GDN Price Controls 2008-2013

RNS Number:9621I
OFGEM
03 December 2007

R/50

NOT FOR PUBLICATION BEFORE 7AM ON MONDAY DECEMBER 3 2007

FINAL PROPOSALS FOR FIVE-YEAR GAS DISTRIBUTION PRICE CONTROLS ARE PUBLISHED

* More than #5 billion investment in the networks, #3.6 billion of which
will pay for replacing ageing gas mains

* Gas distribution networks (GDNs) must operate more efficiently in an
environment of increasing cost pressures

* New incentives for GDNs to cut greenhouse gas emissions and to
encourage sustainable development

Sir John Mogg, Chairman of Ofgem's governing authority, has today (Monday)
unveiled final proposals for new price controls setting out maximum revenue
allowances for the gas distribution networks (GDNs) for the period 2008-13.

The price controls will allow the GDNs to spend on average over #1 billion a
year on investment in the networks. This is 36 per cent more than they spent in
the previous price control. The main area of investment will be the mains
replacement programme, which is required by the Health & Safety Executive and is
targeted at the replacement of ageing iron mains to create a safer network for
all customers.

The GDNs currently face pressures in a number of areas where costs are
increasing faster than the rate of inflation. But Ofgem has demanded that the
GDNs step up their productivity to cut the resulting level of operating
expenditure by 2.5 per cent a year.

Ofgem Chief Executive, Alistair Buchanan, said: "Our proposals are a fair deal
for the GDNs and for customers, who will benefit from these investment
increases. We have for the first time been able to reduce the GDNs' expenditure
forecasts by comparing the performance of separately owned GDNs.

"This has allowed us to get a better deal for customers by challenging the
companies to deliver investment and operate the networks more efficiently. At
the next review we will have five more years of evidence of how the GDNs can
improve efficiency and would expect to see even more significant benefits for
customers at that stage. We have authorised #80 million for training and
apprentices so the GDNs can maintain a high level of skilled staff to carry out
their operations."

Ofgem has put forward a package of incentives for sustainable development of the
networks. Changes will be made to cut the upfront charges that customers in fuel
poor communities face if they want connections to the networks. Encouraging
network extensions can help to alleviate fuel poverty and bring environmental
benefits. For example, replacing fuel oil with mains gas for heating cuts
household emissions.

The GDNs will now have a much stronger incentive to reduce the impact the
networks have on the environment as they will be exposed to the Government's
shadow price of carbon. This puts a monetary value on the decrease or increase
in emissions from the networks, such as methane - a powerful greenhouse gas.

The GDNs will also have incentives to raise awareness of the dangers of carbon
monoxide poisoning and gas safety. The companies can invest #60 million on
research and innovation targeted at projects which promote sustainability.
Similar incentives are in place for energy transmission companies between 2007
and 2012, and for the electricity distribution companies.

Under Ofgem's proposals household gas bills will increase by approximately #2 a
year in real terms. The GDNs have until 7 January to respond to the final
proposals. If accepted by the companies the finalised controls will take effect
from 1 April 2008 and run to 31 March 2013.

All figures are in 2005-2006 prices.

Notes to Editors:

1. In June 2005 National Grid Gas completed the sale of four of its eight GDNs.
The Scotland and South of England networks were sold to Scotia Gas Networks.
The Wales and West network was sold to Wales & West Utilities and the North of
England network was sold to Northern Gas Networks.

The table below shows Ofgem's final proposals for expenditure allowances and how
they compare to companies' forecasts for spending between 2008 and 2013,
spending under the previous five-year price control and allowances for the
one-year price control (2007-2008). The proposals reflect Ofgem's assessment of
each GDN's actual spending in 2006-2007.

2002-07 2007-08 Average annual amounts 2008-13
#m 2005-06 prices Average actual One year control GDN forecast Final proposals Difference between GDN
spending allowances forecast and final
proposals
Operating
expenditure 656.5 652.5 723.6 663.8 -8%
Capital
expenditure 260.7 358.4 396.2 345.2 -13%
Replacement
expenditure 491.9 588.0 787.5 722.0 -8%

The figures in the table take into account the information quality incentive
which discourages the companies from bidding for higher capital expenditure
allowances than they actually require. Under the incentive companies that put
forward sensible projections will receive bigger rewards for outperforming
the allowances than those who have bid for higher allowances

2. To address safety concerns all gas distribution companies are required to
carry out a mains replacement programme which has been approved by the Health
and Safety Executive. This programme, introduced in 2002, requires that all
iron gas mains within 30 metres of homes and premises must be replaced over a
30-year period. The GDNs face rising costs for delivering this programme due
to several factors including increasing labour costs.

3. Ofgem sets the allowed rate of return the companies can recoup when they
invest in their networks - this is the cost of capital. Ofgem's final proposals
are for a cost of capital of 4.94 per cent. This is a weighted average cost of
capital (with a pre-tax debt and a post-tax equity component). The cost of
capital for the GDNs is less than the 5.05 per cent for the 2007-2012 energy
transmission price control and the 5.55 per cent for the 2005-2010 electricity
distribution price control. The main driver for this reduction is the continuing
evidence of relatively low interest rates.

4. Through the price controls Ofgem has strengthened the obligations on the GDNs
to offer good customer service. For example, the existing targets for handling
calls about gas leaks and attending them will be specified in licence
conditions. This will enable Ofgem to take more appropriate enforcement action
against GDNs if they do not perform as required. Other examples include a
reduction from ten days to five days of the time allowed to complete
reinstatement after a GDN has finished work on a connection or repaired a pipe.

5. Ofgem is the Office of the Gas and Electricity Markets, which supports the
Gas and Electricity Markets Authority, the regulator of the gas and electricity
industries in Great Britain.

The Authority's functions are set out mainly in the Gas Act 1986, the
Electricity Act 1989, the Competition Act 1998 and the Utilities Act 2000.
In this note, the functions of the Authority under all the relevant Acts are,
for simplicity, described as the functions of Ofgem.

For further press information contact:

Chris Lock: 020 7901 7225
Mark Wiltsher: 020 7901 7006
Rebecca Hill: 0207 901 7158
Out of hours contact: 07766 511470 or 07774 728971

This information is provided by RNS
The company news service from the London Stock Exchange
END

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