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OFGEM Should Be Scrapped

Wednesday, February 27, 2013

OFGEM cut of 20% investment in gas distribution will lead to 3,000 job losses and lives lost in gas explosions warns GMB.

OFGEM must go and a system of regulation introduced that ensures customers don't get ripped off but there is also sufficient investment in jobs, skills and safety to keep the country safe and warm says GMB.

GMB, the union for energy workers, commented on the announcement by National Grid that the Board had accepted Ofgem’s RIIO Final Proposals in full. See notes to editors 1for National Grid announcement and for details on RIIO. Gary Smith GMB National Secretary for Energy and Utilities said "This decision was inevitable from National Grid. The other gas distribution companies will be compelled to comply too (Wales and West Utilities, SGN, Northern Gas networks - see note 2 below). It would be too big a gamble to do anything else.

However, what this means in real terms is that 3,000 jobs will go across the gas sector and gas mains replacement programme which is about safety will be slashed.

Less investment will give rise to a less safe gas industry and not a penny off people's bills. This 20% cut in investment by OFGEM will cause more gas leaks. Ofgem’s RIIO formula takes no account whatsoever of the dangers in handling the volatile and highly explosive substance. See criteria in note to editors 3 below. Gas main replacement will be cut and gas workers aren't going to be able to cope with gas escapes if it gets cold. An increased risk of loss of life as a direct result is inevitable.

OFGEM has failed. It must go and a system of regulation introduced that focuses on making sure customers don't get ripped off but there is also sufficient levels of investment in jobs skills and safety to keep the country safe and warm"


Contact Gary Smith 07710 618 909 or GMB press office 07921 289880

Notes to Editors

Note 1 Statement by National Grid 28 February 2013

National Grid announces agreement of RIIO price controls

National Grid has agreed all of the UK RIIO price control arrangements proposed by Ofgem. The Board of National Grid believes that the combination of revenue allowances and incentive mechanisms provides a good opportunity to earn appropriate returns for investors while delivering essential infrastructure investment for the benefit of consumers and the UK economy.

The RIIO-T1 and RIIO-GD1 price controls cover all of National Grid's transmission and distribution owner and system operator businesses in the UK, with a current regulated asset value in excess of £22bn. Ofgem’s latest forecast predicts this asset value will grow by around 80% over the eight years of the price control, which will run from 1 April 2013.

As previously stated, the Company is in the latter stages of work to evaluate the long term outlook of the Group as a whole, ahead of announcing a new dividend policy for the period starting from 1 April 2013. We expect to announce this new policy by, at the latest, the time of our full year results in May 2013.

Steve Holliday, Chief Executive, said: "I am pleased to confirm agreement of the RIIO price controls for our UK businesses. This is the culmination of a new process that started over three years ago, and represents another opportunity for National Grid to deliver further shareholder value.

These arrangements give our UK businesses their longest ever period of regulatory clarity. This enables us to focus on driving efficiency across our operations while building the infrastructure that the country needs and at the same time realise the benefits of excellent performance for both customers and investors."

Note 2 Gas distribution is the process whereby gas is taken from the high pressure transmission system and distributed through low pressure networks of pipes to industrial complexes, offices and homes.

There are eight gas distribution networks (GDNs), which each cover a separate geographical region of Britain. In addition there are a number of smaller networks owned and operated by Independent Gas Transporters (IGTs) - most but not all of these networks have been built to serve new housing.

Existing gas distribution networks are monopolies. GDNs and IGTs are regulated by Ofgem to protect consumers from potential abuse of monopoly power.

In order to be able to distribute gas on the distribution systems, a GDN and IGT must hold a licence. The licences contain conditions which among other things limit the amount of revenue which these companies can recover from their customers.

On 1 June 2005 National Grid Gas plc sold four of the eight GDNs to Scotia Gas Networks (which owns Southern Gas Network and Scotland Gas Network), Northern Gas Networks and Wales & West Utilities.

Note 3 RIIO stands for Revenue= Incentives+ Innovation+ Outputs. Key features of the RIIO model include:

lengthening price controls from five to eight years which will provide more stability

much greater say for network customers in setting out what network companies need to deliver, i.e. renewable developers might want faster connections fast track price controls will be introduced for companies who innovate, deliver good service and produce well-evidenced plans setting out how they will invest efficiently for the future

poorly performing companies will face much more intrusive regulation and lower returns

stronger incentive regime to encourage more efficient investment and innovation adding the option of giving new network companies a greater role in delivering certain large-scale projects where this does not delay delivery. This could open up new sources of finance and encourage innovation, and

expansion of the current Low Carbon Networks Fund to encourage greater innovation across gas and electricity networks.

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