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National Grid Transco's Gas Distribution Networks

The Secretary of State for Trade and Industry (Ms Patricia Hewitt): I am taking the earliest opportunity to inform the House of my decision on 27 January to give regulatory consent to National Grid Transco's (NGT) proposed sale of four distribution networks (DN).

NGT announced in 2003 that it was considering the sale of between one and four of its gas distribution networks. In August 2004, it announced that it had reached provisional agreement, subject to regulatory consent, on the sale of four of its DNs.

The DNs are:

NGT required regulatory consents to proceed with the sale from GEMA (Gas and Electricity Markets Authority, which heads Ofgem, the Office of Gas and Electricity Markets) and myself. In considering whether to give consent, we share the same duties under the Gas Act 1986 (as amended). The central duty is to protect the interests of consumers in relation to gas conveyed through pipes, wherever appropriate by promoting effective competition. The legislation confers no powers for GEMA or the Secretary of State to require that
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consumer benefits should be maximised. GEMA, but not the Secretary of State, has the power to attach conditions to the sale.

Over the last 18 months or so Ofgem has been leading a major exercise within the gas supply industry to design new industry arrangements for managing separate DNs and allocating responsibilities between the players; to identify and manage risks to consumers; and to assess consumer benefits, in order to inform GEMA's decision whether to consent to DN sales. My Department has liaised closely with Ofgem during this exercise.

Ofgem's final impact assessment (IA), published in November 2004, estimates that DN sales would generate a net benefit of £225 million, net present value (NPV) over 18 years (starting from the beginning of the next gas distribution price control in 2008–09) for GB gas consumers connected to the DNs. This includes domestic, commercial and industrial consumers. This is Ofgem's central estimate within a range of £80 million–£500 million. I am informed that, against the experience of comparative regulation in the electricity sector, this reflects a cautious judgement. Ofgem has assessed the benefits of independently owned networks. A greater flow of information about networks will allow Ofgem to compare their performance and thereby to identify the level of costs associated with the most efficient network. Ofgem will then be able to use this information to set more appropriate price controls for each DN.

I have carefully considered the potential impact of DN sales, including the risk of fragmentation on prices and standards of service; on security of supply; and on safety.

Ofgem and NGT have agreed to create an "agency" as a single point of interface between the gas transporters and the shipper/suppliers (wholesale traders) using the gas pipelines. The agency is expected to discharge many of the functions and services which are currently provided by NGT for example, information processing and handling. This would reduce duplication, and hence costs, that would otherwise be faced by shippers.

GEMA has determined the scope of this agency. If changes in the scope are thought necessary by stakeholders, these would be considered by the whole industry and subject to the approval of GEMA. The agency proposals are a key element of the proposed industry framework, and the basis on which the costs to the industry of the DN sales were assessed by Ofgem in its IA.

The main impact on prices would arise from the new opportunity for Ofgem to apply comparative regulation as assessed in their IA. I have already mentioned the savings to consumers from 2008. There are also likely to be one-off costs of £18 million for 2005, substantially less than £1 per consumer and £8 million per annum on-going.

The ability of consumers to change supplier will not be affected. NGT's role in the consumer "switching" process will be placed within the "agency" arrangements. Other standards of service by licensed gas transporters will continue to be regulated by Ofgem.

In the event that NGT do not sell all four of their distribution networks, and there is only one comparator, thereby reducing the opportunity for
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comparative regulation, Ofgem have required NGT to agree a "safety net", by which NGT (not consumers) would take the risk of a net detriment to consumers.

Security of supply would be maintained. There would be clear responsibilities for operating and investing in the National Transmission System (NTS) and DNs. The new industry arrangements would ensure efficient investment and operation at the interface. This includes market-based signals for pipeline investment at the NTS offtake points and in the DN pipelines, and incentives on Transco and DN operators to respond to these signals.

Safety of the public is paramount. The Health and Safety Executive (HSE) are working to ensure that safety will not be jeopardised. The freephone 24-hour national gas emergency service (0800–111–999) operated by Transco will remain unchanged, and will remain seamless to the public who use it. Transco will remain the Network Emergency Co-ordinator for the GB gas network, accountable to the HSE. HSE will ensure that the revisions to Transco's safety case, and the safety cases from the new DN operators, are robust, and that resources are properly prioritised and allocated
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to safety case verification and inspection. The HSE will also continue to approve and monitor replacement programmes for the population of iron gas mains.

Following the work on the proposed sales, I am satisfied that the longer-term potential savings outweigh any short-term costs. On this basis, on 27 January 2005, I granted regulatory consent for NGT to proceed with the proposed sales. GEMA has also granted consent, subject to a number of conditions, under the same duties.

If the sales proceed, Transco would retain responsibility for the operation of the NTS, and would transfer its four retained DNs into other Group companies.

The sales are expected to take effect on 1 June 2005 and new industry structure is expected to take effect 1 May 2005, subject to processes to modify and transfer appropriate licences, and acceptance of the safety cases by the HSE. GEMA's consent to the sale included relevant conditions.

Ofgem, HSE and DTI will work together in the coming months to ensure a smooth transition to the new industry arrangements.