Governance and Charging Methodology for User Pays Services 10 th January 2007

Governance Approach  A framework for user pays services is included as an ancillary document in the Uniform Network Code.  Provides governance and reassurance to stakeholders.  A Charging Methodology is agreed between GTs/xoserve and Users.  Provides protection for Users against anti-competitive behaviour.  Users contract with xoserve for the delivery of services.  Provides flexibility for the delivery of services.  Note: Scope is limited to services delivered in a non- competitive environment.

Framework Within UNC  Standard terms and conditions.  Process for contracting.  Requirement to publish a charging methodology.  Requirement to publish charges consistent with the charging methodology.  Duty on transporters to ensure Transporter Agency enters into contracts.  Rights of appeal or determination.  Will require a UNC Modification to implement.  Could be modified through UNC modification process.

Charging Methodology Principles  Charges will be based on additional costs incurred plus a proportion of fixed costs.  A margin will be applied to all base charges.  Charges will be non-discriminatory.  Charges will not be used to recover investment to sustain UK Link systems.

Charging Methodology Process  The Charging Methodology would be published each year with a period for responses from Users.  A revised Charging Methodology would be published, together with details of action taken on each response.  A Charging Statement would be published giving the charge applying to each user pays service for the coming year, together with information to support the level of the charge.

Contract With xoserve  Standard contract concentrating on the delivery of the service rather than the specification of the service.  At start-up, contracts are the same for all Users.  Potentially there would need to be a requirement to sign a contract if the service relates to a licence or UNC activity.

Charging Methodology Applied to Scenarios

Approach for Existing Services  xoserve cost forecasts are reviewed by Ofgem and an allowance is set for each year in the price control period.  Apportionment of costs to service lines undertaken using an agreed methodology.  Division of total costs into fixed and variable.  Variable costs, a proportion of fixed costs, and forecast volumes are used to derive a unit charge.

Apportionment of Costs  Costs incurred as a direct result of delivering a particular service line.  Employee costs of staff involved with activity.  Other costs directly associated with the service line (e.g. Shipper Information Service telephone costs).  Support costs, either employee costs or bought in services, are allocated in proportion to staff directly involved in the activity (service lines and projects).  IS costs are allocated to applications and subsequently to the service lines delivered by each application.

Variable and Fixed Costs  Variable costs are those which can be adjusted to meet the demand for a particular service within a two year time horizon.  These will be a mixture of employee costs and readily terminable contracts.  Fixed costs are those which can only be reduced on a longer- term basis, eg property  On this basis, approximately a quarter of xoserve’s costs are variable.

Charge Calculation  The charge for a particular service line would be calculated as:  A = the proportion of fixed costs covered by a user pays charge.  Volume = The forecast number of units in the period that the charge will apply.  Margin is the profit on the service. This should reflect the risks associated with a user pays regime. Charge = A * Fixed Costs + Variable Costs Volume * (1 – Margin)

Transitional Issues  The incentive introduced with user pays charges could be expected to reduce the volume of activity.  One-off exercise required to agree initial set of user pays services and charges.  Unclear how a service could be ‘converted’ during the price control period.

Change  Change can be of two forms:  One-off development to change the way an existing service operates or to provide a new service.  A new or modified service that incurs enduring costs.  Either type of change could be triggered by a UNC modification or User request.  If a UNC modification, the approach to cost recovery could be determined by UNC governance.  If a User request, then those users involved will agree the cost recovery approach.

Change Cost Recovery  Currently transporters do not receive any additional funding for change.  If the cost of change has not been allowed for, a mechanism is required to fund the change to central systems.  The options are:  An allowance/incentive adjustment mechanism similar to that proposed by NGG.  Treat the costs as an Income Adjusting Event.  Additional charge to users.  The remaining slides only consider the last option.

Development Costs  If the development costs have not been or cannot be included in allowances, then the alternative options to fund the change are:  Additional charge(s) to Users based on an agreed methodology.  Alternatively, if usage of the modification can be measured, additional user pays charge.  If not all Users are funding the development cost, then a ‘buy- in’ arrangement would be required for late entrants.  There is a risk that industry developments will be delayed without clarity of governance.

Development - Apportionment  The additional charge needs to be apportioned to Users and optionally over time.  An example methodology that could be applied:  Market sectors impacted are identified.  Costs apportioned by supply point across impacted market sectors.  Weighting applied to market sectors to reflect different nature of market, for example:  Daily Metered10  Non Daily Metered, Industrial & Commercial5  Non Daily Metered, Domestic1  Methodology could be included in the UNC framework or Charging Methodology.

Development – Usage Recovery  Charge set to recover costs over an agreed period.  Similar methodology as that used for existing services could be applied.  Would be complex to vary user base.  Where development costs are recovered over a period, greater uncertainty over recovery implies a higher margin should be applied.

New or Modified Enduring Services  If there is an appropriate usage measure for the new or modified service, the costs could be recovered by a usage charge evaluated using the same methodology as for existing services.  Where there is no appropriate usage charge, the costs for a period could be recovered as a one-off charge, similar to the development cost arrangement.  Enduring costs may go down, in which case the charge would be a credit.

Summary

Summary  Governance Approach  Framework within UNC  Charging Methodology  Users contract with xoserve  Charging Methodology  Existing Services - Variable costs, proportion of fixed costs and forecast volume used to calculate charge.  Change - Upfront development and/or enduring costs, recovered as a usage charge or apportioned additional charge.