Office of Gas and Electricity Markets (Ofgem)

Annual Report 2009-2010

consumerChange, challenge and the

E-Serve

Ordered by the House of Commons to be printed 15 July 2010

HC 267 London: The Stationery Office £14.75

Report of the Office of Gas and Electricity Markets for the period 1 April 2009 to 31 March 2010 to the Secretary of State for Energy and Climate Change.

Presented to Parliament pursuant to Section 5 Utilities Act 2000.

Ofgem is the Office of Gas and ElectricityMarkets, regulating the gas and electricityindustries in Great Britain.

Ofgem operates under the direction andgovernance of the Gas and Electricity MarketsAuthority which makes all major decisions andsets policy priorities.

The Authority’s powers and duties are providedfor under the Gas Act 1986, the Electricity Act1989, the Competition Act 1998, the UtilitiesAct 2000 and other statutes.

Office of Gas and Electricity Markets (Ofgem)Annual Report 2009-2010

E-Serve

© Crown Copyright 2010

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Foreword: Tough calls in tough times 4-5

The Gas and Electricity Markets Authority 6-7

Introduction: Excellence in Energy and Sustainability 8-9

New challenges, new responsibilities, new structures 10-12

A voyage of discovery 13-15

Pricing in the future 16-18

Reviews, reforms, renewables 19-21

Better, greener, fairer deals 22-25

A leading voice in Europe 26-28

Energy, efficiency, environment 29-32

Delivering value for money 33-36

Appendix I Ofgem's performance against 2009-2010 deliverables 37-41

Appendix II Performance indicators 2009-2010 42-43

Appendix III Impact Assessments undertaken 2009-2010 44-45

Appendix IV Investigations and enforcement action 2009-2010 46-47

Appendix V Simplification plan 2009-2010 48-50

Appendix VI Financial statements (extracts) 2009-2010 51-52

Contents

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The Ofgem Resource Accounts for 2009-2010 are published separately

1 Foreword: Tough calls in tough times

The past year has been one of the most challenging in Ofgem’s history.Essential and radical internal reorganisation has been carried through againstthe backdrop of an industry confronting a fundamental dilemma: the need formassive investment to secure low carbon energy and market stability, at a timeof acute fragility in the global financial system and economic weakness.

Ofgem’s internal reform was driven by the organisation’s growing role inBritain’s plans to develop a low carbon economy. A separate business unit,Ofgem E-Serve, has been created under the Gas and Electricity MarketsAuthority (the Authority), with the twin tasks of administering many of theGovernment’s environmental programmes and delivering vital projects such asthe offshore transmission regime; the roll-out of smart meters; the carboncapture and storage levy and feed-in tariffs.

We have also restructured our regulatory activity - the traditional core of Ofgem’s business — to put even greater emphasis on sustainability. A new sustainable development division has been created, bringing togetherenvironmental, social and consumer policy. Two separate networks divisionshave been set up, designed to ensure that Britain’s high voltage transmissionnetworks are more accessible to new sources of renewable generation. Theyalso bolster the role of regional networks in tackling climate change byincreasing micro and renewable generation access to local smart grids.

Foreword: Tough calls

in tough times

05The challenges of reshaping our own organisationhave come at a time when the externalenvironment has been characterised bycompeting pressures. On one hand, the need toreduce carbon emissions and a demand on theindustry to make huge investments to replaceageing nuclear and fossil-fueled generation. On the other hand, the need to ensure a stableregulatory framework within which to makethose investments.

At the same time the crisis in the financial systemmeant, and continues to mean, that investors andthe boards of many companies are often muchmore cautious in their approach to risk, especiallyin relation to the type of long term investmentrequired by the energy industry. Governmentsaround the world, too, are borrowing more asthe global economic slowdown, which followedthe financial crisis, has adversely affected publicfinances – with a knock-on increase incompetition for funds in the financial markets.

A slow-down in the global economy has broughta reduction in energy demand with a consequentfall in wholesale prices. That has been reflected ina modest, albeit temporary, fall in retail gas andelectricity prices in Britain. However, a pickup inglobal economic growth in the future is likely tosee resumption in the upward pressure on globalenergy prices.

In the face of such external turbulence Ofgemhas taken a series of difficult decisions and set intrain a number of initiatives. The findings of ourearlier in-depth investigation into the workings ofthe retail energy market, for example,demonstrated that there were a number of areaswhere action was required to benefit and protectconsumers.

The Authority decided that it would use itsexisting powers to deliver the reforms neededwithout incurring potentially long delays anduncertainty. Over the last year a number ofbeneficial changes for customers have beenintroduced – with others following in the nextfew months – so that consumers now enjoybetter protection and a stronger voice.

Other reforms launched by Ofgem last yearincluded our review of Codes Governance, theindustry’s rules making process; and RPI-X@20, aroot and branch analysis of the regime which hasdetermined the revenues and expenditure ofBritain’s energy networks for the past 20 years todetermine whether it will remain fit for purposein the future.

A major inquiry, Project Discovery was alsocompleted and is currently in the final stages ofconsultation. This was a comprehensive analysisof the challenges facing Britain’s energy suppliesas the country becomes more reliant on imports,and an indication of the scale of the investmentthat is likely to be required to enable Britain to

secure its energy supplies and meet its climatechange targets over the coming decade.

It is increasingly evident that continental Europeexerts a growing influence on Britain’s energypolicies and energy markets. With the negotiationand the implementation of the European ThirdEnergy Package, the ground is laid for a morecompetitive European energy market and theestablishment of the Agency for the Co-operationof Energy Regulators (ACER). Ofgem welcomesthe implementation of the European Third EnergyPackage as a major milestone in the developmentof a more open European energy market.

The challenges posed by the need to tackleclimate change and deliver secure energy suppliesare not, however, confined to one country or onecontinent but are truly global in scale. The yearhas seen the establishment of the InternationalConfederation of Energy Regulators (ICER) at theWorld Energy Forum in Athens. ICER’s purpose isto review key energy issues from a globalperspective and report to the next World EnergyForum in Quebec in 2012.

Amid the many changes, both internal andexternal, one factor has remained constant:Ofgem’s determination to meet its responsibilitiesto existing and future consumers promptly andefficiently while keeping its costs under tightcontrol. Over each of the last five years Ofgemhas met our self-imposed and demanding targetof keeping cost increases to three percentagepoints below the rate of inflation – savingconsumers some £11.9 million to date.

Ofgem’s ability to deliver its responsibilities asindustry regulator and as a leading player in theGovernment’s plans to build a low carboneconomy has earned respect – although notwithout challenge. We shall continue to makeevery effort to do better although the burden ofcriticism should perhaps be seen as a fact of lifefor any regulator. Indeed, there will always besome who will say we should do more – andothers who would be happier if we did a littleless.

I began by saying that last year was one ofOfgem’s most challenging. The current yearshows every sign that more “hard pounding” isto be expected. With our able and expert staff,to whom all on the Authority pay particular creditand extend their heartfelt thanks, theorganisation seems well equipped to meet everychallenge.

Lord Mogg

Chairman

2 The Gas and Electricity Markets Authority

Alistair Buchanan CBE

Chief Executive

Professor David Fisk CB

Non-executive

Miriam Greenwood OBE DL

Non-executive

Membership

Lord MoggChairman

Sarah Harrison

Executive

David Harker OBE

Non-executive

Ofgem is governed by the Gas and Electricity Markets Authority which determinesstrategy and decides on major policy issues. The Authority is made up of executiveand independent non-executive members.

The Gas and Electricity

Markets Authority

07

The Authority is supported by a Senior Management Team and committees thathave clear terms of reference. There are three main committees: the AuditCommittee, the Remuneration Committee and the Enforcement Committee. They create a strong framework of internal control throughout the organisation.

John Howard

Non-executive

Jim Keohane

Non-executive

Steve Smith

Executive

Andrew Wright

Executive

John Wybrew OBE

Non-executive

Jayne Scott

Non-executive

3 Introduction: Excellence in Energyand Sustainability

In 2009/10 both the regulatory policy and regulatory delivery functions have beencharacterised by major set piece projects. The common themes in these projectshave been significant commitment to sustainability, intellectual rigour andpunctual delivery. The common binding across all of what we do is serving andrepresenting consumers’ interests.

Regulatory policy has been dominated by three set-piece projects in 2009/10:

l Project Discovery was a review of GB’s security of supply born from theAuthority’s concerns about ‘the unholy trinity of events’ impacting the sector:the credit crisis, the crisis in carbon pricing, and the vagaries of global gasmarkets. On behalf of consumers we used our Utilities Act duties to prepare areport which inputted directly into the Government’s Energy MarketAssessment, announced in March 2010. The £200 billion investment by 2020,identified by Project Discovery, has been broadly accepted across all parties asthe benchmark of what will be required.

l The fifth Electricity Distribution Price Control Review (DPCR5), our five yearlysetting of the regulated prices, was a ground breaking review. Under our newsustainability duty we significantly ‘greened’ the process, including theprovision of £500 million for low carbon network innovations.

l The RPI-X@20 project will deliver its conclusions in the Summer 2010, butmost of the detailed work was done in 2009/10. This is the moment when we say good-bye to the way we have been doing regulatory network reviewssince 1990.

These projects are the ‘tip of the iceberg’ and our work has straddled a range ofissues – at times complex, at times relating to very basic needs of vulnerableconsumers. We rely heavily on our staff to deliver under demanding conditions,and their efforts enable Ofgem to be seen as a very attractive place to work. Thelevel of enquiry and application for posts at Ofgem, from graduate positions toGroup Finance Director was extraordinarily high in the last year.

