Memorandum submitted by National Grid
INTRODUCTION
1. National Grid plc owns and operates the
high voltage electricity transmission system in England and Wales,
and as Great Britain System Operator (GBSO), we operate the Scottish
high voltage transmission system. National Grid also owns and
operates the gas transmission system throughout Great Britain
and through our low pressure gas distribution business; we distribute
gas in the heart of England, to approximately 11 million offices,
schools and homes. In addition National Grid owns and operates
significant electricity and gas assets in the US, operating in
the states of New England and the state of New York.
2. In the UK, our primary duties under the
Electricity and Gas Acts are to develop and maintain efficient
networks and also facilitate competition in the generation and
supply of electricity and the supply of gas. Our activities include
the residual balancing in close to real time of the electricity
and gas markets.
3. Through our subsidiaries, National Grid
also owns and maintains around 20 million domestic and commercial
meters, the electricity Interconnector between England and France,
and a Liquid Natural Gas importation terminal at the Isle of Grain.
4. National Grid is pleased to have the
opportunity to contribute to this inquiry. Our submission will
focus on:
— the regulatory checks and balances
in place around the scale of transportation charges;
— how National Grid transportation
charges feed through into end users energy bills;
— demonstrating the efficiency
savings achieved through the cost saving measures;
— our role in promoting a competitive
market environment through effective and timely provision of information;
and
— the role of National Grid's
Affordable Warmth Programme in tackling fuel poverty.
HOW NATIONAL
GRID DETERMINES
ITS CHARGES
5. National Grid's charges that feed through
to end users' bills are designed to be non-discriminatory and
cost reflective, and are set by applying methodologies regulated
by Ofgem. The total revenue National Grid collects through its
charges is restricted by the allowed revenue and tariff caps set
by Ofgem as part of five-year price controls. The transmission
businesses in gas and electricity along with gas distribution
and regulated metering business are all subject to separate price
control reviews. The consultation period for changing the price
control typically lasts for two years. The process involves not
only just licence holders, but also consumer interest groups,
market participants, major energy consumers and any other interested
parties.
6. In electricity transmission, the high
level regulatory framework is set out in our transmission licence.
This includes prices controls and incentives schemes for our Transmission
Owner and Systems Operator functions. Revenues remunerating transmission
assets are regulated through a price control running until 31
March 2012. The transmission licence also details National Grid's
annual system operation incentives to efficiently balance the
system in real time. Annual charges for market participants are
determined by applying a Charging Methodology.[289]
This is published, together with the resulting charges, in a number
of Charging Statements. Changes to the Charging Methodology can
be made following consultation with market participants and must
improve cost reflectivity and promote competition. Any changes
are subject to an Ofgem veto, and Ofgem can conduct a Regulatory
Impact Assessment, if necessary, before making any decision.
7. In gas transmission, National Grid's
regulatory framework is set out in our gas transporter licence.
National Grid is subject to a five year Transmission Owner (TO)
price control for gas transmission activities that currently runs
to 31 March 2012. The TO price control sets a maximum allowed
revenue which covers assets and related expenditure. We are also
subject to a System Operator (SO) price control which covers operating
costs and mechanisms to fund the additional provision of transportation
capacity for new connections to the system. In addition the SO
activity is subject to a number of financial incentive schemes
of varying durations aimed at driving efficiencies in the overall
costs of system operation and market operation.
8. Similar price controls exist for the
four gas distribution networks that National Grid owns. The level
of distribution charges is regulated by Ofgem in respect of each
network. The current price control for the distribution activities
run to 31 March 2013. Along with the other gas distribution network
owners, National Grid establishes the charging methodology that
determines the structure of the distribution charges.
9. Any potential change to the gas transmission
and distribution charging methodology has to be consulted on with
the gas shippers through the Joint Office of Gas Transporters.[290]
All the staff for this office are seconded from the different
gas transporters involved. The role of this office is to provide
an even handed service to all parties to the Network Code and
the wider gas industry by publicly providing information and acting
as a forum for discussing modifications of the commercial regimes.
