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

DN Update 24DN Update 24thth May May 20072007

LDZ System Charges LDZ System Charges Capacity/Commodity Capacity/Commodity

Split and Interruptible Split and Interruptible DiscountsDiscounts

The ProposalsThe Proposals

Restructure the LDZ system charges Restructure the LDZ system charges target capacity/commodity split from target capacity/commodity split from 50:50 to 95:550:50 to 95:5

Introduce partial capacity charges for Introduce partial capacity charges for Interruptible supply pointsInterruptible supply points

Target Implementation date 1 April Target Implementation date 1 April 20082008

Why Change the Why Change the Cap/Com SplitCap/Com Split

Improve Cost Reflectivity Improve Cost Reflectivity

Improve the stability of chargesImprove the stability of charges

Improve competitionImprove competition

Cost ReflectivityCost Reflectivity

Recent cost analyses by the DNs Recent cost analyses by the DNs show that only about 5% of a DN’s show that only about 5% of a DN’s cost base varies with throughputcost base varies with throughput

95% of a DN’s cost base are either 95% of a DN’s cost base are either capacity related or indirect costscapacity related or indirect costs

Therefore appropriate to reflect these Therefore appropriate to reflect these proportions in the charging structureproportions in the charging structure

DN Cost ReflectivityDN Cost Reflectivity

DN transportation charges are DN transportation charges are around 17% of domestic supplier around 17% of domestic supplier costscosts

Proposal is to move 30% of DN Proposal is to move 30% of DN charges from commodity to capacity charges from commodity to capacity basisbasis

Proposal would therefore impact Proposal would therefore impact only around 5% of domestic supply only around 5% of domestic supply costscosts

Cost ReflectivityCost ReflectivitySumamry of DN Capacity/Commodity cost split for Ofgem

DIRECT COSTS Average of All WWU Scotia Northern NG% % % %

Operational Costs: 20% 21% 19% 17% 24%Replacement Expenditure 50 % 18% 16% 19% 21% 18%Total Depreciation 23% 22% 23% 25% 23%Total Direct Capacity Costs 62% 59% 61% 63% 65%Shrinkage 5% 4% 5% 5% 4%Odorant 0% 0% 0% 0% 0%Total Direct Commodity Costs 5% 5% 5% 5% 4%Total Direct Capacity +Commodity 67% 64% 67% 68% 69%INDIRECT COSTSFormula Rates 15% 12% 13% 18% 16%PGT Licence Fee 1% 1% 1% 1% 1%Service Agreements 5% 6% 7% 7% 0%Other Net Overheads 13% 17% 13% 7% 15%Total Indirect Costs 33% 36% 33% 32% 31%TOTAL DIRECT PLUS INDIRECT COSTS 100% 100% 100% 100% 100%

Timing - April 08 Timing - April 08 ImplementationImplementation

Allowed Revenues agreed for 2007/8Allowed Revenues agreed for 2007/8 Indicative notices of Transportation Indicative notices of Transportation

Charges Changes published early Charges Changes published early May by DNs.May by DNs.

Increases in Oct 07 designed to Increases in Oct 07 designed to recover 2007/8 Allowed Revenuerecover 2007/8 Allowed Revenue

If we implement change from current If we implement change from current to 95/5 in April 08 will the rates be to 95/5 in April 08 will the rates be artificially high ?artificially high ?


If we implement change from If we implement change from current to 95/5 in April 08 will the current to 95/5 in April 08 will the rates be artificially high ?rates be artificially high ?

Answer = Depends on two key Answer = Depends on two key factors :factors : 1. Any over/under recovery from 2007/81. Any over/under recovery from 2007/8 2. The 2008/9 PCR outcome2. The 2008/9 PCR outcome


Based on assumed 25% charge increase at October 2007

April 2008 Price Change

Allowed Revenue Current split 95/5 from 95/5 from 95/5 fromfor 2008/9 continues April 2008 Oct 2008 April 2008

As 2007/8 -14% -16% -1% -8%

As 2007/8 + 10% +1% +2% +17% +1%

As 2007/8 - 10% -30% -34% -19% -17%Range of potential changes20 % points 31 % points 36 % points 36 % points 18 % points

Price Change at October 2008

Timing of 95/5 Timing of 95/5 ImplementationImplementation

ConclusionsConclusionsMoving to 95/5 cap/Com split at April 2008:Moving to 95/5 cap/Com split at April 2008:

Does not greatly change Oct 08 change levelDoes not greatly change Oct 08 change level Because half-year split moves from 42:58 to 49:51Because half-year split moves from 42:58 to 49:51 But would almost eliminate weather impactBut would almost eliminate weather impact This option would result in a price rise on 1st This option would result in a price rise on 1st

April 08 only if Allowed Revenue was to increase April 08 only if Allowed Revenue was to increase by a minimum of 10%' in 2008/9 by a minimum of 10%' in 2008/9