Introduction: Excellence in

Energy and Sustainability

09By serendipity the regulatory delivery work has also beendominated by three set piece work streams:

l In June 2009 we delivered the new offshoretransmission regime to `go active’ status, and wespent the rest of the year delivering Round 1 of thetender process. I am pleased to report that Ofgemhas delivered this on time to enable anannouncement of `go live’ status by the Departmentof Energy and Climate Change (DECC). This shouldgive a welcome boost to both the renewables andoffshore wind businesses.

l Throughout 2009/10 Ofgem has been working onthe initial phase of the smart meter roll-outcampaign. The Prospectus should be signed off byour Gas and Electricity Markets Authority andDECC, on schedule, this summer.

l The Feed-in Tariff (FIT) programme came intoexistence on 1 April 2010, as one of the manyenvironmental based schemes run and operated byOfgem E-Serve. This was an excellent example ofour delivery team (including our IT department)meeting stringent timescales laid down by ourclient, DECC.

All of these projects have reflected well on the way thatOfgem E-Serve has developed as a business in 2009/10– the first year in creation. The service and commercialculture has progressed across all the activities. The newsenior management team is now in place, attractedfrom both the private and public sector.

The Energy Acts of 2008 and 2010 have furtherempowered Ofgem in our work to promote sustainableenergy and take account of the interests of future aswell as existing consumers. Across our work we canpoint to decisions that are impacted by these newstatutory duties, and lay to rest the idea that aneconomic regulator cannot handle matters such assustainability. In our networks businesses, our rulings oninterim connect and manage (to get early renewableprojects plugged into the system) or the high rate ofreturn provided to the cable providers to the Scottishislands or in the coastal waters between Scotland andEngland reflected our new approach. More directly forconsumers, we continued to roll out our 2008 EnergySupply Market Probe remedies to provide greaterconfidence about the behaviour of their powercompanies. We also worked at building consumers’confidence in green energy supply with a new greentariff logo. Even closer to home Ofgem set up a divisionwith specific responsibilities for sustainable development,led by a senior partner.

Ofgem’s roles straddle facilitation, advisory andregulatory policy leadership. However, we never forgetthat our job as a policeman is vital. In a number ofinstances this entails ‘throwing the charge book’ at thecompanies and seeking redress against them. In the lastyear we were pleased to report that the CompetitionAppeals Tribunal upheld our case against National Grid,and we fined EDF Energy Networks £2 million for failingto make timely connection offers to customers. Further,we sought and obtained greater powers in the 2010Energy Act to tackle market abuse and strengthenpenalties to put Ofgem in the strongest position to act,where necessary, in consumers’ interests. On a moreregular basis we continued to deliver the quarterly

review of prices, which we believe has significantlyenhanced the debate over supply margins and prices ingeneral.

With such national focus on value for money, I am verypleased to report that Ofgem’s delivery under our selfimposed RPI-3 per cent cost control regime hascomfortably beaten our five year target. This takes ourown savings for consumers in the five year controlperiod, which finished on 31 March 2010, to £11.9million. Our audit committee’s recommendation that welive under the same stringent annual cost controls until2015, has been accepted by HM Treasury. Away frombeating our financial targets, Ofgem improved stronglyin its own sustainability targets, notably on electricityusage (down 9.1 per cent), our travel choices (rail travelto Brussels and Glasgow office are strongly up againstair travel), and our building rating. We also signed up tothe 10:10 corporate challenge.

A particular focus for the organisation, nowadministering £4 billion of consumers’ money, has beenrisk management. The audit committee and theAuthority continue to set very high standards in this areaand our new Group Finance Director has a distinguishedrecord in this field, having once been global riskmanager for Diageo plc. External and internal auditorscontinue to give both risk management and our majorprojects in Ofgem E-Serve considerable attention. Thesmart meter project so far in 2010 has had audit reviewsfrom various external bodies including the OfficeGovernment Commerce, National Audit Office and HM Treasury. We welcome this level of review, andhelpful advice.

Finally, as a national regulator we take our GB-wide roleand responsibilities very seriously. In the last year we setup a directorate responsible for Scotland, Wales and theRegions based in our Glasgow office. This appointmentcoincided with the opening of our new office inGlasgow by Jim Mather (Scottish Minister for Enterprise,Energy and Tourism). As well as being cost effective, thisinitiative has been well received and seen as symbolic ofour commitment to Scotland. In particular, regulatorynetwork policy is very high on the agendas in Holyroodand Cardiff and we seek to listen and respond to theseviews. We have Board meetings in both countries andwe have just appointed our first Ofgem staff memberbased full time in Cardiff.

I continue to be hugely impressed by the enthusiasmand dedication of the staff at Ofgem. We need toensure that we convert this ‘excellence in energy andsustainability’ into direct positive action for consumersbut as importantly to work for consumers through otherbodies. As well as working through our own ConsumerFirst campaign, we also collaborate with other regulatorswith whom we share powers, such as the Office of FairTrading, and with other organisations such as CitizensAdvice and Consumer Focus to safeguard consumers’interests. Our relationship with Government is one thatprotects our independence but supports the DECC andHM Treasury in maintaining their momentum on criticalpublic policy agendas in energy and climate change.

Alistair Buchanan

Chief Executive

4 New challenges, new responsibilities,new structures

• Key organisational changes in 2009/10

• Creation of new business unit, Ofgem E-Serve

• Two separate network divisions

• Increased focus on sustainability

• Separate European directorate

• Expanding presence in Scotland, Wales

and the Regions

Highlights

Ofgem E-Serve

Through a series of incentives and requirements,the Government is encouraging the market toembrace measures which will help build a lowcarbon economy. Ofgem E-Serve has beencreated to help efficiently deliver that low carbonfuture for UK consumers. Ofgem had alreadytaken responsibility for almost £4 billion a year ofGovernment environmental programmes and the£15 billion offshore transmission tendering regime.These responsibilities have been placed withinOfgem E-Serve which is also taking a leading rolein other key areas, including:

l Feed-in tariffs to encourage local generation

l The development of the renewable heatincentive

l Responsibility for collecting the carbon captureand storage levy

l Preparations for the introduction by suppliersof smart meters in Britain’s 26 million homes

Networks Divisions

Networks have a vital role in fulfilling Britain’sambitions for a low carbon economy. Inrecognition of that role Ofgem has set up twoseparate network divisions:

Transmission and governance division – responsiblefor the high voltage national electricity grid andthe high pressure gas network, as well as issuesaround easier access for the UK’s growingrenewable electricity generation;

Local Grids and RPI-X@20 division – responsible forbringing forward reforms to the 20 year oldapproach to network regulation. It is alsosupporting measures to ensure more renewableand micro-generation can be connected to localsmart grids, notably through the fifth distributionprice control review (2010-2015).

Sustainable development

A new sustainable development division has beenformed. It brings together environmental, socialand consumer policy which together withenforcement, provides a stronger voice in helpingOfgem carry out our duties to promotesustainability and the interests of existing andfuture consumers in the energy market.

Markets Division

The Markets division is continuing to monitor andanalyse the security of Britain’s energy supplies, asits reliance on imported energy continues to grow.It also performs a role in actively policing the retailand wholesale, electricity and gas markets toensure they work fairly for consumers.

Europe

In response to the introduction of the EuropeanThird Energy Package and the important influenceof events in Europe on UK energy markets andsupplies, Ofgem has set up a separate Europeandirectorate.

New challenges, new responsibilities,

new structures

11

Ofgem’s principal role is the protection of present and future electricity andgas consumers – a duty which includes helping to maintain sustainable andaffordable energy supplies. Alongside that central responsibility, theGovernment has also asked Ofgem to take a leading role in the drive tocreate a low carbon economy, a strategy through which Britain aims to cutcarbon emissions by 34 per cent by 2020.

Over the past year Ofgem has undertaken a radical reform of our ownstructures, including the creation of a new business unit, Ofgem E-Serve.This allows us to address the challenge of our increased responsibilities andto help drive through the major changes in the energy industry needed todeliver a low carbon economy.

Introduction

Scotland Wales and the Regions

Building on our existing presence in Scotland anew role of director for Scotland, Wales and theRegions has been created to ensure the interestsof stakeholders are fully understood. This allows usto enhance our engagement with the ScottishParliament and the Welsh Assembly.

Key themes going forward

Underpinning the organisational changes thatwere introduced in response to our externalchallenges and new responsibilities, Ofgem is nowfocusing on four key themes:

1. Contributing to the achievement of a lowcarbon energy sector

2. Helping to maintain the security of Britain’senergy supplies

3. Promoting consumer choice and value andprotecting vulnerable customers

4. Ensuring the timely and efficient delivery ofGovernment programmes for a sustainableenergy sector (through Ofgem E-Serve).

The increasing responsibilities, particularly theimplementation of Government policies designedto foster a low carbon economy, mark a stepchange in the functions Ofgem is being asked toundertake. While this has meant a need toincrease the resources available to theorganisation, Ofgem will continue to maintain itspolicy of efficient delivery against a background oftight cost control. (See operational report).

New challenges, new responsibilities,

new structures

12

Gas and Electricity

Markets Authority

Chairman - Lord Mogg

Chief Executive

- Ofgem Group

Transmission and GovernanceStuart Cook - Senior Partner

Local Grids and RPI-X@20Steve Smith - Senior Partner

MarketsAndrew Wright- Senior Partner

Sustainable DevelopmentSarah Harrison - Senior Partner

Group Finance David Pimm -

Group Finance Director

E-Serve

Alistair BuchananRoy Field

Secretariat -

Ofgem Group

Ofgem E-ServePaul McIntyre - Managing Director

Group Finance David Pimm -

Group Finance Director

CommercialRobert Hull - Managing Director

5 A voyage of discovery

• Project Discovery - the £200 billion investment challenge

• Energy Supply Market Probe implemented

• Enhancing liquidity in the electricity market

Highlights

A voyage of

discovery

14

Project Discovery

In October 2009 Ofgem published an in-depthscenario analysis, Project Discovery, setting outwhat we saw as the risks and challenges facingboth gas and electricity industries over the next 10to 15 years. That was coupled with an assessmentas to whether the current market-based industryframework would be able address them.

Project Discovery concluded that Britain couldneed up to £200 billion of investment in energyinfrastructure by 2020 – at a time when othercountries would also be seeking large scale energyinvestment and credit, while equity markets werelikely to remain cautious in the wake of the recentcrisis in the financial markets.

