Select Committee on Constitution Minutes of Evidence

Memorandum by the Gas Forum


  1.1  The Gas Forum's membership comprises the majority of gas shippers and suppliers in the UK. The Forum and its Workgroups provide a meeting point for shippers and suppliers, allowing expert scrutiny of proposed changes within the gas industry.

  1.2  Overall, the Forum supports much of the work that Ofgem carries out, particularly in the regulation of monopoly elements of the transmission and distribution markets. Whilst members frequently and robustly challenge the position taken by the industry regulator, Ofgem, they fully support the basic principle of a regulator independent of government with a clear objective to protect the interests of consumers wherever appropriate by promoting effective competition.

  1.3  The success of competition in the wholesale and retail gas markets in the UK is due in part to the actions of Ofgem, and its predecessor, Ofgas as well as to the significant resource and time devoted by gas shippers and suppliers.

  1.4  The question of the scrutiny of Ofgem's actions, and challenge if they are inappropriate, is therefore a timely issue. The Gas Forum welcomes the Select Committees inquiry, and sets out detailed comments below.

  1.5  In order to illustrate some of the issues of accountability raised by the Select Committee there is included at the end of this document a commentary on a major change proposal for the industry in the area of gas balancing.

1.6  Recommendation

  Gas Forum members are strongly in favour of the introduction of a new appeals process for regulatory decisions. There is currently no mechanism for appealing the substance of an Ofgem decision—a licensee can only appeal for judicial review of the process that Ofgem used in arriving at a decision. (see 6.1)

Specific Points raised in Consultation


  2.1  Q4—What are regulators set up to achieve; to what extent do regulators achieve their purposes without adverse consequences; how is their effectiveness achieved?

  Although the Authority reports annually, there are very few specific targets against which it measures its own performance. Members feel that the Authority should be specifically required to consider how well it is withdrawing from regulation in areas open to competition, as has been proposed when setting up regulatory bodies for the communications sector.

  2.2  Q5—To what extent are regulators both prosecutors and juries on an issue; what rights of appeal are there against decision made by regulators?

  Members of the Gas Forum were not concerned that Ofgem may act as both the prosecutor and jury on an issue regarding matters of compliance. However, they were more concerned that they can use both roles by promoting and then approving certain approaches with no mechanism available to appeal the substance of that decision. Members of the Gas Forum see particular value and protection from the introduction of an ability to appeal decisions made in respect of Network Code modifications.

  2.3  The Network Code in gas is a common carriage contract between the natural monopoly owner/operator of the pipelines (principally Transco) and its users, ie shippers. The arrangements for the Network Code in gas differ from those in electricity [a note on the differences is included at the end of this paper]. The Network Code Modification Panels' roles are confined to procedural matters and they cannot make recommendations to Ofgem regarding Code modification proposals. While there may be the potential for improvements to the process in gas, we do not consider that wholesale adoption of the arrangements used for Connection and Use of System Code (CUSC) and/or the Balancing and Settlement Code (BSC) (together the equivalent electricity industry codes) would necessarily be the best way forward.

  2.4  The Rules of Procedures for the Authority do not mention Code modifications, instead concentrating on licence changes. Code modifications can have equally significant effects on industry participants as licence changes and therefore any delegation of powers should be more explicit rather than less. Decisions should be taken at equally senior levels within the Authority as for licence changes.

  2.5  Some changes have been introduced through modification to Transco's licence. There is no appeal mechanism for third parties (eg shippers and suppliers) against these changes that can lead to Transco being incentivised to introduce change to the Network Code. As it is not possible to appeal code decisions the only test applied by Ofgem is whether the modification proposal is consistent with Transco's licence. A recent example of this is the new approach to the gas exit capacity and interruption regimes. These changes will have significant impacts on consumers and suppliers in terms of their contracts, systems etc. It is essential that a mechanism is introduced to ensure that market participants can appeal any Network Code proposal on its merits. Ofgem chose not to publish a decision document on this particular issue and as a consequence many issues raised are only being addressed post the implementation of the licence amendments.

  2.6  There have been occasions when modification proposal have been objected to by the majority of respondents including Transco (eg Modification Proposal 511—where shippers tried to delay implementation of a new regime and evidence supporting a delay came to light but was not considered). Ofgem's decision to implement in this case (and others) appeared to rest on its views and vision of the future of the industry rather than a factual analysis of the issues presented to it through the consultation process.

  2.7  The lack of robust transparent process and open decision-making causes unacceptable levels of uncertainty in the markets. Ofgem has recently introduced a licence change to allow third party participants to raise modification proposals to Transco's Network Code. This has increased risk for industry participants without any concurrent protection being introduced.

  Appeals Mechanisms benefit Ofgem as well as market participants

  2.8  The introduction of an appeals mechanism that allows for decisions to be reviewed on their merits would not threaten the work of Ofgem, nor be of detriment to the interests of consumers. No single organisation or regulator has a monopoly on knowledge or approach and it is not reasonable to expect it to always make perfect decisions.

