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Our UK gas distribution segment comprises almost half of Great Britain’s gas distribution network, and remains the largest gas distribution network in the country, consisting of approximately 82,000 miles of distribution pipelines.
We transport gas on behalf of approximately 70 active gas shippers from the gas transmission network through our four retained regional distribution networks to around 11 million consumers.
We continue to be responsible for the safety, development, maintenance and daily operation of our UK gas distribution networks.
We also continue to manage the national emergency number (0800 111 999) for our networks, the sold networks and the other gas transporters. During 2005/06 we handled around 2.5 million calls to the national emergency number.
Gas is piped from the gas transmission network into each of the eight regional gas distribution networks, which in turn distribute gas to consumers.
Detailed arrangements for the gas industry are provided through the Uniform Network Code (as approved by Ofgem, from time to time), which defines the obligations, responsibilities and roles of the industry participants.
We hold a single gas distribution transporter licence, which authorises us to operate the four gas distribution networks we own. However, each of our four networks has its own separate price control, which establishes the prices we can charge for the services provided by each network.
Each network’s separate regulatory asset value associated with its distribution assets was originally allocated to it using an estimate of the UK gas distribution business’s regulatory asset value as at 1 April 2002. The allocation was aimed at minimising unnecessary regional differentials in transportation charges.
Our principal business drivers are considered to be the following:
| Business driver | Description |
|---|---|
| Gas distribution price control | The price controls that apply to UK gas distribution take into account Ofgem’s estimates of operating expenditure, capital expenditure, replacement expenditure and allowed rate of return. The current rate of return is set at a real pre-tax rate of 6.25% on our regulatory asset value. As at 31 March 2006, our regulatory asset value is estimated at approximately £5.9 billion. |
| Factors driving revenue | The networks’ price control formulae specify a maximum allowed revenue assigned to each network. Each formula retains a 65% fixed, 35% variable revenue associated with transportation volume changes, a mains replacement incentive mechanism and the pass-through of prescribed rates and gas transporter licence fees. In any year, revenue can be more or less than is allowed under the price control formula, although charges should be set to recover allowed revenue. Any difference is carried forward and our charges are adjusted accordingly. |
| Replacement expenditure | Replacement expenditure improves the future safety and reliability of the network, through the replacement of older gas pipes with modern pipes. Ofgem treats 50% of projected replacement expenditure as recoverable during the year and 50% as recoverable over future years. Each network is subject to its own mains replacement incentive mechanism and retains 33% of any outperformance against Ofgem’s annual cost targets as additional return or, alternatively, bears 50% of any overspend if it underperforms. |
| Capital expenditure | Capital expenditure ensures supply security and meets growing customer demand. Central coordination ensures capital investment is effective and efficient. |
Ofgem has established standards of service we are required to meet that apply to our operations.
These include:
Compensation is paid to customers for any failures to meet both the guaranteed and the connections standards of service.