In February, after widespread consultation, Ofgemput forward a series of options – from specificallytargeted reforms to the creation of a single entityresponsible for ensuring Britain had sufficientenergy supplies - which could be used to tacklethe looming energy crunch. Ofgem warned thatcurrent energy market arrangements could not beleft untouched. Rather, significant action wouldhave to be taken and whilst the threat to securityof supply is not immediate, it is important thatsome measures are introduced as soon as possible.

Project Discovery also looked at the potential needfor new gas storage – an area where Britain lagsbehind countries such as France and Germany;new combined cycle gas turbines to replaceageing power stations; the need for low carbonelectricity generation including nuclear new buildand carbon capture and storage; and finally theneed to at least double the amount of electricitygenerated by wind farms.

It acknowledged, however, that investment wasrequired at a time of increased risk anduncertainty, including worries that the future priceof carbon might not be high enough to temptinvestors to back low carbon technologies.

Project Discovery also warned that the cost offinancing the investment programme would belikely to push energy bills higher. That in turn could

affect Britain’s economic competitiveness andcould make it harder for an increasing number ofconsumers to afford the gas and electricity theyneed. Discovery did not specifically address theissue of affordability but Ofgem continues toassess the impact of higher prices on specificgroups of consumers.

Energy Supply Probe: the reforms

In February 2008 Ofgem launched an investigationinto Britain’s energy supply markets through whichdomestic consumers and small businesses buytheir gas and electricity. The probe concluded thatwhile, in general, the markets were working well,there were several areas where competition wasnot fully effective so that not all consumers werereceiving the full benefits of competition.

Over the last year, and after detailed consultations,Ofgem has been introducing a series of measuresdesigned to address the problems highlighted bythe probe.

In September Ofgem introduced two new licenceconditions to tackle unjustified price differentials.The first said the prices charged by companies toconsumers using different payment methods – forexample those using pre-payment meters – had toreflect the cost of providing those differentpayment methods. The second prohibitedcompanies from using undue discrimination intheir terms and conditions – for example offeringunjustifiably better prices to one group ofcustomers than were available to another.

Since October a second package of reforms aimedat improving competition and giving consumersmore information is being progressively rolled out.The package said companies must:

l Improve the information provided withcustomers’ bills as well as an annual statementwhich provides all the information a consumerneeds in order to switch suppliers in a singledocument

The need to secure sustainable energy supplies in the coming yearspresents an unprecedented challenge. Britain is becoming more dependenton imports of gas as the output from the North Sea declines. Many ofBritain’s ageing fossil-fuel fired and nuclear power stations will have toclose. Heavy investment will be needed in new, renewable and low carbongeneration, and in the transmission infrastructure needed to connect thatgeneration to the national grid.

Introduction

A voyage of

discovery

15l Provide help to vulnerable and indebtedcustomers who were unable to switchsuppliers because of their outstanding debts

l Improve the conduct of their sales andmarketing activities to prevent mis-selling

l Supply small business customers with betterinformation in relation to their supply contracts

l Improve the transparency of their supply andgeneration operations by providing moreinformation on their costs and revenues.

Opening the electricity market

One result of the Energy Supply Market Probe wasto highlight a lack of liquidity in the wholesalemarket for electricity. That lack of liquidity hasmade it difficult for small firms that want to enterthe supply market to buy a sufficient variety ofsmall scale contracts which would allow them tomanage their risks and recruit customers in amanageable manner. Enabling more firms to enterthe market would increase competition,benefitting consumers.

It is hoped that new market-led measures will helpimprove liquidity and give small, new, independentsuppliers the boost they need. However, Ofgem isprepared to take action if that does not happenand has launched a consultation on measureswhich could be introduced if the market-ledmechanisms fail to deliver.

6 Pricing in the future

• Price control review opens way for £7.2 billion

network investment

• Work continuing on review of 20-year-old price

control regime

• New guidance on regulatory response to network

financial distress

• Network merger rules updated

Highlights

Fifth distribution price

control review

All seven owners of Britain’s electricitydistribution networks accepted Ofgem’sproposals for the 2010-2015 price control. Theseven companies between them own the 14regional networks which transport electricityfrom the national grid to homes and businesses.The settlement will allow the companies toinvest in improving their networks at a fair priceto consumers who will get better service.

In total, over the next five years, the companieswill be able to invest up to £7.2 billion inupgrading their networks. This includes a £500million low carbon network fund allowing themto undertake large-scale trials of smart grids andother technology and commercial arrangementsrequired in a low carbon economy. The impacton household electricity bills will be an increaseof £4.30 per year on average across the country.The new price control began at the beginningof April 2010 and will run until 31 March 2015.

Ofgem’s focus on sustainable development wasa key part of the price control package and waswelcomed by the Sustainable DevelopmentCommission (SDC). The SDC said the pricecontrol provided a practical example of howexisting policy frameworks could be adjustedbetter to deliver the transition to a low carboneconomy in the short-term, pending theconclusions of Ofgem’s more fundamental,ongoing review of the approach to networkregulation under the RPI-X@20 project.

The SDC noted that following its 2007 reporton Ofgem, progress has been made in all theareas it identified to give the energy sector moreincentives to reduce greenhouse gas emissions.

RPI-X@20

Ofgem is undertaking the biggest review in 20years of the price control regime which governsBritain’s energy networks - the pipes and wireswhich bring gas and electricity to homes andbusinesses.

The networks are natural monopolies which aresubject to price control regulation by Ofgem.Network charges account for between 17 and18 per cent of household energy bills.

For more than 20 years Ofgem has set networkprices based on an inflation linked formula RPI-X. The system has worked well, deliveringbig efficiency savings which in turn have helpedto keep down customer bills. However, Ofgemhas looked hard at the RPI-X approach in lightof the need to replace ageing infrastructure,connect new, renewable generation and buildnew infrastructure for the gas imports on whichBritain is becoming increasingly reliant. Itsanalysis shows that, while the current pricecontrol arrangements are not broken they donot represent the best method of meeting thechallenges and uncertainties of building a lowcarbon economy.

Ofgem believes networks need a simple,effective, regulatory regime which encouragesthe companies which run them to be flexible,innovative and prepared to make long terminvestments to meet the demands of theircustomers. The emphasis has changed from aregime designed to squeeze out efficiencies forthe benefit of consumers to one which willdeliver vital, large scale, investment. It isestimated that some £40 billion will need to beinvested in the gas and electricity networks tosecure Britain’s energy supplies and meet itsclimate change target – almost a quarter of thetotal figure Ofgem believes needs to be investedacross the energy industry.

Ofgem has produced a series of consultationdocuments outlining its thinking on a new pricecontrol regime and seeking the views ofstakeholders. More detailed proposals will bepublished in summer 2010 and will then beincorporated in Ofgem’s network price controls.The Transmission and Gas Distribution PriceControl Reviews in 2013 will be the first timethe new regime will be implemented.

Pricing in

the future

17

The fifth electricity distribution price control review set the allowed revenuesfor companies to deliver £7.2 billion of network investment, with particularfocus on sustainable development. Building from this, the aim of thebiggest review to network regulation in 20 years, RPI-X@20, is to encouragecompanies to be more flexible and innovative and to plan with a longerterm view to meet the demands of their customers.

Introduction

Networks Financial Health Check

New guidelines were published dealing withthe way Ofgem would respond if one of thenetworks ran into financial difficulties. Themove was not prompted by concerns aboutany particular network. It followed a stress testof existing arrangements for dealing withfinancial distress as part of Ofgem’scommitment to best practice and forwardplanning in the interest of consumers,particularly at a time of tight credit markets.The new guidelines cover Ofgem’s responses tonetwork companies experiencing differentdegrees of financial difficulty up to andincluding energy administration. Howeverprimary responsibility for a network company’sfinancial integrity lies with that company’smanagement and its shareholders.

Ofgem believes the new regime is robust andwill carry out periodic reviews to ensure itremains up to date and effective.

Merger policy reviewed

In February 2010 Ofgem suspended its policyfor mergers between network companies,following consultation, and initiated a policyreview. Since the end of the year in question anew merger policy is in place and applies to allnetwork sectors: electricity distribution, gasdistribution and transmission.

Pricing in

the future

18

7 Reviews, reforms, renewables

• Final proposals on code governance published

• £4 billion package for critical investment

• Connect and manage access arrangements introduced

• Securing timely access to transmission

• Facilitating carbon capture and storage

Highlights

Reviews, reforms,

renewables

20

Code governance reform

At the end of March Ofgem published its finalproposals for the reform of the codegovernance – the rule book which governsBritain’s gas and electricity industry. The reviewconcluded that the code governancearrangements needed strengthening in anumber of areas. As they stood, thearrangements slowed the pace of necessarychange and, in the longer term, threatened theindustry’s ability to deliver reforms needed tomeet environmental challenges and security ofsupply issues.

The changes put forward have been designedto make existing arrangements more flexible,transparent and accessible to smaller players inthe industry and to consumers, allowing themgreater understanding of what is happeningand therefore increasing their ability toformulate and express their views.

Other measures included ways of speeding upthe implementation of wide ranging andcomplex changes as well as moves to give theindustry a greater degree of self governance byreducing the regulator’s role in areas wherethere would be little or no impact onconsumers.

Funding critical investment

In January final proposals were put forward fora £1 billion package, which is the first trancheof the £4 billion additional expenditureidentified by the working group, led by Ofgemand the industry, that is needed to put Britainon the right track to meet its 2020 carbonreduction and renewable targets.

The funding proposals will enable vital newgeneration, much of it renewable, to beconnected to the grid. Ofgem has beenworking with industry to overcome delays tocritical investments and the funding proposalsmark a significant step towards facilitating theGovernment’s 2020 carbon emission reductionstarget.

The £1 billion package is in addition to the£3.8 billion investment Ofgem approved for thethree electricity transmission companies tospend on network upgrades in their currentprice control review (2008-2012).

