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National Grid Gas Cost Forecasts to 2013

National Grid Gas Cost Forecasts to 2013. GDPCR Industry Cost Workshop 19 April 2007. Earnings, contractors & materials. Safety related maintenance. Lower shrinkage and escapes workload. Emergency Service impact.

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National Grid Gas Cost Forecasts to 2013

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  1. National Grid GasCost Forecasts to 2013 GDPCR Industry Cost Workshop 19 April 2007

  2. Earnings, contractors & materials Safety related maintenance Lower shrinkage and escapes workload Emergency Service impact Operating ExpenditureWe are targeting challenging performance improvements to help mitigate adverse market and workload movements

  3. Capital ExpenditureLoad growth and asset renewal requirements drive investment back up to the long-run rate Four major LTS schemes and above ground plant Stable workloads, efficiency improvements. Long Run Average Restricted expenditure in current period • Obsolete business systems • network control system, • front office systems • UK-Link (within xoserve) Average Allowance

  4. Mains Replacement ExpenditureIncreased costs reflect contractor prices and the need to tackle the larger diameter risk mains. Further improvements targeted from our four Alliances • Alliance productivity • New selection technique agreed with HSE Contractor demand-driven 2-4% pa Impact mitigated by recycling and “no-dig” Large mains now pose the highest risk per km.

  5. Mains Replacement Expenditure

  6. Mains Replacement - background to GDPCRGDNs have achieved the HSE ramp-up and replacement is now the biggest single activity undertaken • Safety driven requirement to remove iron mains within 30 metres of property • HSE requirement: “as soon as reasonably practicable” • Prioritised annually on a risk basis (“20/70/10”) • NGGD decommissions further c80km pa. outside the HSE target (e.g. diversions)

  7. Historic Diameter MixSmaller pipes have presented the highest risk this period and so the programme has been skewed away from a proportionate 30-year profile

  8. Cavendish Mill. 14/11/01, 15” CI Southall. 22/11/05, 30” CI Newton Heath, 18/11/01, 15” CI Large Diameter MainsLarger diameter pipes now represent higher percentage of risk and need to be decommissioned at a proportionate rate (as a minimum) Total Network Length Total Network Risk May 2004 11% 10 37/50 % 7% 94 % 89 13/50 % 7% of length producing 11% of risk June 2006 17% 17 % 8% 92 % 8% of length producing 17% of risk 83 % >12” <=12”

  9. Future Diameter MixBPQ moves closer to a proportionate profile in the next price control period This upward shift in diameter mix towards proportionality increases cost compared with first 5 years

  10. Large Diameter CharacteristicsNumerous reasons why larger mains require more resources per km to replace than smaller pipes • Restricted to summer window • More attention to safety • Can require non-standard pipe & fittings • Require resources with higher skills • Needs investment in training • Predominantly Victorian • Deep excavations • Tend to exist in busy thoroughfares • Require specialist tools & equipment • 40% operate at medium pressure

  11. Cross Rail Link and Thameslink £10.5billion Network Rail £8billion Investment projected to continue at approximately £2billion per year Transport for London £10billion Transport 2025 Program and Waterloo station redevelopment £11billion M25, M1 and M62 Road Widening £3.7billion Water Industry £16.8billion Investment shows no signs of abating (Water UK) London and Barts Hospital and Stratford City Development £5billion London Airport Expansion and Redevelopment £9.5billion 2012 Olympics Infrastructure £3.3billion Post 2012 Regeneration £1billion Power Generation Replacement £8.1billion National Grid Gas Replacement £1.9billion 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Longer Term DemandWe do not see evidence for contractor demand softening after 2012/13. Continuing to defer larger mains likely to store up a growing problem National Grid Gas Replacement £1.9billion Year

  12. Key Seed Pipe Sector pipes Zonal (‘postcode’) SelectionBPQ assumes continued productivity improvements (plus customer and environmental benefits) from a move to zonal selection From this (20/70/10 design for Sheffield) BPQ submission targets 4% productivity in 2007/8, falling to 1% pa from 2010/11 Productivity delivers c£110m Continuation of 20/70/10 would lead to reducing productivity as project size deteriorates Lost productivity could impact c£60m To this (zonal design for Sheffield) 0.49 0.49 • Larger project lengths bring efficiency and customer benefits… • Larger scale site operations with dedicated supervision • Demonstrable safety improvements • Better co-ordination with other utilities and agencies • Overall lower environmental impact • Proportionally lower mobilisation and demobilisation costs

