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APPENDIX 6 LONDON NETWORK

A6.1 SUMMARY

London Network Net Opex £m (2005/06 prices)

2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

BPQ Submission Work Management 27.6 29.2 29.6 29.1 28.5 144.1 Emergency 12.8 10.6 11.8 11.3 11.3 57.9 Repairs 17.1 17.0 17.3 17.2 17.0 85.7 Maintenance 13.8 12.2 13.2 14.6 14.1 68.0 Other Direct Activities 1.7 1.7 1.7 1.7 1.7 8.5 Shrinkage 0.0 0.0 0.0 0.0 0.0 0.0 xoserve 0.0 0.0 0.0 0.0 0.0 0.0 Total 73.1 70.7 73.6 74.1 72.7 364.2 Normalisation Adjustments Work Management -8.5 -9.5 -9.7 -9.5 -9.2 -46.3 Emergency -3.1 -0.9 -1.7 -1.3 -1.2 -8.2 Repairs -3.1 -3.0 -3.1 -2.9 -2.6 -14.8 Maintenance -0.9 0.7 0.1 -0.5 0.3 -0.3 Other Direct Activities -0.2 -0.2 -0.2 -0.2 -0.1 -1.0 Shrinkage 7.2 6.9 6.7 6.4 6.0 33.2 xoserve 3.5 3.2 3.6 3.5 3.2 17.1 Total -5.2 -2.8 -4.3 -4.4 -3.6 -20.2 Normalised Opex Work Management 19.2 19.7 19.9 19.7 19.4 97.8 Emergency 9.7 9.7 10.1 10.1 10.1 49.7 Repairs 14.0 14.0 14.2 14.3 14.4 70.9 Maintenance 12.8 13.0 13.4 14.2 14.5 67.8 Other Direct Activities 1.4 1.5 1.5 1.5 1.6 7.5 Shrinkage 7.2 6.9 6.7 6.4 6.0 33.2 xoserve 3.5 3.2 3.6 3.5 3.2 17.1 Total 67.9 68.0 69.3 69.6 69.1 344.0 Adjustments Work Management -1.1 -2.1 -2.6 -2.8 -3.0 -11.6 Emergency 2.1 1.7 0.9 0.4 -0.1 5.0 Repairs -3.3 -3.5 -4.1 -4.5 -5.0 -20.5 Maintenance -0.3 -2.8 -3.4 -4.1 -4.4 -15.0 Other Direct Activities 0.0 0.0 0.0 0.0 -0.1 -0.2 Shrinkage 0.0 0.0 0.0 0.0 0.0 0.0 xoserve 0.0 0.0 0.0 0.0 0.0 0.0 Total -2.6 -6.7 -9.3 -11.0 -12.5 -42.2 Proposed Opex Work Management 18.0 17.6 17.3 16.9 16.4 86.2 Emergency 11.9 11.4 10.9 10.5 10.0 54.7 Repairs 10.7 10.4 10.1 9.8 9.4 50.5 Maintenance 12.5 10.1 9.9 10.1 10.0 52.7 Other Direct Activities 1.4 1.4 1.5 1.5 1.5 7.3 Shrinkage 7.2 6.9 6.7 6.4 6.0 33.2 xoserve 3.5 3.2 3.6 3.5 3.2 17.1 Total 65.3 61.2 60.0 58.6 56.6 301.7

Table A6 - 1

Ref No: 62533 2006 36621 (Update v1.2) PB Power

London Network Net Opex £m (2005/06 prices)

2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

Proposed Opex Work Management 19.8 19.4 19.0 18.6 18.1 94.8 Emergency 12.2 11.8 11.5 11.2 10.9 57.6 Repairs 11.2 10.8 10.5 10.1 9.8 52.4 Maintenance 10.9 8.8 8.5 8.4 8.2 44.8 Other Direct Activities 1.3 1.3 1.3 1.2 1.2 6.3 Shrinkage 7.2 6.9 6.7 6.4 6.0 33.2 xoserve 2.9 2.9 2.9 2.9 2.9 14.4 Total 65.5 62.0 60.3 58.7 57.1 303.5

Table A6 - 2

London’s Opex projections for the forecast period 2008/09 to 2012/13, based on the updated analysis, are detailed in Table A6 - 1. Our original recommended Opex projections are shown in Table A6 - 2.

The GDNs recommended total Opex has reduced from £303.5 m to £301.7m, a reduction of 0.8%, which is driven by the revised benchmarking analyses based on the 2006/07 outturn performance. The factors which affect the revised recommendations are considered in the relevant sections of this report.