Interim connect and manage

As part of the ongoing effort to make itquicker and easier to allow new generationcapacity to be connected to the grid, Ofgemintroduced interim measures to allow newsources of generation, much of it renewable, tobe connected to the grid. This avoids the needto wait until the transmission grid has beenreinforced so it can handle the additionaloutput from these new generators.

Transmission access review

If Britain is to meet the Government's climatechange and renewable energy targets, it iscritical that renewable and other low carbongenerators secure timely access to the nationalgrid. To achieve this, we need access ruleswhich encourage the best use of the existingtransmission capacity and which support thetimely delivery of new capacity. We aresupporting the work of DECC who are leadinga project to reform these rules.

Other developments

The year also saw the introduction of enduringarrangements for exit capacity and theintroduction of entry capacity substitution ontothe high pressure gas grid. The formercompletes a programme of work whichcommenced with the sale of a number of gasdistribution entities by National Grid. The latterallows grid capacity to be transferred frompoints on the system where it is no longerneeded, to points where there is a demand foradditional capacity, which is expected to helpreduce consumers’ bills by reducing the level ofunnecessary investment.

Ofgem has carried out a two year review of the code governance in linewith its better regulation principles. The review looked at ways in which therule-making process could be modernised to cut red tape, speed upindustry reform and allow consumers and small generators and suppliersthe opportunity to engage more actively in industry reform. At the sametime Ofgem is working with industry in funding proposals to allow £4 billion of critical investment needed to help meet the Government’s2020 environmental targets.

Introduction

Reviews, reforms,

renewables

21At the request of National Grid, Ofgem alsolooked at the possibility of using part of thenetwork to transport carbon dioxide from acoal-fired power station in Scotland to allow itto be buried in an exhausted gas field in theNorth Sea. The potential use of depleted NorthSea fields to store carbon dioxide, usingexisting gas infrastructure fits in with DECC’sprogramme to encourage the commercialdevelopment of carbon capture and storage(CCS). Ofgem is due to report in full in summer 2010.

8 Better, greener, fairer deals

• Certifying green tariffs

• Tighter guidelines to protect vulnerable customers

• Monitoring suppliers’ social spending

• Working with consumers for consumers

Highlights

Green tariffs

In February this year Ofgem supported the launchof a new certification scheme for green electricitytariffs, the `Green Energy Certified’ label, led bysuppliers. The new scheme should give confidenceto customers that when they choose a certifiedgreen energy deal they will be supporting supplierswho are going the extra mile to reduce carbonemissions.

The certification scheme seeks to ensureconsistency with Ofgem’s Green SupplyGuidelines, published last year. To be eligible forcertification, suppliers will have to demonstrate toan independent panel of experts among otherthings that their tariffs result in a reduction ofcarbon dioxide emissions over and above aminimum threshold.

Crucially, suppliers must show that the activityassociated with the green tariff is in addition towhat they already have to do to meet existingGovernment targets for sourcing more renewableelectricity and reducing household carbonemissions. The certification scheme is administeredby an independent panel made up of leadingenvironmental and sustainability experts.

To date, ten tariffs have been given the `GreenEnergy Certified’ label across all seven participantsin the scheme.

Protecting vulnerable customers

Ofgem has continued to press energy suppliers tohelp customers who are struggling to pay theirbills, with particular emphasis on the protection ofvulnerable consumers. In partnership withConsumer Focus, Ofgem conducted a review ofthe issue of disconnections of vulnerableconsumers during the year. The review found thatwhile there was much good practice across energysuppliers to protect vulnerable customers fromdisconnection, there was still room forimprovement.

As a result of the review Ofgem has tightenedlicence obligations on suppliers and therepresentative body, the Energy Retail Association(ERA) has strengthened its guidelines to ensureelderly and other potentially vulnerable customersare better protected.

Overall in 2009 the total number of disconnectionsof domestic energy customers fell to 4,230compared with 5,890 during 2008, 8,384 in 2007and around 30,000 a year a decade ago.

Ofgem is continuing to press suppliers to helpcustomers who are struggling to pay their bills orwho have fallen into debt. A major innovation inthe year has been Ofgem’s debt review, conductedjointly with Consumer Focus. This review hasfocused on suppliers’ approaches to customerswho could fall or have fallen into debt.

Ofgem has set new principles of best practicewhich it expects suppliers to take into account inmeeting their licence obligations. These have beenbacked by industry and are in line with the bestpractice standards set by Citizens Advice whichworked with Ofgem in promoting them.

Suppliers’ social spending

In the 2008 budget the Chancellor announcedsuppliers had agreed to increase their voluntarysocial spending by at least £150 million a year by2011. Government asked Ofgem to assesssuppliers’ performance in meeting the targets laiddown. The result has been a sharp increase in thenumber of customers receiving help, more thandoubling to one million in the year to March 2009the number of customer accounts receiving asocial tariff. Ofgem will continue to monitor theperformance of suppliers and is working withGovernment to develop and administer the newsocial price support mechanism which will replacethe current arrangements for social support.

Ofgem has a strong commitment to thepromotion of equality and diversity. During 2009we published Equality Schemes for race, genderand disabilities. These schemes outline what

Better, greener,

fairer deals

23

The Sustainable Development division was set up during the year as partof a reorganisation at Ofgem as it geared up to support the Government’sprogramme to deliver ambitious carbon reduction targets as well as forchanges in the market environment. The division encompasses consumerand environmental policy and the social action strategy. At a time ofdramatic changes and challenges in the energy industry the division aims to ensure consumers have a powerful voice.

Introduction

Ofgem has done so far, and what we propose todo, to ensure that we embrace best practice in theway we consider equality and diversity issues inour policy work as well as in our employment andoperational policies. To help us develop andmonitor our Disabilities Equalities Scheme weestablished a Disabilities Advisory Forumcomprising a range of organisations representingthe interests of people with physical and mentaldisabilities. The Forum meets with Ofgem on aregular basis and provides advice on key policyissues affecting energy customers with disabilitiessuch as the design of smart meters and suppliers’debt collection practices.

Energy Supply Market Probe

Ofgem introduced a series of reforms designed totackle problems for the consumer highlighted byOfgem’s 2008 Energy Supply Market Probe intoretail energy markets, including a ban onunjustified pricing differentials, more detailed billsand improved arrangements for customerswitching including those in debt.

Direct debit

In late 2008 Ofgem received complaints fromalmost 1,000 customers in relation to significantincreases in direct debit payments. Ofgeminvestigated suppliers' direct debit arrangementsand in March 2009 published the results. Thoughit found no evidence of deliberate attempts bysuppliers to increase cash flow through unjustifiedincreases in direct debits, nor of systematic errors,the review showed suppliers’ processes for settingdirect debits could result in large variations inpayment levels. A lack of transparency and poorcommunication by suppliers was at the heart ofthe problem. While suppliers made moves toimprove communications, Ofgem decided newlicence obligations were needed to secure bettercustomer service. These came into effect inJanuary this year.

Complaints

Ofgem warned companies to improve complainthandling as consumer research found less thanone in four customers were satisfied with the waycomplaints were dealt with. An independentaudit commissioned by Ofgem showed suppliershad made the significant systems investments andsought to update their processes in preparation fornew complaint handling standards introduced lastyear, but customers remained dissatisfied.

The research found that consumers wereparticularly unhappy with the number of timesthey had to contact the supplier, suppliers whopromised to call back but did not, failure to record

details of customers’ complaints, the attitude ofsome staff and the fact that suppliers often viewedthe problem as resolved when in the customer’seyes it was not.

Ofgem has warned the companies it will lookagain at complaints handling in the current yearand that it expects to see a significantimprovement.

Energy Best Deal

Ofgem and Citizens Advice has continued tooperate the Energy Best Deal scheme, designed toidentify those consumers who need guidance andadvice to get the best deal from the competitiveenergy market. The scheme, launched in Englandand Wales last year, is funded by the suppliers EDF,E.ON, Scottish Power and npower. Anindependent evaluation of the scheme carried outby the Centre for Sustainable Energy found that ofthe ordinary consumers who attended Energy BestDeal sessions:

l Fifteen per cent did not know they couldswitch their energy supplier. Of those who didknow they could switch, nearly a third saidthey did not know how to do this prior to thesession

l Forty-five per cent went on to look intogetting a better deal on their energy. Of these,over two thirds said they found it easy or fairlyeasy to get information about different tariffsand almost half went on to switch suppliersuccessfully

l Eight per cent said they would apply for ahome improvement grant, fifteen per cent saidthey would check out their entitlement tobenefits and tax credits while twelve per centsaid they would get advice on paying off theirdebts

l Ofgem is now looking to extend the EnergyBest Deal to cover Scotland in a newpartnership between Ofgem and ConsumerFocus Scotland

Consumer First

Ofgem has continued to use its Consumer Firstprogramme which draws on consumers’ insightfrom its householder panel and researches. Thisresearch is used to inform key policy decisions anddisseminate genuine insight across theorganisation, making Ofgem’s consultations moreconsumer-focused and friendly.

The Consumer First Panel consists of 100 domesticcustomers recruited from a series of locationsacross Great Britain. The Panel continued to meetregularly to discuss key consumer issues in relation

Better, greener,

fairer deals

24

Better, greener,

fairer deals

25to the energy market. In June the Panel looked atprice controls and tariffs. It later consideredsustainable development and reflected views thatevery household should play its part. At the sametime the panel said fuel poverty remained animportant issue.

As part of the Consumer First programme toensure consumers’ interests were taken intoaccount in the 2010-2015 Electricity DistributionPrice Control Review, Ofgem set up a ChallengeGroup. The Group of six consumer experts actedas Ofgem’s `critical friend’ and brought additionalexpertise above and beyond consumer research.The challenge group model is now beingdeveloped for the next transmission and gasdistribution price control reviews.

9 A leading voice in Europe

• European Third Energy Package unveiled

• New climate change measures introduced

• Encouraging the development of cross border integration

• Gas market guidelines drawn up under Ofgem lead

Highlights

European Energy Third Package

In June last year the European Union unveiledits European Third Energy Package designed tofurther liberalise Europe’s energy markets.