A report on the consultation highlighting representations made
and any consequential change proposals has to be provided to Ofgem
which has the power to veto any proposed change.
NATIONAL GRID
CHARGES AS
PROPORTION OF
CONSUMERS' END
BILLS
10. National Grid's transmission and distribution
charges are a small component of the end users bills and we have
made considerable steps in reducing the costs these charges seek
to recover.
11. The contribution of gas distribution
charges from National Grid and the four distribution companies
to an average consumer gas bill of approximately £549 pa
make up around £104 (19%). Gas transmission charges levied
by National Grid account for £11 (2%) of that bill. The electricity
transmission charges which recover the costs of the Scottish transmission
companies as well as National Grid Electricity Transmission account
for about £20 (5%) of an average electricity bill costing
approximately £393 pa. The charts below illustrate these
charges as an approximate proportion of current end users gas
and electricity bills.[291]
EFFECTIVE OPERATION
OF OUR
BUSINESSES
12. National Grid is dedicated to delivering
the highest level of safety, reliability and efficiency while
controlling the cost of our operations borne by the customers.
13. National Grid has been subject to the
RPI-X regulation for around 20 years. The Ofgem price control
reviews use this method to incentivise National Grid to achieve
efficiency savings that are in turn passed on to end users through
lower bills. National Grid has also undertaken a programme of
cost reduction measures to deliver best value to gas and electricity
consumers, as well as to shareholders. The chart below gives an
example of how we have performed in this area. In electricity
transmission, National Grid has delivered estimated cost reductions
of around £350 million in the period between 1991 and 2006.
COST REDUCTIONS IN ELECTRICITY TRANSMISSION
14. Between 1996 and 2006, the contribution
of National Grid's gas distribution charges on an average consumer
gas bill fell by approximately 23% in real terms. There was an
increase between October 2006 and 2007 which can be attributed
to the outcome of the one year distribution price control review
for 2007/8. The review gave an 11% increase in allowed revenue
and partly reflected the company's existing and planned investment
in replacing iron mains pipes. The replacement projects aim to
minimise leakage and to allow the company to maintain our excellent
safety record and ensure security of supply over the long term.
FOSTERING A
COMPETITIVE MARKET
ENVIRONMENT THROUGH
INFORMATION PROVISION
15. National Grid endeavours to promote
a competitive market environment by providing useful, relevant
and timely information to the market in order to assist operational
and commercial decision making by participants such as generators,
suppliers and energy traders.
16. Under our licences, National Grid is
obliged to provide long term outlook of seven and 10 years for
electricity and gas respectively.[292],
[293]
The statements outline the company's latest capacity forecasts,
system reinforcement projects and investment plans. This information
assists existing and prospective new users of the GB transmission
system in assessing opportunities available to them for making
new or additional use of the GB transmission system in the competitive
market. In conjunction with the industry, we compile summer and
winter consultation reports to provide the market with analysis
of the supply and demand backgrounds in the gas and electricity
markets under a range of weather conditions.
17. Other market information is available
closer to real-time such as normalised demand data, latest weather
forecast, indicated generation and system reserves information.
The majority of information from National Grid related to the
electricity transmission system is published on a website operated
by a third party.[294]
Information related to gas transmission is published on National
Grid's own websites.
NATIONAL GRID'S
AFFORDABLE WARMTH
PROGRAMME (AWP)
18. In 2000 National Grid launched the Affordable
Warmth Programme which is designed to generate consumer benefits,
with an emphasis on deprived consumers by increasing household
energy efficiency.
19. This programme systematically targeted
households at estate, community, local area and most recently
at regional level.
20. The principal outcomes of the programmes
under AWP have assisted almost 600,000 households, with over 130,000
homes receiving a central heating system. Over thirty communities
have been connected to the gas network where otherwise under usual
regulatory mechanisms it would be uneconomic to do so. A further
twenty five network extension projects are under construction
or subject to detailed contractual negotiations.
21. In addition, a further 5700 people have
received training in schemes ranging from domestic gas appliance
installers, energy efficiency advisors to cavity wall insulators.
