Transcript SGN Cost Workshop Presentation Slides

Gas Distribution Price Control Review
Ofgem Costs Workshop
19 April 2007
Agenda
• Introduction to Scotland Gas Networks and
Southern Gas Networks
• Opex forecasts and benchmarking
• Capex drivers and SGN’s forecasts
• Repex forecasts
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Scotland Gas Networks
Key Features
• Scottish Independent
Undertakings
supplying remote
communities –
atypically high costs
• Large area to support
with low population
density
• Major centres in
Glasgow and
Edinburgh
• Unique stakeholders
incl. Scottish
Executive
Thurso (SIU)
Wick (SIU)
Stornoway (SIU)
Elgin
Inverness
Aberdeen
Dundee
Oban (SIU)
Glasgow
Edinburgh
Campbeltown (SIU)
Population Density
Dumfries
Stranraer
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Southern Gas Networks
Key Features
• Serving half of London - one third
of workload inside M25
• Congestion and impact on working
practices and patterns
• High competition for utility resource
and higher contractor rates
• Large number of high rise buildings
• Large number of gas holders
• Larger diameter pipes in London
Banbury
Aylesbury
Oxford
London
Greenwich
Reading
Margate
Gillingham
Bromley
Epsom
Andover
Maidstone
Canterbury
Dorking
Aldershot
Dover
Horsham
Salisbury
Hastings
Shaftesbury
Chichester
Southampton
Population Density
Eastbourne
Brighton
Poole
Lyme Regis
Portsmouth
Bournemouth
Wareham
Weymouth
Isle of Wight
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SGN Objectives
To be the frontier company in: -
• Safety
•
This is a key driver, influenced by HSE, for SGN in relation to
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Policy setting
Asset maintenance
Standards of service
Employee welfare
Replacement workloads
• Customer Service
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A fundamental reorganisation to a customer-focused geographical structure has
already reduced complaints by over 50%
• Efficiency
•
Replicate the operating model that drove SSE to efficiency frontier in 1999 and
2004
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Opex – Key assumptions
• Controllable Opex (excluding shrinkage and pensions)
•
2005/6 £158m; Rising to £172m by 2012/13 (2005/06 prices)
• Cost pressures (2012/13 cf. 2005/06 levels):
•
Safety and standards of service improvements:
• Asset maintenance driven by legislation, condition and cycles
• Improving performance on repair within 12 hours standard
• Employee working practises e.g. Working Time Directive
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Real wage inflation e.g. contractor costs – real increases of 3.8% per annum
Other:
• SIU LNG storage costs (not in current price control and future cost
uncertain)
• Training and insurance costs
• Efficiency savings:
• Productivity 2% per annum, falling to 1% by end of plan
• Leakage workload 1% reduction per annum
• Savings in Support Services
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Uncertain costs
• Costs not included in the BPQ submission due to
uncertainty over timing and level. Need for Ofgem to
address these exposures:
• Cost of Emergency Service and loss of shipper/ NGM contracts
• Traffic Management Act and Transport (Scotland) Act e.g. lane
rentals
• Congestion charges
• Changes to tax rules i.e. move to IFRS
• Expected Carbon Monoxide safety and monitoring obligations
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Benchmarking
• Support benchmarking in principle, however in our view it has limited use in this review:
•
2005/6 data still largely reflects NG common ownership and was the year of network sales,
therefore concerns exist about full reflection of costs
• Concerns about consultants reports:
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Europe Economics – Top down benchmarking can be made too complex. Single scale variable
is sufficient at total cost level e.g. total customers
PB Power / LECG:
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Cannot simply add them together, bottom-up benchmarking risks “cherry picking” benchmarks and
creating a “virtual” DN that cannot exist
Total customers is no longer appropriate once costs are disaggregated
CSV needs further work
Insufficient allowance for regional costs. In DPCR4 LPN was allowed c. £20m (opex and
capex) for additional costs of operating in London
Erratic results i.e. differing benchmarks and outliers, potential allocation/ business model
differences between direct and indirect opex. No conclusive evidence that any DN is more or
less efficient than any other
• Therefore focus at this review on understanding each DNs’ forecasts to set allowances.