The package grew out of the EuropeanCommission’s energy sector enquiry, whichidentified a number of areas where theCommission believed reform was necessary toimprove the workings of the single market interms of gas and electricity.

Among the measures put forward were reforms“unbundling” transmission networks andelectricity generators – effectively creating anoperational (but not ownership) separationbetween the transmission networks andsuppliers and generators; restrictions on theownership of EU transmission systemcompanies by companies from countriesoutside the EU; and greater powers to nationalenergy regulators. Many European regulatorsdo not currently have the same enforcementpowers or the same level of independence ascurrently has Ofgem.

The measures included in the package are nowbeing introduced into national law and will bebrought into effect from next year. They includethe establishment of a new agency, the Agencyfor the Cooperation of Energy Regulators(ACER). ACER will complement and coordinatethe work of national regulators at EU-level. Itsroles will include participation in the creation ofEuropean network rules; taking bindingindividual decisions on terms and conditions foraccess and operational security for cross borderinfrastructure if national regulators cannotagree; giving advice on various energy-relatedissues to the European institutions; andmonitoring and reporting to the EuropeanParliament and the Council.

Since the end of the year under review,Ofgem’s chairman, Lord Mogg has beenelected chairman of the ACER board ofregulators. Lord Mogg is already chairman ofthe Council of European Energy Regulators(CEER) and the European Regulators’ Group forElectricity and Gas.

New climate change measures

The EU agreed a comprehensive package ofclimate change measures after long runningnegotiations with member states. Theagreement established the 20-20-20 targets (a 20 per cent cut in greenhouse gas emissionsby 2020, a 20 per cent cut in energyconsumption, with renewables providing a 20 per cent share in energy supply.)

During the year Ofgem played a key role in thedevelopment of a number of initiativesdesigned to encourage the development ofcross border energy links:

l It contributed to discussions on electricitytarget models for cross-border trade andbegan working with BritNed, the electricityinterconnector joint venture, owned byNational Grid and TenneT and linkingBritain and the Netherlands, on their accessrules and market coupling. BritNed is due tocome into service next year

l It drafted a consultation on integration ofwind generation into EU electricity markets,presented at the Bucharest and FlorenceForums on renewables and energyefficiency issues and generally continued tolead sustainable development issues

Gas market guidelines

As part of a wider regional initiative Ofgemcompleted the project to create moretransparency in the gas market. Increasinginformation on transmission capacity and gasflows is crucial to the development of a moreopen and competitive European energy market.Subsequently the commission has introducedlegally binding rules building on Ofgem’s workon transparency. The requirements are designedto ensure effective access to natural gastransmission systems and a minimumguarantee of equal market access conditions.Gas transparency requirements would alsoapply to gas storage and liquefied natural gas(LNG), not just infrastructure.

l Ofgem has also contributed to theEuropean regulators’ work on gas capacityallocation and congestion management andis leading work on gas balancing.

A leading voice

in Europe

27

Britain’s growing reliance on imported energy has meant the regulation andoperation of energy markets in the rest of Europe has become increasinglyimportant to Britain’s energy industry and consumers.

Introduction

l Through the France-UK-Ireland regionalinitiative, we have seen implementation ofa new capacity allocation and congestionmanagement system on the IFA (England-France interconnector) and earlierintroduction of new balancingarrangements.

l Ofgem also hosted the second annualmeeting of the European Commission’sCitizens’ Energy Forum, giving an up todate account of its own retail market probeand as well as the progress made on workwith other European energy regulatorsrelating to retail market issues.

A leading voice

in Europe

28

10 Energy, efficiency, environment

• Creation of E-Serve as a separate business unit

• Offshore transmission tender process underway

• Preparations for the introduction of smart meters

• Expansion of environmental programmes administered

by Ofgem E-Serve

• Introduction of the Community Energy Saving

Programme (CESP)

• Development and introduction of the Feed -in Tariffs regime

Highlights

Energy, efficiency,

environment

30

Creation of Ofgem E-Serve

To address its rapidly expanding role in thepromotion of a low carbon economy Ofgem hasset up a separate business unit – Ofgem E-Serve.The new business unit is responsible for Ofgem’ssupport and delivery functions and its creation ispart of a broader Ofgem reorganisation.

In 2009/10 Ofgem administered environmentalprogrammes and services worth some £3.9 billion– more than 25 times greater than in 2001, andthe value of environmental schemes and projects isexpected to double over the next decade. To datethese programmes have been delivered at a costof less than one percent of scheme values.

The restructuring has been designed to ensurethere is no dilution of the organisation’s regulatoryrole and to allow the necessarily differentoperating styles between delivery and regulatoryactivities to develop. The new regime will enableOfgem E-Serve to have access to the expertise andexperience of the energy industry within theregulatory arm and to maximise efficiencies byallowing the two arms of Ofgem to share systemsand back office facilities.

Offshore transmission

Within the overall policy framework, offshore windis recognised as being an important source ofrenewable energy. For this type of power to reachhomes and businesses in Great Britain, fit forpurpose electricity networks must be developed.Offshore network investment could be up to £15billion.

Ofgem has been given a central role in developinga competitive offshore transmission regulatoryregime and running the tender process for licencesto own and maintain new offshore transmissionassets. The new regime came into effect in Junelast year and four weeks later Ofgem began thefirst set of tenders to appoint new offshore grid

companies (Offshore Transmission Owners –OFTOs).

The auction for the first nine projects in the firstround – covering £1 billion worth of transmissionlinks- has attracted stiff competition. Plans for thesecond auction are underway.

Smart meters

In October 2008 the then Government announcedits intention to mandate a roll out of electricity andgas smart meters to all homes in Great Britain,with the aim of completing the roll out by the end2020.

After consultation a decision was reached on apreferred delivery model for the smart meteringroll out. This included a central communicationsmodel, under which energy suppliers will beresponsible for purchasing and installing meters,and communications will be organised centrally.High-level smart capabilities for domestic electricityand gas meters were set and a central SmartMetering Implementation Programme wasestablished.

The Implementation Programme’s work is buildingon the Government response, and is preparing theway for the start of the mass roll out of smartmeters. The first phase is concerned with definingthe scope and key principles of the smart meteringsolution. These principles will form designparameters which will guide the preparation ofdetailed specifications as well as commercial andregulatory arrangements. This work includes aProspectus, decided upon by Government and theAuthority, taking into account the views ofstakeholders.

Ofgem’s detailed knowledge of the energymarket, its strong relationships with industryplayers and consumer bodies and its regulatoryrole, mean it is ideally placed to help design thearrangements for introducing smart metering

The Government has set an ambitious target for the deployment ofrenewable energy over the next decade. By 2020, the Government expectsthat 15 per cent of the UK’s energy needs will be met from renewablesources. This means that around 30 per cent of our electricity may comefrom renewables.

To achieve these challenging targets for green energy, the Government hasestablished a policy framework to support investment in renewablegeneration, deploying a combination of incentives and regulation.

Introduction

Energy, efficiency,

environment

31effectively into the complex structure of the energyindustry.

The implementation programme touches all partsof the energy industry, and careful design andplanning will be needed to deliver the maximumbenefits to consumers and industry, at the sametime as driving down the costs of installing andoperating the new smart meters.

Environmental programmes

The Renewables Obligation (RO) and theRenewables Obligation (Scotland), requireelectricity suppliers to buy part of their electricityfrom renewable generation. Ofgem administersthe Renewables Obligation in England, Scotlandand Northern Ireland (the latter on behalf of theNorthern Ireland Authority Utility Regulation),accrediting stations, issuing Renewable ObligationCertificates (ROCs) and ensuring suppliers complywith their obligations.

Early in the reporting period Ofgem successfullyimplemented major changes to the RenewablesObligation. Banding and grandfathering, whichrequired different stations to be issued differentnumbers of ROCs per MWh depending on theirtechnology, capacity and commissioning date,were introduced with effect for generation from 1 April 2009. Implementation ran very smoothlywith generators experiencing very few bandingissues since that date.

The number of stations accredited for the ROincreased dramatically year on year, largely due toa rush of microgeneration applications prior to theintroduction of the Feed-in Tariff scheme. We sawa large increase in the number of stationsaccredited from 750 in the year to 31 March 2009to 2,200 in the year to 31 March 2010.

Over 20.5 million ROCs were issued during2009/10, across the three schemes for Englandand Wales, Scotland and Northern Ireland (via anagency services agreement), compared with justover 19 million in 2008/09.

In 2009/10 the use of renewable generationsupported through the renewable obligationsregime reduced CO2 emissions by an estimated 8million tonnes – the equivalent of taking almost2.8 million cars off the road or sufficient to fillWembley Stadium more than 1,000 times.

Ofgem E-Serve has also continued to administerthe following programmes on behalf of theGovernment:

l Climate Change Levy (CCL) exemption forrenewables in 2009/10 issuing nearly 25million Renewables Levy Exemption Certificates(LECs), broadly flat with the previous year.Since April 2003, the exemption from CCL fordirect supplies of Combined Heat and Power(CHP) generated electricity, from sourcesdesignated as good quality, was extended toinclude indirect supplies - those suppliesexported to the grid. We issued just over 22 million CHP LECs in 2009/10 to complyingCHP schemes compared with just over 21 million in 2008/09.

l Renewable Energy Guarantees of Origin(REGOs) scheme which was introduced as partof a European Union directive. REGOs areissued by Ofgem E-Serve to generators toprove that their electricity is being producedfrom renewable sources.

l Carbon Emissions Reduction Target (CERT)which places an obligation on certain gas andelectricity suppliers to meet a carbon emissionsreduction target from domestic properties. Theoverall target is set by DECC with at least 40per cent of the target having to be met fromthe priority group (those on certain benefits orover 70 years of age).

