Transmission Price Control

RNS Number:1331F
OFGEM
26 June 2006



R/31


MONDAY 26 JUNE

OFGEM PROPOSES INVESTMENT BOOST FOR BRITAIN'S ENERGY NETWORKS
     
*    More than #4 billion investment proposed in Britain's energy networks
     to connect renewables, gas import projects and to replace infrastructure

*    Impact on domestic customer bills will be limited as transmission
     costs only represent between 2 and 3 per cent of an energy bill

*    Proposals to reduce barriers preventing viable renewable projects
     getting connected

*    Investment will ensure customers continue to see high standards of
     reliability from the networks


Britain's gas and electricity transmission* networks are expected to invest more
than #4 billion over the next five years following initial proposals published
today (Monday) by energy regulator, Ofgem.

This level of investment is required to meet consumer energy needs. It will
enable the four companies which run the networks to adapt to change by
connecting more renewable energy and new gas import projects including pipelines
and terminals. The proposals are being made as part of Ofgem's review of the
prices the four transmission companies are allowed to charge users of their
networks between 2007 and 2012.

Ofgem Chief Executive, Alistair Buchanan, said: "Britain's energy networks face
huge challenges over the next five years to respond to changes in the sources of
our gas and power. A variety of import projects to bring gas from areas across
the world are being built and there are also proposals to greatly increase the
amount of electricity sourced from renewables.

"However, there is uncertainty about when projects may be completed and where
exactly investment is needed. Therefore, Ofgem is proposing price controls which
will have significant flexibility to allow the companies to invest efficiently
when necessary and in a way that best protects customer interests. The
investment will also mean the companies can continue to maintain Britain's
energy networks, which are among the most reliable in the world."

The proposals may result in almost double the amount of investment in the
networks that was allowed in the previous five-year price controls. Given the
challenges facing the energy networks, the price controls will also ensure the
companies are able to make additional investments to connect viable gas import
or renewable electricity projects when commitments from users demonstrate this
need.

The proposals also address the need for companies to replace infrastructure,
particularly electricity network equipment, so that current high levels of
reliability can be maintained. The impact of the proposals on customer bills is
likely to be minimal as transmission costs make up just three per cent of a
household electricity bill and two per cent of a household gas bill.


                                   -ends-

* transmission networks are the high-voltage electricity network and high
pressure gas pipeline networks which are used to move energy around the country.


Notes to editors

1. Ofgem is reviewing the price controls for the four electricity and gas
transmission companies which own Britain's high-voltage networks and the high
pressure gas transportation system.  The consultation process for the price
control review will be completed at the end of this year, following the
publication of Ofgem's final proposals in December. The finalised controls will
then take effect from April 2007. The companies involved are:
     
*    National Grid Electricity Transmission (NGET)

*    National Grid Gas NTS (National Transmission System)

*    Scottish Power Transmission Limited

*    Scottish Hydro-Electric Transmission Limited.


2. The timeline for the remainder of the review is as follows:

*    June 26 2006: initial proposals

*    September 2006: Draft proposals
     
*    November 2006: Final proposals

The agreed price controls will take effect from April 1 2007 until 31 March 2012

The initial proposals document has been published today on the Ofgem website
www.ofgem.gov.uk


3. Capital expenditure

As part of the review process Ofgem has carefully considered each company's
forecasted capital expenditure for 2007-2012 (ie the amount they wish to invest
in their networks to accommodate new renewable generation, gas import capacity
and replacement of infrastructure). The table below summarises Ofgem's current
assessment of their spending requirements:

                      National Grid    National Grid      Scottish Power    Scottish           Total
                      Gas NTS          Electricity        Transmission      Hydro-Electric
                                       Transmission Ltd   Limited           Transmission
                                                                            Limited.

Ofgem's capital       #737 million     #2.791 billion     #555 million      #164 million
expenditure proposals
for 2007-2012
                                                                                               #4.25 billion

Illustration of                                                                                #750 million
additional investment
to accommodate new
potential projects*

Grand total                                                                                    #5.0 billion


* As part of the review Ofgem is also proposing to introduce mechanisms to
adjust the companies' revenue allowances automatically, either up or down, in
response to the needs of users of the networks. There is uncertainty over when
some renewable generation or gas import projects will be completed. If these
projects do go ahead then the price controls will allow the transmission
companies to make additional investments. A reasonable scenario of additional
projects could result in total capital expenditure allowance for all four
companies of around #5 billion.


4. Cost of capital

Cost of capital sets the allowed rate of return the companies can recoup when
they invest in their networks. For modelling purposes, and to provide a
reference point for consultation responses, Ofgem has currently adopted a real
post-tax cost of capital of 4.2% for all four companies.  Ofgem will not
finalise its view on the appropriate levels of return until the price control
final proposals in November. The 4.2% figure reflects several factors including
generally low real interest rates which make it cheaper for companies to borrow
money to invest in developing their networks.

5. A further issue which will impact on Ofgem's price control review is the
Government's Energy Review, which will set out Britain's future energy policy.

6. 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. Ofgem's aim is to bring choice and value to all gas
and electricity customers by promoting competition and regulating monopolies.
The Authority's powers are provided for under the Gas Act 1986, the Electricity
Act 1989 and the Utilities Act 2000.


For further press information contact:

Chris Lock:           020 7901 7225, 07766 511470
Mark Wiltsher:        020 7901 7006, 07774 728971
Julia Collings:                     020 7901 7217




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