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GDPCR Costs Workshop WWU’s View on Operating Costs Bob Westlake 19 th April 2007.

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Presentation on theme: "GDPCR Costs Workshop WWU’s View on Operating Costs Bob Westlake 19 th April 2007."— Presentation transcript:

1 GDPCR Costs Workshop WWU’s View on Operating Costs Bob Westlake 19 th April 2007

2 2 Agenda Introduction to WWU Network Characteristics BPQ Forecasts –Capex –Repex –Opex Main Assumptions Opex –Assessment – Cost Pressures –Factors –Setting Allowances- Direct - Indirect –Future Efficiencies –Conclusions

3 3 Introduction to WWU Wales & West Utilities (WWU) 1 of 8 RGN’s - 4 sold by National Grid Transco in 2005 Turnover £240m, 2.4m connections, deploys c2200 people This contrasts with; (approx numbers) Northern Gas Networks £275m Scotia Gas Networks £615m National Grid Gas £1.5bn ‘The gas distribution sector now has companies with very different scale and operating strategies’

4 4 Operating region is 27% of England and Wales, but with only 15% of the population Difficult access given geography and road networks (e.g. drive from north to south is over 9 hours). Length of LTS Network is 3.3 times national average per customer Distribution mains length per customer in Wales is 14% above national average Significant Features

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7 7 Opex BPQ Forecast £million 05/06 prices 04/0505/0606/0707/0808/0909/1010/1111/1212/13 Direct cost54.459.453.759.861.664.363.162.362.7 Indirect cost20.723.225.924.224.524.925.325.725.9 Total Controllable75.182.679.684. Shrinkage6.911.611.3 Xoserve02. Total82.097.094.498.5100.5103.6102.8102.4103.0

8 8 Direct labour wage costs to increase by RPI + 2.0% Material costs to increase by RPI + 2.5% Contract labour costs to increase by RPI + 4.5% Maintenance workload based on WWU policies and procedures Emergency & Repair forecast workload is based on our best estimates taking into account historical information, average system pressures and the mains and service replacement programme. No increase in Standards of Service GSMR requirements to remain constant (no enforcement of “12 hour” rule) Forecast Assumptions and Process - Opex

9 9 Assessment Different Drivers – Different Environment – for example London – London Weighting, congestion, customer density (high) WWU – geography, customer density (low), more assets all = higher costs

10 10 Greater length of pipe means: more inspection work more emergency work more repairs more materials More work requires: more people more vehicles more travel time more time for working more records This effect also puts a cap on the potential efficiencies that can be achieved. Network Features

11 11 Environmental spend – clean up of contaminated sites – WWU statutory liability in excess of £25m. c. £6 m of costs already removed from WWU business in 06/07 Landfill tax increases of £8 per tonne for next 4 years – will be £53 tonne in 10/11 Traffic Management Act – potential costs of £5m per annum (not part of BPQ costs) Age profile of Industrial workforce requires investment in recruitment and training Skilled labour shortage – NTS pipeline projects and major construction schemes pushing up contract prices. Opex Cost Pressures

12 12 Assessment We did not delay cutting costs Amongst other things we: Net Change in Controllable Costs 2005/6 to 2007/8 NG DNs Scotia DNs Norther n Wales & West -8 -6 -4 -2 0 2 4 6 8 £m Renegotiated EPC rates Pushed more work onto the Direct Labour force Streamlined the organisational structure Reorganised three head office locations into one Came off NG contracts early Brought Connections in- house Starting point: - Needs to recognise cost reductions already made:- Assessment

13 13 2006/07- Regression of Direct Opex vs Length

14 14 LECG cherry-picked a combination of external and internal benchmarks throughout the report creating an artificially efficient GDN. It is too early to effectively benchmark GDN’s internally due to the short period that the management teams have been in place. External benchmarks should be used for Indirect Opex Costs as they are independent and represent best practice in private industry. WWU has commissioned an independent study of appropriate external benchmarking. WWU has built the management and support functions from scratch with no inherent inefficiency. Indirect Opex – Main Points

15 15 LECG benchmarks used for WWU Support Services, £mBenchmark Low Savings, £m High Savings, £m ISIS costs as a % of adjusted revenue0.12N/A Finance & AuditF&A costs as a % of adjusted revenue0.171.36 RegulationR costs as a % of total op costs 08/09-12/130.06 InsuranceInsurance premium as a % of revenue0.00 Property ManagementTotal property costs per sq ft floor space0.00 Corporate Centre & Comms C&C costs as a % of total cont & non cont Opex 06/070.040.19 HRHR costs as a % of total adjusted revenue 06/070.000.28 Legallegal costs as a % of total adjusted revenue 06/070.00 Procurement & LogisticsL&P costs as a % of total opex.0.00 Total 0.391.89

16 16 WWU support the use of 2006/07 data, 2005/06 is not fully representative. Network length as a cost driver must be included. The NISEC02 data set for the TFP analysis is outdated and does not reflect current UK productivity trends and has a 7 year credibility gap as it ends in 1999. Too many assumptions made without supporting evidence – placing considerable doubt on the output. Privatisation effect does not exist over 20 years on. Future savings not credible. Total Opex- Europe Economics

17 17 Future Efficiencies Privatisation over 20 years ago - inconceivable there is still a privatisation effect Why are utilities expected to out perform private industry? RPI captures efficiencies in the economy as a whole – therefore to match economy efficiency need to match RPI To outperform RPI is to out perform private industries – no sound or credible basis for this presumption

18 18 Conclusions Direct opex is driven by geography, network characteristics, customer density and levels of performance, therefore network length must be taken into account Indirect opex is suitable for benchmarking, should be assessed externally against best practise Economies of scale are real and exist Top down regressions useful cross check Must use appropriate drivers and normalised 06/07 costs Future efficiencies should match RPI Can not expect utilities to constantly outperform general economy cost efficiencies in perpetu Future allowances must recognise legitimate cost pressures

19 19 2,400kms of Local Transmission Pipelines 15 NTS Offtakes + 2 proposed as part of SW Reinforcement 316 LTS Pressure Reduction Stations and Above Ground Installations Holders – 15 HP vessels on 3 sites – 20 LP holders on 15 sites 3,478 District Governor Installations 95,000 Internal Public Reported Escapes per annum 24,500 External Public Reported Escapes per annum 19,200 Mains and Service Repairs per annum Appendix 1 - Key Statistics

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