Moving to 95/5 cap/com split at October Moving to 95/5 cap/com split at October 2008:2008: Range of possible price changes is just as wideRange of possible price changes is just as wide

Impact Assessment by Impact Assessment by SectorSector

North West DNNorth West DNNorth West

Load Factor Charge Difference

Domestic 0-2,500 37.23% -0.5%

Firm 2,500 - 5,000 33.46% 4.7%

5,000 - 10,000 33.43% 5.3%

10,000 - 15,000 34.70% 4.0%

15,000 - 20,000 34.93% 3.8%

20,000 - 25,000 35.38% 3.3%

Firm 25,000 - 75,000 34.56% 3.2%

75,000 - 100,000 39.08% -1.1%

100,000 - 200,000 40.55% -2.0%

Firm 200,000 - 500,000 45.44% -6.0%

500,000 - 1,000,000 51.54% -10.4%

1.0 m - 2.0 m 46.70% -5.0%

2.0 m - 10.0 m 56.22% -11.9%

10.0 m - 50.0 m 100.00% -32.9%

Interruptible 200,000 - 500,000 15.32% 113.5%

500,000 - 1,000,000 29.52% 31.3%

1.0 m - 2.0 m 46.80% -8.6%

2.0 m - 10.0 m 37.93% 12.4%

10.0 m - 50.0 m 52.98% -12.2%


West Midlands DNWest Midlands DNLoad Factor Charge Difference

Domestic 0-2,500 33.50% -0.4%

Firm 2,500 - 5,000 29.94% 4.6%

5,000 - 10,000 29.94% 5.1%

10,000 - 15,000 28.41% 7.3%

15,000 - 20,000 28.92% 6.7%

20,000 - 25,000 29.57% 5.9%

Firm 25,000 - 75,000 30.29% 4.1%

75,000 - 100,000 34.89% -0.6%

100,000 - 200,000 35.69% -0.9%

Firm 200,000 - 500,000 31.98% 4.2%

500,000 - 1,000,000 47.96% -11.3%

1.0 m - 2.0 m 42.91% -5.8%

2.0 m - 10.0 m 54.27% -14.5%

10.0 m - 50.0 m 89.15% -31.8%

Interruptible 200,000 - 500,000 27.70% 29.4%

500,000 - 1,000,000 25.98% 39.6%

1.0 m - 2.0 m 48.77% -15.0%

2.0 m - 10.0 m 45.59% -7.7%

10.0 m - 50.0 m 42.10% 1.6%

West Midlands corrected


East of England DNEast of England DNLoad Factor Charge Difference

Domestic 0-2,500 36.02% 0.0%

Firm 2,500 - 5,000 32.32% 5.3%

5,000 - 10,000 32.05% 6.1%

10,000 - 15,000 33.41% 4.7%

15,000 - 20,000 33.79% 4.3%

20,000 - 25,000 34.61% 3.4%

Firm 25,000 - 75,000 34.69% 2.3%

75,000 - 100,000 39.14% -1.9%

100,000 - 200,000 40.26% -2.4%

Firm 200,000 - 500,000 40.85% -2.0%

500,000 - 1,000,000 50.80% -10.4%

1.0 m - 2.0 m 50.60% -9.4%

2.0 m - 10.0 m 45.61% -3.6%

10.0 m - 50.0 m 66.98% -17.9%

Interruptible 200,000 - 500,000 15.93% 105.6%

500,000 - 1,000,000 40.03% 1.6%

1.0 m - 2.0 m 41.10% 0.9%

2.0 m - 10.0 m 53.25% -16.3%

10.0 m - 50.0 m 47.74% -4.5%

East of England


London DNLondon DNLoad Factor Charge Difference

Domestic 0-2,500 33.29% 0.3%

Firm 2,500 - 5,000 35.22% -0.1%

5,000 - 10,000 35.12% 0.0%

10,000 - 15,000 33.56% 1.8%

15,000 - 20,000 34.27% 1.0%

20,000 - 25,000 34.32% 1.0%

Firm 25,000 - 75,000 36.02% -2.0%

75,000 - 100,000 39.12% -4.4%

100,000 - 200,000 39.85% -4.7%

Firm 200,000 - 500,000 42.24% -6.6%

500,000 - 1,000,000 46.49% -9.6%

1.0 m - 2.0 m 54.26% -14.8%

2.0 m - 10.0 m 64.58% -20.8%

10.0 m - 50.0 m 84.93% -29.7%

Interruptible 200,000 - 500,000 24.33% 43.9%

500,000 - 1,000,000 27.64% 33.7%

1.0 m - 2.0 m 38.70% 3.3%

2.0 m - 10.0 m 23.39% 59.0%

10.0 m - 50.0 m 49.39% -9.6%

