Industry Dialogue on xoserve Services Progress Report for Ofgem 5 th December 2006

Terms Workgroup  The Workgroup is expected to cover five key areas:  Features of xoserve’s systems  Cost requirements  xoserve funding arrangements  Service standards  Governance  The intention is to describe what we have done and direction of Workgroup thinking in each of these areas.

Approach Taken  Four Industry Meetings  Well attended by Shippers, GTs, xoserve  xoserve provided majority of material  Possible model presented by group of Shippers  Followed agreed Workplan to ensure all deliverables considered

Features of xoserve’s Systems  The existing ASA service lines have been reviewed to identify any new service lines, modifications to existing service lines or services lines that are no longer required.  The high level features of UK-Link replacement have been documented, together with the underlying assumptions that support the features.  It was recognised that new or modified service lines are likely to be required at the point when the UK Link Replacement business requirements are agreed (2010).  However …

Features of xoserve’s Systems  The potential new or modified services cannot be specified in sufficient detail at this stage to enable costs estimates to be made for inclusion in price control allowances.  The Workgroup considered it would be desirable to have a mechanism to adjust price control allowances in order to remove barriers to implementing future developments.  It was recognised that the timescales of the current dialogue are insufficient to fully define the business requirements for UK Link.  Shippers welcomed the commitment to undertake industry consultation on UK Link business requirements prior to detailed design commencing in 2010.

Cost Requirements - Replacement  The UK Link high level features are consistent with the replacement cost estimates already provided to Ofgem by xoserve.  For commercial reasons, xoserve did not share the replacement cost estimates with the Workgroup, but did give an indication of the cost of the complete investment programme over the next seven years.  Shippers considered that they were not in a position to assess the reasonableness of replacement costs.  The Workgroup considered that economically and efficiently incurred replacement costs should be funded by price control allowances.

Cost Requirements - Operating  Following the replacement of a significant system, it is unlikely that operating cost savings will be achieved in the first year of operation because of the time required to embed modified processes and to rectify any implementation issues.  As UK Link replacement is targeted for implementation in 2012, any operating efficiencies are likely to be realised beyond the end of the next price control period.  Therefore, the Workgroup took the view that any operating cost reductions due to the replacement of UK Link were outside the scope of the current dialogue.

xoserve Funding Arrangements – Criteria  The Workgroup has developed an initial set of criteria for identifying candidate user pays services:  The key stakeholders are Users and  Users have discretion on either whether or how to use the service and  The cost of the service line is usage dependent.  xoserve applied the criteria to all of the ASA service lines and twelve service lines were reviewed in detail by the Workgroup.  The application of the criteria to all nineteen of the high level service lines was reviewed by the Workgroup.

xoserve Funding Arrangements – Application of Criteria to Existing Services  The high level service lines identified as user pays candidates were:  Provide Query Management  User Admission & Termination  Must Reads  Provision of Services in Relation to Obligations under GT licence  Provision of user reports and information.  The Workgroup noted that:  Not all service lines within the above high level lines would be appropriate for user pays. Similarly, some user pays service lines may exist within non-user pays categories.  Service lines identified as user pays candidates can have a significant fixed cost element, which the Workgroup considered should be funded by price control allowances.  Additional criteria are required to reflect the materiality of the service line, recognising that the cost of implementing a user pays approach could be greater than any benefit gained.  Discussions have not been concluded in this area.

xoserve Funding Arrangements - Models  For services that meet the user pays criteria, two models were considered by the Workgroup:  Model A (Regulatory Model) utilises the existing UNC and ASA contractual arrangements and was the early preference expressed in the 2 nd GDPCR Consultation Document.  Model B (Direct Contracting) reflects the current arrangements for non-ASA services.  The Workgroup expressed a clear preference for Model B subject to sufficient transparency and governance arrangements to allow scrutiny of charges.

xoserve Funding Arrangements – Model A GTs xoserve User ASA Charges Service Request Service Provision Pay for Service Excluded Service Invoice UNC

xoserve Funding Arrangements – Model B GTs xoserve User ASA Request and Provide Service Invoice and Pay for Service Contract Recognition of use of assets shared with users.

