Memorandum by the Gas Forum|
1.1 The Gas Forum's membership comprises
the majority of gas shippers and suppliers in the UK. The Forum
and its Workgroups provide a meeting point for shippers and suppliers,
allowing expert scrutiny of proposed changes within the gas industry.
1.2 Overall, the Forum supports much of
the work that Ofgem carries out, particularly in the regulation
of monopoly elements of the transmission and distribution markets.
Whilst members frequently and robustly challenge the position
taken by the industry regulator, Ofgem, they fully support the
basic principle of a regulator independent of government with
a clear objective to protect the interests of consumers wherever
appropriate by promoting effective competition.
1.3 The success of competition in the wholesale
and retail gas markets in the UK is due in part to the actions
of Ofgem, and its predecessor, Ofgas as well as to the significant
resource and time devoted by gas shippers and suppliers.
1.4 The question of the scrutiny of Ofgem's
actions, and challenge if they are inappropriate, is therefore
a timely issue. The Gas Forum welcomes the Select Committees inquiry,
and sets out detailed comments below.
1.5 In order to illustrate some of the issues
of accountability raised by the Select Committee there is included
at the end of this document a commentary on a major change proposal
for the industry in the area of gas balancing.
Gas Forum members are strongly in favour of
the introduction of a new appeals process for regulatory decisions.
There is currently no mechanism for appealing the substance of
an Ofgem decisiona licensee can only appeal for judicial
review of the process that Ofgem used in arriving at a decision.
Specific Points raised in Consultation
2.1 Q4What are regulators set
up to achieve; to what extent do regulators achieve their purposes
without adverse consequences; how is their effectiveness achieved?
Although the Authority reports annually, there
are very few specific targets against which it measures its own
performance. Members feel that the Authority should be specifically
required to consider how well it is withdrawing from regulation
in areas open to competition, as has been proposed when setting
up regulatory bodies for the communications sector.
2.2 Q5To what extent are regulators
both prosecutors and juries on an issue; what rights of appeal
are there against decision made by regulators?
Members of the Gas Forum were not concerned
that Ofgem may act as both the prosecutor and jury on an issue
regarding matters of compliance. However, they were more concerned
that they can use both roles by promoting and then approving certain
approaches with no mechanism available to appeal the substance
of that decision. Members of the Gas Forum see particular value
and protection from the introduction of an ability to appeal decisions
made in respect of Network Code modifications.
2.3 The Network Code in gas is a common
carriage contract between the natural monopoly owner/operator
of the pipelines (principally Transco) and its users, ie shippers.
The arrangements for the Network Code in gas differ from those
in electricity [a note on the differences is included at the end
of this paper]. The Network Code Modification Panels' roles are
confined to procedural matters and they cannot make recommendations
to Ofgem regarding Code modification proposals. While there may
be the potential for improvements to the process in gas, we do
not consider that wholesale adoption of the arrangements used
for Connection and Use of System Code (CUSC) and/or the Balancing
and Settlement Code (BSC) (together the equivalent electricity
industry codes) would necessarily be the best way forward.
2.4 The Rules of Procedures for the Authority
do not mention Code modifications, instead concentrating on licence
changes. Code modifications can have equally significant effects
on industry participants as licence changes and therefore any
delegation of powers should be more explicit rather than less.
Decisions should be taken at equally senior levels within the
Authority as for licence changes.
2.5 Some changes have been introduced through
modification to Transco's licence. There is no appeal mechanism
for third parties (eg shippers and suppliers) against these changes
that can lead to Transco being incentivised to introduce change
to the Network Code. As it is not possible to appeal code decisions
the only test applied by Ofgem is whether the modification proposal
is consistent with Transco's licence. A recent example of this
is the new approach to the gas exit capacity and interruption
regimes. These changes will have significant impacts on consumers
and suppliers in terms of their contracts, systems etc. It is
essential that a mechanism is introduced to ensure that market
participants can appeal any Network Code proposal on its merits.
Ofgem chose not to publish a decision document on this particular
issue and as a consequence many issues raised are only being addressed
post the implementation of the licence amendments.
2.6 There have been occasions when modification
proposal have been objected to by the majority of respondents
including Transco (eg Modification Proposal 511where shippers
tried to delay implementation of a new regime and evidence supporting
a delay came to light but was not considered). Ofgem's decision
to implement in this case (and others) appeared to rest on its
views and vision of the future of the industry rather than a factual
analysis of the issues presented to it through the consultation
2.7 The lack of robust transparent process
and open decision-making causes unacceptable levels of uncertainty
in the markets. Ofgem has recently introduced a licence change
to allow third party participants to raise modification proposals
to Transco's Network Code. This has increased risk for industry
participants without any concurrent protection being introduced.
Appeals Mechanisms benefit Ofgem as well as
2.8 The introduction of an appeals mechanism
that allows for decisions to be reviewed on their merits would
not threaten the work of Ofgem, nor be of detriment to the interests
of consumers. No single organisation or regulator has a monopoly
on knowledge or approach and it is not reasonable to expect it
to always make perfect decisions.
