Supplier Energy Theft Scheme 10 th August 2009

2 Introduction The following slides are only intended as a strawman proposal on how a Supplier Energy Theft Scheme (SETS) might operate. It is not intended as a proposal on how the scheme should work and is only intended to stimulate debate and allow more formal proposals to be built outside of the Review Group.

3 Overview of the scheme Scheme operates annually, and opens on D1. Theft detections reported to [Xoserve]. On D365 the scheme closes before restarting the following day. –Market share measurements are taken by the Administrator of the scheme at the end of the scheme year. –Theft detections as a proportion of the total measured at the end of the scheme year. –Credits and debits for each supplier are calculated as follows: [X*(STD / TTD)] – [X*SMS] Where –X is the total value of the scheme –STD is the volume of theft detections by the supplier. –TTD is the total volume of theft detections in the scheme year. –SMS is the market share of the supplier expressed as a decimal.

4 Example Supplier A –[X*(STD / TTD)] – [X*SMS] or [25*0.6] – [25*0.33] = pay in £8.25m, rcv £15m. –£6.75m net profit Supplier B –[X*(STD / TTD)] – [X*SMS] or [25*0.4] – [25*0.66] = pay in £16.5m, rcv £10m. –£6.5m net loss. Total paid in equals total paid out over all suppliers (£25m). SETs Scheme Year 1. Scheme value £25m*. Supplier % Market Share (MPRN) Annual Detections % SETs Fund Claimed A33%12060% B66%8040% Total100%200100% * This value is for illustrative purposes only. The true value will need to be established, but should be calculated so as to provide an adequate incentive for suppliers to employ a national RPU service.

5 Governance & Administration Governance should be within the UNC. Means that changes to the scheme value or credit / debit calculation subject to Ofgem approval and supported by evidence. Administrator? –Transporters. –Xoserve. –Ofgem. –Independently appointed body.

6 Controls Administrator should be able to ask for evidence of any theft detection as they see fit. –As collected under Code of Practice. Audited?

7 ERA / ENA Commentary The scheme rewards better performance and penalises poor performance. It is self financing: total credits will equal total debits. It is simple to administer with current data (at least in gas). It does not in itself result in price rises in either transportation charges or charges to end-users as in the Reasonable Endeavours Scheme. Gas suppliers are familiar with the concept (as in EBI and Filter Failure Liabilities). It would produce competition between participants, leading to more pro-activity in the pursuit of theft of gas cases.

8 Summary Details need to be developed by a modification proposal and be subject to normal rigours of the change process. Notwithstanding this, the group is in a position to agree 1.An incentive scheme would encourage desirable behaviours (i.e. theft detection). 2.The SETS provides a robust solution. 3.To be effective, an incentive scheme must cost those that do nothing at least as much as the cost of running a theft detection unit.