A6.2 WORK MANAGEMENT

A6.2.1 SUMMARY

London Controllable Opex £m (2005/06

prices) 2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

BPQ Submission 27.6 29.2 29.6 29.1 28.5 144.1 Normalisation Adjustments -8.5 -9.5 -9.7 -9.5 -9.2 -46.3 Normalised BPQ 19.2 19.7 19.9 19.7 19.4 97.8 Adjustments -1.1 -2.1 -2.6 -2.8 -3.0 -11.6 Proposed 18.0 17.6 17.3 16.9 16.4 86.2

Table A6 - 3

For comparison, the original PB Power proposals are summarised in Table A6 - 4 below.

London Original Controllable Opex £m

(2005/06 prices) 2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

Proposed 19.8 19.4 19.0 18.6 18.1 94.8 Table A6 - 4

A6.2.2 2006/07 FORECAST/OUTTURN COMPARISON

The normalised outturn figure for London is £18.7m. The normalisation adjustments applied to the reported BPQ figure are shown in the following Table.

London Normalisation Adjustments

2006

/07

Cost transfer -8.9 Shrinkage -6.3 xoserve -2.7 LECG Adjustments -0.2 Ofgem Accounting Adjustments -0.3 Pension Adjustments 0.0 Removed costs 0 Total -9.4

Table A6 - 5

Shrinkage and xoserve costs have been moved to separate specific categories. The LECG adjustment relates to skills and competency costs that have been reclassified from work management to HR.

The normalised outturn exceeds the normalised forecast for 2006/07 by £0.6m.

The workload reduced by 9.7%, but this saving was more than offset by additional costs in London arising from the appointment of additional first line managers to support workload delivery driven by additional workload arising from recommendations from the 2005 Southall incident, made available in late 2006 (£0.9m). The net result, was that costs increased by 3.3%.


A6.2.3 IMPACT OF MOVEMENTS ON REGRESSION

The movements of GDNs overall have resulted in a reduction of the target costs and therefore a general reduction in the recommendations. The effect of the revised values, are to lower the target point for London Network on the regression graph, from £17.0m to £14.8m.

A6.2.4 REVIEW WORKLOAD PROJECTIONS

Opex expenditure forecasts have not been revised as part of the 2006/07 update process.

The components of the CSV for the forecast period reflect the reported figures for distribution network length and the PB Power adjusted forecasts for public reported escapes and repairs.

A6.2.5 REVISED RECOMMENDATIONS

The following table sets out the principal results of the revised analysis:

London 20

08/0

9

2009

/10

2010

/11

2011

/12

2012

/13

GDN BPQ Submission 27.6 29.2 29.6 29.1 28.5 Normalised Adjustments -8.5 -9.5 -9.7 -9.5 -9.2 Normalised Submission 19.2 19.7 19.9 19.7 19.4 Combined Driver 25368 25398 25429 25461 25494 Benchmark (Ex RF RPE) 14.9 14.8 14.6 14.5 14.4 Baseline (Ex RF RPE) 17.2 17.1 16.9 16.8 16.6 Gap 2.3 2.3 2.3 2.3 2.2 Convergence 1.8 1.5 1.2 0.9 0.7 Recommended (Ex RF and RPE) 16.7 16.3 15.9 15.5 15.1 Recommended (Inc RF and RPE) 18.4 18.2 17.9 17.7 17.4 IT Productivity Adjustments -0.4 -0.5 -0.7 -0.8 -1.0 Recommended (Inc RPE) 18.0 17.6 17.3 16.9 16.4

Table A6 - 6

The result of the analysis, showing the normalised GDN forecast, the target cost and the line representing the recommended allowance cost is shown on the following graph.

Chart showing London Recommended Work Management Opex

15.0

16.0

17.0

18.0

19.0

20.0

21.0

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

Total Work Management Opex £m

Ope

x £m

Normalised BPQ Benchmark Performance Proposed Baseline Performance Figure A6 - 1


Note: For comparability purposes the Benchmark and Baseline Performance lines include the Adjustments shown in Table A6 - 6 above.


A6.3 EMERGENCY

A6.3.1 SUMMARY

The proposed workloads and allowances based on the 2006/07 actuals are shown in the following table.


prices) 2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

BPQ Submission 12.8 10.6 11.8 11.3 11.3 57.9 Normalisation Adjustments -3.1 -0.9 -0.9 -0.3 -0.1 -5.3 Normalised BPQ 9.7 9.7 10.9 11.0 11.2 52.5 Adjustments 2.1 1.7 0.1 -0.5 -1.2 2.2 Proposed 11.9 11.4 10.9 10.5 10.0 54.7

Table A6 - 7

Our original proposed workloads and allowances based on the 2005/06 figures are shown in the following table.


