Customer Charge On behalf of all DNs 25 October 2010

History of the Customer Charge ______________________________________________________________________________________________________________________________ Originally determined by Transco Subsequent adjustments for: Removal of Meter reading costs, 1997 (PC17) Removal of Metering costs, 2000 (PC58) SSP conversion to capacity charge, 2007 (DNPC01) All current DN charges are based on these original National basis charging structures

The current Customer Charge ______________________________________________________________________________________________________________________________ Customer Charges generate around 30% of Collected Revenue; over 90% is collected from SSPs (circa £30/ SSP annually). Supply Points with an AQ above 732 MWh have a capacity based power function. Supply Points with an AQ between 732 MWh and 73.2MWh have a fixed unit capacity charge and an additional per supply point element. Supply Points with an AQ less than 73.2MWh have a fixed unit capacity charge.

Recent activity ______________________________________________________________________________________________________________________________ Final area of methodology in the 2006 Ofgem report to be reviewed Relevant costs were identified in DNPC05 DNs have prepared to consult on this area prior to change of governance DNPC08 responses suggest that some shippers may not be happy to see further changes close to the point of governance change

Proposed way forward ______________________________________________________________________________________________________________________________ Move forward with the review of the customer charge under the new governance regime Start the review process now, in order to not “lose” 3 months, and provide as much time as possible between decision and implementation. Requires buy-in from shipper community to engage in the process in advance of January.

Potential Timeline ______________________________________________________________________________________________________________________________ DateActionGovernance October 2010Presentation of issue and some potential solutions to DCMFExisting DCMF November 2010Receive feedback and further ideas, to enable development of UNC Modifications Existing DCMF December 2010DNs develop Modifications and circulate in draft for comment/discussion at DCMF Existing DCMF 2 January 2011DNs and/or shippers issue Modifications to JO for inclusion at next Modification Panel, recommending issue for consultation UNC 20 January 2011Modification Panel decides pathway:  Workgroup  Consultation (15 WD) (if consultation…) UNC 11 February 2011Final date for representationsUNC 17 February 2011FMR not ready for 5 days in advance due to close out dateUNC 17 March 2011Modification Panel votes on recommendationUNC ??Ofgem decision (KPI 25 days)UNC ASAP after decisionJO update UNC with legal text if it includes transitional arrangementsUNC 1 April 2012Implementation DateUNC

Relevant objectives ______________________________________________________________________________________________________________________________ (a) that compliance with the charging methodology results in charges which reflect the costs incurred by the licensee in its transportation business; (b) that, so far as is consistent with (a), the charging methodology properly takes account of developments in the transportation business; (c) that, so far as is consistent with (a) and (b), compliance with the charging methodology facilitates effective competition between gas shippers and between gas suppliers.

Costs underlying the Customer Charge ______________________________________________________________________________________________________________________________ Emergency costs Service Pipe replacement costs Service pipe operational costs e.g. leakage Service Pipe depreciation A share of indirect costs

Emergency Costs ______________________________________________________________________________________________________________________________ Emergency costs are driven by the existence of service pipes in the ground. No evidence of correlation between the volume of gas flowing through a service pipe or its capacity, and the likelihood that that pipe may have an emergency situation or the level of emergency cost incurred. Therefore it seems reasonable to allocate emergency costs by supply point or meter point.

Service pipe Repex ______________________________________________________________________________________________________________________________ Service pipe Repex costs are reported on the basis of whether they are Domestic or Non Domestic pipes.

Service pipe Operational Costs Leakage Less than 2% of customer costs Overall leakage is considered to be primarily a cost related to size of network rather than throughput or capacity No evidence of relationship with supply point size

Service pipe depreciation 1 ______________________________________________________________________________________________________________________________ Most services costs in the DN asset base are those built as part of the domestic “10 metre allowance” policy. These depreciation costs could be apportioned to domestic supply points only or to all supply points. The remaining depreciation costs are made up from replaced service pipes.

Service pipe depreciation 2 ______________________________________________________________________________________________________________________________ 10 metre allowance domestic service pipes replaced pipes Could be allocated across DOMESTIC supply points Could be allocated across ALL supply points Could be allocated across DOM and NON DOM supply points, in proportion to their relative asset value

Indirect Costs ______________________________________________________________________________________________________________________________ In line with other existing areas of methodology it is suggested that these costs be allocated in proportion to all the direct costs

Costs Overview ______________________________________________________________________________________________________________________________ Customer Charge related costs for Northern Gas Networks Cost Category % Emergency 7.5% Service Repex Expensed 15.4% Regulated Service Depreciation 17.5% Operational Costs 2.8% Work Management 6.8% Other Indirect Costs 5.8% Shrinkage Service Leakage 1.7% Network Rates 11.1% License, NTS pension etc 2.8% Scaling to Adjusted Allowed Revenue 28.6% Total 100.0%

Potential issues with cost Allocation ______________________________________________________________________________________________________________________________ Service pipe costs are reported as Domestic/Non Domestic (ie Market Sector Flag), not by load size or any other basis that could be a proxy for load size. It is not possible at present to invoice by Market Sector flag The split of depreciation between original connections and replacements is not known

Market Sector Flags ______________________________________________________________________________________________________________________________ Market sector flags have been a compulsory field within UK Link for around 4 years now, and over 70% of supply points have a flag. The table shows how they correspond to SSP and LSP load categories. Market Sector Flag AQ RangeI&CDomesticBlank % of I&C sites% of Dom sites in loadband (SSP)370,57914,683,9136,213, %99.8% (LSP)219,93036,36816, %0.2% (LSP)30, %0.00%

10m allowance v replacement pipes ______________________________________________________________________________________________________________________________ Difficult to determine proportion of new connection vs replacement assets. further investigation ongoing At network sale, no distinction was made between different types of service pipe assets, and so again some kind of proxy may need to be identified.

DN ideas to date ______________________________________________________________________________________________________________________________ A single charge per supply point for each network SSP and LSP charges per supply point for each network A derived capacity charge Shipper views sought

Next steps ______________________________________________________________________________________________________________________________ Arrange November DCMF workshop for this subject Collect feedback today for an initial view on what DNs should look into further for discussion in November Shippers invited to also individually discuss any ideas with DNs for further areas to investigate ready for November