1. EHV generation charging methodology change Harvey Jones

2. Existing EHV DG methodology The income to be recovered through UoS as part of this mechanism consists of the following elements: Annuity pass-through calculation – a calculation incorporating a proportion of the costs of connecting generators, depreciation and a rate of return. OR&M – based on an allowance for each kW of installed generation capacity; and Revenue driver – based on an allowance for each kW of installed generation capacity Transmission system exit charges – a proportionate share of the exit charges apportioned on an agreed capacity basis. The changes in any one year for DG tariffs were restricted to +10% or - 10% Charges for generators connected before April 2005 are zero

3. Proposed interim EHV generation charge An incentive payment (GI) which has the value of £1,000 per MW of incentivised generation capacity (in 2007/08 prices); Pass-through revenue (GP) which is based on the amount of use of system capex for generation that is subject to the pass-through arrangement, a 5.6% pre-tax cost of capital and a 15 year depreciation period; An operation and maintenance cost adjustment (GO) which has the value of £1,000 per MW of incentivised generation capacity (in 2007/08 prices); and Value of the previous price control amount (GL) which represents revenue in respect of the generation that was connected to the distribution system prior to 31 March 2010 (as a result of the generation incentive scheme that was in effect at that date) and has the value shown against the licensee’s name in CRC11. Once the allowances have been calculated they will be spread across the full EHV customer group based on the cumulative connected capacity, regardless of the connection date. As this is an interim solution until the EDCM is fully developed and is only intended to be in place for a six month period, we will be removing the +10% or –10% price capping mechanism that formed part of our previous methodology. The methodology applied irrespective of the date of connection. If the application of charges from this methodology would give rise to either; a breach of any existing contractual terms on which a generator is able to use the system; or an undue preference or undue discrimination in respect of any generator. We shall consider on a case-by-case basis or whether any compensatory payment or discount would be required in the light of the change in charging methodology.

4. Tariff

5. Better meets the relevant objectives We believe that this modification will help us better meet objectives (b) and (c) of licence condition 13 in relation to EHV generation charges when compared with our existing charging arrangements. This proposal better meets objective (b) because the introduction of an interim EHV generation charging methodology, prior to the introduction of a common EHV Distribution Charging Methodology (EDCM), has the benefit of introducing a credit for all generators connected at EHV (which is more consistent with the charges levied at high-voltage (HV) and low- voltage (LV)) which will further facilitate (and not distort) competition in generation. In addition the proposal also removes any potential undue discrimination in the application of generation UoS charges between pre- and post-2005 connected distributed generation (SLC19). Objective (c) is better met because the proposal to remove the 10% cap on the change in generation UoS charges allows the generator charges to be more cost reflective.

6. Mid-year tariff change Based on the May 2010 revenue forecast position, if we did not introduce a mid-year tariff change we expect to be over-recovered at the end of 2010/11 by circa £28.8m (£10.7m in NEDL and £18.1m in YEDL). This has been driven almost entirely by negative losses reconciliations in the back end of the year. Giving us an over-recovery in 2009/10 of £34m. We are currently discussing this issue with Ofgem and are due to make a decision in the next week or so. If we were to implement a mid-year tariff change and reduce charges. This would mean a reduction in tariffs in October 2010 by circa 8.7% in NEDL and 11.3% in YEDL. However, this would be followed by significant price increases in April 2011 of circa 18.4% in NEDL and circa 22.4% in YEDL to recover our allowed income entitlement. if we were to maintain charges at their current levels and carry forward the forecast large over-recovery position, we would still be looking to increase prices in 2011/12 by circa 3.0% in NEDL and 2.7% in YEDL in order to recover the DPCR5 allowances - this is primarily because Ofgem smoothed the DPCR5 revenue allowance on a Po=X basis in the final proposals which means that our revenue entitlement ramps throughout the review period);

7. Mid-year tariff change