(2005/06 prices) 2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

Proposed 12.2 11.8 11.5 11.2 10.9 57.6 Table A6 - 8


The table below shows the cost of the emergency process as forecast by the GDN for 2006/07 and the comparable normalised actual costs for 2006/07 from the latest GDN submission. The forecast 2006/07 costs exclude the service relay costs transferred from Repex as part of our original report.

Expenditure breakdown (2005/06 prices)

London 2006

/07

(fore

cast

)

2006

/07

(act

uals

)

Contract 2.1 3.4 Direct 7.3 8.1 Materials 0.0 0.1 Other 0.6 1.1 Total 10.0 12.7

Table A6 - 9

The above table shows a 27% increase in costs with PRE workload some 7% higher than forecast (taking East of England and London together).

From 2005/06 to 2006/07 actual workload increased by 5%. London has identified the following cost factors contributing to the changes in costs over this period:

Increase in PRE workload – cost impact £0.6m additional costs to resource revised D2 recheck procedures – cost impact £1.9m loss of meterwork – cost impact £0.5m (see normalisation table) higher salary and related costs, and transport and plant costs contractor price inflation


reallocation of Outer Met costs to East of England to align costs and workloads with GDN boundaries (the 2005/06 costs and workloads were aligned to network boundaries, so Outer Met costs were allocated to London).

Cost normalisation applied to 2006/07 actuals

The normalisation adjustments applied to the reported BPQ figures are shown in the following table.


2006

/07

Cost transfer 0.0 Ofgem Accounting Adjustments -0.2 Pension Adjustments 0.0 Removed costs -0.5 Loss of emergency meter work -0.5 Total -0.7

Table A6 - 10

There is a small pension adjustment, which is not apparent due to rounding. To carry out the comparative analysis of the emergency activity across all GDNs on a consistent basis we have removed the additional costs reported by GDNs as arising from the loss of meterwork as part of the normalisation adjustments applied to the 2006/07 costs


London’s Emergency costs (after normalisation and adjustment for regional factors) were £10.5m in 2005/06 and £11.1m in 2006/07. The 2005/06 cost included £1.7m of costs transferred from Repex.

As regards the regression results, our original report showed an upper quartile cost for London of £8.8m in 2005/06. Overall across all GDNs, the updated regression analysis gives upper quartile costs in 2006/07 5% below those in 2005/06, reflecting the removal of the Repex related costs from our normalisations but offset to some extent by increases in some GDN costs.

For London the regression quartile for the 2006/07 data is 9% lower than for the 2005/06 data. The upper quartile cost for London is £8.0m in 2006/07

In terms of the main cost driver (PREs), the updated quartile result is equivalent to a unit cost of £57.4/PRE compared to the average unit cost in 2006/07 across all GDNs of £67.4/PRE.


Section 4 of the main document sets out our proposed workload assumptions. Applying the upper quartile unit costs (expressed in terms of the regression explanatory variable, ie £/CSV) to the workload projections gives the recommended operating expenditure allowance. The potential loss of meterwork through the plan period is addressed separately below.


London GDN Proposed Workloads

PB Power Proposed Workloads

PB Power Proposals% change

on 2006/07

Internal PREs 2006/07 118447 118447 N/A 2008/09 119607 118447 0.0% 2012/13 118796 118447 0.0% External PREs 2006/07 21218 21218 N/A 2008/09 21882 20474 -3.51% 2012/13 21734 19062 -10.16% All PREs 2006/07 139665 139665 N/A 2008/09 141489 138921 -0.53% 2012/13 140530 137509 -1.54%

Table A6 - 11

Loss of meterwork

To meet its PRE standards of service the Network has to deploy sufficient FCOs to deal with peak workload levels. Emergency workload tends to peak in the morning and evening, leaving potentially unproductive time (i.e. waiting time) in the middle of the day. During this time FCOs are utilised for meterwork and other maintenance work. Meterwork is available via contracts with third party meter asset owners such as Onstream and NGG Metering.

In our previous report we assessed the impact of loss of meterwork on GDN’s emergency costs at £5.4 /PRE, based on an assumption that 45% of the 2005/06 meterwork will be retained across the period 2008/09 to 2012/13. We have not reviewed these costs in this update and basis of the allowance for the loss of meterwork is therefore unchanged from our previous report.

The following table shows the proposed costs for London for the loss of meterwork, with the revised PRE workloads.

London

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

PRE workload 138921 138558 138202 137853 137509 Cost of Meterwork loss £m 0.8 0.7 0.7 0.7 0.7

Table A6 - 12

Since our original report, the GDNs have provided additional information on the volume of meterwork they expect to retain and the associated costs.

London expects to retain of the 2005/06 workload on average across the period 2008/09 to 2012/13 at an average cost of £1.5m pa or £10.9/PRE. This cost is approximately double the cost derived in our original report for a similar level of workload retained. London has also reported additional costs arising in Work Management and Indirect opex as a result of the loss of meterwork.



