Modification 194 11th July 2008

Content Overview Framework Adjustment Mechanisms Un-registered sites Shrinkage Independent Gas Transporters Metering Read factors Theft Populated table Next steps

Overview Modification 115 Ofgem agree that LSP sector should receive an element of RbD Ofgem’s decision letter on 115/a – “We agree with the basic tenet of the proposals, that it is inappropriate for one sector of the gas market to bear all of the costs of unallocated gas through RbD.” Further work required to do to help determine level allocation to LSP sector Modification 194 Initiated January 2008 9 meetings 15 Presentations Reviewed extensive independent data analysis

Framework Recognises difference between market sectors. Incentivises behaviours in these areas Identifies each cause of RbD. Allows for a more scientific approach to the apportionment of RbD Enduring solution – can be amended as new information becomes available or incentives are put in place. Reasonably sophisticated but not overly complex Foundation for further refinement if appropriate

Adjustment mechanisms Strong support for stability and certainty that codification would provide Some feedback that ability to vary apportionment under certain circumstances E.g. level of unconfirmed sites in I&C sector reduces Plan to create provision for UNC committee to agree changes, but decisions with right of appeal to Ofgem – similar to Shrinkage. Values also amendable by modifications

Un-registered sites / late confirmations Costs for energy consumed by Unregistered sites are all allocated into RbD. xoserve data shows, for sites with Shipper Activity, 87% of Energy (by AQ) is in LSP. 76% of the energy which will be lost under the Mod 152 cut of next April belongs to the LSP. Data presented by xoserve has shown that 0.0475TWh is approaching Mod 152 cut off date and will be unable to reconcile. In addition to this, 0.164TWh is in the orphaned sites process and the energy will not be reconciled. Therefore; 3.57% of RbD caused by Un-registered sites, and of this; 24% SSP 74% LSP NDM 2% LSP DM

Shrinkage It is an accepted principle that losses which occur up stream of the ECV (Shrinkage) are recovered based on throughput outside of the LSP and SSP allocations. In the present regime, Shrinkage is calculated based on a set of assumptions at the beginning of the period. These assumptions are validated at the end of the period and any differences are charged solely to RbD. This is clearly inequitable and the allocation of differences should be based on throughput. Therefore: 0.006% of RbD is attributable to Shrinkage Error, and of this; 62% SSP 24% NDM LSP 14% DM

Independent Gas Transporters Review group 157 has identified problems with the connections process between the IGT and the DNO combined with poor updates of AQs and reads into the IGTs have led to an understatement of the IGT energy, which is picked up wholly by RbD. The NDM LSP market makes up approximately 12% of IGT throughput. Conclusion – CSEPs errors are structural rather than driven by supplier performance therefore the cost allocation should be driven by throughput. Therefore; CSEPs error accounts for 7.14% of RbD; and of this – 88% SSP 12% LSP NDM

Metering Accuracy standards to +/- 2%. Same standards apply to both SSP and LSP (and LDZ) meters No evidence presented to show any difference in SSP / LSP meter performance Though generally acknowledged that older meters have propensity to over, rather than under register Under registering has similar effect as theft Domestic meters are not believed to under register. Over registering would suppress level of RbD. Therefore; Conclude that metering errors have a net zero impact on RbD O difference amongst sectors therefore O reallocation proposed

Theft #1 General agreement that theft is “the balancing factor” In the absence of other contributors to RbD Theft makes up the difference Conclusion is that presently 4TWH (71.35%) of RbD caused by theft Extensive analysis presented by xoserve General agreement that theft minimal / non existent in Daily metered sector Different ways of interpreting data

Theft #2 Ratio of detected theft 92.55% SSP 7.45% LSP NDM However figure understates LSP theft lack of incentives on I&C sector and failure to investigate numerous allegations Expectancy that detected theft would result in re-allocation of energy Higher proportion of cases where theft detected in LSP sector but volumes not submitted to xoserve Lower rate of detection in LSP sector 17.84% versus 32.34%

Theft #3 2. Ratio of allegations (weighted by volume) This matches AQ for each allegation and compares aggregated AQs allegations on LSP and SSP sectors 55.35% SSP 44.65% LSP NDM

Theft #3 3. Simple Average of (1) + (2) Assume ratio of theft is mid point between actual and alleged 68.6% SSP Sector 31.4% LSP NDM sector 4. Weighted average of (1) + (2) Place twice as much credence on detection rates as allegation levels 76.58% SSP sector 23.4% LSP NDM sector Conclusion is; Likely that approach (2) no less accurate than approach (1) But given a level of subjectivity have erred substantially on side of caution in favour of LSP sector 76.58% SSP, 23.4% LSP NDM Therefore 71%% RbD caused by Theft, and of this; 76.58% SSP 23.4% LSP NDM 0% LSP DM

Conclusions The overall apportionment of RbD should be SSP 72.9% LSP NDM 27.08% LSP DM 0.01% This is supported by; Independent industry data and analysis The most prudent judgements and interpretations of this data. Of special significance are those judgements on theft. Alternative judgements on theft could justify OVERALL levels of apportionment to the LSP NDM sector of at least 33%

Populated table

Next steps Separate modifications Framework Values Development workgroup report to be submitted to August Mod Panel based on Framework. New Modification to be raised on Values.