1. Credit Arrangements Rob McDonald Group Regulation Manager Scottish and Southern Energy plc

2. Principles of Good Credit Arrangements Minimise costs overall (target costs on those who fail). Facilitate supply competition. Protect DNOs from bad debts. Maintain incentives for efficiency.

3. Current Position on DUoS Credit rating above BBB-, no credit cover. No credit rating or qualifying guarantee, 60 days use of system in cash or equivalent. No guaranteed, mechanistic process for pass-through of bad debt. Remedies exist for breach of DUoSA.

4. No credit Option No supplier posts any credit. Full pass-through in all circumstances. Resulting costs are smeared across all suppliers and their customers.

5. No Credit Option Targets costs on those that failX Facilitates supply competition? Protects DNOs Encourages efficiencyX

6. Full security Option All suppliers provide security for maximum possible exposure, regardless of credit rating. At least 4 months DUoS in cash deposits. No pass-through for DNOs.

7. Full security Option Targets costs on those that failX Facilitates supply competitionX Protects DNOs? Encourages efficiency

8. An Alternative Proposal 3 levels of credit worthiness: –gold; silver; bronze Use of credit ratings and some cash deposits Supplemented by mechanistic process for determining pass-through Clear remedies for supplier non-compliance

9. Example Credit Rating Changes Standard & Poors LT Foreign Issuer Credit TXU Europe Group –09/10/98BBB+ –10/10/02BBB- *- –14/10/02B+*- Enron Corp –08/12/95BBB+ –01/11/01BBB*- –09/11/01BBB-*- –28/11/01B-*- *- = under review, negative implications

10. 3 levels of Credit Worthiness Gold- credit rating A- or above or PCG from such an entity - no security. Silver - credit rating from BBB+ to BBB- or PCG from such an entity - tapered security. Bronze - no credit rating or qualifying guarantee - 60 days cash or equivalent security.

11. Pass-Through & Process 100% pass-through vital for remaining bad debts. Requires firm commitment from Ofgem in advance. Agreed mechanistic process for DNOs setting out billing & debt recovery. Tick box approach.

12. Remedies Agreed process would also need to include remedies. Suspension of registrations remains appropriate: –Prevents growing exposure; –Proportionate response. Disconnection?

13. Other Alternatives Bronze status costs could be reduced by: –Prepayment of DUoS; –Weekly payment arrangements. Not in favour of: –credit insurance; –Mutualisation; –reliance on past payment record.

14. Summary Targets costs on those that fail Facilitates supply competition Protects DNOs Encourages efficiency

15. Conclusions Credit arrangements requires solution to several trade-offs. Cash credit cover, parent guarantees and ratings agencies are still important. Firm commitment to pass-through also required. Same principles could apply in gas and wholesale markets