Some potential issues with the CDCM Franck Latrémolière CDCM review workshop, 17 May 2011

2 Agenda Objectives –High-level review of CDCM issues –Try to give a structure for your feedback Attempt at a categorisation of issues –But remember that the CDCM is a package Who might be affected by each issue?

3 Some categories of issues Issues about the structure of tariffs Issues about the structure of calculations Issues about each step in calculations Issues about predictability and volatility Issues arising from wider developments

4 Structure of tariffs: Features DUoS billing using industry data flows EDCM/CDCM boundary Non-locational tariffs Demand: different structure for half hourly and non half hourly tariffs Generation: fixed charges and unit credits

5 Structure of tariffs: Issues Generation dominated areas Unmetered supplies Incentives near EDCM/CDCM boundary Smart metering and elective half hourly settlement

6 Structure of calculations: Features Use of 500 MW model for notional assets Use of DNO forecasts for running costs Separate model M for LDNO tariffs

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8 Structure of calculations: Issues Why are assets modelled on a reinforcement basis when other costs are based on forecasts? Can revenue matching be cost-reflective? Why is there a separate model M?

9 Step 1 cost analysis: Features 500 MW model: hypothetical reinforcement Service models: hypothetical replacement Direct costs, indirect costs, network rates, and transmission exit: forecasts Customer contribution percentages

10 Step 1 cost analysis: Issues Are 500 MW models consistently constructed across DNOs? Should most of the LV trenching costs be excluded from the 500 MW model? Should a more detailed analysis of other costs (e.g. from RRP) be used? Are customer contributions data robust?

11 Step 1 cost analysis: More issues Is the 500 MW model about the cost of reinforcing an existing network or the cost of rebuilding a hypothetical network? Should indirect costs be disaggregated? –Is capitalisation policy relevant? –Interaction with on-costs in 500 MW model?

12 Step 2 cost allocation: Features 500 MW assets annuitised at 5.6% + RPI Omit assets that would be contributed if first built under the current connection charging policy Coincidence factors Standing charge factors

13 Step 2 cost allocation: Issues Half hourly and non half hourly tariffs –Only half hourly tariffs have capacity charges –Unrestricted and multi-rate tariffs may give inconsistent average unit rates –Impact on unmetered and elective half hourly Standing charge factors –Discrepancy between LV and HV capacity charges?

14 Step 2 cost allocation: More issues Should DUoS charges include a specific contribution to the costs of replacing customer-contributed assets? Direct costs, indirect costs and rates account for a large opaque lump of money Changing the rate of return from 6.9 to 5.6 per cent had a sizeable effect on tariffs

15 Step 3 revenue matching: Features Compare forecast revenue from cost allocation with price control target Discrepancy smeared across demand on peak-time unit rates Downwards adjustment permitted, but negative charges are not allowed

16 Step 3 revenue matching: Issues Can revenue matching be cost-reflective? Revenue matching highlights other issues –Does the omission of replacement costs mean that HV users pay for LV costs? Are there any specific issues with the way in which revenue matching works?

17 Step 4 LDNO model M: Features Separate model to disaggregate price control revenue allowances between network levels Used to calculate percentage discounts LDNO tariffs are derived from all-the-way tariffs using these percentage discounts

18 Step 4 LDNO model M: Issues Some issues go to the CDCM structure –Do the two models work well together? –Which costs do fixed and capacity charges in LDNO tariffs reflect? Specific issues with workings of model M –FBPQ data sources for capital expenditure –Allocation rules in opex allocation –Differences with EDCM model M

19 Transparency: Features Input data published in full Additional five-year information published Open-source spreadsheet –There is no password –All formulas can be inspected or changed User manual

20 Transparency: Issues Big and complicated Perception of a black box Tariffs appear to change unpredictably Does CDCM governance work for you?

21 Wider developments Sub-100 kW half hourly metering and smart metering roll out –Is the CDCM a barrier to progress? Link with EDCM (FCP and LRIC) –Boundary issues –Treatment of generators

22 Which industry parties are affected Suppliers may be mostly affected by –Predictability, transparency, governance –Interactions with wider industry issues Generators may be mostly affected by –Generation dominated areas, EDCM IDNOs and out-of-area DNOs are potentially affected by all the issues

23 How does this affect consumers? Hard to foresee effect of CDCM changes because of interactions between tariffs –Revenue matching –Allocation of direct, indirect costs, rates Impacts may be different for different users subject to the same tariff

24 A simple worked example Simplified CDCM with only three tariffs –Domestic Unrestricted (PC1) –Domestic Two Rates (PC2) –HV Half Hourly (HV) Hypothetical input data

25 Worked example: base case Rate 1Rate 2Rate 3FixedCapac.React. PC PC HV

26 Effect of adding a charge for replacement of contributed assets Average change Why? PC1+ 2.7%Fixed charge up 58% Unit charge down 16% PC2– 6.9%Fixed charge up 58% Unit charges down 17% HV– 8.6%Capacity charge up 19% Unit charges down 33%

27 Some customer characteristics that may drive the effect of changes Balance between peak-time consumption and other network use (e.g. capacity) –Driven by customer groups coincidence to DNO system peak Network level of supply Load profile data for the customer group

28 In which direction will charges move? Sometimes easy to foresee effects on cost estimates or cost allocation Hard to foresee effect on tariffs –Because of revenue matching and direct/indirect costs No real substitute to experimentation

29 Feedback session I will try to categorise issues and ideas –Issues about the structure of tariffs –Issues about the structure of calculations –Issues about each step in calculations –Issues about predictability and volatility –Issues arising from wider developments There will be uncategorisable issues