0. DISTRIBUTION NETWORKS PRICING CONSULTATION PAPER – DNPC04
Methodology for Determining the Balance of Revenue Recovery
Between LDZ System Charges and Customer Charges
Anna Taylor
Pricing Manager

1. Background
Current balance of LDZ System and Customer charges
Details of proposed changes
Impact of the proposed changes
Consistency with the objectives of the Charging Methodology
Timing of implementation

2. Background
A review of this aspect of the charging methodology was initiated as a result of Ofgem’s “Conclusions on the Structure of Charges” report.
The objective is to ensure charges are cost reflective
System charges primarily reflect costs related to the use, maintenance and replacement of the LDZ system
Customer charges mainly reflect those costs incurred in providing supply point emergency services and the cost of service pipes funded by the transporter.
Customer Charges are applied for Directly Connected loads only, and larger supply points incur a lower unit charge than small supply points

3. Current Situation
Current balance between System and Customer charges was determined in 2003, on a national basis, based on actual costs.
Actual costs were determined to be 71.8% System related costs and 28.2% Customer related costs.
Therefore charges set to approximately 70 : 30.
This has remained unchanged since.

4. Proposed Changes
Rebalance System and Customer charges to reflect network costs, either on a network specific basis or a national average basis
Establish rule going forward for any resetting back to this rebalanced level
Timing of the implementation of any proposals resulting from this consultation

5. Set network specific LDZ System and Customer charge revenue apportionments
Analysis of individual network costs has identified variations in the split between system and customer costs.
System costs in different networks vary between 68.4% and 78.8%, with a weighted average of 74.4%
These different proportions reflect differences in the structure of costs between networks and therefore adopting them into the charging methodology would make it more cost reflective.
An alternative would be for all networks to use the weighted average national split.
QUESTION: Should we rebalance on a network specific basis or on a national average basis?

6. Network Specific cost splits
LDZ System
Customer
East of England
75.5%
24.5%
London
68.4%
31.6%
North West
77.1%
22.9%
Northern
71.7%
28.3%
Scotland
70.7%
29.3%
Southern
75.1%
24.9%
Wales & West
76.0%
24.0%
West Midlands
78.8%
21.2%
Average – Weighted by Total DN Allowed Revenue
74.4%
25.6%
Based on FY 2006/7 Cost Base LDZ System Customer
East of England 75.5% 24.5%
London 68.4% 31.6%
North West 77.1% 22.9%
West Midlands 78.8% 21.2%
Scotland 70.7% 29.3%
Southern England 75.1% 24.9%
Northern England 71.7% 28.3%
Wales & West 76.0% 24.0%
Average – Weighted by Total DN Allowed Revenue 74.4% 25.6%

7. Rule for adjusting the level of the charges to maintain actual revenue recovery in line with the published target
a) Identify a specific threshold which would trigger a re-adjustment of the split of charges.
b) Rebalance the LDZ System and Customer charges each time the level of charges is changed. (ie generally each April)
c) Continue the current position, which leaves the timing and implementation of any future rebalancing at the discretion of DNs.
QUESTION: How should we reset charges to maintain the chosen revenue recovery split?

8. Current Status LDZ System Customer East of England 70.1% 29.9% London
70.4%
29.6%
North West
69.8%
30.2%
Northern
69.9%
30.1%
Scotland
70.2%
29.8%
Southern
70.9%
29.1%
Wales & West
70.6%
29.4%
West Midlands
71.2%
28.8%

9. Impact of proposed charges for Directly Connected sites
0-73 MWh
MWh
732-5,861 MWh
>5,861 MWh Firm
Interruptible
Large Loads
East of England
-1.4%
4.6%
5.8%
6.2%
4.9%
5.6%
London
0.5%
-1.5%
-2.2%
-2.3%
-1.6%
-2.0%
North West
-1.9%
6.0%
8.0%
8.4%
6.7%
6.1%
Northern
-0.6%
2.4%
2.0%
1.5%
2.1%
Scotland
-0.2%
0.7%
0.8%
0.9%
N/A
Southern
-0.8%
3.5%
4.0%
3.8%
3.7%
4.5%
Wales & West
4.3%
4.8%
West Midlands
-2.1%
6.3%
7.9%
8.6%
6.6%

10. Impact of proposed charges for CSEPs
0-73 MWh
MWh
732-5,861 MWh
>5,861 MWh Firm
Interruptible
Large Loads
East of England
7.7%
7.8%
7.5%
N/A
London
-2.9%
-2.8%
North West
10.5%
10.4%
10.3%
Northern
2.6%
Scotland
1.2%
Southern
6.0%
5.8%
Wales & West
West Midlands
10.7%
10.8%

11. Impact of proposed charges for Daily Metered Sites
Max/Min change for Daily Metered Sites
DM Firm Max
DM Firm Min
Interruptible Max
Interruptible Min
East of England
7.9%
6.0%
4.4%
London
-2.0%
-2.4%
-1.3%
-2.1%
North West
10.3%
8.0%
10.4%
Northern
2.6%
2.0%
1.4%
Scotland
1.0%
1.1%
0.7%
Southern
4.8%
4.5%
4.0%
3.2%
Wales & West
6.3%
5.0%
4.1%
West Midlands
8.9%
8.1%
7.3%
5.7%

12. Consistency with the Objectives of the Charging Methodology
Provide cost reflective charges
Take account of developments within the transportation business
Facilitate Competition between gas shippers and between gas suppliers
Proposals better meet Objectives

13. Timing of implementation
1 April proposed.
Any reason for delay?
Indicative notices published by 2 November will include estimated charges with proposal implemented.
QUESTION: Is there any reason why these charges should not be rebalanced on 1 April 2009?

14. Your views
Should the balance between LDZ System charges and Customer charges for each DN be based upon a network-specific estimate of the split of relevant costs, or a national average?
On an ongoing basis, what rule should the DNs use to maintain the actual revenue recovery in line with the published target
If agreed, when should the final proposals of this consultation be implemented?

15. Please respond by Tuesday 4 November
Next Steps
Consultation Response period ends 4 November
Once responses have been collated, the DNs will produce a report and submit a proposal to Ofgem.
Ofgem will then have 28 days in which to choose to veto or not to veto the proposal.
Please respond by Tuesday 4 November

16. Questions