In 2018 I was approached about an assignment that at first glance looked decidedly unattractive.

A consortium of Dutch gas producers was seeking to overturn a tariff decision that had already been reached by the regulatory authority on the basis of the evidence and agreement of two major pipeline operators. The decision was a relatively complex package of elements supported by a large and well-known international consultancy whose report, artfully combining best EU regulatory practice with the promise of benefits for all, had been met with almost universal acceptance. Except my prospective clients, who would end up paying more and wanted me to challenge some of the assumptions in the report to perhaps weaken the regulator's resolve. 

Aside from having to overcome language barriers in a complex technical area, my contacts in the industry were confident that the deal was done and the commission looked pointless. But the realisation that ordinary Dutch consumers were going to end up paying more money as the result of this scheme led me to take a closer look.

On first reading the report appeared persuasive. Setting out to streamline administration and facilitate international trade as well as appealing to EU regulatory objectives such as the expansion of the Dutch gas balancing zone. Its interlinked proposals included removing from the tariff map a seemingly “unnecessary” point of interconnection between one pipeline operator and another. A bit like taking the toll booth away from a motorway junction. On the face of it, smoothing the passage of traffic and reducing the need for yet another pricing calculation. But removing this toll would mean that the clients’ costs would go up elsewhere to cover that loss of revenue.

There were a number of parts to the package but as a whole the report sold the end product very well. It would facilitate cheaper virtual imports of gas as well as physical exports, and deliver efficiency savings for the whole regime. The report recognised the “unavoidable” consequential loss of revenue to the national pipeline operator, which would naturally enough have to be met by a “very small” increase on everybody else’s gas transport bills. The regulator had been persuaded by the net present benefit calculation of the whole deal.

We were expected to challenge the calculation of assumed benefits but what really interested me wasn't the accuracy of the report's conclusions, but the basis on which it had been commissioned in the first place. I started unpicking the premise of the report. What exactly had the consultant been asked to consider, and how free a hand did they have to look at a range of solutions to the problem posed by removal of the revenue associated with the interconnection point? It started to look like perhaps they had simply been given a solution – let the ordinary gas customer pay - and asked to justify it from a public interest perspective.  

I found myself recalling an old Forbes article on the science and marketing of bundling of products like TV packages. And more recently the scandal of the 2007/8 financial crisis and the role of collateralised debt obligations (CDOs). What these very disparate things had in common was that there'd been a bundling up of the good stuff with the bad stuff, and people had been persuaded to buy the package as a whole without looking too closely at all the constituent parts.

And then the penny dropped – break the package down and ask the question, why does each bit need to be included, what’s it actually costing, and for what value? And then, how could you put a different package together that delivers what is really needed at a fair price? Although there was still a lot of technical detail to address - such as theoretical arbitrage opportunities for virtual imports and physical exports of gas between two major traded hubs - the battle was essentially won from that moment of insight. In fact we didn’t even need to challenge the level of claimed benefits any more – we could simply use the report’s own values and achieve a better net present value by changing the package.

So whenever you're confronted with an expensive bundle tied up with a pretty ribbon, do some rummaging around before accepting it. The issue you need to consider isn't whether the end result is acceptable, or even attractive, but rather whether it delivers maximum potential by being  put together properly with consideration for ALL of its impacts. And if you're the one putting the package together? Well, ask yourself if it's really worth the reputational damage of alienating the customer, and whether you're truly meeting the spirit of your regulatory objectives, however clever the design and marketing of the bundle may be?

Brian Withington