Conclusions and recommendations
1. Ofgem approved the sales on the basis that
they did not result in a net detriment to consumers, rather than
because they would bring benefits to consumers. Ofgem
should take a less restrictive view and focus on getting the best
deal for consumers, which is its primary statutory duty.
2. As part of its sales approval process,
Ofgem introduced unnecessary additional changes to the way gas
networks operate. Ofgem subsequently decided
to defer these reforms, known as gas exit reforms, until at least
September 2007. On future projects, it should be confident that
its proposed tasks are central to the fulfilment of its objectives
and, therefore, that the regulatory burden imposed on the industry
is justified.
3. The project team launched 13 consultations
and 387 documents within 16 months, thus placing a heavy consultation
burden on the gas industry which struggled to respond. Ofgem
should explain the full consultation burden at the outset of projects
and minimise burdens by co-ordinating the methods and timings
of consultation—for example, by using workshops to engage
more directly with stakeholders and by grouping separate documents
from across the organisation.
4. Ofgem did not evaluate fully the range
of sale outcomes. Ofgem evaluated the
costs and benefits of the proposed sales, assessing the impact
of the number of networks sold and variations to the timing of
cost savings. But it could have improved its analysis by modelling
whether each of its assumptions was realistic in the light of
experience. Ofgem's cost-benefit analysis needs to be consistent
with the Treasury Green Book and, in particular, the likelihood
of different scenarios needs to be assessed.
5. Before the sales, Ofgem had no independent
source of information to benchmark whether National Grid was efficient.
It was, therefore, difficult to regulate
the company effectively and set stretching targets to reduce costs.
6. There is the potential for cost savings
of £830 million across the gas networks between 2008
and 2023. Ofgem calculated that there
was the potential to operate the networks more efficiently regardless
of whether the sales proceeded. It should make clear to the owners
of gas networks that it intends to set a challenging price control
in 2008, using efficiency savings of at least 3% per annum as
a starting assumption.
7. Ofgem's ability to bring forward the delivery
of benefits is dependent upon the quality of information it collects
on the performance of the network owners.
Having several comparators is only beneficial if Ofgem is able
to establish clear, reliable and comparable data. It should target
its approach to information gathering, focusing on cost and performance.
8. Ofgem expects that 80% of the consumer
benefits arising from independent ownership will come after 2013.
With rising energy prices, consumers need
to see the benefits of the sales well before then. Ofgem therefore
needs to establish coherent and reliable datasets as a priority,
if possible using comparative information for the 2008 price control.
9. Ofgem delayed the next price control until
2008, thereby deferring the possibility of bringing early benefits
to consumers. It should consider more
carefully the costs and benefits of extending the future duration
of price controls by quantifying the consequences of such decisions
in terms of the likely impact on prices.
10. Past capital expenditure on the networks
has led to problems with reliability, and 39% of the gas network
needs to be replaced Ductile iron pipes
introduced in the 1970s are vulnerable to corrosion and hence
leakage. Ofgem should ensure that future capital expenditure is
incurred by the network owners on the basis of costs over the
whole life of the relevant asset, and not just the up-front capital
cost.
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