The proposed workloads and allowances are shown in the following table. As in our original report a productivity improvement of 1% per annum is assumed.

London

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

GDN BPQ Submission 12.8 10.6 11.8 11.3 11.3 Normalised Adjustments -3.1 -0.9 -0.9 -0.3 -0.1 Normalised Submission 9.7 9.7 10.9 11.0 11.2 Composite Regression Driver 0.888 0.882 0.876 0.870 0.865 Benchmark (Ex RF RPE) 7.7 7.6 7.5 7.3 7.2 Baseline (Ex RF RPE) 10.7 10.5 10.3 10.2 10.0 Gap 3.0 2.9 2.9 2.8 2.8 Convergence 2.3 1.9 1.5 1.2 0.8 Recommended (Ex RF and RPE) 10.0 9.5 9.0 8.5 8.0 Recommended (Inc RF and RPE) 11.1 10.6 10.2 9.7 9.3 Allowed Adjustments 0.8 0.7 0.7 0.7 0.7 Recommended (Inc RPE) 11.9 11.4 10.9 10.5 10.0

Table A6 - 13

Chart showing London Recommended Emergency Opex

8.0

9.0

10.0

11.0

12.0

13.0

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

Tota

l Em

erge

ncy

Ope

x £m

Normalised BPQ Benchmark Performance Proposed Baseline Performance

Figure A6 - 2

Note: For comparability purposes the Benchmark and Baseline Performance lines include allowed adjustments shown in Table A6 - 13 above.


A6.4 REPAIR

A6.4.1 SUMMARY

London Net Opex £m (2005/06 prices)

2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

BPQ Submission Repairs 17.1 17.0 17.3 17.2 17.0 85.7 Total 17.1 17.0 17.3 17.2 17.0 85.7 Normalisation Adjustments Adjustments -0.8 -0.7 -0.7 -0.6 -0.6 -3.5 Removed Costs -2.3 -2.3 -2.4 -2.3 -2.0 -11.3 Total -3.1 -3.0 -3.1 -2.9 -2.6 -14.8 Normalised BPQ Repairs 14.0 14.0 14.2 14.3 14.4 70.9 Total 14.0 14.0 14.2 14.3 14.4 70.9 Adjustments Allowed Costs 0.0 0.0 0.0 0.0 0.0 0.0 Workload Adjustment -1.9 -2.1 -2.4 -2.6 -2.8 -11.7 Efficiency Adjustments -1.4 -1.4 -1.7 -1.9 -2.2 -8.7 Total -3.3 -3.5 -4.1 -4.5 -5.0 -20.5 Proposed Repairs 10.7 10.4 10.1 9.8 9.4 50.5 Total Net 10.7 10.4 10.1 9.8 9.4 50.5

Table A6 - 14


2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l Proposed 11.2 10.8 10.5 10.1 9.8 52.4

Table A6 - 15

The outcome of the updated regression analysis is to decrease the cost of repairs by £1.9m over the five years to 2012/13.


The normalisation adjustments applied to the reported BPQ figure are shown in the following Table


2006

/07

Cost transfer 0.0 Ofgem Accounting Adjustments -0.1 Pension Adjustments 0.0 Removed costs 0.0 Total -0.1

Table A6 - 16

This section reviews the Network’s actual 2006/07 performance and compares this with the forecasts contained within the Network’s October 2006 submission.


In undertaking this review it is recognised that the Network’s forecast is made on a seasonal normal basis and that weather effects, subject to any mitigation measures open to the Network, are largely outside of the Network’s control.

We have only identified significant movements between the October forecast and the reported results.

Repair Cost £m (2005/06)1

London Normalised Forecast2 Actual Change % Change

Contract 6.7 6.5 -0.2 -4% Direct 6.9 4.4 -2.5 -37% Materials 2.0 0.4 -1.6 -80% Other 0.2 0.7 0.5 330% Gross Cost 15.8 11.9 -3.9 -24% Income -0.8 -1.3 -0.5 63% Net Cost 15.0 10.6 -4.4 -29%

Table A6 - 17

There were significant negative variances in Direct Labour and Materials costs but the Network has adjusted actual costs (-£1m transfer to East of England) to correct for the “Outer Met” area, but even after allowing for this there remains a significant variance of -£2.9m (-20%) between the corrected normalised forecast and reported gross expenditure. Comparable workload (corrected for the “Outer Met” area) is largely unchanged and we are unable to identify a cause for the variance other than forecasting error.

The Network has advised that it received income of £0.5m from two major third party incidents and also undertook a greater percentage of large diameter mains repairs resulting in increased subcontractor costs associated with reinstatement.

