90JH North Gas 27

RNS Number:3195E
OFGEM
24 September 2007


R/39



NOT FOR PUBLICATION BEFORE 7AM ON SEPTEMBER 24 2007



UPDATED PROPOSALS FOR GAS DISTRIBUTION PRICE CONTROLS ARE PUBLISHED



*         Gas distribution networks (GDNs) will be set challenging cost-cutting
          targets

*         #5 billion funding for investment so GDNs can develop networks and
          continue mains replacement

*         #68 million for training apprentices

*         An allowance of up #60 million for research to promote sustainability
          issues

*         New incentive to reduce greenhouse gas emissions



Energy regulator Ofgem is keeping up the pressure on the gas distribution
networks (GDNs) to operate more efficiently over the next five years.



Under the updated proposals for the 2008-2013 price controls published today
(Monday) each GDN will be allowed an average each year of #628 million for
operating costs - a 13 per cent reduction on the amount they had requested from
Ofgem. Ofgem has listened carefully to responses from the GDNs since its initial
proposals in May and overall it has allowed a small increase in the amount of
mains replacement expenditure (see notes to editors). This will help the GDNs to
continue a nationwide programme to replace ageing gas mains.



Comparing the performance of the GDNs owned by National Grid against the four
GDNs under new ownership will result in efficiency savings being passed back to
customers over successive price controls. Ofgem has set the revenue allowances
including an annual efficiency saving of 2.5 per cent over the five years of the
price control.



Ofgem Chief Executive, Alistair Buchanan, said: "Our latest proposals protect
customers by requiring challenging cuts in operating expenditure. Overall the
proposals allow the companies to invest #5 billion in delivering a safe, modern
gas network while ensuring that costs to customers are kept to a minimum."



Ofgem is proposing two new initiatives to promote sustainability: an allowance
of up to #60 million for research and development into sustainability issues;
and an environmental emissions incentive that rewards GDNs for reducing their
gas emissions. Ofgem also believes that developing employee skills is a
significant issue for the GDNs. The updated proposals include #68 million for
apprenticeships and training.



The overall effect of Ofgem's proposals will be an increase of around #1 a year
in real terms on current gas bills. Final proposals for the price controls will
be published this December.



 * All figures are in 2005-2006 prices.




 - ends -





Notes to editors


1. In June 2005 National Grid Gas completed the sale of four of its eight GDNs.
The Scotland and south east of England networks were sold to Scotia Gas
Networks. The Wales and south west network was sold to Wales & West Utilities
and the network in the north east was sold to Northern Gas Networks.


The table below shows Ofgem's proposals for expenditure allowances and how they
compare to companies' forecasts. The updated proposals reflect Ofgem's
assessment of each GDN's actual spending in 2006-2007.

                  Average annual GDN Average annual    Average      Difference   Difference between GDN forecast
                  forecast for       Ofgem allowance   annual Ofgem between GDN  and Ofgem allowance in updated
#m in 2005-06     2008-13            over 2008-13 for  allowance    forecast and proposals
prices                               initial proposals for          Ofgem
                                                       2008-2013    allowance in
                                                       for updated  initial
                                                       proposals    proposals

Operating         722.1              598.0             628.0        -17%         -13%
expenditure
                                                       
Capital           396.8              328.2             319.2        -17%         -20%
expenditure
                                                       
Replacement       784.5              654.0             678.6        -17%         -13%
expenditure
                                                       

The figures in the table do not take into account the information quality
incentive which discourages the companies from bidding for higher capital
expenditure allowances than they actually require. Under the incentive companies
that put forward sensible projections will receive bigger rewards for
outperforming the allowances than those who have bid for higher allowances

2. All gas distribution companies are required to carry out a mains replacement
programme which has been approved by the Health and Safety Executive to address
safety concerns. This programme, introduced in 2002, requires that all iron gas
mains within 30 metres of homes and premises must be replaced over a 30-year
period. The GDNs face rising costs for delivering this programme due to several
factors including increasing labour costs.

3 Ofgem sets the allowed rate of return the companies can recoup when they
invest in their networks - this is the cost of capital. For the updated
proposals Ofgem has kept its assumption of a weighted average cost of capital
(with a pre-tax debt, and a  post-tax equity component) of 4.84 per cent. This
was the assumption used in the initial proposals. Final proposals will determine
the cost of capital for the GDNs.

4. Through the price controls Ofgem has strengthened the obligations on the GDNs
to offer good customer service. For example the existing targets for handling
calls about gas leaks and attending them will be specified in licence
conditions. This will enable Ofgem to take more appropriate enforcement action
against GDNs if they do not perform as required. Other examples include a
reduction from ten days to five days of the time allowed to complete
reinstatement after a GDN has finished work on a connection or repaired a pipe.

5. Ofgem is the Office of the Gas and Electricity Markets, which supports the
Gas and Electricity Markets Authority, the regulator of the gas and electricity
industries in Great Britain. The Authority's functions are set out mainly in the
Gas Act 1986, the Electricity Act 1989, the Competition Act 1998 and the
Utilities Act 2000. In this note, the functions of the Authority under all the
relevant Acts are, for simplicity, described as the functions of Ofgem.



For further press information contact:



Mark Wiltsher: 020 7901 7006
Rebecca Hill: 020 7901 7217

Out of hours contact: 07774 728971








                      This information is provided by RNS
            The company news service from the London Stock Exchange
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