WWU Regulatory Accounts to 31st March 2006 - Our Home Page

issue connection quotations on time and offering dates to commence and complete connections work. The Company’s licence also requires it to meet certain connection targets.
Performance against the aforementioned standards is reportable to Ofgem on a quarterly basis and is reported to the Executive team every month.
Certain costs, of course, cannot be controlled and hence are not included within the definition of controllable costs. Some are fixed or semi fixed and generally cannot be
influenced by management actions. These costs included:
• Depreciation charges,
• Replacement expenditure in line with the HSE and Ofgem agreed 30 year programme,
• Shrinkage gas purchase costs relating to changes in the commodity price,
• Business rates
• Ofgem licence fee
• Certain pension and pension deficit related costs.
Operational reliability is a core measure of the Company’s success, and it is fundamental to the Company’s relationships with Ofgem and the public. The Company also measures
service quality to assess the performance of management and staff in serving customers; including a quarterly customer survey which is undertaken by an independent market
research company, the results of which are published on the Company’s website and are reported to Ofgem.
Operating review
Background
The Company comprises the majority of the gas distribution network within Wales and the South West of England Local Distribution Zones. This consists of some 32,000
kilometres of pipelines. Gas is transported on behalf of 30 gas shippers through the Company’s distribution pipelines to around 2.4 million consumers.
The Company is responsible for the safety, development, maintenance and daily operation of the gas distribution network which it operates.
In September 2005, the Company brought the gas connections business in-house replacing the contract which was previously managed independently by Fulcrum Connections.
This included the preparation and issue of quotations for connections, the planning of work for accepted quotations and the management of the internal and external relationships
with the workforce providing the connection.
Regulation
In common with the other UK gas distribution businesses, the Company is regulated through the gas transporter licence under which it operates its gas distribution network.
On 1 April 2002, the activities of the then NGG Distribution Gas Business became subject to a separate five year price control formula (“distribution price control formula”) to 31
March 2007. This control included specific Ofgem allowances in respect of operating expenditure, capital expenditure, replacement expenditure and an allowed rate of return
(which is currently set at a real pre-tax rate of 6.25% on the Company’s regulatory asset value). With effect from 1 April 2004, however, this single price control formula was
disaggregated into eight separate price control formulae (“network price control formulae”) to cover the activities of the eight regional gas distribution networks. The Company
operates under the network price control formula applicable to its geographic network.
The network price control formula take the same form as the NGG Distribution Gas price control formula, with a maximum allowed revenue assigned to the network. The formula
retains a 65% fixed and 35% variable revenue calculation associated with transportation volume changes, a mains replacement incentive mechanism and the pass-through of
prescribed network rates and gas transporter licence fees payable to Ofgem.
Wales & West Utilities Ltd (Formerly Blackwater 2 Ltd)
4