Repairs Workload

London Forecast Actual Change % Change

Repairs to mains (condition) 7578 6039 -1539 -20% Repairs to mains (interference) 199 200 1 1% Repairs to services (condition) 9655 9667 12 0% Repairs to services (interference) 1562 1302 -260 -17% Total 18994 17208 -1786 -9%

Table A6 - 18

Overall, repairs decreased by 9%, but this variance from forecast is accounted for by the transfer of “Outer Met” repairs to East of England (1709 repairs) making the corrected variance -77.

The Network commented that the warm summer and marginally lower system pressures had contributed towards the fall in repair numbers.

Assumptions and Adjustments

2006/07 costs have been adjusted as in Table A6-15 but we have made no adjustments to the associated workload.

1 Note that the cost and workload forecasts include the “Outer Met” area (managed by London Network, but part of East of England) but the actual expenditure and workload has been reported excluding the “Outer Met” area. 2 GDN, Ofgem and Network adjustments have been attributed to the categories above to aid comparison.



Repair Opex v Total Repairs Comparison

WWWM

So

Sc NW No

LonEoE

579

1113151719212325

4000 6000 8000 10000 12000 14000 16000 18000 20000 22000 24000

Weighted Average Workload

Tota

l Rep

air O

pex

£m

2006/07 2005/06 Linear (2005/06) Linear (2006/07) Figure A6 - 3

Change in the Regression 2005/06 to 2006/07

The Network’s costs have increased towards the regression line because its costs have increased at a proportionally greater rate than its workload3 4. On a year to year basis, normalised gross costs have increased from £11.0m to £11.9m (+£0.9m; +8%) whilst repairs has increased by 130 (+0.8%)5. No unit costs are available for repairs, but we have evaluated the increase in workload (principally services condition repairs, offset by mains condition repairs) using the weighted average workloads used within the regression analysis. The value of this change is approximately +£0.3m which we estimate is the contribution of the workload change to the total increase in costs.


GDN Proposed Volumes London

2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Repairs to mains (condition) 7406 7322 7239 7156 7074 Repairs to mains (interference) 194 192 190 188 185 Repairs to services (condition) 9437 9329 9223 9118 9015 Repairs to services (interference) 1526 1509 1492 1475 1458 Total 18563 18352 18144 17937 17732

Table A6 - 19

The Network’s revised forecast is unchanged from its October 2006 submission.

In our last report we assumed that condition repairs would on average fall by 3% per annum and that interference repairs would fall by 1% per annum. We have reviewed the 2006/07 reported workload and the workload trends for all Networks since 2002/03, considered comments by the Network, and concluded that this remains a reasonable assumption.

3 Weighted average workload for 2005/06 was calculated using an assumed frequency for the size of mains condition repairs. The 2006/07 calculation uses reported repairs by size. 4 The Network understated its 2005/06 workload by 1103 repairs. 5 Changes to costs and repairs calculated on a corrected basis.


2006/07 included an exceptionally warm summer and some Networks6 recorded a reduced number of repairs. We have taken an average of the 2005/06 and 2006/07 repairs in each category as the starting point for our forecast which assumes repair numbers reducing as explained above.

PB Power Forecast Repair Volumes London

2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Repairs to mains (condition) 5741 5569 5402 5240 5082 Repairs to mains (interference) 189 187 185 183 181 Repairs to services (condition) 8961 8692 8432 8179 7933 Repairs to services (interference) 1299 1286 1273 1260 1247 Total 16189 15733 15291 14861 14444

Table A6 - 20

Our revised workload forecast, adjusted to reflect the 2006/07 reported workload, and corrected by the removal of “Outer Met” repairs is less than that in our previous report.


2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

BPQ Submission Repairs 17.1 17.0 17.3 17.2 17.0 85.7 Total 17.1 17.0 17.3 17.2 17.0 85.7 Normalisation Adjustments Adjustments -0.8 -0.7 -0.7 -0.6 -0.6 -3.5 Removed Costs -2.3 -2.3 -2.4 -2.3 -2.0 -11.3 Total -3.1 -3.0 -3.1 -2.9 -2.6 -14.8 Normalised BPQ Repairs 14.0 14.0 14.2 14.3 14.4 70.9 Total 14.0 14.0 14.2 14.3 14.4 70.9 Adjustments Allowed Costs 0.0 0.0 0.0 0.0 0.0 0.0 Workload Adjustment -1.9 -2.1 -2.4 -2.6 -2.8 -11.7 Efficiency Adjustments -1.4 -1.4 -1.7 -1.9 -2.2 -8.7 Total -3.3 -3.5 -4.1 -4.5 -5.0 -20.5 Proposed Repairs 10.7 10.4 10.1 9.8 9.4 50.5 Total Net 10.7 10.4 10.1 9.8 9.4 50.5

Table A6 - 21

The outcome of the revised regression analysis is to reduce the cost of repairs by £1.9m (over the five years to 2012/13) from that recommended in our previous report.

