DNPC05 Consultation Paper Balance of Revenue Recovery between LDZ System Charges and Customer Charges Steve Armstrong 27 th July 2009

DNPC05 Background DNPC04 responses Cost Analysis Proposed methodology changes Impact analysis Timing of implementation

Background DNPC04 Consultation in October 2008 January 2009 Ofgem announced Competition Act investigation into electricity DNO/IDNO boundary charging Possible implications for gas Ofgem asked DNs to delay submitting final proposal May 2009 Ofgem indicated investigation would not have significant impact on gas proposal New consultation DNPC05 Takes account of DNPC04 responses Uses updated 2007/8 and 2008/9 cost analysis

DNPC04 Responses 13 responses: 10 from shippers/suppliers, 3 from iGTs Use of network-specific split Majority of respondents agreed that it is appropriate No clear preference on process for updating the split Greater clarity sought Timing of implementation Majority sought longer notice than 5 months Other issues raised Impact on iGTs and RPC Cost analysis methodology Level of information provided

Cost Analysis: Changes since DNPC04 Mains and Services replacement expenditure Now use levels assumed in price control More reflective of ongoing levels Shrinkage costs Own Use and Theft costs still allocated to LDZ System Leakage costs now separately identified for LDZ System and Customer categories Emergency costs Higher unit cost weighting now applied to external jobs relative to internal jobs Consistent with basis of Emergency Service charges to iGTs Based on 2007/8 and 2008/9 data Uses costs reported to Ofgem for regulatory reporting purposes Consistent framework and definitions across two years and DNs

DNPC05 Cost Analysis

Updating of Revenue Split Current analysis gives a robust basis to determine a cost-reflective revenue split between LDZ System and Customer charges Responses to DNPC04 did not give clear majority support for any of the updating options set out there – most support for review of cost basis every 5 years Benefits of keeping a set revenue split until costs re-analysed Predictable Enhances ability of suppliers to offer longer-term contracts Appropriate to update analysis as soon as practical at start of next price control period (2013)

Proposed Methodology Changes To set charges so as to give a forecast balance of revenue from LDZ System and Customer charges in line with a DN specific estimate of the split of relevant costs To assess balance of costs relating to LDZ System and Customer charges using an average of an appropriate number of years for which data on a consistent basis is available for each network To review the balance of costs relating to the LDZ System and Customer charges at the start of each new Price Control period, except in exceptional circumstances

Impact on Charges

Impact of proposed charges for Directly Connected sites

Impact of proposed charges for CSEPs

Timing of implementation Many respondents to DNPC04 wanted more than 5 months notice Time to pass through changes in longer-term contacts More time for impact on iGT connected customers DNPC05 Proposals Smaller level of impact on average than previous proposals Should aim to implement as soon as practical to achieve benefits Indicatives will show combined impact of changes No impact through RPC on iGT charges until following year Allows over a year for iGTs to engage with Ofgem Propose to implement from 1 April 2010 Indicative notices published by 2 November will show charges both with and without proposal implemented

Your views Should the charging methodology be changed so that the balance between LDZ System charges and Customer charges for each DN is based on a network specific estimate of the split of relevant costs? Should the balance of costs relating to LDZ System and Customer charges be assessed using an average of an appropriate number of years for which data on a consistent basis is available for each network? Should the balance of charges relating to LDZ System and Customer charges be reviewed at the beginning of each Price Control period, except in exceptional circumstances? Is there any reason why the proposal should not be implemented from 1st April 2010?

Next Steps Consultation response period ends 18th November Once responses have been collated, the DNs will produce a report and submit a proposal to Ofgem. Ofgem will then have 28 days in which to choose to veto or not to veto the proposal. Please respond by Wednesday 18 November

Questions