Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 680-685)


  680. You are not looking for a change in your statutory, if they are indeed statutory, requirements for a one in 20 peak winter day or the one in 50 severe winter weather?
  (Mr Bolt) That remains as part of the obligations which we are required to meet. What we are saying is that that is not enough. We have to add other things on top of that.

  681. You are not proposing to change that. You are proposing to have output requirements agreed between yourselves, Ofgem and presumably suppliers and other stakeholders for the process, but in a form which is able to be changed on an annual basis.
  (Mr Bolt) Yes.

  682. What would be the key time frame for you? Is it the annual review, is it the ten year plan or is it in fact really the three-year rolling review because that is the sort of time frame on which the investment primarily has to be determined?
  (Mr Bolt) In very broad terms, the lead time for additional capacity in the national transmission system is about three years. There are some things we can do more quickly, but investment in pipe or new compressors with planning permission issues and things like that is a three-year process. What we do as required by our licence is carry out an annual review of that plan on a rolling ten-year basis. We are proposing to enhance that in two ways: one is to put into the consultation process more information such as costed options as to how we could develop the network, as information to shippers and producers. The other part is having some longer-term auctions as a way of providing additional information to us. All of that will feed into an improved—we hope—ten-year investment plan which we shall publish each year.

  683. Do I gather that you are looking effectively for an additional investment activity which is more or less double what would otherwise be required to meet the statutory obligations, rather like £600 million referred to here to meet the statutory requirement and something like £600 million on top of that to meet the output requirements you could foresee?
  (Mr Bolt) Ofgem has already said as part of the price review settlement which was announced a month or so ago that they have accepted the case for additional investments to provide some flexibility over and above the one in 20 winter peak, but they disallowed additional investment of about £200 million which we had suggested to provide extra resilience in the network. As we go forward, looking at the need to accommodate additional imports in the network, we can see the potential for the current £1 billion programme over the next five years being significantly enhanced. What we want to be clear about is whether that will be allowed in future prices, because if it is needed to meet consumer requirements, we are ready to get on with that investment, but we need to make sure that the regulatory framework is going to reflect that in places over the life of the investment which will be 20, 30, 40 years.

  684. Does that mean overall a shift away from RPI-X or does it just mean for the specific investment needs associated with meeting those additional output requirements something like an RPI-X+Y, a further addition over and above what would otherwise be a continuing pressure for cost saving?
  (Mr Bolt) It is a development of RPI-X rather than a replacement of it.
  (Mr Wybrew) RPI-X has done an excellent job in driving operational efficiency, in our case over 15 years. It has done a pretty good job of ensuring the utilisation of existing assets over 15 years. The jury is out on whether it really will serve the best purpose in looking ahead at a new cycle of investment, which is clearly required as the industry looks to imports and a changing set of supply patterns. That is where the debate involving Ofgem and ourselves and the rest of the industry sits, around that key question.

Mrs Lawrence

  685. You mentioned the regulatory constraints on development of the infrastructure from your perspective, but I am interested in your view in relation to a situation in my constituency. In your opinion, is it holding back potential for companies to expand significantly? I am thinking particularly of my area of West Wales where we have major multinational companies who have been frustrated by this. I just wondered what you might have to say on that issue.
  (Mr Wybrew) There is no doubt that one of the problems—there have been many advantages but one of the disadvantages—of the liberalised market, is that it has stalled when it has come to finding a consistent basis on which to extend the network. The liberalised market does not tolerate cross-subsidy as a basic principle and it does not allow suppliers to capture consumers for a prolonged period in order to recover their investment to get the gas to them. We have done quite a lot of pioneering work and we can expect it to bear fruit, not only in looking at the economic benefits of extending the network but also costing on a consistent basis, and there are well established techniques now for doing this, the social and the environmental benefits. A working party has been going on on this very subject. The need to press on in this area is referred to in the Government's fuel poverty strategy. We are hopeful, not through an extrapolation of the liberalised market, but by finding other mechanisms, to confront this particular problem. We are hopeful that we can first of all establish on a consistent basis the case for extending the network and then to find the mechanisms for implementing it.

  Chairman: Thank you very much, that has been very helpful. If you feel there is anything you would like to send to us in addition to what you have given us, then please do so. Thank you very much for your evidence.

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