6 London repair numbers were similar to 2005/06 but we have taken the average of the two years for consistency.


Proposed Against BPQ Submission - London

8

9

10

11

12

13

14

15

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

Tota

l Rep

air

Ope

x £m

Normalised BPQ Benchmark Performance ProposedBaseline Performance Workload Adj Net BPQ

Figure A6 - 47

7 Workload Adjusted Net BPQ: The normalised BPQ adjusted for the workload changes recommended by our consultants. The key to this and other charts is at section 2.3.2 of the Introduction to this report. There is a full explanation of the terms in our report of June 2007.


A6.5 MAINTENANCE

A6.5.1 SUMMARY

This has now been compiled from the Total Maintenance regression analysis, and not, as previously, the summation of LTS, Storage, and Other Maintenance.


prices) 2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

BPQ Submission 13.8 12.2 13.2 14.6 14.1 68.0 Normalisation Adjustments -0.9 0.7 0.1 -0.5 0.3 -0.3 Normalised BPQ 12.8 13.0 13.4 14.2 14.5 67.8 Adjustments -0.3 -2.8 -3.4 -4.1 -4.4 -15.0 Proposed 12.5 10.1 9.9 10.1 10.0 52.7

Table A6 - 22

For comparison, the original PB Power proposals are summarised in the Table below.


(2005/06 prices) 2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

Proposed 10.9 8.8 8.5 8.4 8.2 44.8 Table A6 - 23

A6.5.2 2006/07 OUTTURN

The normalised outturn figure for London is £8.8m. The normalisation adjustments applied to the reported BPQ figure are shown in the following Table


2006

/07

Cost transfer 0.0 Filter replacement transfer to Repex 0.0 Ofgem Accounting Adjustments -0.1 Pension Adjustments 0.0 Removed costs -1.6 Holder painting -1.1 COMAH -0.2 OLI costs -0.3 AGI painting costs 0.0 Total -1.8

Table A6 - 24

The removed costs are detailed in following sections, under the related activity heading..

A6.5.3 IMPACT OF MOVEMENTS ON RECOMMENDATIONS

The impact of the movements is to increase the recommendation over the review period by £7.9m. The impact of the latest reviews is to increase benchmark unit costs for both Storage and LTS, where improved data has become available.



Opex expenditure forecasts have not been revised as part of the 2006/07 update process. The same applies to the components of the CSV used for the regression analysis. The components of the CSV for the forecast period have been updated to reflect the latest forecasts for workloads and cost drivers.


The result of the Maintenance analysis, showing the normalised GDN forecast, the target cost and the line representing the recommended allowance cost is shown on the following table.

London Controllable Opex (£m)

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

GDN BPQ Submission 13.8 12.2 13.2 14.6 14.1 Normalised Adjustments -0.9 0.7 0.1 -0.5 0.3 Normalised Submission 12.8 13.0 13.4 14.2 14.5 Unit Cost Driver 5.4 5.2 5.1 5.1 5.0 Benchmark Unit Cost 0 0 0 0 0 Benchmark (Ex RF RPE) 7.5 7.2 7.0 7.0 6.9 Baseline (Ex RF RPE) 7.8 7.5 7.3 7.3 7.2 Gap 0.3 0.3 0.3 0.3 0.3 Convergence 0.2 0.2 0.2 0.1 0.1 Recommended (Ex RF and RPE) 7.7 7.4 7.2 7.1 7.0 Recommended (Inc RF and RPE) 8.8 8.5 8.4 8.4 8.4 Recommended (Inc RPE) 12.5 10.1 9.9 10.1 10.0

Table A6 - 25

The comparison between the normalised BPQ forecast, the target and recommended expenditure is shown in the following figure:

Figure A6 - 5


A6.5.6 LTS ANALYSIS

The 2006/07 LTS costs feeding into the Maintenance regression have been adjusted to take account of major non-routine costs. The costs that have been removed in 2006/07 and for the 5 years of the review period are shown in the table below:

London LTS costs removed

2006

/07

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

On Line Inspection 0.3 0.4 0.1 0.1 0.1 0.0 Pipeline repairs 0.0 0.0 0.0 0.0 0.0 0.0 AGI Painting 0.0 0.2 0.3 0.2 0.4 0.4 Crack remediation 0.0 0.0 0.0 0.0 0.0 0.0 Total 0.3 2.1 0.4 0.4 0.6 0.5

Table A6 - 26

Note: Replacement Filter costs, have been removed and transferred to Capex Other Plant and Equipment

