11. Ofgem's project plan identified four key tasks
that needed to be resolved before it could approve the sales,
including the introduction of new commercial and operational arrangements
to support the multi-ownership of the networks.
These tasks were successfully completed. But Ofgem made the sale
process more complex than necessary. It initially regarded reform
of the arrangements for allocating gas capacity on the transmission
system as a pre-requisite for the sale but, in January 2005, decided
to defer implementation until 2007.
12. The complexity of the issues led to a heavy burden
of consultation for the industry. Ofgem issued 13 consultations
in a 16 month period, including four in two months in the summer
of 2004. Companies acknowledged the efforts made by Ofgem to consult,
but were stretched to respond in the timescales allowed.
13. Nevertheless, Ofgem's work was welcomed by most
participants in the industry, who felt it had a good grasp of
operational issues. But its planning could have been improved
in two ways. First, the project timetable could have been made
clearer to the industry. Second, it did not identify all the relevant
tasks at the outset. This meant that some work, such as the licence
changes, could have been started earlier and the need to grant
exemptions from the Gas Act was overlooked. There were also unexpected
additions for the sale participants. For example, a letter of
comfort was requested in the week before sale completion.
Analysis of consumer benefits
14. Ofgem analysed whether the sales would benefit
consumers, in order to inform its decision to approve the sales.
It saw the main benefit as coming from its ability to compare
the efficiency of several similar companies. It therefore estimated
efficiency gains that would arise from having such comparators.
15. These estimates were based on a cost-benefit
analysis which, in most respects, complied with Treasury's Green
Book. Ofgem conducted sensitivity analysis to evaluate the effect
of different numbers of comparators and the timing of benefits.
It produced a range of results under different assumptions, including
a potential loss to consumers of £63 million, but it
did not consider the likelihood of each result. So it was unable
to estimate whether the loss of £63 million was highly unlikely
16. The price paid by the purchasers represented
a 14% premium on the estimated regulatory asset value at the time
of the sale. Purchasers can be expected to pay a premium in acquisitions
which, in this case, was in line with other disposals in the regulated
utility sectors in the UK. Ofgem did not believe that the price
paid for the assets or the sale premiums raised any regulatory
implications. Its decision to approve the sales was based solely
on its assessment of the impact of the sales on consumers, not
on the purchasers of National Grid as seller.
2 C&AG's Report, paras 1.1-1.2 Back
C&AG's Report, para 1.3 Back
C&AG's Report, Figure 5 Back
Q 88 Back
Qq 1-2, 74 Back
C&AG's Report, para 13 Back
C&AG's Report, paras 3-4 Back
C&AG's Report, paras 13, 2.1 Back
Qq 24-25, 77 Back
Q 77, C&AG's Report, para 2.7 Back
Q 23 Back
Q 24; Ofgem Annual Accounts 2005-06 Back
C&AG's Report, para 2.3 Back
Qq 3, 77 Back
Q 3; C&AG's Report, para 2.11 Back
C&AG's Report, para 2.13 Back
Qq 30-47 Back
Qq 78-80 Back