Examination of Witnesses (Questions 80-99)
OFFICE OF
GAS AND
ELECTRICITY MARKETS
MONDAY 8 MAY
2006
Q80 Mr Mitchell: It is difficult
to see what those savings would be unless they came from over
soft regulation, but at the end of the day, when National Grid
got the £5.8 billion, what benefit is that to the consumer?
Mr Buchanan: The ruling that we
had to take on this was whether there was a no net detriment from
the transfer of assets, which is how we approached this deal.
We have identified a benefit for consumers, so that is really
how we approach this particular situation.
Q81 Mr Mitchell: What happened to
the money? If it was not distributed to shareholders, where has
it gone?
Mr Buchanan: Indeed there has
been a special dividend at National Grid, but if you go back all
the way to 1990, you may not like it, you may like it, but the
companies in the utility sector have regularly paid large dividends,
special dividends and share buybacks. That may not be something
that you particularly like, but it is something that they have
done.
Q82 Mr Mitchell: You are certainly
right there.
Mr Gray: What you have to remember
is that that money came from the buyers. What has happened is
that money has come in from buyers, gone to seller and gone out
to their shareholders. It has not come from consumers.
Q83 Mr Mitchell: Yes, but you are
looking at disbenefits or benefits to the consumer. All this money
just flies over the consumer's head: it is not going into his
or her pocket.
Mr Gray: The fact that a premium
was paid gives us quite important evidence about the sort of cost
savings that we can go after in future reviews and if there had
not been a premium you would have known there was nothing to go
for.
Q84 Mr Mitchell: The National Audit
Office has looked at the alternative, which would be not to flog
them. It seems to indicate, as I read it, that instead of the
largely hypothetical benefits of having more information to make
more comparisons, which you say is the benefit from the sale,
there will be more real and direct benefits from keeping it operated
by the National Grid, for instance £830 million benefit from
retention, and deliverable much earlier, deliverable in 2008 as
opposed to 2013. What do you have to say to that?
Mr Buchanan: The answer is much
as I gave earlier, which is that the figures that the NAO have
used on that 3% appear to be reasonable figures to us.
Q85 Mr Mitchell: But the savings
would start earlier.
Mr Buchanan: This comes back to
your question as to whether you do need to sell them to get the
benefits. There is an argument, there has to be, that if you have
very, very good regulation and very, very good information and
the regional companies of a very large parent company compete
very aggressively with each other, then possibly you can achieve
the kind of outcome that we think you can achieve better through
having comparative regulation with independent management teams
going at each other. I do accept that has to be an argument.
Q86 Mr Mitchell: That is provided
you have the wit, the staff and the ability to regulate and to
know what is going on and you have not demonstrated so far that
you have, in the particular way this was done, the benefits of
more information.
Mr Buchanan: The only thing I
should say is that I would be disappointed if that were the conclusion
from the NAO Report because that was not what we had taken from
it. I welcome your view.
Q87 Mr Mitchell: You are offering
hope rather than dosh. Your costs were about £2.5 million
and the Report says, paragraph 3.10, in a statement I cannot quite
understand "... added to estimates of additional regulatory
costs and offtake costs... to calculate that net present value
of costs resulting from disposals as £100 million".
In other words, you have a cost, there are other costs arising,
why for a start should the Grid not pay you your £2.5 million
instead of you having to run up these costs?
Mr Buchanan: It is a very good
question and we gave that consideration, but there is a great
danger that you might be seen to be lacking in independence if
a company who wanted a corporate deal were willing to pay your
costs. That would be a dangerous thing to do.
Mr Gray: We should have been very
uncomfortable about coming to you to explain why we had allowed
the National Grid to pay our costs in support of their deal. We
did think about that quite hard.
Q88 Annette Brooke: Just referring
perhaps to the future anticipated benefits, there is a figure
on average of a pound per year per consumer which sounds remarkably
low in relation to my gas bill. We have this overall figure of
£325 million, but what were your calculations of the potential
benefits in percentage terms to the average consumer?
Mr Buchanan: It says in the Report,
the distribution network businesses only represent a fifth of
your gas bill and therefore represent about a tenth of your overall
energy bill. When you look at the one pound, you might ask whether
that is all you can get, but when you look at some other figures
in the Report, apart from the £325 million, you will see
47% savings by 2023 discussed by the NAO. The other issue and
one that I have found interesting since being in this job is that
when you look at the figures broken down per consumer, it always
looks quite different. If I may give you an example, last year
we approved an increase in capital expenditure in the electricity
networks of £5.7 billion, which is six pence per month on
the bill. I always get a little bit nervous when you do bottle
it down to the six pence or the one pound. They are important,
very important, but when you look at the bigger savings and when
you look at that figure of 47%, then it is worth going for.
