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Higher prices, worse service and less choice: Why Consumers on Independent Gas Transporter (IGT) Networks are Losing Out!

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Higher prices, worse service

and less choice:

Why Consumers on

Independent Gas Transporter (IGT)

Networks are Losing Out!

energywatch

June 2006

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Higher Prices, Worse Service and Less Choice:

Why Consumers on

Independent Gas Transporter (IGT)

Networks are Losing Out!

energywatch June 2006 Index

1. What are Independent Gas Transporters? 2. Introduction

3. Higher Prices for Consumers on IGT Networks 4. Background on IGT Charging Arrangements 5. Relative Price Control Charging Arrangements 6. Level of Transparency of Suppliers’ Surcharges 7. Switching Away from Surcharges?

8. Worse Service 9. Less Choice

10. Conclusion – the Outcomes energywatch Wants 11. What’s the urgency?

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What are Independent Gas Transporters?

Irrespective of who their supplier is, all gas consumers have the gas transported to their home or business by a licensed gas transporter. Gas consumers have the right to choose a supplier of their choice but they do not have the right to choose their gas transporter. This is because gas transportation is what is known as a natural monopoly, as it would be uneconomic to duplicate the network of gas pipelines. The homes and businesses of approximately 21 million gas consumers in Great Britain are connected to one of the five regional gas Distribution Networks (DNs), the owners of which include National Grid and four new companies created by the sell-off of several of NG’s networks in June 2005. A further 760,000 gas consumers, equal to 3% of all gas consumers, are connected to one of the networks operated by an Independent Gas Transporter (IGT). The number of IGT network connections is increasing rapidly, with the industry regulator Ofgem estimating that 1 million homes and businesses will be connected to one by 2008.

Who are the Major IGT Groups?

1) Envoyoperates Independent Pipelines Limited (IPL) and Quadrant Pipelines Ltd (QPL).1 The companies are owned by Inexus Group Holdings.

2) Gas Transportation Company is a subsidiary of Babcock & Brown Infrastructure Ltd. It owns GTC Pipelines Ltd (GPL) and Utility Grid

Installations Ltd (UGI) as well as the former assets of Mowlem Energy Ltd, SP Gas Ltd.

3) ES Pipelines also owns ESP Networks, ESP Pipelines and ESP Connections2. 4) SSE Pipelines

Together these four groups account for the majority of IGT connections in Great Britain. There are also other smaller IGT groups such as Global Utility

Connections.

Introduction

Independent Gas Transporters (IGTs) are playing an increasingly important role in the gas market in Great Britain. energywatch is eager to have a full understanding of the issues affecting consumers served by IGT networks. We have carried out a thorough investigation of this market and questioned all of the main industry players including IGTs, suppliers and National Grid.

energywatch believes that the 760,000 gas consumers served by Independent Gas Transporters (IGTs) are not receiving the same benefits of competition and choice as the 21 million consumers served by the main Distribution Networks (DNs). energywatch has already received hundreds of contacts from consumers on IGT

1 QPL was previously known as East Midlands Pipelines Limited.

2 ESP Networks was previously known as United Utilities Gas Networks (UUGN), ESP Pipelines was

previously known as United Utilities Gas Pipelines (UUGP) and ESP Connections was formerly known as British Gas Connections Ltd.

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networks upset about having to pay higher costs for their gas supply, whilst receiving worse service and less choice from their gas suppliers.

This report focuses on the issues affecting domestic consumers because of the diversity of experiences in the business market. We believe that certain problems facing industrial and commercial consumers served by IGTs, such as of lack of choice and higher costs, are even worse than those of domestic consumers. Furthermore, this report is concentrated on the issues affecting the hundreds of thousands of consumers living on new build developments served by IGT networks, as opposed to the much smaller number of consumers living on infill developments in areas which previously had no access to the gas network.3

energywatch’s investigation found that consumers served by IGT networks may be paying higher costs for their gas, are unable to access the full range of payment methods and are not always able to access all the different tariffs on offer. energywatch has also identified a range of common problems affecting these

consumers when they attempt to switch supplier, with many facing subsequent billing problems.4 These problems include delays with the transfer process or inaccurate or missing meter readings. Consumers moving into new-build homes often face similar difficulties with establishing who their supplier is and many fail to receive either accurate or timely bills as a result.

