Select Committee on Public Accounts Minutes of Evidence


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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