THE TRADE AND INDUSTRY COMMITTEE'S
NETWORK RESILIENCE REPORT
64. In March 2004 we published a Report into the
Resilience of the National Electricity Network.[68]
Our reason for inquiring into the state of the electricity network
was the series of power cuts, in the UK and abroad, that took
place in the summer and early autumn of 2003. We noted that, although
the electricity network in the UK performed well compared to those
in other OECD countries, the majority of the network had been
built in two main bursts of activity in the 1960s and mid 70s,
and most of the equipment had a life expectancy of 40 years. Therefore,
simply in order to maintain current performance, the network companies
would have to replace much of the network over the next few years.
We expressed concerns that "there is currently insufficient
investment in the network to replace in a planned and orderly
way equipment which is reaching the end of its life."[69]
Moreover, we noted that the electricity and gas industry regulator,
Ofgem, had consistently applied pressure on the network companies
to minimise operational expenditure, which, we feared, might lead
the companies to cut corners in the maintenance of equipment.
We were particularly anxious over the state of the (regional)
distribution networks, which were built to a lower operating standard
and experienced a higher number of faults than the (national)
transmission network. We concluded: "we believe that the
age of sections of the infrastructure means that, without significantly
faster replacement rates and more maintenance, power cuts are
likely to increase in frequency."[70]
65. Because the network operators, both for the transmission
and for the 14 distribution networks, form national/local monopolies,
Ofgem has a role in regulating the charges that they can levy.
Ofgem sets separate distribution and transmission network revenue
controls for five year periods. These controls affect not only
the companies' operational expenditure but also capital investment
because they put a cap on the amount the companies can pay as
interest and other charges when borrowing capital. We noted in
our Report that the latest revenue control negotiations had just
started, and said that we would keep a watching brief on these
to ensure that Ofgem "set revenue controls in order to meet
the reasonable longer-term programmes and forecasts of demand
submitted by the network companies, rather than (as some have
suggested that it does) focussing on what is needed for the next
five year period."[71]
We further suggested that "a rise of ten percent in distribution
charges to support network security[72]
would not be an unreasonable amount to pay, and that, in
certain particularly vulnerable areas, the Regulator should be
willing to consider more investment to enhance security."[73]
OFGEM'S PROPOSED REVENUE CONTROLS
FOR THE DISTRIBUTION NETWORK OPERATORS
66. Ofgem's Initial Proposals for revenue controls
for the DNOs were published in June,[74]
following an already lengthy consultation process.[75]
Press reports indicated that the DNOs found these proposals unacceptable,
arguing that Ofgem was allowing them only a fraction of the capital
expenditure that they needed to maintain the network, and was
putting so much pressure on operational expenditure that efficiency
savings alone would not suffice, with the result that there would
have to be real cuts in service. Ofgem published revised proposals
towards the end of September with a request for responses by 25
October.[76] Its final
proposals were due to be published on 29 November. In the summary
to its September proposals, Ofgem said: "In general, unless
otherwise noted, the policy decisions set out in this paper are
unlikely to change unless compelling new evidence or arguments
are produced."
67. From initial reports, it appeared that the DNOs
in general considered the September proposals an improvement on
the June ones.[77] However,
the September proposals still fell short of what the DNOs had
told us would be necessary: for example, Ofgem proposed that the
companies should be able to increase their capital expenditure
by 46 percent over the next five years, whilst the DNOs' evidence
to us on network resilience had been that investment would need
to be at twice the current rate for the next 20 years just to
maintain the existing network—in other words, not taking
into account the cost of the renewable energy programme or network
improvement.[78] Also,
the September proposals continued to show wide variations between
companies. Although Ofgem proposed to allow some companies virtually
everything that they had indicated they needed, the allowances
sought by other companies had been significantly reduced by the
regulator.
68 Trade and Industry Committee, The resilience
of the national electricity network, Third Report of Session
2003-04, HC 69-I (referred to subsequently as 'Third Report') Back
69
Third Report, Summary Back
70
Ibid., paragraph 88 Back
71
Ibid., paragraph 84 Back
72
Including to accommodate renewable generation Back
73
Third Report, paragraph 88 Back
74
Electricity Distribution Price Control Review: Initial proposals
on www.ofgem.org.uk These are referred to from now on as "the
June proposals". Back
75
The first consultation paper on the review was published in July
2003, with a further paper setting out key policy decisions being
published in March 2004. The process also involved consultation
on a number of specific issues, a workshop and a series of meetings
with each of the companies, plus a consumer survey and two reports
by consultants. Back
76
Electricity Distribution Price Control Review: Update paper
on www.ofgem.org.uk These are referred to from now on as "the
September proposals". Back
77
See, for example, 'Ofgem gives power firms a better deal', The
Independent, 28 September 2004, p37, and 'Electricity companies
can spend £5.7 bn' Daily Telegraph, 28 September 2004,
p33 Back
78
September proposals, Table 4.6; Third Report, paragraph 72 Back
