Here is a lecture by Mr. Phil Nolan, BG Group Executive Director and Chief Executive, Transco. His lecture deals with market changes and the creation of growth opportunities.
It is my pleasure to open the second day of the IGE's Annual Conference. In doing so, I would like to take as my theme the scope that exists in Britain's newly-liberalized gas industry for embracing change and, in doing so, for creating new growth opportunities.
Those of us working in the industry today are no strangers to the profound and continuing changes which are part and parcel of the liberalized and steadily expanding British gas market. I will be touching on some of the more far-reaching aspects of such change which are likely to preoccupy us in the coming months. But first let me address the over-arching theme of this Conference - the additional scope for radical change and value creation from novel applications of the remarkable power of the Internet.
At the prestigious World Economic Conference in Davos, early in 1999, a good many experts predicted a setback to the world economy at the turn of the new Millennium - a consequence of the Y2K problem and other adverse factors.
No such setback has occurred - far from it. Instead, we have seen the 'dot com' bubble grow and burst as speculative investors piled into so-called 'new economy' shares, pushing them to prices far above those which could be sustained on the fundamentals of cash generation and profit. With bewildering rapidity, paper companies with no demonstrable track record pushed traditionally stable earners out of the FTSE 100, if only briefly.
With a heritage going back to the industrial revolution, BG was inevitably labeled 'old economy' and our experience was the opposite of the 'dot coms'. At the turn of the Millennium, as the world prepared to celebrate while holding its breath to see if the lights would stay on, BG's share price briefly touched £4.
However, by mid-February it had fallen some 35 per cent to £2.59. Now, of course, the 'dot com' bubble has burst, and the fundamentals have reasserted themselves. I am glad to say that our share price is back above £4.
Was it all just a short-term flight of speculative fancy, like others before? I believe not. In this case, there was an important underlying reality - the potential of IT, the Internet and the remarkable advances in telecommunications:
· to transform the nature of human activity, and of business;
· to give us undreamed of capabilities with which to create new sources of value; and,
· in the case of the liberalised British gas industry, to reinforce the empowerment of the individual consumer, now provided with choice, information and connectivity.
One thing is clear. There can be no lasting divide between so-called new and old economy companies. 'Old economy' companies will have to embrace the 'new economy' attributes, techniques and capabilities - because if they don't, they simply won't survive.
In gas industry terms, that essentially is the theme of this conference - significantly, the IGE's first Annual Conference of the 21st Century. Like all the other 'old economy' sectors, the gas industry must embrace change and recreate itself, on the basis of e-commerce, information management and the huge potential of broadband telecom.
As David Varney said yesterday in his keynote address to this Conference, "the international gas industry is now truly universal" - as we saw demonstrated at last week's 21st International Gas Conference organized in France by the IGU.
Yet for all the growth and development in the international gas industry, no company has accomplished more than Transco in embracing 'new economy' attributes and techniques, and in applying them to the benefit of consumers.
The plain fact is that the British gas industry has led the world in successfully liberalizing and opening up to competition the most intensely developed gas supply system to be found anywhere. Transco has been central to this achievement, providing not just the physical infrastructure but the unique commercial protocols and the complex information systems.
To the outside world Transco is the company that pipes gas to you and ensures the safety of the gas system in Great Britain. That is only as it should be. Our customers, and the public at large, have every right to expect a safe and reliable gas network - the more so as gas assumes a proportionately greater role in meeting the country's energy needs.
What they do not see is a Company that handles 50 per cent more data than a clearing bank; more than 1 million Internet transactions a day; and a Company that daily e-trades 24 TWh to balance supply and demand across the gas transportation network. Increasingly, Transco - with its traditional strapline of 'piping gas to you' - is becoming 'e-Transco'; not just the world's leading gas network manager, but also the leading exemplar of the transforming power of IT and the Internet.
Given Transco's leading capabilities and experience, we face growth opportunities across the UK utilities sector. And potentially these opportunities exist overseas in other OECD countries, as they seek to emulate the successful British experience in liberalizing their established gas industries, and opening them up to competition. They too will need the enabling expertise of network managers with the sort of attributes which Transco now exemplifies.
This factor, and the exceptional opportunities also facing BG International in contributing to the development, management and supply of new gas industries, is the reason why BG is pursuing another demerger - this time born out of strength and opportunity.
Given the scale and nature of the opportunities now foreseen, the continuing organic growth of the BG Group is no longer seen as being sufficient to realize the full potential for building shareholder value. Structural growth through acquisitions, mergers or alliances should be allowed to play its part.
Here, the ability of the successor companies to use their own shares as 'currency' will be a significant benefit, creating greater freedom than that available to BG with its two principal businesses, each different in character for equity investors.