There is no single industry system that holds all of the necessary supply point administration information because the data used by IGTs is often not in the same format as the data used by the DNs. This means that suppliers need to operate two separate databases, an automated system for ‘normal’ gas consumers and a separate system requiring some degree of manual input for consumers on IGT networks. The operation of separate systems means higher costs for suppliers, which are then passed through to consumers. Furthermore, when problems occur due to data errors, consumers are also faced with additional costs, including the time taken, of resolving these problems.

energywatch believes that IGTs have had some positive impacts on the gas

connection and transportation markets. However, we believe that other aspects of these markets have had unintended negative repercussions for consumers served by IGT networks. With IGTs set to play a more prominent and larger role in the future, a clearer framework is necessary to ensure this growing group of consumers do not experience unnecessary detriment and derive maximum benefit from this aspect of the competitive market.

3 Consumers living on infill sites, who had previously been relying on solid fuels or electric heating to

heat their homes, will derive substantial cost savings as a result of gaining access to the mains gas network.

4 Consumers served by the DNs may also experience billing and transfer problems when switching

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Where are IGT consumers located?

Country Consumers % of IGT % of total gas consumers

England 84% 86.3%

Scotland 11% 8.7%

Wales 5% 5%

Source: National Grid and Ofgem

There is a disproportionately higher percentage of consumers on IGT networks in Scotland than could be expected based on the number of gas consumers.

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Higher Prices for Consumers on IGT Networks

Four out of the big six suppliers, EDF Energy, Npower, Powergen and Scottish Power, are currently levying supplemental charges on their customers on IGT networks. The charges for domestic consumers range from £30 to over £50 per annum (excluding VAT) for an average user.

SSE was one of the first suppliers to levy an IGT surcharge but announced the removal of its surcharge as of 1 May 2006.5 British Gas is the other major supplier not currently levying a charge at present. These six suppliers have over a 99% share of the domestic gas supply market.

Table 1: Extra Charges Levied by Suppliers on Domestic Consumers Served by IGT Networks

Suppliers

Approximate value of extra charge per

annum First levied in How levied Any differences between IGTs?

British Gas not applicable not applicable not applicable not applicable

EDF Energy

£38.80-£68.14 excluding VAT for

gas-only customers*

April 2002 for London Energy/SWEB and Dec 2005

for Seeboard embedded in tariff no

Npower £30 excluding VAT** April 2002 embedded in tariff no

Powergen £40 excluding VAT July 2005

shown as extra administration charge at £10 per quarter no Scottish and Southern Energy

(SSE) not applicable 2002 to 1 May 2006 not applicable not applicable

Scottish Power (SP) £40 excluding VAT 1 December 2004 increased standing charge or embedded in tariff no *surcharge only applies to gas-only customers and is approximately £68.14 for low users (10,000 kWh per annum), £51.03 for medium users (20,500 kWh) and £38.80 for large users (28,000 kWh), ** has a PPM IGT tariff which has £30 additional annual standing charge but is unable to support this tariff in the current IGT market. ***charged for the number of days that a supply is received. Source: suppliers.

energywatch has estimated that over 400,000 of the 760,000 gas consumers served by IGT networks are currently paying a surcharge, costing these consumers an additional £15 million each year. This sum is set to increase, with Ofgem estimating that the number of consumers on IGT networks will reach 1 million by 2008.

5 SSE’s previously had a variable surcharge depending on the IGT and amounted to £43.80 per year

for IPL, £27.38 for GTC, £23.73 for British Gas Connections (now owned by ES Pipelines) and £5 for ES Pipelines all excluding VAT. The surcharge was shown as an extra administrative charge.

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In an era of soaring energy prices, the majority of consumers on IGT networks are paying even more for their gas, with the surcharge amounting to an extra 6-8% on their annual bill.

Background on IGT Charging Arrangements

Suppliers claim that the surcharges are necessary because of the higher

transportation and administration costs associated with supplying consumers on IGT networks.

In general the cost of a new connection to an IGT’s network can be significantly cheaper than the cost of connecting to a DN. This is because the IGTs tend to charge a lower ‘upfront’ connection cost and recover the overall cost of the connection by charging higher transportation costs over the next 10-20 years. The cost of connecting to a DN’s (National Grid) network was more expensive because the gas transportation charges were regulated and capped by Ofgem, with the connection costs paid for upfront by the developer or consumer. Competition in gas connections was originally implemented in 1997 in order to bring down the overall costs of a gas connection, as connections were previously under the monopoly control of National Grid.