  2.9  Given the considerable administrative burden of raising an appeal, it is unlikely that market participants would expend time and resource on frivolous appeals, and we do not envisage that such a change would lead to a flurry of appeals. During the operation of the Master Registration Agreement, for example, only six of the 110 Change proposals have been appealed to the Authority for determination.


  3.1  Q2—How are regulators accountable to those whom they regulate; what is the impact of regulation on the economy; how transparent are their methods of working?

  Market participants have long had concerns regarding the limited transparency of Ofgem's decision making. Members are pleased that Ofgem has now committed to doing Regulatory Impact Assessments (RIAs) and we hope that these will be carried out in accordance with the OFT guidance. We look forward particularly to seeing detailed analysis of the benefit that will arise from proposed changes for both the industry and the consumer. We note that the level of underlying costs of regulation have risen from a figure of £10 million per annum to £40 million, although that we note that £4 million of this is for the additional costs that have arisen from social and environmental guidance.

  3.2  One proposal that may improve the decision making process for the benefit of all players would be the introduction of an honest and objective assessment after the introduction of any major project, undertaken perhaps by an external agency. Post-project assessment will result in a more considered and iterative decision making process.


  3.3  We ask that the Select Committee strongly endorse the principle that appeal to regulatory decisions should be available.

  3.4  All members would welcome a greater involvement in the early stages of strategic planning. This would allow industry players have the chance to influence Ofgem thinking before it becomes policy and hence difficult to change.

  3.5  We would be pleased to discuss any part of this paper, either in person or by telephone.


  4.1  Operation of the gas supply network requires inputs (from production facilities, interconnectors from other countries or storage facilities) to be balanced with outputs (to consumers). The current rules governing this activity require shippers (the intermediates between producers and consumers) to balance their inputs and outputs each day, with Transco managing within day activity to ensure safe operation of the network. The prices paid by shippers for balancing activity therefore relate, whether struck through a market or determined by a set of rules, to a single day.

  4.2  In electricity, the equivalent period is half an hour.

  4.3  Concerns over the difficulties faced by Transco in efficiently balancing the system with the day led Ofgem to propose changing to an hourly or half-hourly basis. The potential cost was projected at between £1 billion and £3.5 billion in a study commissioned by the industry as a result of no Ofgem analysis being available, with industry participants required to make major systems investment and Terminal operators and upstream producers facing additional operating costs.

  4.4  The history of the proposal is:

    February 2001—Ofgem initial consultation

    February 2002—Ofgem revised proposals

    Summer 2002—industry workgroup considers alternatives

    March 2003—further consultation document due (expected to propose incremental, and more modest, change)

  4.5  Ofgem have recently shelved proposals to introduce shorter balancing periods. A key point emerges from the process—a RIA in the initial consultation would have led to an earlier focus on more cost-effective proposals. It is essential that regulators listen to industry opinion, whenever proposals are complex—the regulator will not be an expert. This requirement cannot easily be formalised, but may be covered by an effective appeals process.


  5.1  There are several different Network Codes—each gas transporter is obliged to have one by licence. They set out the "rules" of the market, and all include a process to make changes.

  5.2  The Transco Code allows for a procedure in which modification proposals to the Code are discussed at a panel comprised of a number of shipping community representatives and Transco staff. Ofgem and energywatch also attend. On the BSC, the panel makes a recommendation, although the modification has often changed radically since being proposed. On CUSC, it is the system operator who makes the recommendation.

  5.3  All gas modification proposals go to Ofgem for a decision, even if all shippers and Transco are against it. The panel does not make a recommendation. Once Ofgem has made a decision, there is no appeal mechanism available.


  6.1  The majority of Gas Forum members support this paper. Members include a diverse range of operators in the UK Gas markets: Atlantic Electric and Gas, BP Amoco, British Gas, Innogy, ExxonMobil, LE Group, Norsk Energy, Powergen, Shell, Scottish and Southern, ScottishPower, Statoil, Telecom Plus and TotalFinaElf.

  While British Gas has some sympathy with the general desire for an appropriate appeals mechanism, it is unable to support the Statement made on behalf of the Gas Forum. British Gas is concerned that the benefits that might arise from an Appeals mechanism would be outweighed by the downside if regulatory decisions were open to challenge, and a consequence this led to undue delays within the decision making process, thereby resulting in increased regulatory uncertainty.

  ExxonMobil is not able to support the Gas Forum statement. ExxonMobil believes that the perceived benefits of a substance based appeals mechanism to provide an incentive for carefully thought through regulatory proposals are limited when compared with (i) the incremental regulatory uncertainty introduced by such processes and (ii) Ofgem's commitment (March 2003 Corporate Strategy 2003-06) that it will in future, for all major proposals, provide Regulatory Impact Assessments which will include an assessment of consequences of proposals for UK security of supply.

The Gas Forum

March 2003

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