. The replacement costs are a significant part of Guernsey Gas’s profit maintaining capital expenditure. UK operators are able to take advantage of the calorific value boost gained by converting to natural gas to reduce network diameters and thus take advantage of low cost no dig pipe replacement techniques. Guernsey Gas does not have as many opportunities to employ such techniques.

A.5 Gas Suppliers Duties with regard to attending Public Reported Emergencies Guernsey Gas and Kosangas (Guernsey) are responsible under the States of Guernsey (Gas) (Guernsey) Ordinance to provide a 24-hour a day 7 day a week response for public reported emergencies. As such we are bound to provide a service to investigate and make safe all public reported emergencies (report of gas leaks, smells and potential reports of fumes etc). No separate charge is levied for this service. Whilst UK LPG suppliers and network operators do carry this responsibility, they will have the opportunity to outsource this service. Guernsey Gas and Kosangas (Guernsey) do not have the opportunity to outsource this activity hence it is undertaken in-house and cost recovery has to be through a smaller customer base. A.6 General

A.6.1 Guernsey – Cost of Living

Guernsey has a higher cost of living than the UK. This of course impacts upon the cost of operating a business in Guernsey. Many of the supplies and services we purchase in cost more than similar supplies and services provided in the UK. If we do purchase supplies or services from the UK we incur additional charges with regard to transport, shipping, travel, accommodation etc.

Salary costs on the island are generally more than those in the UK. Whilst Guernsey Gas and Kosangas (Guernsey) salaries are above those of a gas supplier in the UK we do not pay salaries above island market rates. We can provide evidence of this by reference to the pay negotiations in 2004/5 which resulted in an arbitrator ruling for a pay increase above RPI and that offered by the company.

A.6.2 Technical Challenges

As alluded to, Guernsey Gas and Kosangas (Guernsey) need to cover many and varied technical challenges above and beyond that of a UK LPG supplier or network operator. To recap examples include LPG sourcing/procurement, LPG shipping, the operation and control of a major hazardous installation, the operation and control of LPG liquid pipelines, dangerous goods road transport activities, gas production operations and appliance conversion. As we have also stated, Guernsey Gas and Kosangas (Guernsey) do not have opportunities to outsource any of these activities. Hence these operations are performed in-house, these present significant technical challenges which, requiring professionally qualified engineers, in turn, consume resource that impacts upon our operating costs.

A.6.3 Outsourcing Opportunities

As mentioned elsewhere, Guernsey Gas and Kosangas (Guernsey) do not have the opportunity to outsource. We would suggest that because we have to cover all of the various activities for what is relatively a small customer base, that we cannot obtain the efficiencies of a UK operator.


A.6.4 Economies of Scale

As a small to medium sized enterprise we do not enjoy the economies of scale and purchasing power of some of the larger UK operators. Wherever possible we use the combined buying power of the IEG group. However it should be recognised that IEG are a small company in UK terms and that its combined buying power is not significant for all of the products and service that Guernsey Gas and Kosangas (Guernsey) require.

A.6.5 Labour Market and Housing Restrictions

As is mentioned above the cost of living in Guernsey, in particular housing costs are significantly more than that in the UK. Also the employment market in Guernsey is tight with very low levels of unemployment. As one would expect this translates through to the labour market, hence the typical terms and conditions of employment offered in Guernsey are better than those on offer in the UK. This has obvious impacts upon salary costs.

As stated elsewhere Guernsey Gas have many technical challenges and in order to meet them we, on occasion, need to recruit experienced specialist staff from outside of the island on housing licences. Such recruitment exercises and subsequent relocation expenses again impact upon our costs. This situation is exacerbated as often the housing licences are only issued for a short term, normally 5 years.