In 2009 the CERT was amended to increase thetarget by 20 per cent and to introduce behaviouralmeasures into the scheme. Ofgem E-Servesuccessfully implemented these changes into itsprocesses to allow the suppliers to use these newmeasures to demonstrate their compliance withtheir obligations. Over the course of the year thesuppliers installed measures leading to lifetimecarbon savings of more than 55 million tonnesCO2, professionally installing insulation in morethan 550,000 cavity walls and 700,000 lofts.

Development

During the reporting period Ofgem E-Serve alsoset up and launched two significant newenvironmental schemes against very demandingdeadlines:

l The Community Energy Savings Programme (CESP) went live on 1 October 2009, andour compliance activities were launched on 1 December 2009. The CESP is a 3 year, £350 million scheme which requiressuppliers and large generators to implementenergy efficiency activities targeted atvulnerable consumers

l The Feed-in Tariff Scheme was launched on 1 April 2010. The FIT scheme is an £8billion scheme which requires electricitysuppliers to pay fixed tariffs to small scalerenewable electricity generators in order tomake this type of installation financiallyviable. Over 1,000 generators have alreadyregistered to receive feed-in tariffs, which isevidence of the smooth running of thescheme since its launch.

We also commissioned independentbenchmarking of our FIT administration costsagainst other comparable government schemes.The benchmarking study, conducted by GrantThornton, showed that administration costs forsimilar schemes were typically between 3-12 percent of the value of the scheme, whereas ouradministration costs for the FITs is expected to be 1per cent when the scheme matures. This isevidence that Ofgem is delivering cost-effective,value for money environmental schemes.

Energy, efficiency,

environment

32

11 Delivering value for money

• Strong operational performance

• Tough financial savings target exceeded

• Delivering value for money in management of

environmental programmes

• Services to other regulators

• Committed to reducing our impact on

the environment

Highlights

Delivering value

for money

34

Delivering performance targets

As well as the Code Governance reforms and theRPI-X@20 review, Ofgem undertook a series ofmajor initiatives including the widely-discussedProject Discovery, the fifth distribution price controlreview and a number of directly consumer-focused initiatives.

In all Ofgem delivered a total of 27 out of the 31 deliverables to which it was committed tocomplete within the year to the end of March (seeappendix I).

Ofgem has a duty to undertake impactassessments (IAs) for all important policy proposals.It has developed a rigorous approach to IAs in linewith best practice, while ensuring that decisionsare consistent with its wider statutory duties. Itsguidance takes account of best practice as it hasdeveloped, for instance in relation to sustainabilityissues, and sets out Ofgem's approach to cost-benefit analysis.

Whilst impact assessments are not determinativeof the final policy decision that we make, they area vital part of the policy-making process andprovide a valuable framework for assessing theimpact of important policy proposals. InDecember 2009 we published revised guidancethat reflected the Government’s own approach tovaluing carbon emissions. A list of the IAs published in 2009/10 can be found inappendix III.

Delivering value for money

Ofgem is primarily funded by a licence fee leviedon the energy industry and not by taxpayers. Thefines it imposes on the industry for infringement ofthe rules – some £38 million since 2002, go to HM Treasury and are not used to fund Ofgem.

Once again Ofgem delivered against stiff financialperformance targets. It outperformed its own costcontrol measure of RPI-3 per cent (the equivalentof a three per cent cut in costs in real terms) forthe fifth year in a row.

Both operational performance and tight budgetarycontrol were achieved against a background of aradical reshaping of the Ofgem organisationalstructure, an expanded portfolio of responsibilitiesand the need to recruit, train and integrate thestaff required to ensure Ofgem has the resourcesto carry out its enhanced work load efficiently andcost effectively.

As an indication of the rapidly expanding scale ofOfgem’s work, in 2001/02 Ofgem administeredgovernment environmental programmes worth£150 million – with 12 members of staff but is now delivering on £4 billion worth ofprogrammes with a staff of 54 at a cost of £8 million. In 2010/11 government environmentalprogrammes are expected to account for morethan half Ofgem’s total budget, making it one ofthe leading organisations delivering the lowcarbon economy in the UK. The cost ofadministering environmental programmes is metfrom a variety of sources but predominantly byDECC.

Operationally Ofgem’s year could be characterised as ‘business as usual inunusual times’. It has continued to seek to improve the regulatory regimethrough a series of reviews and reforms alongside the day-to-day regulationof the energy industry for the benefit of consumers.

As a result of the Code Governance review, for example, Ofgem introduceda series of measures designed to enable necessary reforms to the rulesgoverning the industry to be brought in with greater speed andtransparency with a bigger voice for all stakeholders. At the same timeindustry has been given a greater measure of self governance in areaswhere there is little or no impact on the consumer.

The review of the energy networks price control regime (RPI-X@20), whichhas been unchanged for two decades, is aiming to build a regulatoryframework which is simple and efficient and which encourages companiesto be flexible and innovative in their approach.

Introduction

Delivering value

for money

35Ofgem’s drive to deliver value for money has beenrecognised externally. In March Ofgem achievedCIPS Certification and the Standard of Excellence,the recognised global accreditation for achievingprocurement excellence through an organisation'sprocurement and supply chain policies, proceduresand strategies. Ofgem was the first UK RegulatoryBody to achieve CIPS Certification whichindependently benchmarks the organisationagainst “best in class”. We now have peer grouprecognition from our stakeholders and thisstandard will lay the foundation for further andcontinuous improvement.

Achieving CIPS Certification will give ourstakeholders - DECC, suppliers, auditors, theenergy sector and, ultimately, energy consumers -confidence that we know what we are doing interms of procurement and delivering value formoney. It will also give suppliers confidence thatwe maintain high ethical standards and deployrobust, fair and transparent procurementprocesses.

The certification process also encouraged the focuson cost savings which led to over £1 million ofquantifiable savings being recorded for 2009/10.

Ofgem also helps other regulators to keep downtheir costs. We provide finance services forPostcomm and administer aspects of therenewable programme for the Northern IrelandAuthority for Utility Regulation.

People development

Retaining, recruiting and developing staff tomaintain high standards of performance is vital toOfgem’s success.

In 2009/10 average staff numbers were 360. Wehave a 14 per cent target for turnover. Actual staffturnover during the year was 13 per cent forpermanent staff and 16 per cent for all staff(permanent and casual). This is significantly lowerthan the 20 per cent level of two years ago for allstaff and is in line with our target level.

Equal Opportunities

Ofgem’s Equal Opportunities Policy aims to ensurethat no eligible job applicant or employee receivesless favourable treatment on grounds of age,disability, sex, race, ethnic or national origin, sexualorientation, religion or religious affiliation orbecause the employee works part-time.

At the end of the financial year:

l 0.2 per cent (0.6 per cent in 2008/09) of allstaff were known to be disabled

l 44 per cent (44 per cent in 2008/09) of allstaff were women

l 39 per cent (41 per cent in 2008/09) of staff inmanagerial grades were women

l 32 per cent (29 per cent in 2008/09) of seniorcivil service members in Ofgem were women

l 23 per cent (17 per cent in 2008/09) of staffwere known to be of ethnic minority origin

l 15 per cent (11 per cent in 2008/09) of staffknown to be of ethnic minority origin were inmanagerial grades.

The policy statement describing Ofgem’s equalopportunity framework is available to provideguidance for all employees.

Days lost due to absence

Ofgem encourages a culture where goodattendance is expected and valued. However, werecognise that from time to time absences formedical reasons may be unavoidable. Ofgem aimsto treat staff who are ill with sympathy andfairness and where possible to provide them withsupport which will enable them to recover theirhealth and attend work regularly.

In 2009/10, the percentage of working days lostwas 1.4 per cent or 5 days per annum peremployee. Recent figures show the average forthe public sector is 7 to 8 days and for the privatesector 6 days.

Communities

Ofgem seeks to support its employees whocommit personal time or funds to help charities,community activities or voluntary public activities.For example, special leave may be granted foracting as a school governor, a magistrate or anemployment tribunal panel member.

A number of events, organised by charities, havealso taken place at Ofgem.

Sustainability

Ofgem is committed to reducing our impact onthe environment and, in addition to thosemandated by central government, set 26 of itsown targets in 2009.

These targets encompass the areas of climatechange and energy efficiency, waste managementand recycling, procurement and travel.

Highlights of our performance for the year are:

l CO2 emissions fell by 18 per cent

l Water consumption per person fell by 17 per cent

l Total energy consumption fell for the fifth yearin succession with electricity consumptiondown by 24 per cent

l 97 per cent of business travel between Londonand Brussels in 2009/10 was by train,compared with 93 per cent in 2008/09

l Total waste produced fell by 27 per cent.

Our performance has been particularly assisted by:

l Voltage optimisation unit (installed inNovember 2008) – saves 9.1 per cent ofelectricity consumption

l Increased awareness of carbon footprintsleading to greater use of rail over air onbusiness travel and increased use of videoconferencing

l Change of waste contractor leading to allwaste now being reused, recycled or sent towaste to energy plant.

In addition Ofgem has retained its certification tothe ISO14001 Standard for environmentalmanagement for the ninth consecutive year.

There are many other areas that are not coveredby specific targets but to which Ofgem remainscommitted. These include:

l Recycling of all printer cartridges and batteriesand recycling/reusing of mobile phones

l The use of bottled tap water for meetings

l The use of minimum 75 per cent recycledcontent copier paper and use of recycledpaper for all external documents including thisreport

l Promoting the use of corporate Oyster cardsfor travel within London

l Freedom of Information: We received 183questions under the Freedom of InformationAct, of which 160 (87.4 per cent) wereprocessed within the prescribed time. Afurther four had extensions as permitted underthe legislation.

Delivering value

for money

36

Appendices

Appendix I

Ofgem’s performance against2009-2010 deliverables

Ofgem’s Corporate Strategy and Plan for 2009-2010 included a number of key

deliverables to be achieved in each quarter.

The table below and detail on the following pages show deliverables met.

