1. DN Update 24 th May 2007 LDZ System Charges Capacity/Commodity Split and Interruptible Discounts

2. The Proposals Restructure the LDZ system charges target capacity/commodity split from 50:50 to 95:5 Restructure the LDZ system charges target capacity/commodity split from 50:50 to 95:5 Introduce partial capacity charges for Interruptible supply points Introduce partial capacity charges for Interruptible supply points Target Implementation date 1 April 2008 Target Implementation date 1 April 2008

3. Why Change the Cap/Com Split Improve Cost Reflectivity Improve Cost Reflectivity Improve the stability of charges Improve the stability of charges Improve competition Improve competition

4. Cost Reflectivity Recent cost analyses by the DNs show that only about 5% of a DN’s cost base varies with throughput Recent cost analyses by the DNs show that only about 5% of a DN’s cost base varies with throughput 95% of a DN’s cost base are either capacity related or indirect costs 95% of a DN’s cost base are either capacity related or indirect costs Therefore appropriate to reflect these proportions in the charging structure Therefore appropriate to reflect these proportions in the charging structure

5. DN Cost Reflectivity DN transportation charges are around 17% of domestic supplier costs DN transportation charges are around 17% of domestic supplier costs Proposal is to move 30% of DN charges from commodity to capacity basis Proposal is to move 30% of DN charges from commodity to capacity basis Proposal would therefore impact only around 5% of domestic supply costs Proposal would therefore impact only around 5% of domestic supply costs

6. Cost Reflectivity

7. Timing - April 08 Implementation Allowed Revenues agreed for 2007/8 Allowed Revenues agreed for 2007/8 Indicative notices of Transportation Charges Changes published early May by DNs. Indicative notices of Transportation Charges Changes published early May by DNs. Increases in Oct 07 designed to recover 2007/8 Allowed Revenue Increases in Oct 07 designed to recover 2007/8 Allowed Revenue If we implement change from current to 95/5 in April 08 will the rates be artificially high ? If we implement change from current to 95/5 in April 08 will the rates be artificially high ?

8. Timing - April 08 Implementation If we implement change from current to 95/5 in April 08 will the rates be artificially high ? If we implement change from current to 95/5 in April 08 will the rates be artificially high ? Answer = Depends on two key factors : Answer = Depends on two key factors : 1. Any over/under recovery from 2007/8 1. Any over/under recovery from 2007/8 2. The 2008/9 PCR outcome 2. The 2008/9 PCR outcome

9. Timing - April 08 Implementation

10. Timing of 95/5 Implementation Conclusions Moving to 95/5 cap/Com split at April 2008: Does not greatly change Oct 08 change level Does not greatly change Oct 08 change level Because half-year split moves from 42:58 to 49:51 Because half-year split moves from 42:58 to 49:51 But would almost eliminate weather impact But would almost eliminate weather impact This option would result in a price rise on 1st April 08 only if Allowed Revenue was to increase by a minimum of 10%' in 2008/9 This option would result in a price rise on 1st April 08 only if Allowed Revenue was to increase by a minimum of 10%' in 2008/9 Moving to 95/5 cap/com split at October 2008: Moving to 95/5 cap/com split at October 2008: Range of possible price changes is just as wide Range of possible price changes is just as wide

11. Impact Assessment by Sector North West DN

12. Impact Assessment by Sector West Midlands DN

13. Impact Assessment by Sector East of England DN

14. Impact Assessment by Sector London DN

15. Impact Assessment by Sector Scotland DN

16. Impact Assessment by Sector Southern DN

17. Impact Assessment by Sector Northern DN

18. Impact Assessment by Sector Wales and West DN

19. Impact Assessment by Sector Conclusions Load factor dependent Load factor dependent Domestic impact typically within +-1% Domestic impact typically within +-1% +1% = £1 for domestic consumer +1% = £1 for domestic consumer Opportunity for loads to reassess SOQ Opportunity for loads to reassess SOQ May reduce impact for DM loads May reduce impact for DM loads

20. Summary Proposal is more cost reflective Proposal is more cost reflective Will give more stable charges Will give more stable charges Will largely eliminate weather uncertainty Will largely eliminate weather uncertainty Will give more predictable charges Will give more predictable charges Impact for domestic transportation: very small Impact for domestic transportation: very small Interruptible discounts maintained Interruptible discounts maintained Implement in 2008 in line with interruption reform Implement in 2008 in line with interruption reform

21. Next Steps Report on responses to DNPD02 Report on responses to DNPD02 Early June Early June Consultation paper Consultation paper July July 28 days for responses 28 days for responses Ofgem impact assessment – 3 months? Ofgem impact assessment – 3 months? Next DCMF Next DCMF July? July?

22. London Price Increase Table 1 – Typical annual domestic transportation charges Network2005/62006/72007/8Average Actual (£) Indicative (£)(£) West Midlands86.9297.31118.13100.79 East of England91.88103.17106.16100.40 London87.5476.46125.3996.46 North West75.5590.22110.6192.13