Whilst new companies were able to enter the gas connections market from 1997 onwards, many of which subsequently set up new transportation networks, the regulator did not immediately move to ‘cap’ the transportation fees charged by these new independent gas transporters. Ofgas, the predecessor of the regulator Ofgem, did not put any regulations in place and Ofgem did not implement transportation price controls on IGTs until 1 January 2004 when the Relative Price Control (RPC) charging arrangements came into effect. The regulation of transportation charges is considered necessary because gas transportation is a natural monopoly, as it is uneconomic to have more than one company’s pipeline network serving a house or a business site.

There are now (in theory) two key groups of consumers served by IGT networks – those who are on the ‘legacy’ or pre-January 2004 charging arrangements and those on the post-January 2004 or ‘RPC’ charging arrangements. In reality there are actually four types of IGT consumers but this is explained in the next section. Relative Price Control Charging Arrangements

On 1 January 2004 the new Relative Price Control (RPC) charging arrangements came into effect. These charging arrangements were intended to link the

transportation charges levied by IGTs on suppliers to the charges made by National Grid, thus removing the price premium charged by IGTs for the use of their

networks.

Following the introduction of the new RPC arrangements, IGTs were given until as late as 1 January 2020 to migrate all of their existing supply points (e.g. consumers) onto the new charging arrangements. These dates were approved by Ofgem. Supply

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points contracted and connected to the IGT’s network after 1 January 2004 would automatically go onto the RPC arrangements.6 Based on our survey of the four major IGT groups7, less than 40% of total IGT supply points are currently on the RPC charging arrangements, with a further 450,000 consumers set to remain on the legacy charging arrangements until as late as 2018 or 2020.

Table 2: Latest Possible Dates for Migrating Legacy Properties into RPC

IGT Migration must be completed by

Quadrant Pipelines Ltd (QPL)* 31 December 2018 Independent Pipelines Ltd (IPL) 31 December 2018 SSE Pipelines completed ES Pipelines completed ESP Networks** 31 December 2018 ESP Pipelines*** 31 December 2018 ESP Connections**** 31 December 2015 Gas Transportation Company (GTC) 01 December 2010 Utility Grid Installations (UGI) 01 January 2020 GTC Pipeline Ltd (GPL) completed Scottish Power Gas (SP Gas) completed Mowlem Energy Ltd completed

Source: Ofgem. Licensees have been grouped by owner.

*Formerly known as East Midlands Pipelines Ltd; ** formerly known as United Utilities Gas Networks (UUGN); *** formerly known as United Utilities Gas Pipelines (UUGP); ****formerly known as British Gas Connections.

However, there is not a simple two-way split between consumers on the legacy and the RPC charging arrangements. Consumers living on domestic infill sites, or areas that previously had no access to the gas network, are subject to an additional surcharge under the RPC. These consumers, if the gas connection in their home was carried out before 1 January 2004, also do not need to be migrated to the RPC charging arrangements if the IGT has obtained permission, also known as a derogation, from the Authority (Ofgem).

All gas transporters are entitled, as a condition of their licence, to charge an

additional transportation surcharge (uplift) of 10 pence per therm for infill sites, for a period of up to 20 years. If the uplift charge is subsequently passed through by the supplier it amounts to an extra £70 a year for an average gas user. The uplift was a financial incentive put in place by Ofgem and the Department of Trade and Industry to encourage the development of new gas networks in areas previously

6 For contracts agreed prior to 01/02/2004 legacy charging arrangements may still apply. If the gas

connection quote was agreed before the January 2004 deadline but not actually executed until a later date, which could be up to several years later, the consumer’s house may still be subject to legacy transportation charging arrangements.

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disadvantaged by their lack of access to gas supplies. It is intended to allow gas transporters to recover the costs of pipeline infrastructure associated with infill developments. The uplift charge is optional, however, and not all infill sites are subject to the additional charge.

Consumers living on infill developments, especially in rural areas, will derive significant benefits from having their homes connected to the mains gas network including reductions in their energy bills compared to solid fuels or electric heating. The switch to mains gas from solid fuels also delivers substantial environmental benefits by reducing the carbon emissions from their homes. energywatch is very supportive of IGTs’ contribution to the development of new networks in

communities previously lacking mains gas suppliers.

