Structure of Charges Year-end review for DCMF

1. Structure of Charges Year-end review for DCMF 22 November 2007

2. Background • Interim arrangements were put in place in 2005 • Consistent connection boundary for demand and generation • Introduction of GDUoS • Long term arrangements were planned for implementation in 2007 • Forward looking charging methodologies, priority EHV • HV/LV generation • Charges to IDNOs • Charging products and structures • Generators connected pre-April 2005 • Common format for charging methodology statements

3. Current position • WPD • Implemented EHV methodology in April 2007 • Continuing to progress outstanding issues • G3 (SSE, SP, CN), UU & EDF • Consulted in 2007 • CE • Developing detailed project plan, discussions with Bath University • Most have made progress on load flow analysis • We do not anticipate any new methodologies for implementation in April 2008

4. Planned implementation • Previously said that new charging models should be implemented prior to start of DPCR5 • Progress to date has been slow and the work and time required has been underestimated • Since April 2005, 81 mods submitted • 58% not vetoed • 19% withdrawn • 23% vetoed • Still no guarantees that revised methodologies will be in place by 2009 • Since 2005 understanding of charging principles has substantially increased

5. HV/LV generator charging • Existing generation charging model simplistic; EHV models cannot be readily extended • At last ISG it was agreed that DCMF would progress • DE is becoming increasingly important: • DEWG has identified the importance of DUoS charges that take into account the benefits of generation • Short haul demand related tariffs more cost-reflective? • Needs to be progressed as a matter of priority

6. Boundary charging • IDNOs constitute an important change to the DNOs’ business • IDNOs will be competing with DNOs to provide part of the service of distributing electricity • In doing so they will be dependent on monopoly services provided by the DNO • Vital that DNOs ensure that charges for use of the upstream network are consistent with the requirements of competition law • Remains a risk that current charging methodologies could distort competition • We have repeatedly urged DNOs to review their approach to charging IDNOs without delay

7. Specific considerations • What costs are assumed to be avoided? How are these calculated? • What cost elements make up the fixed charge, in the boundary & end user tariff? • What cost elements are represented by scaling, in the boundary & end user tariff? • Justification for additional costs and how these are calculated • Use of average assumptions

8. Principles • Principle of equivalent charges for same loads is desirable but secondary to compliance with competition law requirements • Charges based on the same model that is used to set charges for end-customers can be appropriate, subject to specific considerations above • Differences in the tariff structure at the boundary compared to the structure applied by the DNO to its own end customers gives rise to the potential for inappropriate margins • e.g. Capacity charges at the boundary for predominantly domestic sites could potentially restrict competition • Risk that average assumptions may result in inappropriate charges in a number of situations

9. Options for taking forward SoC Three options: • Continue with individual methodology development • 42% mods to date vetoed or withdrawn • Probable resource clash with DPCR5 • Postpone development until after DPCR5 • Not appropriate for generation charges/benefits or for charges to IDNOs • Introduce a common methodology for all DNOs

10. A common methodology for all DNOs What are the benefits? • Consistency in methodology across DNOs – benefits to suppliers and customers • Most cost and time effective way to achieve a positive outcome within the original timescales • Manage resources during busy price control period, for DNOs and for Ofgem, but would require commitment from all parties

11. A common methodology for all DNOs How would this be achieved? • Draft common methodology for all DNOs, facilitated by Ofgem • Likely to allow different versions of load flow analysis to determine time to reinforcement • Taken forward through industry meetings in first half of 2008 • Implementation: • high degree of buy-in at start, DNOs submit mods Sept 08; or • implement as part of DPCR5 through licence mod and/or via DCUSA; need to consider governance process • Look to approve methodologies in 2008/09

12. Any views?