Against a background of rising gas prices, Sir John Bourn, head of the National Audit Office, reported today on major developments in the gas industry that have the potential to reduce gas bills in the longer term. There is uncertainty, however, as to whether consumers will see the full extent of the potential benefits.
In June 2005, National Grid sold four of its eight gas distribution networks to three companies for £5.8 billion. The sales, which required regulatory approval, resulted in a major restructuring of the industry’s commercial and operational systems. The Office of Gas and Electricity Markets (Ofgem) was successful in completing the regulatory aspects of the sales.
Ofgem’s best estimate of the impact of the sales was that there could be benefits of £325 million for consumers over the 15 year period 2008 to 2023. The sales have led to costs for the industry of about £100 million. By quantifying Ofgem’s assumptions on the potential for efficiency gains in the sector regardless of whether the sales took place, the National Audit Office calculated that the total potential industry savings could be £1.2 billion.
A lot depends on Ofgem being able to set tough price controls on the distribution companies in 2008, 2013 and 2018. Ofgem is determined that the potential benefits for consumers are realised. It has already started to consult on the next price control and to put in place the information systems that will enable it to compare the efficiency of the distribution companies.
This was a challenging project for Ofgem. In meeting its commitments, Ofgem displayed a sound understanding of the complexities of the sales and the project team showed drive and determination to ensure that necessary regulatory tasks were completed before the networks were sold. The team was under constant pressure and, although there were insufficient staff with some of the specific expertise required, Ofgem was able to employ consultants to fill this gap.
The difficulties in reconciling the regulatory aspects of the sales with National Grid’s commercial timetable meant that there was uncertainty within the gas industry over the project timetable. The industry also faced a large burden of consultation. Many gas companies were concerned that Ofgem added complexity and costs by unnecessarily including in the sales process major changes to the way capacity in the National Transmission System is allocated.
In the report the NAO make a number of recommendations to help Ofgem with the management of projects involving sales and mergers, including sharing expertise between regulators. There are also recommendations to help Ofgem to continue to protect the consumer interest in the future.