  13. High risk and steep risk gradient favours schemes which remove highest risk pipes (“seeds”) Reducing risk levels and gradient results in moderate risk penalty from grouping over five years Average Risk Score Efficiency top down Reducing difference between pipes enables further grouping into sectors ‘Seeds’ become a progressively redundant concept as the limits of the model are reached 20/70/10 zonal & seeds zonal & reduced seeds “free” zonal National Grid Time Zonal Now Right for NGGThe optimal strategy for smaller mains depends on where a networks’ assets lie on the risk curve

  14. Conclusions • Risk dictates that large diameter replacement should ramp-up to be at least proportional to the overall population • No benefit in further “holding off” - apart from risk considerations, resource constraints are not expected to ease • National Grid’s mains risk profile enables further efficiencies through zonal replacement • Short and medium term benefits to consumers • We see no reason why condition and customer diversion work should not contribute to the annual total (but will need HSE agreement)

  15. Additional Background Information[Not intended for presentation at the workshop]

  16. CONTINUAL IMPROVEMENT RESTRUCTURING GROWTH 2008 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Completed Work in progress Industry Timeline 25% manpower reduction Transco Response 1 Operation 8 Asset Businesses Transco Formed Merger Savings 13 LDZs 90 Districts 32 Districts 8 Networks NTS Separated Network Sales MMC Inquiry Centrica Demerger The Way Ahead Domestic Supply Competition Alliances Connections Unbundled Shared Services Org Larkhall Explosion Cont. Improvement BG Demerger Global Line of Business Lattice Accepts Final Proposals

  17. OPEX Po cut 16% • Followed by annual reductions of almost 4% Gas Distribution (2002/03) Transco & NGC (1997/98) Transco & NGC (1997/98) NIE (1997/98) NIE (1997/98) Sewage & Sewage & PESs PESs (2000/01) (2000/01) NGC, Mid Kent & NGC, Mid Kent & Railtrack Railtrack (2001/02) (2001/02) Water & Sewage (1995/96) Water & Sewage (1995/96) Water (2000/01) Water (2000/01) Sutton & East Surrey (2000/01) Sutton & East Surrey (2000/01) PESs PESs (1995/96) (1995/96) Scottish Hydro (1995/96) Scottish Hydro (1995/96) NIE (2002/03) NIE (2002/03) Average Water & Water & DNOs DNOs (2004/05) (2004/05) 0 0 - - 1 1 1 1 - - 2 2 2 2 - - 3 3 3 3 - - 4 4 >4 >4 Percentage Percentage • Capex allowances well below the long term average The 2002 Settlement - Arguably the toughest regulatory targets ever

  18. NGGD has broadly achieved underlying opex, but… Average NGGD network Po cut of 16% 3.7% annual reduction New Safety costs Underlying costs

  19. … significant external costs have adversely impacted overall NGGD performance Average NGGD network Po cut of 16% Costs in excess of 2001/2 allowance 3.7% annual reduction New Safety costs Underlying costs

  20. M1 Corridor Alliance NW Gas Alliance North London Alliance West Midlands Alliance Concentrations of replacement work in National Grid

  21. Environmental challenges – pipes replaced in 5-year period under 20/70/10 Dronfield, near Sheffield Red pipes = not replaced Many streets across the town are not replaced, despite NGGD working throughout the town - impact on all

  22. Environmental challenges - zonal approach leaves a better legacy Dronfield, near Sheffield Red pipes = not replaced North of town largely complete South of town largely unaffected

  23. Indexation Rolling Incentives Regulatory Incentives Comparative Regulation Major Maintenance Asset Management Plant Renewal Emergency Service Funding Exit / Interruptions Reform Safety & Environmental Work Traffic Management Act Legislation Ageing Workforce EU Legislation Contractor Supply / Demand Metering Competition Mains Risk Reduction Resourcing Contractor Prices Key Uncertainties Market Factors GDPCR issues - increasing workloads, challenging resource environment and numerous uncertainties NGGD PCR Environment

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