At present there are now four key classes of domestic consumers on IGT networks8:

• Consumers connected prior to 1 January 2004, who will be charged under legacy arrangements until 2020 at the latest.

• Consumers connected prior to 1 January 2004, who are charged under legacy arrangements and because they live on a domestic infill site need not ever be migrated.

• Consumers connected after 1 January 2004, who are charged under the RPC arrangements.

• Consumers connected after 1 January 2004, who are living on a domestic infill site and are subject to RPC charging arrangements plus the additional uplift.

There are even more classes of domestic consumers. For example non-domestic consumers, if connected prior to 1 January 2004, are also not necessarily subject to the migration arrangements if the IGTs have agreed higher transportation costs upfront in order to reduce the initial connection quotes.9

There is an associated problem with regard to the IGTs’ Annual Quantity (AQ) data, which is used to calcuate the transportation charge paid by the supplier and

subsequently passed through to the consumer. The AQ is based on how much gas a consumer uses over a one year period. However, the AQ values used by the IGTs to calculate the transportation charge they charge to suppliers are ‘fixed’ for a set period of time and may bear no relation to a consumer’s actual consumption. Under the current charging arrangements, the IGTs’ AQ values for legacy consumers are fixed until 2018 and RPC consumers have their AQs fixed for up to 20 years from

8 Suppliers have told energywatch that they are usually unable to distinguish between legacy, RPC and

infill consumers until the first invoice is received from the IGT, which is often several months later. Industry parties are working on solutions to address this problem which should make this process easier going forward.

9 For example, energywatch understands that at least one IGT has obtained a derogation from Ofgem

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the date of connection.10 By constrast, the AQs used by the DNs are reviewed each year and are based on a consumer’s actual consumption over the preceeding year. Ofgem’s introduction of the RPC charging arrangements was intended to make the connection and transportation charging arrangements for consumers on IGT networks more transparent and consistent. But this intention is not reflected in the current reality and the creation of at least four types of charging arrangements for domestic consumers. Theoretically, consumers whose homes are on the RPC arrangements should not attract a transportation price premium and theoretically should not be subject to the suppliers’ surcharge. Three suppliers introduced an IGT surcharge only after the RPC arrangements came into place, although the

introduction of new surcharges did coincide with massive rises in wholesale gas costs from Autumn 2003 onwards. Where previously some suppliers had been willing to absorb the higher costs of serving consumers on IGT networks, they were now seeking to recover their costs.

Level of Transparency of Suppliers’ Surcharges

Suppliers have told energywatch that transportation costs are not the only reason why consumers on IGT networks are more expensive to serve.

Whilst there may be extra costs associated with administering these consumers’ accounts and a transportation premium payable for some (but not all) sites, energywatch remains highly concerned about the lack of transparency and consistency surrounding the suppliers’ supplemental charges. We have already received hundreds of calls from consumers dissatisfied with the surcharges. If the surcharge is an attempt to compensate for higher transportation charges one would expect that suppliers would levy the surcharges in a broadly similar manner and at a similar level. Table 1 on page 4 demonstrates that there is significant variation.

10 These charges are not paid directly by consumers on IGT networks. However, if suppliers have to

pay higher transportation charges to the IGT as a result of fixed AQ values, the supplier is entitled to pass those costs through to their customers e.g. in the form of a surcharge.

What an IGT connection means in practice:

IGT scenario: A consumer pays a slightly lower connection cost but is then liable for a transportation surcharge for the next 20 years and could possibly be liable for higher transportation charges for ever depending on where they live.

DN scenario: A consumer pays a slightly higher connection cost but pays the same transportation costs as all other consumers.

Question: If consumers were made aware of this disparity from the beginning, would they have chosen to go with an IGT connection quote? But the majority of consumers don’t make this choice, the new housing estate developer contracts with the IGT and the consumer is highly unlikely to find out before they move into their new home that they are served by an IGT network. The consumer will only find out that their house has a gas supply not whether the gas is transported by an IGT or DN. The cost savings made by the developer may or may not be passed on to the consumer in terms of the price they paid for their new home.

