Like all utility companies, Transco is covered by European Union regulations in terms of its capital purchasing. For example, all major contracts are advertised in the EU's Official Journal.
The company uses a range of contracts, framework agreements, call-off contracts, turnkey contracts and competitive tendering. For example, contracts for new pipe-laying projects are competitively tendered whereas maintenance work is currently let under term contracts. Morrison Utility Services recently won Transco's southern service provider contract (£90m a year over five years).
Current and future projects
In its previous review of Transco's capital investment programme for the period 1997/98 to 2001/02, regulator Ofgem forecast that the company would need to spend £500m a year on its capital programme, and £300m on replacement expenditure. Due to a slow start in the first three years (1997 to 1999) expenditure has had to rise since, and this explains the steep increase over the past two years. Replacement expenditure also increased in 2001/02 as a result of a programme to replace ductile iron pipes. Pipeline replacement totalled £432m over the 15 months to March 2002. Capital expenditure in 2001/02 was higher as a result of an increase in investment in high pressure pipelines.
Looking to the future, Transco recently reached an agreement with Ofgem regarding capital expenditure over the years to 2007. The agreement allows for Transco to invest £2.5bn (in 2000 prices) in developing the gas network, and £1.5bn on renewing the network. This relates to Transco's accelerated programme of mains replacement. Overall, therefore, Transco is expected to invest £4bn (or £800m a year in 2000 prices) upgrading and renewing its assets. This compares with the near £1.2bn invested in 2001/02. Even allowing for inflation, this represents a sharp reduction in investment over the years to 2007. In order to meet the physical investment targets within the given expenditure levels, Transco plans to make significant savings, especially in its mains replacement programme.
In early 2002 Lattice, Transco's parent company, announced a merger with the National Grid company. With this merger the combined group will become a major purchaser of construction services. National Grid currently invests about £350m a year in its UK transmission system, which combined with Transco's investment programme will result in annual capital expenditure of more than £1bn a year. Both companies also have telecoms interest, and Transco has a small energy services company – Lattice Energy Services – that invests in alternative energy plants.
Lattice Property manages the group's extensive portfolio of land and buildings. Its aim is to realise value from surplus land and sites. Much of this is brownfield, and in today's market of urban regeneration, attractive to developers.
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