A.7 Security of Supply Unlike electricity or water networks gas networks do not fail to a safe condition in the event of an interruption to supply. Also it should be noted that in the event of a supply failure gas couldn’t simply be reintroduced. Security of supply has been mentioned in a number of items above. Security of supply is a major factor for Guernsey Gas that causes us to incur additional costs above and beyond that of a typical UK LPG supplier and network operator. Security of supply is a major influence to us throughout the supply chain up until the mains gas distribution network. Security of supply influences our decisions when negotiating LPG supplies, negotiating LPG shipping contracts, it influences LPG storage levels, it causes us to provide back-up for the LPG pipelines and drives us to build significant contingency into the production plant facilities to the extent of providing an additional standby plant. The risks to Guernsey Gas of a product run-out are much more significant than those of a UK operator. The potential for a run-out of product is much greater and the consequences much more severe. The typical UK gas network has multiple supply points and the probability of a widespread loss of supply is remote. If a large number of customers were affected by a supply interruption, national resources could be mobilised quickly to recover the situation. A typical UK LPG supplier’s customer base will be made up of cylinder customers, bulk customers and possibly a relatively small number of gas supply networks with limited customer connections. A short duration run-out of LPG is likely to have no or only a small effect upon their customers. A UK LPG supplier would be able to find alternative supplies of LPG to service their customers. Guernsey Gas and Kosangas (Guernsey) are not in the same situation. We have a higher probability of a product run-out due to (a) the possible delays associated with shipping, jetty and harbour availabilities; and (b) the lack of contingency in the event of a product shortage. We are the only LPG supplier on the island and we would not be able to source LPG in any significant quantities from elsewhere at short notice. Also the consequences, particularly to Guernsey Gas, are significantly more severe than those presented to a UK LPG supplier. Guernsey Gas has over 9,500 customers connected to a single mains gas network. A short term run-out or momentary loss of supply could affect all of these customers (95% of the total metered customers for Guernsey Gas and Kosangas (Guernsey) combined). Under the scenario of a complete interruption, as the gas supplier we would be obliged to visit each and every mains gas customer to isolate their supply at their emergency control valve (this would mean gaining access into customers’ premises in the majority of cases). We would then need to purge the mains gas network, then re-pressurise and finally visit all the customers once again to reinstate the gas supply to their installation pipe work and re-light their appliances. This type of exercise would take several weeks, even with additional resource. As a consequence during the period Guernsey Gas and Kosangas (Guernsey) would suffer loss of profits, reputation damage, customers would suffer hardship and the cost of the recovery operation would be significant. Such a scenario would be devastating for our business. Hence security of supply is a significant risk, it is recognised as such and additional costs are incurred to reduce the probability of such an event occurring.


B. An explanation of the differences between operating a gas business in Guernsey versus a heating oil business B.1 Commodity Costs

B.1.1 Product costs

LPG costs are higher than heating oil costs. Heating oil suppliers on the island are all connected to major oil companies, Esso, Shell, and TFE. Hence they may benefit by not having to pay a handling charge to load product from the supplying refinery or collection point. Guernsey Gas / Kosangas (Guernsey) pay Esso, the current contracted LPG supplier, a handling charge.

B.5.2 Shipping costs

LPG is a more volatile product than heating oil; LPG must be stored under pressure or at a reduced temperature. As such, specialist ships are required to transport LPG. Hence LPG shipping costs will be above those of heating oil. As stated in item B.1.1 all of the island’s heating oil suppliers are connected to major oil companies hence we expect them to be able to benefit from lower shipping costs as a result of economies of scale.

B.2 Storage As highlighted in B.1.2 LPG must be stored under pressure or at reduced temperatures, heating oil is stored in atmospheric pressure tanks. LPG storage vessels are built to a higher standard and as a result the cost of storage is significantly higher than that of heating oil. We would estimate that Guernsey heating oil suppliers do not carry the same proportion of product storage as Guernsey Gas / Kosangas (Guernsey). Guernsey Gas / Kosangas (Guernsey)’s strategic storage represents circa 17% of its annual sales. We would assess that the level of risk posed by a product run out for a heating oil supplier is significantly less than that for Guernsey Gas / Kosangas (Guernsey). The probability of a run out is less given the higher availability of suitable ships, the resource and influence of the major oil companies to ensure continuity of supply to their operations and the possibility of being able to use competitors supplies to service customers if a run out situation was encountered. Guernsey Gas / Kosangas (Guernsey) do not have such mitigation. The consequences of a short duration product run out to a heating oil supplier would be significantly less severe than that presented to Guernsey Gas / Kosangas (Guernsey). We would suggest that the worst-case scenario for a heating oil supplier is that a small number of their customers could experience an interruption to supply. As pointed out in section 4.7 the consequences of a product run out for Guernsey Gas / Kosangas (Guernsey) is severe. We believe that the standards associated with the storage of LPG are significantly more stringent than those for storage of heating oil, this again results higher costs. B.3 Heating Oil Versus Gas Delivery Costs

B.3.1 LPG Cylinder Gas

Approximately 50% of Kosangas (Guernsey)’s annual sales are via cylinder gas (approximately 1,000 tonnes of gas per annum). Supplying gas via cylinders is a relatively high cost activity, additional costs associated with this activity include the cost of the cylinders themselves, the costs of cylinder filling equipment, the operation of cylinder filling is labour intensive as is the delivery of the cylinder gas.