The 'Transco group' will comprise not only Transco, the regulated provider of Britain's gas transportation network, but also subsidiaries for participating in joint ventures to realize the opportunities in Britain's telecommunications sector through the complementary use of our gas-related infrastructure and expertise.
Also, as we press ahead with the separation of Transco's regulated assets from the contestable activities servicing their needs, we foresee the creation of service subsidiaries both to meet the needs of Transco's assets, and to win third party business in the utilities sector.
As I have already said, the Transco group is well positioned to take advantage of the opportunities in the liberalizing, information-based gas markets which will soon be established in most other OECD countries.
But while BG's demerger should provide the platform for the Transco group to pursue these new growth opportunities, Transco's core business of managing Britain's regulated gas transportation network continues to be engaged in far-reaching and innovative change.
Indeed, one of the lessons we have learned from the rapid and successful liberalization of the British gas industry is that liberalization is not a straightforward transition from one stable state, monopoly, to another, a fully open and competitive market. Instead, it is a continuing process of change and evolution as advancing technology facilitates new possibilities for creating value and benefiting consumers.
Nothing stands still. Take, for example, the current areas of development and change affecting the legislation, public policy and regulation which frames the liberalized British gas industry. The last three weeks are perhaps exceptional in this regard, but there are certainly some big issues in play:
· for a start, Ofgem has published its initial consultation document on Transco's 2002 Periodic Review. This document sets out the principal issues and Ofgem's intended approach to the Review. Perhaps the most significant aspect of the paper bearing on the future structure of the British gas industry is the proposal to develop separate price controls for Transco's National Transmission System, and potentially for our individual regional distribution networks;
· complementary to this, Ofgem is defining the issues and consulting on options for planning the long-term expansion of the NTS, and for providing appropriate investment incentives;
· and at the same time, a blueprint for the liberalisation of gas metering has been put forward for consultation, this time jointly by Ofgem and Transco;
· meanwhile, earlier this week, the Utilities Bill advanced to Standing Committee debate in the House of Lords.
What does this flurry of recent developments tell us about the evolution of the institutional framework within which Transco, and the gas industry as a whole, will be operating?
First the Utilities Bill. Ever since the new Government started to consult on its proposals for regulatory reform back in March 1998, BG has publicly supported the stated goal of achieving a system of utility regulation that is consistent, transparent and predictable. Our support stems from the belief that these attributes will mutually benefit consumers and investors.
Utility industries, such as gas, are dependent on the continuing development and maintenance of their capital-intensive transportation infrastructures. As utility regulation matures, it becomes increasingly difficult to sustain the early, big improvements in operating efficiency.
Instead, the emphasis needs to shift to capital efficiency which, in part, is a function of the cost of the capital. In large measure the cost of capital for regulated infrastructure businesses like Transco is determined by capital markets and their perception of regulatory risk and uncertainty. This is why regulatory consistency and predictably is such a worthwhile prize.
However, as it currently stands, there is a danger that the Utilities Bill will turn out to be an opportunity missed. Do not mistake me, there are large parts of the Utilities Bill which we can support, for example, the creation of a merged Gas and Electricity Markets Authority and a single Gas and Electricity Consumer Council.
We also support the provisions which will underpin the new electricity trading arrangements. Beneficially, this in turn will allow the lifting of the DTI's stricter consents policy for new gas-fired power stations. In addition, we see merit in the explicit recognition of the social and environmental, as well as economic, aspects of regulation. Far better that these dimensions of regulation are dealt with transparently and with appropriate safeguards for investors.
Source:BG
Embracing Change and Creating Growth Opportunities – part two.
Here is a lecture by Mr. Phil Nolan, BG Group Executive Director and Chief Executive, Transco. His lecture deals with market changes and the creation of growth opportunities.
However, we also see a Bill which gives additional, and admittedly necessary, flexibility on the part of the Regulator, but without the safeguards to deliver the promised regulatory consistency and predictability.
To compound the uncertainty, new tensions will be introduced between the Regulator, focusing on the economic dimension of regulation, and the Government, now able to intervene in pursuit of social or environmental objectives. Having worked hard to represent these concerns to the Government, we will be watching the final stages of the Utilities Bill through Parliament with no little interest.
What then of the regulatory relationship? As one of the first nationalized utilities to be privatized, there is obviously a long history to BG's regulatory relationship. British Gas was privatized with its monopoly intact and set out robustly to defend the status quo.
Given the duty of successive regulators to curb monopoly power and to introduce competition where possible, this approach was bound to lead to confrontation. With hindsight, our predecessors in British Gas under-estimated the power of the Regulator, particularly when backed by a Government intent on rapidly liberalizing the British gas market.