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energywatch believes these charges are worthy of further investigation by Ofgem given the differences between the level of surcharges charged by the different suppliers, the (previous) decision by one supplier to assign separate charges for individual IGTs, and the fact that the suppliers’ decision to levy a surcharge against all IGT consumers does not take into account whether they are on the legacy or the RPC charging arrangements. Our concern is shared by the IGTs, which feel that the surcharges are not sufficiently transparent and in certain cases, not justified.

Consumers have told energywatch they are concerned about the lack of consistency with regard to the value of the supplemental surcharge or how suppliers choose to levy the surcharge on consumers’ bills.

• EDF Energy levies the surcharge on its gas-only customers but not on its dual fuel customers. Gas-only IGT customers pay a higher premium on the first 5,860 units used and a slightly lower price for the remaining units used. The value of the annual surcharge varies depending on the customer’s usage from £68.14 for low users to £38.80 for high users11. Due to the way the

surcharge is calculated lower users pay a higher surcharge than large users. • Npower has embedded the £30 IGT surcharge within the tariff by charging a

higher unit rate for the first 4,572 kWh used. As a consequence, all of its consumers, with the exception of very low users, pay the same annual surcharge.

• Powergen lists the £40 IGT surcharge separately on the bill as an additional transportation cost that accrues daily and billed quarterly. All of its

customers pay the same annual surcharge regardless of their actual usage. • SSE previously charged its customers for the number of days the supply is

received.12

• SP levies the £40 surcharge either through a higher standing charge (standing charge tariff) or embeddened in the tariff (no standing charge tariff). All of its customers pay the same annual surcharge regardless of their actual usage. • The charges levied by Powergen, Npower, SP and (previously) SSE do not

differentiate between high, medium and low users, with large users required to pay the same surcharge as someone who uses a significantly smaller amount of gas.

• Out of the four suppliers levying the surcharge, EDF Energy is the only company that does not charge its dual fuel customers a surcharge and varies the cost of the surcharge for its gas-only customers by their annual usage. • Two suppliers, British Gas and SSE, do not feel it necessary to levy a

surcharge, while another suppliers’ IGT surcharges cost from £30 up to over £50 per annum to the average consumer.

11 Based on energywatch’s definition of high (28,000 kWh), medium (20,500 kWh) and low (10,000

kWh) users.

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Switching away from Surcharges?

Consumers may not always be able to switch away from these surcharges as all but two of the major domestic gas suppliers are levying these surcharges. For instance, the two suppliers not levying the surcharge may not be the most competitively priced supplier for a given consumer. IGT consumers might actually be better off financially with a supplier that has a surcharge as opposed to either British Gas or SSE. We recommend that consumers use the energywatch pricing factsheets and the information in Table 1 to calculate which suppliers could offer better deals. Consumers need clear and consistent information about the prices and deals on offer in order to take advantage of the competitive market. energywatch has received many complaints from consumers who had switched away from their supplier after being informed of their decision to levy a surcharge only to find out several months later that their new supplier has now introduced a surcharge. Other consumers who have just moved into a newly built home are frustrated because the developer did not inform them that they would be subject to a

surcharge from their gas supplier. They believe that the extra costs should have been highlighted in advance.

Worse Service

In addition to the surcharge that consumers served by IGT networks are required to pay, there are several other key problems in the market that need to be resolved urgently.

For example, there is no regulatory requirement on IGTs to adhere to standard industry processes for how customer data is recorded and stored. As a consequence each IGT developed their own system for holding supply point data and transferring data between relevant industry parties such as shippers and suppliers. The data held

Examples

A consumer wrote to energywatch in August 2005 after receiving a letter from Powergen informing him that they would be levying a £42 (includes VAT) annual surcharge as he is living in a newly built home served by an IGT. The consumer is upset because the charge is levied as a standing charge as opposed to through the tariff. He claims that the supplier should publicly state that the £42 is a standing charge as “this would allow customers to choose for themselves who provides them the best service on a level playing field and not one of hidden costs and

deceitfulness.”

A consumer had attempted to switch from SP to Powergen in May 2005 but this was delayed for several months as the IGT’s address data was incorrect. The transfer eventually took place on 20 July 2005. The consumer switched to Powergen on the understanding that he would have a no standing charge tariff as he is frequently away and uses very little gas. On 21 July 2005, Powergen said it began imposing an IGT surcharge, equal to £42 a year, which is paid quarterly in

installments of £10 plus VAT. The consumer has remained on their ‘no standing charge tariff’. A consumer wrote to energywatch as he lives in a new-build house in Oxford and is a customer of SSE and served by an IGT. He is upset that the developer did not inform him of the non-Transco gas transporter charge before purchase.

