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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 l.jpg

National Grid GasCost Forecasts to 2013

GDPCR Industry Cost Workshop

19 April 2007


Slide2 l.jpg

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


Slide3 l.jpg
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


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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.



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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)


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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


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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”


Future diameter mix bpq moves closer to a proportionate profile in the next price control period l.jpg
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


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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


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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


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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


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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


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Conclusions remove highest risk pipes (“seeds”)

  • 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)


Additional background information not intended for presentation at the workshop l.jpg

Additional Background Information remove highest risk pipes (“seeds”)[Not intended for presentation at the workshop]


Industry timeline l.jpg

CONTINUAL IMPROVEMENT remove highest risk pipes (“seeds”)

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


The 2002 settlement arguably the toughest regulatory targets ever l.jpg

  • OPEX Po cut 16% remove highest risk pipes (“seeds”)

  • 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


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NGGD has broadly achieved underlying opex, but… remove highest risk pipes (“seeds”)

Average NGGD network

Po cut of 16%

3.7% annual reduction

New Safety costs

Underlying costs


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… 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


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M1 Corridor Alliance overall NGGD performance

NW Gas Alliance

North London Alliance

West Midlands Alliance

Concentrations of replacement work in National Grid


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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


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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


Gdpcr issues increasing workloads challenging resource environment and numerous uncertainties l.jpg

Indexation legacy

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