total capex and opex allowances to run its network. For example, we do not seek to approve individual capital expenditure (capex) projects that a service provider must then implement. Rather, we determine what costs may reasonably form part of the sum total of revenue that we consider satisfies the requirements of the NGL and NGR. Consistent with incentive regulation, it is then for the service provider to determine the particulars of how this allowance is applied in the next access arrangement period. As the overall revenue allowance is the key binding feature of our draft decision, it is important that we specifically assess its contribution to the achievement of the NEO. Understanding the NGO The NGO is to promote three factors for the long term interests of consumers: efficient investment in efficient operation of efficient use of; natural gas services. Energy Ministers have provided us with a detailed body of analysis and explanation that guides our understanding of the NGO. The long term interests of consumers are not delivered by any one of the NGO's factors in isolation, but rather by balancing them. In general, we consider that we will achieve this balance and, therefore, contribute to the achievement of the NGO where consumers are provided a reasonable level of service at the lowest sustainable price. In most industries, this outcome is achieved through the operation of competition. Competition drives suppliers to refine their offerings to attract customers. Where a supplier’s offering is not attractive it risks being displaced by other suppliers. However, in the energy networks industry the usual competitive disciplines do not operate. The service providers are largely natural monopolies. Many of the products they offer are essential services for most consumers. Consequently, in a non-competitive environment, consumers have little choice but to accept the quality and price service providers offer. The NGL and NGR aim to remedy the absence of competition by empowering us, as regulator, to make decisions that are in the long term interests of consumers. In particular, we might need to require the service providers to offer their services at a different quality or different price than they would choose
Key elements of the building blocks There is no one tool that by itself determines an overall revenue allowance. Therefore in setting our alternative overall revenue allowance for JGN of $2477.3 million ($ nominal) for the 2015–20 access arrangement period we: apply relevant tests under the NGR, the assessment methods and tools developed as part of our Better Regulation guidelines and consider information provided by JGN, the CCP, consultants and stakeholder submissions consider our total revenue allowance against section 28 of the NGL, including the constituent decisions and the interrelationships we discussed in section 5. The building block approach We have employed the building block approach to determine JGN's total revenue—that is, we based the total revenue on our estimate of the efficient costs that JGN is likely to incur in providing gas distribution network services. The building block costs, as shown in Figure 81, include: return on the projected capital base depreciation on the projected capital base the estimated cost of corporate income tax increments or decrements resulting from the operation of an incentive mechanism to encourage gains in efficiency forecast opex. Our assessment of capex directly affects the size of the capital base and therefore, the revenue generated from the return on capital and depreciation building blocks. Figure 81 The building block approach for determining total revenue The following section summarises our decision by building block and provides our high level reasons and analysis.