1. CDCM Training Session Introduction to producing DUoS Tariffs using CDCM Models Julia Haughey (EDF Energy) Binoy Dharsi (IPM Energy Retail Ltd) 20 December 2010 1 | Energy Networks Association

2. Agenda Brief explanation of CDCM Information now available to suppliers Assumptions to consider Overview of CDCM model Annual review pack EDCM what’s happening How to get involved 20 December 2010 2 | Energy Networks Association

3. CDCM o Common Distribution charging methodology (CDCM) o In October 2008 Ofgem published proposals for common distribution charging methodology o Long Run Incremental Charge(LRIC) for EHV customers o Distribution reinforcement model (DRM) for LV/HV customers o Objections were raised by the two Scottish companies o Ofgem decided not to go the competition commission but instead the two models became separate CDCM and EDCM o DNOs published proposals for CDCM in August 2009 with a few amendments these were accepted and CDCM went live on 1 st April 2010

4. CDCM objectives o Cost reflective model o Common model to calculate the charges but with DNO specific inputs rather than 7 different methodologies that were already in place o Common structure to the charges so all tariffs have the identical components whatever DNO they are in o Common Licence condition 14 statements same structure tables called the same o Consistent and simplified information for customers and suppliers

5. CDCM issues o Main issues of the CDCM o Some customers saw huge changes in April 2010 increases of over 200% o Mainly in the HH market o The trade off for cost reflective tariffs means that more updates are likely o For suppliers offering fixed term contracts this can prove to be even more challenging

6. CDCM change to charges April 2010

7. CDCM changes

8. CDCM timebands

9. Process involved in creating tariffs 20 December 2010 9 | Energy Networks Association Price Control Review (DCPR5) Revenue derived for each DNO for five years Revenue entered into CDCM model DUoS tariffs produced RPI, Low Carbon Networks, Under/Over -Recovery Repeat for each year Possible parameter changes in the future (e.g. time bands)

10. Price Control Review http://www.ofgem.gov.uk/Networks/ElecDist/PriceCntrls/DPCR5/Documents1/A ppendix%201%20Feb%2023%20signed.pdfhttp://www.ofgem.gov.uk/Networks/ElecDist/PriceCntrls/DPCR5/Documents1/A ppendix%201%20Feb%2023%20signed.pdf (page 24) 20 December 2010 10 | Energy Networks Association Allowed Revenue as published by Ofgem in February 2010 The allowed revenue does not account for inflation, so this (at the very least) would need to be accounted for

11. Updated Revenue Information 20 December 2010 11 | Energy Networks Association The most up-to-date view of DNO’s revenue can be gained from the quarterly DCP 030 teleconference calls

12. The CDCM Model o The CDCM model is a standardised methodology that apportions allowed revenue (set by Ofgem) and translates this into tariffs for HH, HH and Unmetered supply points o The model has been developed to represent a more unit driven tariff to firstly provide a cost signal to customers to reduce usage and also replicate the system peaks by loading costs into the day unit and/or red/peak for HH tariffs o Each DNO essentially has the same CDCM model with variations to represent regional differences o To use the model at its most basic level it requires the input of only 1-5 data fields o The model also have several other more sensitive elements which can be changed as part of a DCUSA change and this will not be covered in this training session 20 December 2010 12 | Energy Networks Association

13. Assumptions o The revenue that feeds into the CDCM model for April each year needs to be scaled by RPI o RPI for Distribution Revenue is set as the average of the last six months of the year (July to December) o DNO’s have incentives in place to ensure that they do not Under/Over Recovery revenue by a set percentage in any given year. If they are close to breaching these limits they will consider a mid-year tariff release o The sensitivity of the model, through demand usage and the weighting of revenue collection through unit rates means that forecasting tariffs become harder o Low Carbon Network (LCN) Schemes and other re-openers are not always accounted for by DNO’s so it is worthwhile understanding the big drivers that need to be factored in o Some DNO’s account for LCN funding however some only apply a small proportion of this 20 December 2010 13 | Energy Networks Association

14. Inputs required to create tariffs 20 December 2010 14 | Energy Networks Association Direct, Indirect and Network costs can be inflated by RPI although DNO’s will update this for the next tariffs for 2011/12. Transmission Exit charges are supplied to each DNO by National Grid

15. Inputs required to create tariffs 20 December 2010 15 | Energy Networks Association This is the main driver in terms of setting tariffs This input is the amount of revenue that is collected through EHV / Site Specific customers There is uncertainty of what this figure is likely to be so taking a 10-20% variance can make £1mn difference