*The original corporate plan listed 30 deliverables, during the year the Q2 deliverable "Review of suppliers’ debtpractices" was replaced with two new deliverables:"Review of suppliers' disconnection of vulnerable consumers" inQ1 (delivered Q1) and "Review of suppliers' debt management" in Q4 (delivered Q4)

Number in Met in Met in Deferred to No longerCorporate Plan* Met in Qtr later Qtr year 2010/11 apply

Full year

Year Total 31 25 2 27 3 1

% - 81% 6% 87% 10% 3%

1st Quarter

Quarter Total 6 6 0 6 0 0

% - 100% N/A 100% N/A 0%

2nd Quarter

Quarter Total 6 6 0 6 0 0

% - 100% N/A 100% N/A 0%

3rd Quarter

Quarter Total 10 7 2 9 0 1

% - 70% 20% 90% N/A 10%

4th Quarter

Quarter Total 9 6 0 6 3 0

% - 67% N/A 67% 33% 0%

Total Achieved

Ofgem performance against

2009-2010 deliverables

39

Directorate Action Period Achieved No longerapplicable

European Strategy Agree plans for phase 2 of gas Q1 Q1 -transparency in the North West Gas Regional Initiative

Submit National Report to Q2 Q1 -European Commission

A leading voice in Europe

Directorate Action Period Achieved No longerapplicable

Industry Codes Industry Codes Governance Review Q2 Q2 -& Licensing - publish initial proposals relating

to major policy reviews/self-governance and the role of industrycode administrators

Industry Codes Governance Review Q4 Q4 -- publish final proposals relating tomajor policy reviews/self-governanceand the role of industry code administrators

Finance Set the Fossil Fuel Levy Rate Q3 Q3 -for 2010/11

Better regulation

Directorate Action Period Achieved No longerapplicable

GB Markets Probe – remedies Q1 Q1 -

Publish 2009 Energy Markets Q3 Q3 -Outlook report

Publish final Winter Outlook Report Q3 Q3 -

Publish proposals for System Q4 Q4 -Operator incentives to applyfrom 1 April 2010

Creating and sustaining competition

xx

Ofgem performance against

2009-2010 deliverables

40

Directorate Action Period Achieved No longerapplicable

Social & Publish report on incentives for Q1 Q1 -Consumer Affairs saving energy

Review of suppliers disconnection Q1 Q1 -of vulnerable consumers*

Update on Social Action Strategy Q1 Q1 -

Publish Sustainable Q3 Q3 -Development Report

Review of suppliers' debt Q4 Q4 -management*

Publish a review of the new Q4 - Awaitingombudsman arrangements additional

consumerresearch

Update on vulnerable customer Q4 Q4 -engagement with the market

Helping tackle fuel poverty

Directorate Action Period Achieved No longerapplicable

Transmission Implement longer-term enhanced Q2 Q2 -Transmission Operator (TO) incentives

Publish Regulatory Reporting Pack Q3 Q4 -for the Transmission Operators

Make decisions on Connection and Q3 - SupersededUse of System Code modifications by DECC relating to the Transmission Access decisionReview

Implement short-term enhanced Q3 Q1 -TO incentives

Approve gas entry substitution Q4 Q3 -arrangements

Distribution DPCR5 - methodology and initial Q1 Q1 -cost assessment update

DPCR5 - publish initial proposals Q2 Q2 -

DPCR5 - publish final proposals Q3 Q3 -

Publish Connections industry Review Q3 Q4 -

Publish DNO costs and outputs report Q4 - Deferredto 2010/11

Publish GDN costs and outputs report Q4 - Deferredto 2010/11

Regulatory Services Publish financial distress process manual Q2 Q1 -

Regulating networks effectively

*The original corporate plan listed 30 deliverables, during the year the Q2 deliverable "Review of suppliers’ debt practices" wasreplaced with two new deliverables: "Review of suppliers' disconnection of vulnerable consumers" in Q1 (delivered Q1) and"Review of suppliers' debt management" in Q4 (delivered Q4)

Ofgem performance against

2009-2010 deliverables

41

Directorate Action Period Achieved No longerapplicable

Energy Efficiency Publish a review of the Energy Q2 Q2 -Efficiency Commitment 2005-08

Community Energy Following the Government's Q3 Q3 -Savings Programme consultation, publish the (CESP) procedures for the administration

of the CESP scheme

Renewables & Publish annual report on Q4 Q4 -Combined Heat Renewables Obligationand Power

Sustainable development programmes

Appendix II

Performance Indicators 2009-2010

Performance indicators - regulatory

Activity Measure Target Actual Comments

GB Markets Consult on applications made for 100% 100% Target deliveredexemption from Regulated ThirdParty Access by prospective storageand pipeline operators

Submit decisions to the European 100% 100% Target deliveredCommission within the prescribedtimescales if adequate informationhas been provided

Assess and make decisions in 100% 100% Target deliveredrelation to any Income AdjustingEvent within three months of it being raised if adequateinformation is provided

Industry Codes Publish decision letters for industry 70% 92% Target delivered& Licensing code modification proposals within

25 working days

Grant competitive licence applications 90% 84% Target narrowly within 8 weeks of receipt missed for

2009-2010

Social & Respond to complaints on 90% 90% Target deliveredConsumer Affairs enforcement matters confirming

whether we will investigate

Respond substantively to customer 93% 96% Target deliveredcontacts

Finance – Pay authorised invoices within 98% 98% Target deliveredAccounting 8 working days of receiptoperations

Performance Indicators

2009-2010

43Performance indicators - sustainable development programme

Activity Measure Target Actual Comments

Energy efficiency Respond to suppliers that have 100% 100% Target deliveredsubmitted schemes within 10 days of submission deadline.

Renewables & CHP Follow up with generators 100% 78.1%outstanding issues in theirapplications for accreditationwithin 10 days of submissiondeadline.

Complete reconciliation of 100% in 100% inCHP LECs 20 days 44 days

Recycle the RO buy-out funds 100% 100% Target deliveredwithin one month

Target missed due to

substantial increase in

the number of stations

accredited, from 650

stations in 2008-09 to

more than 2,200 in

2009-10

Target missed - 33%

increase in number of

stations to be

reconciled

Statutory requirement:

of 90 days delivered

Appendix III

Impact Assessments undertaken2009-2010

Ofgem published 15 impact assessments (IAs) between 1 April 2009 and

31 March 2010.

Further information on the following documents can be found at www.ofgem.gov.uk andsearching using the appropriate reference number.

Date Title

14/04/2009 Further consultation on CAP148 - Deemed access rights to the GB transmission system for renewable generation (Reference number: 40/09)This document contained a further IA of Connection and Use of System Code (CUSC) Amendment Proposal 148. It sought views on the impact of a change in our duties (in the Energy Act 2008) on our ‘minded to’ position and on issues that had come to light since our previous IA was published.

15/04/2009 Addressing undue discrimination IA (Reference number: 43/09)

This IA set out our thinking on the likely impacts, costs and benefits of new supply licence conditions that we were minded to introduce in order to address undue discrimination in the domestic energy supply market.

21/05/2009 CAP 170: Category 5 System to Generator Operational Intertripping Scheme (Reference number: 53/09)This document assessed the impacts of CAP170 - an urgent proposal to amend the CUSC to introduce a new category of System to Generator Intertripping Scheme with administered prices.

26/06/2009 Addressing Undue Discrimination Final IA (Reference number: 73/09)Building on document 43/09 and responses to it, this IA set out a wide range of impacts, costs and benefits of the proposed supply licence conditions to tackle undue discrimination in the domestic energy supply market.

24/07/2009 Code Governance Review – major policy reviews and self-governance initial proposals(Reference number: 84/09)

This consultation assessed the impact of our initial proposal for major policy reviews and introducing a measure of code self-governance.

24/07/2009 Code Governance Review – role of code administrators and small participant/consumer initiatives initial proposals (Reference number: 85/09)This consultation assessed the impact of our proposals for improving the operation of the industry code panels and the role of the code administrators and assistance offered to smaller participants and consumer representatives.

26/08/2009 Code Governance Review – governance of charging methodologies initial proposals (Reference number: 108/09)This consultation assessed the impact of our proposals for reforming the governance of gas and electricity transmission charging methodologies, allowing materially affected parties to propose changes and improving upon existing levels of transparency and accountability.

28/09/2009 Electricity distribution structure of charges project: DNO proposals for a common methodology at lower voltages (Reference number: 114/09)This document sought views on our ‘minded to’ decision conditionally to approve the common charging methodology at lower voltages and included an IA of the proposals.

Impact Assessments

undertaken 2009-2010

45Date Title

07/10/2009 Credit Arrangements (UNC 246) IA (Reference number: 120/09)This document set out our IAs for the Uniform Network Code (UNC) modification proposal UNC246 (“Quarterly NTS Entry Capacity User Commitment”) and its alternatives.

04/11/2009 Gas Entry Capacity Substitution Methodology Initial IA (Reference number: 136/09)This document assessed the impact of National Grid Gas’ methodology for implementing entry capacity substitution (ie. the process by which unsold entry capacity is permanently moved from one NTS entry point to another).

30/11/2009 Identification and Apportionment of Costs of Unidentified Gas (Reference number: 143/09)This IA set out our assessment of several UNC modification proposals (UNC194, UNC194A, UNC228, UNC228A and UNC229) seeking to amend the rules for allocating the costs of unidentified gas.

03/12/2009 GB ECM-18 Locational BSUoS IA (Reference number: 149/09)This IA related to a charging modification proposal (GB ECM-18) seeking to introduce locational Balancing Services and Use of System charges.

26/01/2010 CAP170 current thinking and further consultation on competition issues (Reference number: 11/10)This document set out our latest thinking on some of the key issues raised by CUSC amendment proposal CAP170. It provided interested parties with a further opportunity to submit their views on the competition issues.

03/03/2010 Review of the Ring Fence Conditions in Network Operator Licences (Reference number: 30/10)This IA and consultation document set out proposed changes to the regulatory ring fence regime for network companies that were intended to address potential weaknesses.