Much has changed over the last few years. Inevitably, there are tensions and scope for disagreement between Transco and Ofgem - one with a duty to uphold the interests of its shareholders and employees; the other, the interests of gas consumers. But both sides have come to recognize the benefits of strategic alignment between Transco's objectives and Ofgem's. Without this, neither Ofgem's objectives in protecting the interests of consumers, nor Transco's in maintaining and enhancing shareholder value, will be delivered as quickly, fully and effectively.
Such alignment does not constitute 'regulatory capture' in either direction. It means that on the one hand we must understand Ofgem's objectives and priorities, while on the other, that Ofgem recognizes the practicalities of delivering them, and the need to secure and fairly reward the necessary resources. Dialogue is usually replacing confrontation, and both sides are now averse to engaging publicly on contentious issues. Together, we are seeking mutual benefit through the harnessing of Transco's capabilities to Ofgem's consumer-oriented objectives.
Transco's next Periodic Review is a case in point. As a price-regulated company, the next Periodic Review is a major landmark for Transco. The regulatory framework established at the Review effectively determines for the next five years the outputs that Transco has to deliver, and the risks and rewards it faces.
Transco is preparing for the Review by carefully examining the relationship between the regulatory framework and the Company's business strategy and its forward business plans. We are doing so in an integrated way, taking account of the views of customers and other important constituencies in the external environment. That is why we talk of a Periodic Review rather than a price control review.
This is a once-in-five-years opportunity to shape the regulatory framework in a way which provides us with appropriate incentives and the commercial freedom to pursue our strategic objectives. Initial discussions with Ofgem have been taking place for some while and, as I mentioned, an Ofgem consultation paper has recently been published on the general approach and the principal issues. The dialogue continues.
Transco's next Periodic Review and our embracing of the potential of IT and the Internet - if you like, 'e-Transco' - may appear to be only distantly related. However, the latter has enabled the rapid and beneficial changes we have seen in the British gas industry.
It offers the prospect of continuing beneficial change and improvement. In a similar way, getting the regulatory framework right offers the prospect of our being able to deliver that change efficiently, and in a way which is directed to the realization of mutual value. This is the key challenge for those of us in the British gas industry. We have led the world in the liberalization of the gas market, to the benefit of consumers. Ahead of us lie big opportunities to harness the transforming potential of the Internet. Regulation must play its part in facilitating and stimulating this.
The concept of 'e-Transco' and the transforming potential of the Internet is all well and good. But we can never lose sight of the fact that ours is an industry which is responsible for the safe and reliable flow of gas from reservoir to consumer. At every point in the system, demand and supply must balance. In the days of British Gas, we had the industry equivalent of a command economy. In today's open liberalized industry structure, no one organization has control, or indeed a complete picture of what is going on. Instead, we have a fast-moving, market-based and increasingly complex system animated by the dynamic of traders and competing suppliers.
In his keynote address yesterday, David Varney drew attention to the growing evidence of an earlier than expected shift in Britain's gas supply/demand outlook. While gas demand remains buoyant, the development of major new sources of gas from UK waters has stalled.
After a prolonged period of over-supply, we are facing prospective supply tightness especially in peak winter conditions. It seems difficult to avoid the conclusion that Britain will become a net importer of gas within the next year or two and, barring major new gas discoveries and developments, on an increasing scale thereafter.
It is against this background that Ofgem has recently published another consultation document on the 'long term signals and incentives for investment in the transmission capacity of the National Transmission System'.
Here, Ofgem is interested in the case for adopting a more market-based approach. The key issue is whether market mechanisms such as auctions, used to ensure the fair and efficient use of existing capacity, can help to guide major infrastructure investment which depends on future supply/demand patterns and related structural questions.
One point is immediately clear. We shouldn't be rushing to judgment on the vital question of how best to plan the future development of the NTS. The stakes are too high. With gas meeting nearly half the country's total energy requirements, and now established as the prime fuel for power generation, there is a strategic case for building flexibility into the National Transmission System.
We are proponents of market liberalization and, where appropriate, the introduction of new market mechanisms. But we need to move carefully. If we rush into further changes without proper assessment of the likely costs and benefits, we could harm the interests of customers as well as shareholders. We will, of course, be engaging constructively in the industry debate.
The liberalization of gas metering is another frontier area. Again, Ofgem is currently consulting, in conjunction with Transco's proposals for a programme of jointly-managed work, to establish a sound practicable basis for the liberalization of metering. Ofgem and Transco have a shared goal of securing effective competition in the provision of metering and meter reading services. At one level, Ofgem's proposals are straightforward, namely the splitting of Transco's existing price control into three elements: transportation, metering and meter reading. In doing so, it is proposed to eliminate the present cross-subsidy from transportation services to metering and meter reading.