B.3.2. Road tanker operations

As has been highlighted in section B.1.2 LPG is stored and transported in pressure vessels that are built to higher standards than heating oil tanks, this again translates through to higher costs.

B.3.3 Production Costs

Guernsey Gas incurs production costs associated with producing an LPG air mix suitable for distribution in a network. Obviously a heating oil supplier incurs no such processing costs.

B.4 Gas Suppliers Duties With Regard To Attending Public Reported Emergencies Guernsey Gas / Kosangas (Guernsey) are responsible under the States of Guernsey (Gas) (Guernsey) Ordinance to provide a 24-hour a day, 7-day a week response for public reported emergencies. As such we are bound to provide, free of charge, such a service to investigate and make safe all public reported emergencies (reports of gas leaks, smells and potential reports of fumes). Heating oil supplies have no such obligation.


B.5 The States of Guernsey (Gas) (Guernsey) Ordinance This ordinance places specific health and safety obligations upon gas installers, service agents and suppliers with regard to, for example, training standards, registration of operatives and organisations with an approved body (CORGI), and standards of work etc. No such equivalent standard is applicable to heating oil suppliers, services agents and/or installers. B.6 Technical Challenges The technical challenges of running our gas business, supplying cylinder, mini bulk and mains gas are highlighted in our commentary of explaining the differences between operating a gas business in Guernsey compared to the UK, see item A.6.2. We are confident that the technical challenges presented to Guernsey Gas / Kosangas (Guernsey) are significantly more onerous than those presented to a heating oil supplier. These technical complications and challenges do translate through to higher costs for our business. As stated earlier all of the heating oil suppliers operating in Guernsey are associated with large major oil companies and they will be able to access technical support from within their UK or European organisation as and when necessary. B.7 Economies of Scale As stated, all of the heating oil suppliers on the island are associated with large major oil companies and as such they will be able to enjoy economies of scale above and beyond those that IEG can command. Heating oil suppliers have a larger share of the islands energy market and as such will benefit from improved economies of scale over and above that of Guernsey Gas / Kosangas (Guernsey). B.8 LPG Cylinder and Semi Bulk Tank Installations It is our understanding that the technical and safety recommendations with regard to the location of customers heating oil tanks are less stringent than those applied to LPG cylinder and mini bulk tank installations. Also as implied elsewhere it should be noted, that customers LPG storage vessels, cylinders and/or tanks are built to a higher standard than those required for heating oil supply.


GLOSSARY

Aviation Spirit Specially blended grade of Gasoline, suitable for use in

aircraft engines, having high anti-knock ratings, high stability, and high overall volatility and low freezing-points

Auto-Oil Collective name for a series of co-operative ventures between

the oil and automobile industries in Europe to develop fuel specifications and engine designs to meet environmental objectives on emissions

Bio fuels Fuel produced from organic matter produced by plants. An

example of bio fuels is alcohol (made from fermented sugar)

Bridging Distribution terminology used to denote the movement [almost invariably by road tanker] from a refinery or terminal to a distributor-owned depot, before further intermediate storage of the product prior to onward delivery to end-user

Calorific Value Measure of the heating power of a gas or liquid

Distillates Products obtained by condensation during the fractional

distillation process Downgrading The use of a higher-specification and higher-cost product,

as a substitute for a lower one, thereby saving the need for separate transportation and storage, but without affecting end-use performance. Common examples are Jet-A1 in lieu of standard grade kerosine or Ultra-Low Sulphur Diesel as a substitute for Gasoil. A cost penalty is always assumed

Dry Depot Facility, usually operated by a fuel distributor, which houses

road tankers, but that does not have any tankage for the storage of petroleum products