METERING
22. National Grid Metering is a subsidiary
of National Grid and is responsible for National Grid's regulated
metering service to around 18 million domestic, industrial and
commercial customers in Great Britain. The costs of providing
a meter contribute on average about 2% to domestic gas bills.
The charges made by National Grid Gas to energy suppliers for
domestic meter services are subject to a price control set by
Ofgem. OnStream is another subsidiary of National Grid offering
competitive metering services thus affording choice to suppliers
in gas and electricity. OnStream currently own 1.7 million meters
in gas and 0.7 million meters in electricity.
23. On 25 February Ofgem announced that
they found National Grid to be in breach of the Competition Act
and imposed a fine of £41.6 million in respect of a number
of metering contracts entered into with gas suppliers in 2004.
24. In 2004 National Grid signed Metering
contracts with most of the major gas suppliers. The contracts
offered suppliers the option of continuing with their existing
arrangements or receiving lower metering prices in return for
a commitment to leave National Grid's meters in place for a specified
period (or completing payment on them if they removed them before
the end of the contracted period).
25. On 24 June 2005, Ofgem announced that
it was undertaking an investigation into the new contractual arrangements
between National Grid and the gas suppliers concerning the provision
of gas metering services.
26. Ofgem's original allegation was that
the contracts locked suppliers in for a significant share of their
gas meter requirements and thereby restricted the development
of competition in metering. Ofgem alleged that this conduct amounted
to an abuse of dominance, which would infringe competition law.
Throughout the course of the investigation, this allegation narrowed
and focused more on the technical aspects of the contracts rather
than the contracts themselves.
27. We support competition in metering and
strongly believe we have never acted anti-competitively in the
development of our contracts. We believe the contracts, which
were developed over a two year period with gas suppliers and in
consultation with Ofgem, have:
— Delivered immediate and substantial
financial benefits to customers in the form of lower metering
prices, saving customers around £120 million over the four
years of operation.
— Not inhibited the development
of competition, such that the market share of National Grid's
metering business is now around 40% of the new and replacement
meter market, from a starting point of over 90% in 2002.
— Provided scope for large numbers
(about 1.2 million per annum) of existing meters to be replaced
annually in an orderly and sustainable way, whilst limiting consumer
disruption, and wasteful replacement of good working meters.
28. Ofgem was consulted throughout this
process of contract development and negotiation and has acknowledged
that National Grid had no intention to breach the Competition
Act. National Grid has consistently demonstrated its support for
competition in metering.
29. We remain convinced that the contracts
do not infringe competition law, and we are taking steps to lodge
an appeal with the Competition Appeal Tribunal (CAT). This appeal
will deal with both the decision and the size of the fine (£41.6
million).It will be a diversion from our primary focus on improving
the services for our customers and will also distract the industry
from the important development of Smart Metering solutions for
the UK—which we strongly support.
CONCLUSIONS
30. Our written evidence to this inquiry
has demonstrated the transparency and regulated nature of the
process through which our transportation charges are derived.
31. We believe we have a role to play and
duly discharge our duties in fostering competition in the market
by providing an array of information about our assets and operations.
32. Support for and involvement in the drive
to tackle fuel poverty continues to be important to us as demonstrated
by our investment over the last eight years in the Affordable
Warmth Programme.
33. We hope that this submission is helpful
to the Business, Enterprise, Regulatory Reform Select Committee
investigation into possible anti-competitive behaviour in the
UK's energy market.
April 2008
289 National Grid, Electricity Charging. http://www.nationalgrid.com/uk/Electricity/Charges/ Back
290
Joint Office of Gas Transporters Home Page. http://www.gasgovernance.com Back
291
The analysis of the charges making the consumer bills is based
on information from a number of sources: Energy Watch, Ofgem,
BERR and other gas and electricity companies. Back
292
National Grid, Seven Year Statement. http://www.nationalgrid.com/uk/Electricity/sys Back
293
National Grid, 10 Year Statement & Long Term Investment Plan.
http://www.nationalgrid.com/uk/Gas/TYS/ Back
294
Elexon Ltd, The New Electricity Trading Arrangement Home Page.
http://www.bmreports.com Back
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