DISTRIBUTION NETWORKS PRICING CONSULTATION PAPER – DNPC04 Methodology for Determining the Balance of Revenue Recovery Between LDZ System Charges and Customer Charges Anna Taylor Pricing Manager

Background Current balance of LDZ System and Customer charges Details of proposed changes Impact of the proposed changes Consistency with the objectives of the Charging Methodology Timing of implementation

Background A review of this aspect of the charging methodology was initiated as a result of Ofgem’s “Conclusions on the Structure of Charges” report. The objective is to ensure charges are cost reflective System charges primarily reflect costs related to the use, maintenance and replacement of the LDZ system Customer charges mainly reflect those costs incurred in providing supply point emergency services and the cost of service pipes funded by the transporter. Customer Charges are applied for Directly Connected loads only, and larger supply points incur a lower unit charge than small supply points

Current Situation Current balance between System and Customer charges was determined in 2003, on a national basis, based on actual costs. Actual costs were determined to be 71.8% System related costs and 28.2% Customer related costs. Therefore charges set to approximately 70 : 30. This has remained unchanged since.

Proposed Changes Rebalance System and Customer charges to reflect network costs, either on a network specific basis or a national average basis Establish rule going forward for any resetting back to this rebalanced level Timing of the implementation of any proposals resulting from this consultation

Set network specific LDZ System and Customer charge revenue apportionments Analysis of individual network costs has identified variations in the split between system and customer costs. System costs in different networks vary between 68.4% and 78.8%, with a weighted average of 74.4% These different proportions reflect differences in the structure of costs between networks and therefore adopting them into the charging methodology would make it more cost reflective. An alternative would be for all networks to use the weighted average national split. QUESTION: Should we rebalance on a network specific basis or on a national average basis?

Network Specific cost splits LDZ System Customer East of England 75.5% 24.5% London 68.4% 31.6% North West 77.1% 22.9% Northern 71.7% 28.3% Scotland 70.7% 29.3% Southern 75.1% 24.9% Wales & West 76.0% 24.0% West Midlands 78.8% 21.2% Average – Weighted by Total DN Allowed Revenue 74.4% 25.6% Based on FY 2006/7 Cost Base LDZ System Customer East of England 75.5% 24.5% London 68.4% 31.6% North West 77.1% 22.9% West Midlands 78.8% 21.2% Scotland 70.7% 29.3% Southern England 75.1% 24.9% Northern England 71.7% 28.3% Wales & West 76.0% 24.0% Average – Weighted by Total DN Allowed Revenue 74.4% 25.6%

Rule for adjusting the level of the charges to maintain actual revenue recovery in line with the published target a) Identify a specific threshold which would trigger a re-adjustment of the split of charges. b) Rebalance the LDZ System and Customer charges each time the level of charges is changed. (ie generally each April) c) Continue the current position, which leaves the timing and implementation of any future rebalancing at the discretion of DNs. QUESTION: How should we reset charges to maintain the chosen revenue recovery split?

Current Status LDZ System Customer East of England 70.1% 29.9% London 70.4% 29.6% North West 69.8% 30.2% Northern 69.9% 30.1% Scotland 70.2% 29.8% Southern 70.9% 29.1% Wales & West 70.6% 29.4% West Midlands 71.2% 28.8%

Impact of proposed charges for Directly Connected sites 0-73 MWh 73-732 MWh 732-5,861 MWh >5,861 MWh Firm Interruptible Large Loads East of England -1.4% 4.6% 5.8% 6.2% 4.9% 5.6% London 0.5% -1.5% -2.2% -2.3% -1.6% -2.0% North West -1.9% 6.0% 8.0% 8.4% 6.7% 6.1% Northern -0.6% 2.4% 2.0% 1.5% 2.1% Scotland -0.2% 0.7% 0.8% 0.9% N/A Southern -0.8% 3.5% 4.0% 3.8% 3.7% 4.5% Wales & West 4.3% 4.8% West Midlands -2.1% 6.3% 7.9% 8.6% 6.6%

Impact of proposed charges for CSEPs 0-73 MWh 73-732 MWh 732-5,861 MWh >5,861 MWh Firm Interruptible Large Loads East of England 7.7% 7.8% 7.5% N/A London -2.9% -2.8% North West 10.5% 10.4% 10.3% Northern 2.6% Scotland 1.2% Southern 6.0% 5.8% Wales & West West Midlands 10.7% 10.8%

Impact of proposed charges for Daily Metered Sites Max/Min change for Daily Metered Sites DM Firm Max DM Firm Min Interruptible Max Interruptible Min East of England 7.9% 6.0% 4.4% London -2.0% -2.4% -1.3% -2.1% North West 10.3% 8.0% 10.4% Northern 2.6% 2.0% 1.4% Scotland 1.0% 1.1% 0.7% Southern 4.8% 4.5% 4.0% 3.2% Wales & West 6.3% 5.0% 4.1% West Midlands 8.9% 8.1% 7.3% 5.7%

Consistency with the Objectives of the Charging Methodology Provide cost reflective charges Take account of developments within the transportation business Facilitate Competition between gas shippers and between gas suppliers Proposals better meet Objectives

Timing of implementation 1 April 2009 proposed. Any reason for delay? Indicative notices published by 2 November will include estimated charges with proposal implemented. QUESTION: Is there any reason why these charges should not be rebalanced on 1 April 2009?

Your views Should the balance between LDZ System charges and Customer charges for each DN be based upon a network-specific estimate of the split of relevant costs, or a national average? On an ongoing basis, what rule should the DNs use to maintain the actual revenue recovery in line with the published target If agreed, when should the final proposals of this consultation be implemented?

Please respond by Tuesday 4 November Next Steps Consultation Response period ends 4 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 Tuesday 4 November

Questions