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by IGTs is not compatible with the data flows used by xoserve13, which holds the details of the 97% of gas consumers served by the DNs. In addition there is no guarantee that the data flows used by individual IGTs are compatible with each other. In practice this means that suppliers need to operate two separate billing and administration systems – one for ‘standard’ customers and an additional ‘manual’ system for customers on IGT networks. The necessity of operating two systems produces extra costs for suppliers, which may be passed through to their customers on IGT networks.

Furthermore, storing customer details on two separate systems can increase the possibility of errors occurring during the management of these customers’ accounts. energywatch has received hundreds of complaints from consumers on IGT networks where the root cause of the complaint appears to be due to suppliers having to operate two systems. The most common complaints made by consumers include:

• Delays with their transfer requests as a result of hold ups in receiving the opening and closing meter reads. This means consumers will often receive late or incorrect bills.

• Receiving bills from two suppliers or no bills at all, with the supplier blaming the problem on the IGTs’ incorrect or out of date MPR (meter point registration) data.

Once again, sorting out all of these problems increases supplier costs, which may be passed through to their customers on IGT networks. Regardless of whether the poor data is the fault of the supplier or the IGT, consumers have no choice but to spend the time and effort needed to resolve these problems.

At present, xoserve holds data on 97% of gas consumers but does not hold IGT data, and the lack of a single centralised database means that:

• Consumers who have moved into a new home or business and are unaware of who their supplier is may have to phone all IGTs until they reach the correct transporter, who will be able to identify their supplier.14

13 xoserve is jointly owned by the five gas Distribution Networks (DNs) and National Grid’s gas

transmission business. It handles gas transportation transactional services, on behalf of each of the DNs, to the gas shipper. The data formats utilised by the DNs are consistent as they previously had the same owner, National Grid.

14 xoserve operates a telephone number (0870 160 0229) that consumers can ring to find out who

their transporter is.

A consumer contacted energywatch after receiving bills from several suppliers and a disconnection notice from Npower. The confusion stemmed from an incorrect MPR created by Npower and registered to National Grid. The consumer is actually served by an IGT and her supplier is London Energy. The situation was eventually resolved with Npower’s bill and non-existent MPR

withdrawn.

A consumer wrote to energywatch in February 2005 after failing to receive a gas bill since moving in December 2003. Her neighbours have had similar problems. The consumer’s nominated supplier was Scottish Hydro-Electric (by the builder) and she is served by an IGT. The confusion stems from the fact that the MPR is still registered to the builder on the IGT’s records.

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• Consumers who want a connection quote, and are not in an area served by the DNs, may be required to phone round to all of the IGTs to find out which companies have a network in the area.

energywatch is aware that various industry players including suppliers, gas shippers, the DNs and IGTs have attempted to resolve these problems, however, change has been very slow and not all companies have been willing to devote the time,

resources and money to find the necessary solutions. In the past IGT problems have been put in the ‘too difficult’ pile and the lack of any regulatory backstop has meant these problems have been left unresolved.

For example, in 2003 energywatch and Ofgem challenged industry to come up with solutions to solve problems surrounding the Customer Transfer Process (CTP). Between 2003 and 2006 the energy industry worked together to deliver cost

effective and sustainable solutions to resolve the associated problems. The issue that has taken the longest time to be resolved is the Single Centralised Online Gas Enquiry Service (SCOGES) database, which will hold all details on gas supply points including both IGT and DN data. This is due to industry’s failure to reach agreement over which companies – suppliers, shippers, IGTs or DNs - should pay to set up and maintain the database. SCOGES is currently scheduled to be introduced in

November 2006.

energywatch is hopeful that the new database will address many of the difficulties currently faced by consumers. However, there are no guarantees that all of the associated transfer and billing problems will be resolved.

Less Choice

As a result of the higher cost of serving consumers on IGT networks, some suppliers have started excluding these 760,000 consumers from certain new tariffs coming onto to the market such as capped, fixed or online tariffs.

