7th DCMF on 19th June Connection Boundary Review Network charges comprise Connection Charges and ongoing Use of System (UoS) charges. The Connection Charging Boundary is the boundary between those assets paid for by Connection Charges and those paid for in UoS. Any review of the connection boundary must consider both aspects. Current guidelines were issued in April 2004 prior to DPCR4 for implementation in April These moved the connection charging boundary deeper in the case of Demand and shallower in the case of Generation. Changes to the Connection Charging Boundary can only realistically be agreed as part of price review process. Any changes need to be agreed by April 2009.

7th DCMF on 19th June Current Boundary Costs required to connect are chargeable in full. Electricity Connection Charge Regulations (ECCR) apply. Costs required to reinforce the existing distribution network are apportioned. Security FactorRequired Capacity New Network Capacity Fault Level3 x Fault Level Contribution New Equipment Fault Level Capacity Second comers also pay for previous reinforcement. Issues (for discussion) What is connection and what is reinforcement? Is the definition clear? In the cost apportionment factor the numerators are based on the increase whereas the denominators are on the total, is this correct? Has the removal of tariff support made connection charging less cost reflective?

7th DCMF on 19th June Principles? (for discussion) The Connection Charging Methodology should be simple and easy to understand and apply. Connection Charges provide a signal, and in some cases the best incentive, for influencing location decisions. Shallow connection charging can lead to perverse investment decisions. Methodology to be applied consistently by all LDNOs. Methodology not to distort competition in distribution or the construction of assets. Should the Guidelines be in the Licence?

7th DCMF on 19th June Proposed approach? (for discussion) Sole use assets to be charged in full. Shared or shareable assets to be apportioned. Amend Apportionment Factors so both numerator and the denominator based on the increases in capacity. Allow introduction of assets adoption payments (AAPs). Where adoption payments to be made apply a consistent approach between statutory and adopted connection. Clear guidance on the areas where CAF rules do not apply: –Work on shared assets where no capacity added, e.g. protection changes, not to be recovered through connection charges –Work on sole use assets where no capacity added, e.g. protection changes, to be recovered in full through connection charges

7th DCMF on 19th June Next steps Discuss with Ofgem on the principle of amending the connection charging boundary for DPCR5. Establish DCMF subgroup to develop proposals. Submit recommendations to Ofgem for consultation and decision as part of DPCR5 process.