Benchmarking should be used to establish the rules going forward and will be central to
GDPCR4
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Capex – Investment assumptions
• DNs have submitted capital investment plans for the 5 year
price control period totalling £2bn (2005/06 prices)
• Investment is almost entirely non-discretionary driven by
statutory, licence and safety obligations for meeting demand and
asset life-cycle renewal
• Investment plans are based on a range of workload and cost
assumptions:
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Demand forecasts
Diurnal storage availability
New Connections forecasts & Market Share analysis
Asset life-cycles and new safety legislation
Historical costs and future cost projections
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Background to Capex submissions
• LTS & Storage
• Investment is lumpy in nature - next period higher than last period
due to timing. Projects timed to prevent failure and to provide
capacity over the planning horizon.
• Mains Reinforcement & Governors
• Mains and governor reinforcement aligned to demand profile.
Investment also driven by safety requirements e.g. replacement of
assets at end of useful life.
• Connections
• Customer driven, based on market requirements.
• Asset integrity
• Meeting specific safety requirements e.g. DSEAR, Working at
Height Regulations etc.
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Capex - Summary costs and volumes
in SGN’s BPQ submission
Activity
Net Cost (£m)
LTS & Storage
292.2
Reinforcement &
Governors
201.5
Connections
99.9
Other Operational
54.1
Non Operational
84.9
Total Net Capex
732.6
Costs are at 2005/06 base
LTS storage projects
include: • Barton Stacey to Stoneham
Lane (South)
• Farningham Phase 2 and 3
(South East)
• Central Scotland Phase 2 –
Bathgate to Armadale
(Scotland)
• Barton Stacey to Bramshill
(South)
• Stirling Phase 3 (Scotland)
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Capex – Key issues from the Fourth
Consultation
• LTS and Storage
• Application of historical benchmarks to unit costs of pipeline
projects underestimates the unique nature of each project, and
future cost pressures.
• IS
• IS investment is still to be reviewed. Front Office and Back Office
replacement costs are the main costs in this area, due to renewal
cycles, functional enhancements and facilitating underlying
operational efficiency.
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Repex - Summary costs and volumes
in SGN’s BPQ submission
Activity
Net Cost
(£m)
Volume
Mains
736.9 5,581 km
Services
530.9
655,000
18.7
11km
Other
Total Net
Repex
• Mains includes 30/30 iron
policy, steel policy, other
iron >30m and PVC
• Services includes relays,
transfers and risers
• Other includes Solent
crossings to Isle of Wight
1,286.5
Costs are at 2005/06 base
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Mains replacement workload
Ramp-up continuing to 2010/11. Decision to adopt a flat profile over the remainder
of the 30yr period significantly reduces workload requirements in the next price
control period, as well as reducing the cost pressures associated with high
workload. Also addresses other asset risks such as unprotected steel replacement.
Scotia Decommissiong Workloads (km)
1,400
1,200
1,000
800
600
400
200
30/30 Policy
Other Policy
With Tail Off
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31/32
30/31
29/30
28/29
27/28
26/27
25/26
24/25
23/24
22/23
21/22
20/21
19/20
18/19
17/18
16/17
15/16
14/15
13/14
12/13
11/12
10/11
09/10
08/09
07/08
06/07
05/06
04/05
0
Innovation in design of replacement
projects
• SGN has adopted a new approach to the
selection and design of replacement projects
using risk, condition and other mains replacement
specific criteria e.g. percentage of remaining
metallic pipes in a geographical area:
• More effective risk reduction, with no increase in work
• Target high leakage networks and help achieve opex
efficiency
• “All PE” networks achieved faster, reducing capex
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Issues arising from the Fourth
Consultation
• Over-complicated bottom-up analysis to derive
regression lines
• Impact of regional factors, particularly in London,
significantly underestimates the proportion of
workload within M25
• Allowance for real price effects inconsistent with
historical trend; apparently based on previous year
only
• Productivity proposals are unrealistic, given the
pressures on timely completion of highly complex
projects.
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Steel supplies to high rise properties
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SGN has a large number of high volume of supplies to high rise properties,
predominantly in South London.
Ageing population, uneconomic to repair, with consequences of failure a major
concern.
SGN therefore has planned to take a proactive approach to their replacement
In a small proportion of cases the option to remove gas supplies and offer an
‘all-electric’ solution should be considered, based on economic assessment.
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Summary
• Facing major cost pressures and cost uncertainties in opex,
the price control and frontier shift assumptions must allow for
these
• Further work required on regional factors and funding of the
emergency service
• Too early to rely on regression analysis at this review, but will
be central to achieving Ofgem’s targeted efficiencies at the
next price control review, when the new management teams
have bedded in
• Issues still to be resolved around capex allowances and the
costs of the repex programme
• Investment will bring safety and security of supply benefits to
customers
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