Select Committee on Public Accounts Fourth Report

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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Prepared 11 January 2007