More importantly, consumers on IGT networks cannot access the full range of payment methods available to all other domestic consumers. Consumers seeking a prepayment meter (PPM) to help manage their energy usage or those seeking to manage their debt with their supplier are unlikely to be able to access this payment method. Meter

operators are currently unwilling to offer terms for providing a PPM or their quotes for this work are uncompetitive, thus consumers on IGT networks are being told by their suppliers that it will cost between £200 to £800 to have a PPM installed. Since consumers typically requesting PPMs are already having difficulties paying for their energy usage it is unlikely that they will be able to afford these exorbitant charges. In some cases these consumers may even run the risk of being disconnected by their

A consumer contacted energywatch as she had a growing debt with her gas supplier Npower. She wanted to get a PPM to help manage her energy usage but Npower said they could not arrange this because she was on an IGT, as opposed to a DN. Npower claimed that they could not support the PPM as there were no contracts in place between the IGT and its meter provider Siemens to collect and allocate

payments from the meters. Furthermore there were no contracts in place between the IGT and the DN to maintain the meter.

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supplier. By comparison, consumers on the DNs who request a PPM will normally receive it free of charge.

energywatch had previously received complaints from consumers on IGT networks who were denied their choice of supplier. This was due to the fact that not all of the gas shippers used by small domestic suppliers were signed up to each of the IGTs’ individual Network Codes. Shippers, which deliver gas on behalf of suppliers, are required to be signed up to the Network Code in order to serve consumers on those networks. energywatch has received some contacts from consumers seeking to switch to a new supplier that were denied their choice of supplier, as the company was not allowed to operate on the IGT’s network. Following the recent failure of a significant number of small domestic suppliers this point has become fairly academic, although this problem could re-occur if the domestic supply market stabilises enough to enable new entrants to thrive.

energywatch understands that Ofgem will soon be consulting on the possibility of creating a single Network Code for all IGTs. We view this as a positive step.

A consumer wrote to energywatch as he wished to transfer his supply from SWEB to Utilita but the transfer was blocked. Utilita said they would not take over the supply since the MPR is owned by an IGT. This is a potential breach of SLC 32. Utilita is no longer active in the energy supply market.

The non-domestic consumer’s experience

A large business consumer with operations throughout Great Britain has told energywatch that it felt that the existence of 4 IGT connected sites out its total portfolio of 350 sites was the main driver behind receiving only 2 quotes from a total of 7 suppliers approached during its Spring 2004 tender round. The consumer does believe, however, that this phenomenon was less marked during the Spring 2005 tender round. Furthermore, the consumer has also experienced problems with a no-supply situation on one occasion when National Grid terminated an IGT connection from their network. National Grid cut supply to the consumer for a couple of days because it did not recognise that the pipe belonged to the IGT.

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Conclusion - The Outcomes energywatch Wants

energywatch has called upon industry and Ofgem take action to eliminate the detriment facing consumers served by IGT networks.

At present, consumers on one side of a road who are served by an IGT may be paying higher prices, receiving poorer service and have less choice than consumers on the other side of the road, who are connected to a DN. This is unacceptable, as is the situation where it is unclear if the surcharge paid by these consumers is fair or cost-reflective.

energywatch believes that the quickest way to resolve many of the administrative problems facing consumers served by IGT networks requires joint effort and support from both industry and Ofgem.

energywatch has made a formal request to Ofgem to determine whether the process of competition is working effectively in a market. A mechanism such as a market investigation would provide a framework for identifying, analysing, and,

where appropriate, remedying industry-wide or market-wide competition problems. energywatch advised Ofgem that we were looking for several key improvements to the services that these consumers receive including:

1) A common service provider or a common data exchange to carry out all supply point administration (SPA) services and Annual Quantity (AQ) reviews for all consumers, regardless of whether their transporter is an IGT or a DN. 2) All IGTs should be required to sign up to and adhere to a single Uniform

Network Code to ensure there are standard industry-wide governance arrangements in place and consumers are able to switch to their chosen supplier.

3) All consumers to be able to access all payment methods, including prepayment meters, at a broadly similar costas consumers on the DNs. 4) All consumers to be able to access any new innovative tariffs launched by

suppliers.

5) An end to IGT surcharges.

energywatch believe that these outcomes will ensure that consumers on IGT networks receive the same benefits of competition and choice as consumers on the DNs. Resolving the administrative problems should reduce the cost burden of serving these consumers, encouraging more suppliers to remove their surcharge and increase the range of tariffs available to these consumers. Tackling these consumers’ lack of access to prepayment meters will be more difficult and may require

regulatory intervention to reach an acceptable resolution.

