4th PAC Report 2006-07
Gas distribution networks: Ofgem’s role in their sale, restructuring and future regulation
Edward Leigh MP, Chairman of the Committee of Public Accounts, today said:
“Approving the sales of four of the regional gas distribution networks on the basis that consumers would be no worse off was far too cautious a stance. As gas prices go through the roof, Ofgem must do everything it can to get the best possible deal for gas consumers. Certainly, they cannot wait until after 2013 to enjoy most of the benefits of the sales of the networks, as Ofgem currently expects.
“Ofgem must be bold in setting price controls at the next review in 2008, negotiating on the assumption that efficiency savings of at least three per cent per annum can be achieved. And the regulator must make sure that the regulations it imposes on the gas industry genuinely encourage innovative and efficient behaviour and that lower gas distribution costs really do result in lower gas bills.”
Mr Leigh was speaking as the Committee published its 4th Report of this Session which, on the basis of evidence from Ofgem, examined the regulator’s approval of the sales of regional networks for distributing gas; the approach to setting prices for the gas networks; and its role in overseeing the infrastructure of the gas networks.
In June 2005 National Grid sold four of its eight regional networks for distributing gas for £5.8 billion. The Office of Gas and Electricity Markets (Ofgem) is the regulator of the gas and electricity markets in Great Britain and was responsible for approving the sales. Its primary statutory duty is to protect the interests of consumers. It concluded that the potential benefits for customers from the sales were likely to be £325 million over the period 2008 to 2023. This sum equates to approximately £1 per customer per year, a small saving when compared to average domestic gas bills of £550 per annum. The challenge facing Ofgem is to regulate the market robustly to secure early benefits for consumers.
Ofgem’s estimate of potential customer benefits represents a modest target. The savings of £325 million are the estimated effect of Ofgem’s new ability to compare the costs and performance of four independently owned companies. But, in addition to these savings, it estimated there was potential for further cost savings of £830 million, regardless of whether the sales took place.
Ofgem predicted that 80% of the £325 million would come after 2013 but is not confident that the benefits will be achieved. It therefore needs to set challenging efficiency targets at the next price review in 2008 to deliver savings as early as possible. Ofgem has begun to collect the information needed to inform its analysis. The availability of historical data and information produced by National Grid for prospective purchasers should strengthen its negotiating position.
Ofgem did what was necessary to enable the sales to proceed. A small project team had to oversee a significant re-structuring of the gas industry whilst working within the constraints of a commercial transaction. But Ofgem also made the project unnecessarily complex and placed a large burden of consultation on the industry.
Notes for Editors
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2. The full text of the Committee’s Conclusions and Recommendations is attached to this press notice.
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