PB Power has identified the appropriate non routine LTS costs that should be added back into the recommended allowances following the analysis, these costs for 2006/07 and for the 5 years of the review period are shown in the table below:

London LTS costs added back

2006

/07

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

On Line Inspection 0.3 0.4 0.1 0.1 0.1 0.0 Pipeline repairs 0.0 0.0 0.0 0.0 0.0 0.0 AGI Painting 0.0 0.2 0.3 0.2 0.4 0.4 Crack remediation 0.0 0.1 0.1 0.0 0.0 0.0 Total 0.3 2.2 0.4 0.3 0.5 0.4

Table A6 - 27

The allowance for crack remediation in small bore pipework has been reduced to 50% of that requested. Some other GDNs following surveys, believe this to be a minor matter, in most instances, able to be dealt with within normal maintenance routines. Further justification is required, to increase these figures to the levels indicated in forecasts.


A6.5.7 STORAGE ANALYSIS

The 2006/07 Storage costs feeding into the Maintenance regression have been adjusted to take account of major non-routine8 costs. The costs that have been removed in 2006/07 and for the 5 years of the review period are shown in the table below

London Storage costs removed

2006

/07

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

Holder handrails 0.0 0.5 0.4 0.0 0.0 0.0 HP Non routine 0.0 0.0 0.0 0.0 0.0 0.0 HP routine 0.0 0.0 0.0 0.0 0.0 0.0 Holder decommissioning 0.0 0.0 0.0 0.4 0.4 0.4 COMAH 0.2 0.2 0.2 0.2 0.2 0.2 Holder painting 1.1 0.7 0.9 1.2 1.7 1.0 Total 1.3 1.4 1.5 1.8 2.2 1.6

Table A6 - 28

PB Power has identified the appropriate non routine Storage costs that should be added back into the recommended allowances following the analysis, these costs for 2006/07 and for the 5 years of the review period are shown in the table below:

London Storage costs added back

2006

/07

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

Holder handrails 0.1 0.1 0.1 0.1 0.1 0.1 HP Non routine 0.0 0.0 0.0 0.0 0.0 0.0 HP routine 0.0 0.0 0.0 0.0 0.0 0.0 Holder decommissioning 0.0 0.0 0.0 0.0 0.0 0.0 COMAH 0.0 0.0 0.0 0.0 0.0 0.0 Holder painting 1.2 1.2 0.9 0.9 0.9 0.9 Total 1.3 1.4 1.1 1.1 1.1 1.1

Table A6 - 29

All allowed costs are based on benchmark costs.

A6.5.8 OTHER MAINTENANCE ANALYSIS

The 2006/07 Other Maintenance costs feeding into the Maintenance regression have been adjusted to take account of major non-routine costs. The costs that have been removed in 2006/07 and for the 5 years of the review period are shown in the table below:

London Other Maintenance costs removed

2006

/07

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

DSEAR 0.0 0.0 0.0 0.0 0.0 0.0 Other non routine maint 0.0 0.0 0.0 0.0 0.0 0.0 Total 0.0 0.0 0.0 0.0 0.0 0.0

Table A6 - 30

PB Power has identified the appropriate non routine Other Maintenance costs that should be added back into the recommended allowances following the analysis, these costs for 2006/07 and for the 5 years of the review period are shown in the table below:

8 For this purpose includes HP Routine and COMAH activities


London Other Maintenance costs added back

2006

/07

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

DSEAR 0.0 0.2 0.1 0.1 0.1 0.1 Other non routine maint 0.0 0.0 0.0 0.0 0.0 0.0 Total 0.0 0.2 0.1 0.1 0.1 0.1

Table A6 - 31

The forecast costs have been allowed in full.


A6.6 OTHER DIRECT ACTIVITIES

A6.6.1 SUMMARY


prices) 2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

BPQ Submission 1.7 1.7 1.7 1.7 1.7 8.5 Normalisation Adjustments -0.2 -0.2 -0.2 -0.2 -0.1 -1.0 Normalised BPQ 1.4 1.5 1.5 1.5 1.6 7.5 Adjustments 0.0 0.0 0.0 0.0 -0.1 -0.2 Proposed 1.4 1.4 1.5 1.5 1.5 7.3

Table A6 - 32

For comparison, the original PB Power proposals are shown in Table A6 - 33 below.


(2005/06 prices) 2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

Proposed 1.3 1.3 1.3 1.2 1.2 6.3 Table A6 - 33


The normalised outturn figure for London is £1.0m. The normalisation adjustments applied to the reported BPQ figure are shown in the following Table


2006

/07

Cost transfer 0.0 Ofgem Accounting Adjustments -1.2 Pension Adjustments 0.0 Removed costs 0.0 Total -1.2

Table A6 - 34

In addition to the Ofgem accounting adjustment, there is also a small pension adjustment, which is not apparent due to rounding.