Ofgem have informed us that they do not feel a formal investigation is necessary because the problems faced by IGT consumers are well understood, work has been ongoing on the issue for a number of years and progress is anticipated in the future. Ofgem is, however, planning to write to suppliers about the reasons why certain

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tariffs or products are not being offered to IGT consumers and to establish whether the surcharge can be made more transparent on suppliers’ bills.

energywatch is aware that industry players have been attempting to develop solutions to these problems for several years and understand that significant progress has been made over the past few months on issues such as setting up a common data exchange. We were also pleased by SSE’s recent decision to remove its IGT surcharge as of 1 May 2006 and have called upon other suppliers to follow suit.

However, energywatch believe that if industry is unable to overcome the problems that have proved insummountable for a number of years, then Ofgem should make clear its intention to formally investigate and impose a regulatory solution.

What’s the urgency?

There have been several major changes in the gas transportation market in recent years.

Four of the eight gas Distribution Networks were divested from National Grid in June 2005, creating competition amongst the DN owners where there was

previously a complete monopoly. The sell-off of four of the Distribution Networks in Wales and Western England, Southern England, Northern England and Scotland could eventually lead to regional differences in transportation charges; similar to what already exists in electricity distribution charges. At present, the RPC charging arrangements link the IGTs’ transportation charges to National Grid’s charges. This means that where consumers on IGT networks could eventually find themselves subject to widely disparate transportation charges compared to their neighbours across the street whose homes are served by the local DN. Regional charging has the potential to further increase the disparity in transportation charges between ‘normal’ gas consumers and consumers on IGT networks, making IGT consumers even less attractive to suppliers. As a final step, energywatch believes that Ofgem may need to consider re-opening the discussion on IGT charging arrangements to ensure consumers on IGT networks are not stuck paying higher gas prices up until 2020 and beyond.

There have also been a significant number of mergers and acqusitions in the IGT market since 2004. IGT groups have been able to derive benefits from the increased efficiencies associated with consolidation. energywatch believes that, wherever possible, consumers are also entitled to share the benefits of companies’ efficiency savings.

In addition to the changing market realities, there are a number of political developments that have made it even more vital that action needs to be taken to resolve these problems and soon. They include:

• The Department for Communities and Local Government’s (DCLG) targets for increasing the annual targets for new build homes from 150,000 to

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200,000 over the next decade, many of which will be connected to IGT networks. This will increase the number of consumers affected.

• The increasing numbers of consumers being pushed back into fuel poverty as a result of soaring energy prices. The IGT surcharge charged by four out of the six suppliers means that prices have risen even further for this group of consumers.

• The proposals to connect off-gas communities, which will provide substantial benefits to large groups of potentially disadvantaged consumers, could be partially undermined by the current inequality between ‘normal’ and IGT gas consumers such as the inability to access prepayment meters.15

Whilst energywatch believes that IGTs have had positive impacts on the gas connection market, the development of markets must not be at the expense of a particular group of consumers. IGTs are set to play an increasingly important role in the gas market in the coming years. Improvements to the current market framework are necessary to provide sufficient protection to this growing group of consumers, and so that the full benefits of this aspect of the competitive market can be passed on to those paying for them, the consumers.

The initial lack of regulatory controls on IGTs, coupled with an industry-wide failure to resolve these problems over a number of years, is causing consumer detriment. It is unacceptable that over 760,000 consumers on IGT networks are currently in a situation where they potentially face higher costs, worse service and less choice. With the number of homes and businesses served by IGT networks set to reach an estimated 1 million by 2008, there must be an orderly process to the expansion of the IGT market. Furthermore, viable solutions must be found to the current problems in order to stop ever increasing amounts of consumers being placed in this situation.

15 Consumers living in areas that lack access to mains gas will derive significant benefits from having

their home connected to the mains gas network. Whilst consumers on these new networks will be subject to surcharges levied by certain suppliers, this disadvantage is substantially outweighed by the cost savings and convenience of mains gas compared with other heating fuels (electricity, fuel oil, LPG or coal). These consumers, however, will still face the same problems causing consumer detriment to other households connected to IGT networks such as the inability to access prepayment meters or the full range of tariffs offered by suppliers.

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