Ofgem rejects increase to theft detection targets for domestic gas suppliers

Ofgem has rejected a proposal put forward by Gazprom to increase domestic suppliers’ share of an annual theft reduction target for the gas sector.

Under the Gas Theft Detection Incentive Scheme, this target is split between the domestic and non-domestic sectors and then allocated to individual suppliers based on their shares in each market.

These shares also determine their contribution to funds for each sector, from which suppliers are paid a set financial reward for every confirmed case of theft detection. The scheme is designed so that companies which exceed their targets will be net beneficiaries, and companies that miss theirs will be net contributors.

Based on estimates of the prevalence of gas theft in each, the target is currently split between the domestic and non-domestic sectors at a ratio of 73:27. Gazprom proposed a modification to the Supply Point Administration Agreement named SCP474 that would shift this ratio to 90:10.

In rejecting the proposal, Ofgem acknowledged that the data on which the current ratio is based is now getting old and it always intended the parameter to be reviewed periodically.

However, the regulator noted that the proposed ratio is based on the recommendations of a report commissioned by the Theft Steering Group (TSG) that is still to be published and which it has not yet endorsed:  “Without understanding and incorporating more of the underlying methodology into the theft target allocation, we are unable to conclude that the 90:10 split would produce a more equitable split of theft targets and incentives in future scheme years.”

Ofgem accepted that this ratio would be closer the proportion of supply point in each sector and may also be reflective of the historic number of cases found each: “However,” the regulator added, “this is not necessarily indicative of the relative value of energy stolen from each sector as the consumption at a non-domestic premise may be several order of magnitude greater than at a typical domestic premise.

“We therefore consider that it is appropriate for greater weight to be given to theft in the non-domestic sector.”

It also pointed out that changing the split would not have a redistributive effect between the sector given that the incentive pots are distinct and separate.

Ofgem said the proposal has brought up an important issue over the relative ease with which different suppliers can meet their targets: “Whilst energy theft is present in the non-domestic sector, we understand that it is much more likely to occur in smaller non-domestic premises, rather than larger commercial and industrial sites.

“Given that suppliers generally focus on one or other end of the market, we accept that those with a predominantly industrial portfolio may find it proportionately harder to detect and investigate each case of theft, than those with a portfolio of small to medium sized business customers.

“We would therefore be open to a further review of the theft targets with a view to further disaggregating them to better reflect the nature of the market.”

Whilst noting concerns raised in the BDO report that the scheme may provide little incentive for smaller suppliers to meet their targets, Ofgem said Gazprom’s proposal represented a “piecemeal approach” to dealing with the issue.

“We do not consider that it would be appropriate to focus solely on the split between smaller supply point and larger supply point sectors without also considering whether the overall theft target is itself set at the right level to improve upon levels of detection, and whether the relative payments are sufficient to cover the costs of those investigations and reward good performance.”