But the required license modifications are not of themselves sufficient to deliver a fully competitive market in this field. That is why Transco has offered to facilitate a managed programme to review and adapt the existing structure of relationships between Transco, other gas transporters, shippers, suppliers and consumers. Our shared goal is a new market structure which facilitates choice across competitive metering and meter reading services. Inevitably, this will entail novel solutions, which brings me back to our theme of e-commerce. I am convinced that a liberalized market for gas metering will stimulate the innovation needed to give consumers access to smart, Internet-enabled, metering and energy management systems customized to their individual needs.
My last examples of the current frontiers of change come from the social and environmental sphere, where the Utilities Bill specifically lays down fresh challenges for the Regulator and regulated companies alike.
In this regard, Transco has already made a positive and significant contribution. Our Affordable Warmth Scheme was officially launched last week by Stephen Byers, Secretary of State for Trade and Industry. This initiative aims to tackle fuel poverty in high-density, low-income housing by working with the grain of the liberalized energy market. The programme recognizes that poorer households frequently use the least efficient equipment, but lack the buying power and creditworthiness needed to break out of this situation. Our commitment, therefore, is to work in partnership with local authorities to install gas central heating and associated energy efficiency improvements in up to one million homes over the next five years. The families which benefit will have warmer homes and improved health. The fuel savings alone will justify the investment and repay the long-term leases underwritten by Transco. The benefits for the whole community include skills and training opportunities for up to 10,000 people; improved public health; a cleaner environment through reduced emissions; and improved housing stock.
The second social and environmental area, and unfortunately one which the Utilities Bill currently does nothing to address, is the extension of gas supplies to non-gas areas. Indeed, as it stands, the Bill appears to discourage companies from extending gas supplies to those potential consumers who are located beyond the existing gas network.
The question of how to extend the gas network to non-gas areas is a particularly difficult one now that we have a liberalized market structure which, in turn, is reinforced by the Competition Act. Gas suppliers, who might otherwise be ready to fund the extension of the network and recover their investment through higher charges over a few years, can no longer 'lock in' their customers. Yet too few consumers are ready to contribute up front to the initial capital project - and what then of the later free riders?
Specifically, this issue challenges the participants in the liberalized gas industry, collectively, to find new ways of efficiently extending the gas supply network. The potential benefits - economic, social and environmental - are clear. Disadvantaged groups, particularly in rural areas, would have access to a clean and efficient fuel which would displace less environmentally friendly fossil fuels. It should also be possible to reinforce the growing use of energy efficient CHP schemes, and to complement renewable energy sources. Indeed, the whole subject of facilitating distributed electricity generation from gas and renewable, and the concept of 'net metering' is likely to assume increasing importance. Certainly, it was a major talking point at last week's World Gas Conference.
As regards the extension of the gas network, we need to develop a mechanism that enables gas transporters and suppliers to devise schemes which are attractive to the consumers concerned while not requiring unjustified cross-subsidy, or being anti-competitive. Some of the possibilities which might be considered in this regard are as follows:
· extending the period over which outlying consumers can by tied to the individual supplier;
· competitive tendering for exclusive supply areas currently beyond the network;
· the development of small-scale CHP schemes to contribute to base loads;
· the introduction of new technology such as domestic-scale CHP to replace or reduce electricity and increase the gas load; and,
· perhaps the selective use of energy efficiency grants.
Speaking for Transco, we are certainly keen to work with others in the industry, with the Regulator, and with the Government to take these ideas forward.
Before concluding, I would like to touch upon the crucial role which I feel the Institution and its Members have to play in the changing gas industry. Like the rest of the industry, the role of the IGE is changing. It has long been the repository of the engineering professionalism of the British gas industry which has led the world. The industry is changing, but the need for professionalism remains.
As I hope I have demonstrated in my address, the nature of the professionalism required is also changing, taking on new dimensions such as regulation, market liberalization, the related information systems and commercial protocols - and, of course, e-commerce in its many forms. This promises to demand more, not less, of the same skills and ingenuity that created and sustained the leadership of the British gas industry over many years. I have every confidence that the IGE, and its Members, can rise to these new challenges.
Ladies and gentlemen, the 'dot com' companies may be disappearing from the front pages of our tabloid newspapers and the so-called 'dot com bubble' may have burst. But that does not mean that the technology on which such companies are based is a passing phenomenon. Indeed, perhaps it is because the e-commerce revolution is so rapidly becoming a part of everyday business life, in the old as well as the new economy, that it features less in the headlines. As some wag might have put it, in time we will all be 'clicks and mortar' companies.
Transco has already embraced this revolution and we are convinced that it will continue to provide us with novel solutions to every sort of problem. It is equally important that a regulatory framework is devised which will facilitate and encourage these developments. I am confident that the gas industry and its people are ready and able to meet this challenge, and to stay one jump ahead of the rest of the world.
Source:BG
© 2000 Mena Report (www.menareport.com)