Dwt Deadweight tonnage is the displacement of a vessel at any

loaded condition minus the “lightship” weight. It includes the crew, cargo, fuel and water. The lightship weight is the actual weight of the ship excluding crew, fuel, cargo and water on board

EBIT Earnings Before Interest and Taxation EBITDA Earnings Before Interest, Taxation, Depreciation and

Amortisation

Ex-Rack Industry term used to describe the collection of product from a refinery or terminal [as opposed to having the product delivered]

Fuel Oil Heavy distillate oil used for power stations, industry and

ships’ boilers

Gas Oil Medium distillate oil, used to produce diesel fuel and to burn in older central heating systems

Gasoline Term the oil industry uses to refer to petrol


GVW Gross Vehicle Weight, used in road transport to describe the

[maximum] operating weight of the vehicle and its payload. Current maximum GVW in the UK is 44 tonnes

High Flash Generic term used to describe those products with a high

flash point, or temperature, at which products burn when exposed to an ignition source. Diesel and gas oils are high flash products

Hydrocarbon Compound containing hydrogen and carbon only.

Hydrocarbons may exist as solids, liquids or gases.

Kerosine Medium-light oil used for lighting, heating and aircraft fuel

Low Flash Generic term used to describe those products with a low flash point, or temperature, at which products will burn when exposed to an ignition source. Gasoline and kerosene are low-flash products, even at ambient air temperatures

Low Sulphur Fuel Any fuel that has reduced sulphur content to meet a

mandated government specification. Typically applied to Gasoline and DERV. Sulphur removed by re-processing products through a second distillation stage or a de-sulphurisation plant.

LPG Liquefied Petroleum Gas. Generic term that includes the

products Propane and Butane

m3 Cubic metre, metre cube or just “cube(s)”. Typically used when describing amount of storage space in tank farms

mt Metric tonne. Used to distinguish measure from confusion

with English long or short tons. SI abbreviation for mass of 1,000 kilograms.

Middle Distillates Term used to group together Gasoils, Diesel oils and

Kerosines, derived from the fact that these products distil off from crude oil in the middle of the fractionation column

Octane Rating Measure of the performance of gasoline. A high octane rating

gives efficient ignition PBIT Profit Before Interest and Tax Platt’s International and universal market assessment for

subscribers to daily service provided by publishers McGraw Hill. Gives petroleum products and crude oil price assessments in various markets based on industry knowledge and contacts, and reporting of daily trading activity

Primary Distribution Modal movement of finished petroleum products from

refinery to inland or coastal terminal. Modal methods include sea-tanker, pipeline or trainload

ROCE Return on Capital Employed Secondary Distribution Distribution, usually by road tanker, of petroleum products

to end-users from refineries, terminals and distributor depots


Self-Bridging Industry term that denotes the transportation of petroleum products from a refinery or terminal to a distributor depot in the distributors’ own tankers. These movements would be dedicated out/empty and back/full flows.

Terminal Used in this report to describe a large tank farm facility, fed

by pipeline, train or sea-tanker from refinery. Stores finished petroleum products for onward distribution to end-users

Ultra Low Sulphur Description applied to both gasoline and diesel fuels.

Commonly interpreted to mean that the fuel has less than 50 p.p.m. [parts per million] by weight of sulphur


ACKNOWLEDGEMENTS

Consultancy Solutions for the Oil Industry would like to thank the following organisations and businesses for their co-operation and help in researching this report. Without their inestimable assistance, the analysis and conclusions would have been impossible to achieve in the timescale. States of Guernsey Commerce and Employment

Customs & Excise Environment Department Guernsey Harbours

Home Department Meteorological Office Statistics Unit, Policy Council

Treasury and Resources The ExxonMobil Petroleum Company Limited Shell UK Oil Limited Total Oil Limited Guernsey Petroleum Distributors Limited Fuel Supplies (C.I.) Limited Total Channel Islands Limited United Kingdom Petroleum Industry Association

Deputy Bill Bell, Public Services Department Roy Bisson, Guernsey Consumer Group

Deputy Mike Torode, Home Department C.I. Traders/ Les Riche’s Stores Channel Islands Co-Operative Society Guernsey Electricity Company Guernsey Gas Guernsey Marine Traders Association Guernsey Motor Trades Association Office of Utility Regulation States of Jersey, Statistics Unit

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