2.9 Given the considerable administrative
burden of raising an appeal, it is unlikely that market participants
would expend time and resource on frivolous appeals, and we do
not envisage that such a change would lead to a flurry of appeals.
During the operation of the Master Registration Agreement, for
example, only six of the 110 Change proposals have been appealed
to the Authority for determination.
3.1 Q2How are regulators accountable
to those whom they regulate; what is the impact of regulation
on the economy; how transparent are their methods of working?
Market participants have long had concerns regarding
the limited transparency of Ofgem's decision making. Members are
pleased that Ofgem has now committed to doing Regulatory Impact
Assessments (RIAs) and we hope that these will be carried out
in accordance with the OFT guidance. We look forward particularly
to seeing detailed analysis of the benefit that will arise from
proposed changes for both the industry and the consumer. We note
that the level of underlying costs of regulation have risen from
a figure of £10 million per annum to £40 million, although
that we note that £4 million of this is for the additional
costs that have arisen from social and environmental guidance.
3.2 One proposal that may improve the decision
making process for the benefit of all players would be the introduction
of an honest and objective assessment after the introduction of
any major project, undertaken perhaps by an external agency. Post-project
assessment will result in a more considered and iterative decision
3.3 We ask that the Select Committee strongly
endorse the principle that appeal to regulatory decisions should
3.4 All members would welcome a greater
involvement in the early stages of strategic planning. This would
allow industry players have the chance to influence Ofgem thinking
before it becomes policy and hence difficult to change.
3.5 We would be pleased to discuss any part
of this paper, either in person or by telephone.
4. GAS BALANCINGAN
4.1 Operation of the gas supply network
requires inputs (from production facilities, interconnectors from
other countries or storage facilities) to be balanced with outputs
(to consumers). The current rules governing this activity require
shippers (the intermediates between producers and consumers) to
balance their inputs and outputs each day, with Transco managing
within day activity to ensure safe operation of the network. The
prices paid by shippers for balancing activity therefore relate,
whether struck through a market or determined by a set of rules,
to a single day.
4.2 In electricity, the equivalent period
is half an hour.
4.3 Concerns over the difficulties faced
by Transco in efficiently balancing the system with the day led
Ofgem to propose changing to an hourly or half-hourly basis. The
potential cost was projected at between £1 billion and £3.5
billion in a study commissioned by the industry as a result of
no Ofgem analysis being available, with industry participants
required to make major systems investment and Terminal operators
and upstream producers facing additional operating costs.
4.4 The history of the proposal is:
February 2001Ofgem initial consultation
February 2002Ofgem revised proposals
Summer 2002industry workgroup considers
March 2003further consultation document
due (expected to propose incremental, and more modest, change)
4.5 Ofgem have recently shelved proposals
to introduce shorter balancing periods. A key point emerges from
the processa RIA in the initial consultation would have
led to an earlier focus on more cost-effective proposals. It is
essential that regulators listen to industry opinion, whenever
proposals are complexthe regulator will not be an expert.
This requirement cannot easily be formalised, but may be covered
by an effective appeals process.
5. NOTE ON
5.1 There are several different Network
Codeseach gas transporter is obliged to have one by licence.
They set out the "rules" of the market, and all include
a process to make changes.
5.2 The Transco Code allows for a procedure
in which modification proposals to the Code are discussed at a
panel comprised of a number of shipping community representatives
and Transco staff. Ofgem and energywatch also attend. On the BSC,
the panel makes a recommendation, although the modification has
often changed radically since being proposed. On CUSC, it is the
system operator who makes the recommendation.
5.3 All gas modification proposals go to
Ofgem for a decision, even if all shippers and Transco are against
it. The panel does not make a recommendation. Once Ofgem has made
a decision, there is no appeal mechanism available.
6.1 The majority of Gas Forum members support
this paper. Members include a diverse range of operators in the
UK Gas markets: Atlantic Electric and Gas, BP Amoco, British Gas,
Innogy, ExxonMobil, LE Group, Norsk Energy, Powergen, Shell, Scottish
and Southern, ScottishPower, Statoil, Telecom Plus and TotalFinaElf.
While British Gas has some sympathy with the
general desire for an appropriate appeals mechanism, it is unable
to support the Statement made on behalf of the Gas Forum. British
Gas is concerned that the benefits that might arise from an Appeals
mechanism would be outweighed by the downside if regulatory decisions
were open to challenge, and a consequence this led to undue delays
within the decision making process, thereby resulting in increased
ExxonMobil is not able to support the Gas Forum
statement. ExxonMobil believes that the perceived benefits of
a substance based appeals mechanism to provide an incentive for
carefully thought through regulatory proposals are limited when
compared with (i) the incremental regulatory uncertainty introduced
by such processes and (ii) Ofgem's commitment (March 2003 Corporate
Strategy 2003-06) that it will in future, for all major proposals,
provide Regulatory Impact Assessments which will include an assessment
of consequences of proposals for UK security of supply.
The Gas Forum