31/03/2010 Code Governance Review – final proposals (Reference number: 43/10)This document assessed the impact of our final proposals for reforming industry codes governance arrangements.

On 6 November 2009 we published a cover letter with a report by Frontier Economics assessing thepotential impact on consumers of connect and manage access proposals.

Summary of actions taken to which IAs relate

The following sets out the decisions taken during the 2009-10 financial year in relation to proposalsfor which an IA was previously carried out.

l On 7 July 2009 we published our decision to require the introduction of common electricitydistribution charging methodologies for extra high voltage loads. These new arrangements areintended to apply from 1 April 2011.

l On 7 August 2009 we published decisions in relation to tackling undue discrimination in thedomestic gas and electricity supply markets (Reference numbers 100/09, 101/09) and associatedguidance on the new undue discrimination licence conditions (102/09).

l On 21 November 2009 we published our decision to approve conditionally a common electricitydistribution charging methodology at lower voltages. The new arrangements and charges wereintroduced from 1 April 2010 except where derogations applied (Reference number 140/09).

l On 7 December 2009 we published our decision to approve National Grid’s Gas Entry CapacitySubstitution Methodology Statement.

l On 1 March 2010 we published our decision that the GB ECM-18 locational BSUoS modificationshould not be made.

Appendix IV

Investigations and enforcementaction 2009-2010

Decision

Breach and £2m penalty.

Date of decision

July 2009

Company

EDF EnergyNetworksXx

Issue

Investigation into compliance bynetwork companies in the EDFGroup with their licence obligationto provide a connection offer withina 3 month period (StandardCondition 4D of their electricitydistribution licence).

Breach ofcomplaint handlingregulations forfailure to recordcomplaintsadequately. Nopenalty in light ofaction taken byEDF, making £200kpayment toconsumer bodies.

June 2010EDF Energy Investigation into EDF’s compliancewith complaints handlingregulations.

Ongoing N/ANational Grid Investigation into compliance withlicence obligation to provide aconnection offer within a 3 monthperiod (Standard Condition 12) andinto the availability of resourcesneeded to comply with the licencecondition (Standard Condition 30).

Ongoing N/ACentral NetworksEast & West plc

Investigation into compliance withlicence obligation to provide aconnection offer within a 3 monthperiod (Standard Condition 12) andinto the availability of resourcesneeded to comply with the licencecondition (Standard Condition 30).

Ongoing N/AScottish Hydro-Electric PowerDistribution

Investigation into compliance withlicence obligation to provide aconnection offer within a 3 monthperiod (Standard Condition 12) andinto the availability of resourcesneeded to comply with the licencecondition (Standard Condition 30).

Investigations and enforcements

action 2009-2010

47Decision

Ongoing

Date of decision

N/A

Company

Electricity NorthWest Limited

Issue

Investigation into ENW underCompetition Act 1998 – allegedabuse of dominant position byforeclosing the market tocompetitors.

Ongoing June 2010National GridGas plc

Investigation into reporting by NGGof regulatory information.

Ongoing N/ABritish Gas plc Investigation into the approach takenby BG towards customers in debtand the extent to which their abilityto pay in considered in settingrepayment rates.

Appendix V

Simplification plan 2009-2010

Each year, during the corporate planning process, Ofgem considers whether there are

any regulations that impose burdens that could, in the context of our duties

generally, be considered unnecessary. In March 2010 we published our latest

Simplification Plan, which set out the activities that we would undertake to reduce or

remove those burdens.

Initiative

The new RPI-3% percent internal costcontrol for 2010-15

Xxx

The Regulatory Enforcement and Sanctions Act 2008 requires the Authority to report on theprogress we have made in removing burdens that we consider unnecessary. The updatedSimplification Plan sets out the progress that we have made on our activities to removeunnecessary burdens since March.

Outcome

The previous cost control increasedinternal efficiency and licenseesbenefited from reduced fees. Thenew cost control will maintainpressure for efficiencies and costreductions that will be passed on tolicensees

Current status

The new internal cost control cameinto effect on 1 April 2010 andcommits Ofgem to save at least £12.5 million in 5 years

The Consumer Firstproject aims toimprove ourunderstanding ofthe priorities ofdomestic consumers

The project has led to improveddecision-making that takes properaccount of consumers' views. Wehave published research and otherdata to facilitate debate.

We have continued to focus onvulnerable consumers and attitudes tothe environment. The Consumer Panelhas contributed views on several issuesaffecting the energy market (such ascomplaints-handling) and will do so onforthcoming network price controls

The codesgovernance review isseeking to improvegovernance forexample by enablingOfgem to examinethe case forsignificant codechanges, introducinga measure of codeself-governance, andmaking the codemodification processmore accessible forsmaller marketparticipants.

The reformed governance regime isintended to deliver change resultingin a proportionate regulatory burden;promote accessible and effectiveconsultation; be transparent andeasily understood; be administered inan independent and objectivefashion; provide rigorous and highquality analysis of proposed changes;be cost-effective; and be sufficientlyflexible that it will always allow forefficient change management.

We published final proposals on 31March 2010. After consideringresponses, we published statutory 28-day consultations on licencemodifications in June 2010. We haveproposed that the modifications takeeffect on from 31 December 2010.Relevant licensees have until 1 July2010 to decide whether to accept ourproposals.

Process initiatives

Simplification plan

2009-2010

49

Initiative

Our Probe follow-upwork includedproposals toincreasetransparency, forexample on billingand in a new annualstatement

Outcome

Our remedies are intended to enablebetter informed switching decisionsby consumers. If, at any time, wefeel that the remedies are insufficientto protect consumers, we willconsider further action.

Current status

These changes come into effect in July2010 and we will monitor their impactclosely.

The RPI-X@20review is examiningwhether the currentapproach to energynetwork regulationwill continue todeliver reliable, well-run networks withgood quality serviceat reasonable pricesdespite growinginvestmentchallenges.

The aim is as far as possible todevelop a framework that istransparent, streamlined, andaccessible to stakeholders. Thereview team will report to theAuthority in the summer of 2010.We will consult on therecommendations. The eventualconclusions will inform our futureapproach to network price controls.The transmission and gas distributionprice controls will be the first timethe new regime is used.

Following the Emerging Thinkingconsultations, the review team isdeveloping recommendations to theAuthority. We intend to consult in Julyand take final decisions on theregulatory framework for energynetworks in September 2010.

Carrying out areview of the gastransmission licence

Consider the scope for simplifyingthe licence held by National Grid Gas

We are likely to take this work forwardas part of revising the transmissionlicence for the price control roll overand TPCR5

Carrying out areview of gasdistribution licences(focusing on theelements of thelicence relating toGas DistributionNetworks)

We aim to improve the ease of useand clarity of the Standard andSpecial Standard Conditions withoutmaking substantive changes tounderlying policies and obligations.We propose to concentrate onrestructuring and consolidation,including removal of redundantconditions and simplifying andredrafting to improve clarity andcertainty.

In May 2010 we published a letter onthe scope and proposed process forthe licence review. We will lead anindustry working group that will helpdrive forward the review. We intendto consult on potential licence changesin spring 2011 and, subject toresponses, issue a formal licencemodification proposal for statutoryconsultation in summer 2011.

Ofgem Policy initiatives

Simplification Plan

2009-2010

50

Initiative

Modifying existingenvironmentalprogrammesincluding theRenewablesObligation and theCarbon EmissionsReduction Target

Outcome

More effective application andefficient administration. Effective useof business process designtechniques and compliance powers

Introducing newGovernmentenvironmentalprogrammesincluding Feed-inTariffs (FITs),Renewable HeatIncentive (RHI) andCarbon Capture andStorage (CCS)

We intend to administer theseschemes cost effectively andefficiently, drawing on ourexperience, facilities and teams fromexisting environmental programmes.We will use business process designtechniques and compliance powerseffectively

Ofgem E-Serve has worked extensivelyon the Government’s FITs scheme,which went live on 1 April 2010. Wehave published guidance on how wewill administer FITs. We are nowadvising DECC in relation to RHI and CCS

We are makinggood progress withPhase 1 of the workto design theregulatory regimefor smart meters

We will use our energy sectorexpertise to help design thearrangements for introducing smartmetering effectively into the complexstructure of the energy industry

We expect, jointly with DECC, topublish the smart metering programmeprospectus for consultation in July 2010

Developing theoffshoretransmissionregulatory regime

Less onerous regulatory burden atstart and during life of projects

The auction for the first nine projects inthe first round – covering £1bn worthof transmission links - has attracted stiffcompetition. We expect to begin thesecond auction in the summer.

Ofgem E-Serve initiatives

Current status

Process reviews have been carried outwith improvements identified. Actionlogs are being pulled together

Appendix VI

Ofgem’s financial statements(extracts) 2009-2010

Statement of financial positionas at 31 March 2010

31 March 2010 31 March 2009£000 £000

Non-current assets

Property, plant and equipment 3,784 3,865

Total non-current assets 3,784 3,865

Current assets

Trade and other receivables 12,802 4,604Cash and cash equivalents 3,235 133

Total current assets 16,037 4,737

Total assets 19,821 8,602

Current liabilities

Trade and other payables (12,082) (6,923)

Total current liabilities (12,082) (6,923)

Non-current assets plus/less net current assets/liabilities 7,739 1,679

Provisions (1,772) (1,778)

Other payables (1,973) (2,290)

Total non-current liabilities (3,745) (4,068)

Assets less liabilities 3,994 (2,389)

Taxpayers’ equity

General fund 3,994 (2,389)

Total taxpayers’ equity 3,994 (2,389)

More detailed information on costs can be found in our Resource Accounts

published 16 July 2010 (HC26)

Ofgem financial statements

(extracts) 2009-2010

52Operating cost statementfor the year ended 31 March 2010

2009–2010 2008–2009

£000 £000

Administration costs

Staff costs 26,199 20,625

Other administration costs 24,862 21,394

Operating income (50,578) (41,324)

Net operating cost 483 695

All income and expenditure are derived from continuing operations.

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