16. Tariffs Produced 20 December 2010 16 | Energy Networks Association

17. Inputs required to create tariffs 20 December 2010 17 | Energy Networks Association Increasing the revenue figure by £20mn

18. Tariffs Produced – Revenue increase 20 December 2010 18 | Energy Networks Association Unit rate have increased through the £20mn revenue increase although Fixed and Capacity Charges have remained the same

19. Worked Examples of Tariffs The NEDL CDCM Model increases the Unrestricted NHH unit rate by 9.4% for a £20mn revenue increase For a LV HH customer you will note that the Red rate increases by 17.4% with little change for the Amber and Green rates It is worth noting that the Red (Peak) rate for HH tariffs are significantly higher than the other (Amber and Green) rates: The Maximum Peak value is in SWEB at approximately 21p/kWh The Lowest Peak value is in London at approximately 2p/kWh Allowed Revenue Allowed Revenue + £20mnDifference% Change Unresticted Rate1.842.0130.1739.4% Revenue £ 238,200,000 £ 258,000,000 £ 19,800,0008.3% LV HHAllowed Revenue Allowed Revenue+£20mnDifference% Change Red5.7316.7260.99517.4% Amber1.2811.3230.0423.3% Green0.233 00.0% Revenue £ 238,200,000 £ 258,000,000 £ 19,800,0008.3%

20. Annual review pack o CDCM Annual Review Pack o Produce 5 year of CDCM inputs o DNOs to provide commentary and assumptions behind the CDCM inputs o To highlight any changes timebands o Suppliers to produce tariffs o To be issued in December 2010

21. Annual review pack contents Sheet 1 - Commentary This sheet contains the DNO's commentary on the forecast input CDCM data for the base forecast over the 5 year period and the high and low scenarios. Sheet 2 - CDCM Inputs Forecast Data This sheet contains historical and forecast data for all CDCM inputs except for volume data (table 1053). The RPI forecast is seperated out and listed as a standalone assumption. Any forecasts that relate to RPI will be linked to this row. Comments are provided alongside each forecast explaining any assumptions made by the DNO. Sheet 3 - CDCM Volume Forecasts This sheet contains forecast CDCM volume data (table 1053). The matrix at the top can be used to apply different growth rates to groups of customers. Sheet 4 - CDCM Input Sheet (Y) This sheet contains the CDCM input sheet for base year 0 (Y) in a format that can be copy and pasted (paste-value) into the CDCM spreadsheet model. Sheet 5 - CDCM Input Sheet (Y + 1) This sheet contains the CDCM input sheet for base year +1 (Y+1) in a format that can be copy and pasted (paste- value) into the CDCM spreadsheet model. Sheet 6 - CDCM Input Sheet (Y + 2) This sheet contains the CDCM input sheet for base year +2 (Y+2) in a format that can be copy and pasted (paste- value) into the CDCM spreadsheet model. Sheet 7 - CDCM Input Sheet (Y + 3) This sheet contains the CDCM input sheet for base year +3 (Y+3) in a format that can be copy and pasted (paste- value) into the CDCM spreadsheet model. Sheet 8 - CDCM Input Sheet (Y + 4) This sheet contains the CDCM input sheet for base year +4 (Y+4) in a format that can be copy and pasted (paste- value) into the CDCM spreadsheet model. Sheet 9 - Tariffs This sheet contains the CDCM tariffs that are produced from the CDCM input data, after the Macro on this sheet has been run. It contains the tariffs for each of the 5 years. Sheet 10 (CDCM Timebands) Contains the time bands that the DNO plans to use for the coming year and advance warning of any changes.

22. Annual review pack contents

23. EDCM what’s happening o EDCM was due to be implemented 1st April 2011 o Ofgem decision to delay until 1st April 2012 o wanted more justification o More stakeholder involvement o Impacts all customers on site specific tariffs o Plus with the boundary change all HVS customers will move onto the EDCM model- more change o All customers will see a change o Allowed revenue to be split between CDCM and EDCM final decision will impact CDCM customers as well o Consultation due out imminently

24. How to get involved o DCMF- ENA offices every two months next one 6th January 2011 o EDCM Consultation responses due 1st February 2011 o Workstream C main suppliers participate o CDCM governance 28 changes to the current model proposed o DCP030 tele-conference calls quarterly

25. Thank you