Mr Gray: The point is that the
benefits we have achieved for customers over the last 15 or 20
years from regulation have been the sum of a whole series of relatively
small incremental amounts. However, the net effect is that charges
have fallen in electricity distribution by about 50% in real terms.
The proportion of the gas and electricity bill that is distribution
is about 20%, it is about £80. If we had not achieved that
saving, it would have been double that and that is made up of
a whole series of individual actions that the regulators have
taken in the various reviews. If you look at any one of them,
you can always do the "But it is only a pound per customer,
is it worth it?", but when you do a number of them they add
up.
Q89 Annette Brooke: So why did you
not take this action earlier?
Mr Buchanan: The answer to that,
again it is tucked away on page 37, is that this is a transaction
of National Grid and therefore it may well be that the current
management team felt that now was the right time to set this transaction
in play.
Q90 Annette Brooke: I suppose I am
actually coming back to previous questions really. What exactly
is your role in terms of the fact that you could have looked at
the individual networks, as I understood your previous answer,
and the comparators, but you did not? You are saying it is National
Grid's responsibility as to whether they sell or not. Do you not
have a responsibility—I am asking out of ignorance here—to
check up on National Grid to make sure they are pushing the costs
down low enough?
Mr Buchanan: If I go back to 2002,
the price review then was done with the national company, Transco,
which basically has the big national pipelines and the regional
companies and that was done as a job-lot. The following year the
price review was then split into the eight regions, so we were
working towards a price review for those eight regions before
we had done the one-year rollover, which would have occurred in
2007 but will now occur in 2008. That would have been the opportunity
for us to look at the individual performance of those eight regions.
To go back to the former question, you can put forward a case,
it is a reasonable argument to make, that with excellent regulation,
excellent information and excellent management teams in each of
the eight competing aggressively with each other, which is an
interesting concept but let us assume that they do, then possibly
you could get to that position. Our experience and the evidence
that we gained in this Report suggest to us that going through
the independent ownership and structure route will give the consumer
a greater chance of getting those benefits, because we will have
access to comparative information and therefore I am hoping that
we can do that.
Q91 Annette Brooke: But you reached
that conclusion quite late in the day. Is that not true? You reached
that conclusion quite late in the day in terms of taking that
route. Given that your costs were quite high, is there any question
of you passing any of those costs of this whole operation back
to National Grid before they give their special dividends out
to their shareholders?
Mr Buchanan: We did not feel that
we could be seen to align our costs with them paying some of the
payment because of question marks over our independence on the
deal.
Q92 Annette Brooke: Right. That is
quite a difficult balance.
Mr Buchanan: It was and we did
discuss it at the board and with the audit committee.
Mr Gray: In a way it is the same
question: why did they not pay our costs up front? If they knew
we were going to pay them later, there is the same potential conflict
of them paying for us to do something where we are actually meant
to be making a judgment on whether or not they are doing it right.
Q93 Annette Brooke: This is clearly
good for the National Grid. Is that sort of balanced judgment
on balance good for consumers?
Mr Gray: There are two ways of
answering that. One is that in the year in question we managed
to accommodate that £2.5 million within our overall budget
by phasing work and making sure we concentrated on priorities.
We have to do that every year and we try to underspend our budget
every year, if we can. So there was no additional cost through
us overspending our budget.
Q94 Annette Brooke: But there are
transaction costs.
Mr Gray: More importantly in the
long run though, the judgment we had to make was whether we thought
the benefits we could pass through to consumers would exceed the
costs imposed by this deal and the answer was yes. On that basis
the correct thing to do for consumers was to allow it to go ahead.
Q95 Mr Davidson: I want to look at
the question of safety. Paragraph 6.3 indicates that there had
been no major unplanned interruptions. Is that still the case?
Mr Buchanan: As far as I am aware,
yes. We have just reached year-end and we shall get that data
in shortly.
Q96 Mr Davidson: How do minor interruptions
compare?
Mr Buchanan: To the best of my
knowledge, and I am still waiting for data, the team has not flagged
up to me that there has been a substantial issue there in the
past year.
Q97 Mr Davidson: How is the figure
of 23,000 reported leaks a year now comparing with then?
Mr Gray: We do not have any data
for the period post the sales, because we have just ended the
first year, which was the one in which ownership changed.
Q98 Mr Davidson: What would you expect?
Mr Gray: I should not want to
express a view for this year. I should expect it to improve in
future. One of the others things we can achieve with comparative
regulation is better customer service. As well as the cost savings
in electricity distribution, where we have been doing this for
some time, we have achieved quite substantial improvements in
customer service.
Q99 Mr Davidson: Okay, I understand
that. So we can expect, if we come back to this in the future,
to see a steadily declining number of gas leaks being reported
to us. Is that what you are saying to me?
Mr Gray: No, I should not want
you to rely on it being steady, because the trend of these things
is not normally steady. One of the things we shall be looking
at is how to incentivise them to improve that performance.
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