1. A layman’s guide to the structure of LDZ gas charges 27 July 2009 Please note – in the interests of clarity and accessibility, simplifications have been made in the presentation that follows, and so whilst it provides a reasonable overview of the concepts underlying the methodology, it is not held out to be a definitive description of the methodology and should not be relied upon.

2. Charging Structures Charges are structured to recover different types of DN costs in different quantities from different consumers… Therefore there are 2 elements to the structure of charges: 1. Cost Type 2. Customer Type Once the total revenue required to recover a particular type of cost has been ascertained, then you can consider how it should be recovered across customers

3. Principles for allocating by Customer Type LDZ System Charges The costs recovered here are for operating the system so should be applied to those who utilise the system. Those who utilise more of the system than others should pay more… Those who want to make use of a larger capacity entitlement within the network should also pay more than those who need a smaller capacity.

4. How costs are allocated across network… Some costs are easy to identify – e.g. activities only performed on the LTS can be allocated entirely to the LTS. Some costs may be allocated between different types of pipe based on the relative quantity (length) of each type of pipe. Some costs may be allocated between different types of pipe based on the relative volume (capacity) flowing through each type of pipe. The Transco Activity Based Cost model provided the basis for this allocation process. NTSNTS Then these costs can be charged to the customers who make use of those pipes.

5. How the system is used Black pipes are small diameter pipes, which connect to bigger green pipes, which connect to the biggest red pipes. A – only make use of the red bit of the network so should pay only for the red bit. B – make use of red and green bits of the network so should pay more C – make use of red, green and black bits of the network so should contribute to the cost of all pipes. These are likely to be small consumers as they only need small diameter pipes. NTSNTS C B A Costs can be allocated to the different elements of the network, and then supply points pick up costs dependant on where they connect to the network.

6. How to tell who is where on the network? A sample is taken, identifying size of supply point and size of pipe attached to, for both directly connected supply points and CSEPs. Sample used to calculate probability of a supply point of a given size attaching to a given diameter and pressure of pipe Assumption that gas flows through all pipe pressures and diameters from biggest to smallest Based on sample, we estimate the likelihood that a customer of a certain size connects to different pressure tiers within the network. From this, we derive the probability-weighted likely usage of the system for a customer of a certain size From this, we derive the typical cost relating to LDZ System usage for a customer of a certain size

7. How costs are allocated to customers… Costs are divided across all customers in proportion to the capacity or throughput utilised. There are too many customers and too many pipes to provide individually tailored charges. Therefore the costs per unit of capacity utilised for different sizes of supply point are graphed, and suitable functions fitted to the graphs so that a trade off can be made between charges that are as cost reflective as possible but still reasonably straightforward.

8. Recent Developments Methodology being re-worked on a network by network basis… Customer connection profiles obtained Gas flows between pressures calculated Cost allocation criteria drafted Awaiting outcome of PC04 to confirm what costs should be included Consult on proposed methodology changes – the move from a national basis, and any other suggested adjustments that may follow on from the analysis.

9. Questions