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Gas Distribution
About the business
Our Gas Distribution business operates in the UK and the US. As a consequence of the differences in the respective economic and regulatory environments, we report the results of Gas Distribution as two segments: Gas Distribution - UK and Gas Distribution - US.
The external and regulatory environments in which our Gas Distribution business operates are described in External market environment and Regulation, our business drivers are described in Business drivers and our objectives and strategy are set out in Objectives and strategy . Further information relevant to an understanding of our Gas Distribution business is included below.
Gas Distribution - UK
Our Gas Distribution - UK segment comprises almost half of Great Britain's gas distribution system, comprising four of the eight regional gas distribution networks in Great Britain. Our networks consist of approximately 82,000 miles of distribution pipelines and we transport gas on behalf of approximately 34 active gas shippers from the gas national transmission system to around 11 million consumers.
Gas Distribution – UK operating area
We also manage the national emergency number (0800 111 999) for all of the gas distribution networks and for other gas transporters in the UK. During 2006/07 we handled approximately 2.3 million calls to the national emergency number.
Detailed arrangements for transporting gas 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.
The price controls that applied to our UK gas distribution networks up until 31 March 2007 took into account Ofgem's estimates of operating expenditure, capital expenditure, replacement expenditure and allowed rate of return (at a real pre-tax rate of 6.25% on our regulatory asset value).
Ofgem has extended each current five year gas distribution price control for a further year through an extension price control to cover the year ending 31 March 2008. The next full price control period will now cover the period from 1 April 2008 to 31 March 2013 as described on page 52. As at 31 March 2007, our regulatory asset value is estimated at approximately £6 billion. 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.
In the UK, the price control formulae specified a maximum allowed revenue assigned to each network. Each formula has 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, collected revenue can be more or less than is allowed under the price control formula, although charges are set broadly to recover allowed revenue. Any difference is carried forward and our charges are adjusted accordingly in future periods.
Replacement expenditure maintains the safety and reliability of the network, by replacing older gas pipes with modern pipes. Ofgem treats 50% of projected replacement expenditure as recoverable during the price control period 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.
Ofgem has established standards of service we are required to meet that apply to our operations. These include: overall standards of service, for example answering 90% of all calls to the national gas emergency number within 30 seconds of the call being connected and attending 97% of reports of a gas escape or other gas emergency within the required timescale; connections standards of service that require us to provide connections to customers to agreed timescales after an unplanned interruption; and guaranteed standards of service for our other transportation services. Compensation is paid to consumers for any failures to meet both these and the connections standard of service.
Gas Distribution - US
Our Gas Distribution operations in New York and Rhode Island provide services to 571,000 customers in 216 communities across upstate New York, and 248,000 customers in 33 communities in Rhode Island. Our network of 11,800 miles of gas pipelines in these two states covers approximately 5,460 square miles.
Gas Distribution – US operating area
In the US, Gas Distribution provides the same core services of operation and emergency response, as well as billing, customer service, and supply services. Except for residential and small customers in Rhode Island, customers may purchase their supply from independent providers, with the option of billing for those purchases to be provided by National Grid. The gas industry is less deregulated in the US than in the UK, in that the majority of gas supplied is still sold by local regulated utilities to their customers. Regulated utilities, such as our gas distribution operations, purchase gas from gas producers, and gas transporters then transport this gas on the independent interstate pipeline system and into regulated utilities' gas distribution networks for delivery to customers. In our case, we receive gas from the inter-state pipeline system at 36 gate stations. The interstate pipeline system and local gas distribution networks are also used to deliver gas on behalf of customers who have purchased gas from independent suppliers or direct from gas producers.
In the US, our delivery rates comprise a combination of a per customer charge, a demand charge and a price per additional therm of gas delivered. The allocation between these components varies by size of customer.
New York
In New York, delivery rates are set to recover estimates of operating costs, capital investment and an allowed rate of return inclusive of a return on equity ranging from 10.6% to 12.6% depending on the achievement of certain customer related performance metrics. Gas delivery rates were frozen until the end of the 2004 calendar year, after which a request to change prices can be made at any time. Gas commodity costs are fully recovered from customers. An adjustment to certain customer bills is made during the months of October to May to cap our exposure to sales variations caused by weather. Commodity prices are applied almost entirely on a per therm basis.
We also have a number of service standards for our New York operations, which are subject to penalties for non-achievement, including: the maximum rate of customer complaints to the state regulator; minimum satisfaction rates for residential, commercial and industrial customer billing and service transactions; minimum percentage of meters actually read compared to readings scheduled; minimum percentage of customer calls answered within 30 seconds and minimum enrolment of customers into the low income customer assistance programme; maximum number of outstanding gas leaks requiring repair measured on 31 December of each year; maximum number of reportable incidents resulting from our failure to respond to a request to stakeout our facilities in 48 hours; and cathodically protecting an agreed-upon mileage of pre-1971 installed wrapped steel gas main.
Our New York gas distribution operations are also measured on our performance in responding to gas emergency calls within 30, 45 and 60 minutes without associated financial penalties.
Rhode Island
In Rhode Island, delivery rates are set to recover estimates of operating costs, capital investment and an allowed rate of return of 9.09%. Gas commodity rates are adjusted every November subject to approval by the state regulator and they are also adjusted whenever a significant over- or under-collection of gas costs is expected. Gas commodity costs are fully recovered from customers. There is also a surcharge mechanism that allows for the recovery of environmental response costs, any recovery or returns to customers as a result of a weather normalisation clause, a sharing of non-firm margins (non-firm margin earned from interruptible customers with the ability to switch to alternative fuels) and a portion of earnings in excess of an 11.25% return on equity.
The public utility commission in Rhode Island has established a number of service standards with associated non-achievement penalties, including: a benchmark percentage of abandoned customer calls and a benchmark percentage of calls answered within 60 seconds; a benchmark percentage of meters read during their normal read cycle; testing a predetermined amount of gas meters on an annual basis, as well as a benchmark percentage of meter testing initiated by customer request; meeting a benchmark percentage of customer service appointments; and benchmarks for responding to gas emergency calls within 30 minutes or less during normal working hours and 45 minutes or less after hours.