Letter from the Managing Director—Networks
at Ofgem to the Chairman of the Environment, Food and Rural Affairs
Committee, 24 March 2009
GOVERNMENT RESPONSE TO THE PITT REVIEW
Thank you for your letter of 4 March 2009 seeking
Ofgem's views on the above subject. You queried specifically the
work being undertaken by the energy networks to implement the
Pitt Review's recommendations. As you know, these recommendations
related to the protection of critical national infrastructure.
In your letter, you also sought Ofgem's views of the funding arrangements
for such protection work.
Following the floods in the Midlands and South
Yorkshire in summer 2007, an industry task group "Substation
resilience to Flooding" was set up under the Energy Emergencies
Executive Committee (E3C). This group, led by the Energy Networks
Association (ENA), was tasked to carry out a comprehensive assessment
of the electricity substations' resilience to flooding and the
steps that may be taken to mitigate current and future risks.
Ofgem has taken an active role in the group. At the end of March
2008, the task group submitted to E3C and the then Energy Minister,
Malcolm Wicks, the report of its Phase 1 work. Subsequently, the
task group initiated a further phase of work to oversee the implementation
of the recommendations put forward in the Phase 1 report. This
includes the production of an Engineering Technical Report containing
a risk based methodology to improve the electricity substations'
resilience to flooding to a level that is acceptable based on
a cost/benefit assessment of each site.
Funding for the network operators to carry out
protection work to achieve adequate level of resilience to flooding,
will be an element of the expenditure to be taken into account
in the five yearly Price controls that Ofgem sets for the electricity
transmission and distribution operators. In line with our duties
(including our principal objective to protect the interests of
energy customers), we seek to set price controls at levels which
would allow efficient network operators to collect from customers
at a level that allows an efficient business to finance their
activities. We also place incentives on the network operators
to improve their efficiency and quality of service.
For the 14 distribution network operators (DNOs),
their current price control expires on 31 March 2010 and Ofgem
is now undertaking the fifth Distribution Price Control Review
(DPCR5) to set the controls for 2010-15. As part of that process,
the DNOs have submitted forecasts of works to be carried out,
and associated costs, relating to improving flood defence at about
450 (of some 5800 in total) of their grid and primary substations.
In evaluating sites to protect and the level of protection to
employ, the DNOs have taken into account the recommendations from
the industry task group on flood resilience, and have based their
forecasts on detailed site survey and societal risk via the inclusion
and weighting of "critical customers". My team is examining
in detail the need, case and efficient costs for works at each
of the at-risk substations within each DNO and across the DNOs,
including the number of customers connected, types of critical
customers connected, the nature and level of defences to be installed
as well as the costs and timings to complete the works, and the
benefit such defences would bring. We will determine funding allowances
in the light of our analysis, current statutory requirements and
ensure it achieves best value for consumers.
The transmission companies have taken part in
the industry task group on flood resilience and have also been
assessing the need for any works at their substations. The same
principle of funding adopted in DPCR5 will be applied for the
consideration of funding for the transmission licensees, but with
some variations in timing. This is because the current transmission
price control runs from 1 April 2007 to 31 March 2012; as a consequence,
the expenditure to step up flood defence was not anticipated at
the time of setting this price control. Should we become aware
of any unanticipated costs which arise during this price control,
we will consider a range of approaches including flexing the revenue
allowance for the current control period and making allowances
in the future price control.
I hope you find the above helpful. However,
if you require any further information, please do not hesitate
to contact me again.
Yours sincerely,
Steve Smith
Managing Director—Networks
The Office of Gas and Electricity Markets
24 March 2009
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