29th May 2007 07:03
OFGEM29 May 2007 R/22 Tuesday 29 May 2007 OFGEM PUBLISHES INITIAL PROPOSALS FOR GAS DISTRIBUTION PRICE CONTROLS • Proposals call for significant reductions in operating expenditurefrom current level • Increased allowances for investment and replacement of old iron gasmains • Obligations to offer good customer service will be strengthened • New approach to charges and incentives to extend gas network to fuelpoor communities Energy regulator Ofgem has today (Tuesday) published its initial proposals forthe price controls which will apply to the gas distribution networks (GDNs)between 2008 and 2013. In 2005 National Grid sold four of the gas distribution networks to new owners.These initial proposals make full use of the new information now available toOfgem through comparison of four independently owned GDNs. They also takeaccount of the challenges the GDNs face including the significant ongoingprogramme of mains replacement, and the outputs they must deliver. Ofgem is proposing a reduction in the GDNs' operating expenditure of 3.3 percent a year from forecast actual levels in 2006-07. Ofgem recognises that thisis a challenging target. Ofgem also recognises that fulfilling the Health and Safety Executive'srequirements on mains replacement and meeting steady growth in gas demand willresult in higher capital and replacement expenditure. These proposals containincreases in capital and replacement expenditure of 26 per cent and 32 per centrespectively compared with expenditure in the previous price control period(2002-2007). In total, allowances for capital and replacement expenditure areapproximately £1 billion per year for the four companies. Ofgem has challengedthe companies' expenditure forecasts to ensure customers get good value. The neteffect of the proposals is a small rise in gas distribution charges, which wouldincrease an average domestic customer's bill by less than £1 per year in realterms.* Ofgem Chief Executive, Alistair Buchanan, said: "Today is one of a number ofmilestones along the way to our final proposals this December. We will listencarefully to the feedback we receive. We do intend to set challenging pricecontrols to give the companies incentives to operate more efficiently. This willgenerate savings for customers which will be passed on in successive pricecontrols. "Our initial proposals set out how existing customer service obligations can beimproved and we have also offered incentives to the companies to extend parts ofthe gas network to connect up fuel poor communities." The obligations on the GDNs to offer good customer service will be strengthened.For example, the existing targets for handling calls about gas leaks andattending them will be specified in licence conditions. This will enable Ofgemto take more appropriate enforcement action against GDNs in the event of afailure to meet the specified performance level. Other examples include reducingthe time allowed to complete reinstatement after a GDN has finished work on aconnection or repaired a pipe from ten days to five days. Extending the gas network can in some circumstances help to alleviate fuelpoverty and have environmental benefits. Ofgem is recommending changes whichwill reduce upfront connection charges to these communities. In addition, wepropose to implement an incentive scheme that will encourage GDNs to help thesecommunities, for example, by coordinating various sources of government fundingfor central heating systems or insulation. - ends - Notes to editors *Gas distribution charges make up around one fifth of a domestic customer'sbill. Ofgem estimates that the effect of the initial proposals will be anincrease in a domestic customer's bill of less than £1 per year in real terms,(i.e. excluding for example changes due to inflation). 1. In June 2005 National Grid Gas completed the sale of four of its eight gasdistribution networks. The Scotland and south east of England networks were soldto Scotia Gas Networks. The Wales and south west network was sold to Wales &West Utilities and the network in the north east was sold to Northern GasNetworks. 2. The table below shows Ofgem's initial proposals for expenditure allowances(prior to the application of the information quality incentive*) and how theycompare to companies' forecasts: Average annual 2007-08 Average annual GDN Average annual Difference actual 2002 to Allowances forecast over Ofgem allowance GDN forecast£m in 2005-06 2007 2008-13 over 2008-13 to allowanceprices Operating 662.4 652.5 722.1 598.0 -17%expenditureCapital 260.5 358.4 393.1 328.2 -17%expenditureReplacement 493.9 588.0 797.5 654.0 -18%expenditure \* The information quality incentive is designed to address concerns thatcompanies have an incentive to bid for higher capital expenditure allowancesthan they actually require. Companies that put forward sensible projections willreceive bigger rewards for outperforming these allowances in future than thosewho have bid for higher allowances. 3. All gas distribution companies carry out a mains replacement programme whichhas been approved by the Health and Safety Executive to address safety concerns.This programme was introduced in 2002 and means all iron gas mains within 30metres of homes and premises must be replaced over a 30-year period. The GDNsface rising costs for delivering this programme due to several factors includingincreasing labour costs. 4 Ofgem sets the allowed rate of return the companies can recoup when theyinvest in their networks - this is the cost of capital. The detailed analysis oncost of capital is yet to be done and the decision on the final figure will notbe taken until final proposals. For the purposes of initial proposals Ofgem hasused a weighted average cost of capital (pre tax debt, post tax equity) of 4.84percent. 5. Ofgem is the Office of the Gas and Electricity Markets, which supports theGas and Electricity Markets Authority, the regulator of the gas and electricityindustries in Great Britain. The Authority's functions are set out mainly in theGas Act 1986, the Electricity Act 1989, the Competition Act 1998 and theUtilities Act 2000. In this note, the functions of the Authority under all therelevant Acts are, for simplicity, described as the functions of Ofgem. For further press information contact: Chris Lock: 020 7901 7225Mark Wiltsher: 020 7901 7006Julia Collings: 020 7901 7217Out of hours contact: 07774 728971 or 07766 511470 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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