xoserve Funding Arrangements – Model Comparison ModelKey Benefits User Pays Model AUser Pays Model B Baseline Services (Core)  GTs have service level obligations under UNC  Ensures all stakeholders in the loop  Increased risks between GTs and Agent  Shippers do not have direct recourse under UNC Volume Driven & Commercial Service (User Pays)  No value added by GTs involvement  Potential for increased delay or reduced service levels  Shipper to Agent direct relationship means better service level and increased leverage for shippers X X

xoserve Funding Arrangements – Model Variant  Some Shippers suggested services with volume driven costs should be charged for based on usage and a variant of Model A was considered where a new Agency transportation charge was introduced on this basis.  The GTs charging methodology would include an element of usage charging for the services taken by individual users, with the remaining costs being recovered on a portfolio basis, similar to the current arrangements for apportioning Agency costs.  This approach created concerns because of the additional complexity of transportation invoicing, the indirect relationship between Users and xoserve and the lack of clarity over incentives.  However, xoserve charges under Model B could be on a volume driven basis.

xoserve Funding Arrangements - Summary User Pays Portfolio Volume Formula Excluded Direct Formula Excluded Direct CriteriaFunding Model Services Consultation Document and Workgroup preference. Consultation Document Preference – Model A Workgroup Preference - Model B Not discussed. Option considered. Must Reads

xoserve Funding Arrangements – Application to Change and New Services Funding Mechanism xoserve income/ costs Existing Services Core + User Pays UNC User PaysUNC Core (unknown at PC outset) UNC Core (known at PC outset) Total xoserve income User Requested (either individual or group) User Pays (Sharing factor, refunding mechanism to all users) Price Control +ve Price Control adjustment Requesting user(s) Users defined at Mod stage -ve Price Control adjustment Model AModel B Contract Mechanism All future UNC mods will need to be defined as core or user pays when they are raised

xoserve Funding Arrangements – Key Points  For candidate user pays services, a clear preference was expressed by Shippers and GTs for Model B.  Shipper concerns over transparency of xoserve costs and governance arrangements – considered under governance key area.  Initial Model B further developed to address concerns over additional value being generated from already funded activities and assets – additional flow added from xoserve to GTs and Users to reflect this factor.  Allowance adjusting mechanism required for unforeseen change/new service costs and sharing of additional value generated from already funded activities and assets.

Service Standards  Relevant service standards were categorised into three areas:  Transportation Standards - Defined in the Uniform Network Code.  Availability and recovery standards – Defined in the UK Link Manual.  Volume constraints – Defined both in the UNC and UK Link Manual.  The service standards relating to UK-Link were reviewed and no changes are being proposed.  The Workgroup recognised that if there was dissatisfaction within the community, Modification Proposals would already have been raised.

Governance  For Model B to operate effectively, all parties within the Workgroup recognised the importance of transparent governance.  Concerns were expressed about xoserve’s position as a monopoly supplier for many services.  Governance options considered:  A user board to oversee cost of services;  Framework within UNC covering terms & conditions and rights to information;  Rights to audit on appeal.  No proposal to utilise SPAA.  Discussions have not been concluded in this area.

Progress with Deliverables a) High level features. High level features accepted and recognition that mechanism is required to allow for future change. b) Costs to fund UK Link replacement. No change to existing cost estimates. Shippers not able to validate. c) GT Operating efficiencies. Any efficiency gains will be in price control period d) User pays principles Set of principles established. e) Core and user pays services  Discussions commenced but not concluded. f) Proportion of xoserve’s costs that are core  Discussed but not quantified. g) Service standards No change. h) Governance arrangements  Discussions commenced but not concluded.

Outstanding Issues and Next Steps  In order to inform the final proposals, further work is required in the following areas:-  Materiality of candidate service lines.  Governance arrangements.  Allowance adjusting mechanisms.