The normalised outturn figure compares with a normalised forecast of £1.4m. In response to a supplementary question, NGG has indicated that the part of the reduction is due to:

The change in the treatment of the Outer Met area between the two submissions moved £0.1m from London into East of England.

Compensation payments for ‘failure to restore the gas supply within 24 hours’ were £0.7m higher than the BPQ forecast, primarily due to increased workload associated with emergency led work on high rise buildings, Ofgem has removed £1.2m as an accounting adjustment.

The variance is not deemed significant.



Regression analysis no longer provides a robust basis on which to prepare future expenditure allowances for Other Direct Activities. Recommended expenditure projections in this report have therefore been based on GDN Projections of expenditure for the period 2008/09 to 2012/13 with the GDN assumed real price effects removed and equivalent PB Power real price effects applied.


Opex expenditure forecasts and workload driver data relevant to Other Direct Activities has not been revised as part of the 2006/07 update process.


The following table sets out the principal results of the revised analysis:

London Controllable Opex (£m) 20

08/0

9

2009

/10

2010

/11

2011

/12

2012

/13

GDN BPQ Submission 1.7 1.7 1.7 1.7 1.7 Normalised Adjustments -0.2 -0.2 -0.2 -0.2 -0.1 Normalised Submission 1.4 1.5 1.5 1.5 1.6 Recommended (Ex RPE) 1.4 1.4 1.4 1.5 1.5 Recommended (Inc RF RPE) 1.4 1.4 1.5 1.5 1.5 Allowed Adjustments 0.0 0.0 0.0 0.0 0.0 Recommended (Inc RPE) 1.4 1.4 1.5 1.5 1.5

Table A6 - 35

The comparison between the normalised BPQ forecast, the target and recommended expenditure is shown in the following figure:

Chart showing London Recommended Other Direct Activities Opex

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

Tota

l OD

A O

pex

£m

Normalised BPQ Proposed Figure A6 - 6


A6.7 SHRINKAGE

A6.7.1 SUMMARY

London Controllable Opex £m (2005/06 prices)

2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

BPQ Submission 0.0 0.0 0.0 0.0 0.0 0.0 Normalisation Adjustments 7.2 6.9 6.7 6.4 6.0 33.2 Normalised BPQ 7.2 6.9 6.7 6.4 6.0 33.2 Adjustments 0.0 0.0 0.0 0.0 0.0 0.0 Proposed 7.2 6.9 6.7 6.4 6.0 33.2

Table A6 - 36

Ofgem are developing a separate incentive for shrinkage costs. We are therefore not proposing allowances for shrinkage. For comparison purposes the table above repeats the figures included in our original report.


A6.8 XOSERVE

A6.8.1 SUMMARY


2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

BPQ Submission 0.0 0.0 0.0 0.0 0.0 0.0 Normalisation Adjustments 3.5 3.2 3.6 3.5 3.2 17.1 Normalised BPQ 3.5 3.2 3.6 3.5 3.2 17.1 Adjustments 0.0 0.0 0.0 0.0 0.0 0.0 Proposed 3.5 3.2 3.6 3.5 3.2 17.1

Table A6 - 37

For comparison, the original PB Power figures are shown in the table below


2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

Proposed 2.9 2.9 2.9 2.9 2.9 14.4 Table A6 - 38


Normalisation adjustments for 2006/07 and succeeding years have been developed and applied to the BPQ reported figures, these are shown in the following Table:


2006

/07

2007

/08

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

5 ye

ar

Tota

l

Cost transfer 2.7 2.9 2.9 2.9 2.9 2.9 2.9 14.4 Transfer from Work Management 2.7 2.9 2.9 2.9 2.9 2.9 2.9 Adjustment (based on xoserve turnover) 0.1 0.5 0.6 0.4 0.8 0.7 0.3 2.7 Total 2.8 3.4 3.5 3.2 3.6 3.5 3.2 17.1

Table A6 - 39

The 2006/07 GDN expenditure returns, which were prepared before information was available on the xoserve dividend distributions, have been normalised to reflect the xoserve reported turnover for each GDN less the allocated dividend.

For the period 2007/08 to 2012/13, as the accounting treatment of xoserve expenditure is still unclear, we have used the xoserve BPQ to allocate the IS projects cost contributions as Capex, removing the same sums from the turnover forecast provided by xoserve.

Having established the net Opex contribution in 2006/07 from the xoserve return we have projected the future year’s net contribution in proportion to the forecast turnover provided by xoserve.


appendix 6 london network - ofgem.gov.uk€¦ · appendix 6 london network a6.1 summary london...

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