London


Scotland DNScotland DNLoad Factor Charge Difference

Domestic 0-2,500 38.98% 0.8%

Firm 2,500 - 5,000 37.70% 2.4%

5,000 - 10,000 37.70% 2.4%

10,000 - 15,000 39.81% -0.1%

15,000 - 20,000 40.67% -1.1%

20,000 - 25,000 41.44% -2.0%

Firm 25,000 - 75,000 41.44% -1.5%

75,000 - 100,000 40.82% 0.2%

100,000 - 200,000 43.44% -2.1%

Firm 200,000 - 500,000 47.75% -5.9%

500,000 - 1,000,000 50.51% -7.2%

1.0 m - 2.0 m 64.06% -17.2%

2.0 m - 10.0 m 79.60% -24.8%

10.0 m - 50.0 m 93.95% -30.9%

Interruptible 200,000 - 500,000 0.00% 24.2%

500,000 - 1,000,000 0.00% 6.9%

1.0 m - 2.0 m 38.98% 13.4%

2.0 m - 10.0 m 38.84% 10.1%

10.0 m - 50.0 m 41.93% -30.8%

Scotland


Southern DNSouthern DNLoad Factor Charge Difference

Domestic 0-2,500 31.45% 1.0%

Firm 2,500 - 5,000 31.82% 0.5%

5,000 - 10,000 31.72% 0.7%

10,000 - 15,000 31.62% 0.9%

15,000 - 20,000 32.13% 0.1%

20,000 - 25,000 32.72% -0.7%

Firm 25,000 - 75,000 33.38% -0.8%

75,000 - 100,000 34.71% -2.0%

100,000 - 200,000 37.16% -4.7%

Firm 200,000 - 500,000 40.97% -9.2%

500,000 - 1,000,000 42.02% -10.2%

1.0 m - 2.0 m 53.33% -29.1%

2.0 m - 10.0 m 47.84% -12.4%

10.0 m - 50.0 m 60.65% -18.5%

Interruptible 200,000 - 500,000 23.58% 59.7%

500,000 - 1,000,000 29.96% 30.1%

1.0 m - 2.0 m 49.25% -16.2%

2.0 m - 10.0 m 34.00% 21.5%

10.0 m - 50.0 m 68.15% -32.0%

Southern


Northern DNNorthern DNLoad Factor Charge Difference

Domestic 0-2,500 35.60% -0.8%

Firm 2,500 - 5,000 29.30% 5.8%

5,000 - 10,000 29.30% 6.4%

10,000 - 15,000 33.00% 2.0%

15,000 - 20,000 34.40% 0.4%

20,000 - 25,000 33.60% 1.3%

Firm 25,000 - 75,000 34.30% 1.3%

75,000 - 100,000 36.60% -0.5%

100,000 - 200,000 36.10% 1.3%

Firm 200,000 - 500,000 41.10% -2.2%

500,000 - 1,000,000 50.50% -8.2%

1.0 m - 2.0 m 53.80% -8.6%

2.0 m - 10.0 m 47.00% 0.5%

10.0 m - 50.0 m 90.20% -19.4%

Interruptible 200,000 - 500,000 32.20% 22.0%

500,000 - 1,000,000 37.70% 11.4%

1.0 m - 2.0 m 30.20% 37.2%

2.0 m - 10.0 m 40.30% 17.7%

10.0 m - 50.0 m 50.70% 11.0%

Northern


Wales and West DNWales and West DNLoad Factor Charge Difference

Domestic 0-2,500 31.72% -0.1%

Firm 2,500 - 5,000 29.02% -0.4%

5,000 - 10,000 26.94% 2.0%

10,000 - 15,000 28.58% 0.1%

15,000 - 20,000 31.01% -2.9%

20,000 - 25,000 29.55% -1.1%

Firm 25,000 - 75,000 30.95% 0.8%

75,000 - 100,000 35.31% -2.7%

100,000 - 200,000 33.47% 0.2%

Firm 200,000 - 500,000 41.24% -6.0%

500,000 - 1,000,000 38.80% -1.2%

1.0 m - 2.0 m 51.00% -9.2%

2.0 m - 10.0 m 53.12% -7.5%

10.0 m - 50.0 m 55.74% -3.7%

Interruptible 200,000 - 500,000 25.84% 20.3%

500,000 - 1,000,000 25.52% 26.1%

1.0 m - 2.0 m 31.78% 10.2%

2.0 m - 10.0 m 43.69% -7.1%

10.0 m - 50.0 m 52.86% -4.6%

Wales and West


ConclusionsConclusions Load factor dependentLoad factor dependent Domestic impact typically within +-Domestic impact typically within +-

1%1% +1% = £1 for domestic consumer +1% = £1 for domestic consumer

Opportunity for loads to reassess Opportunity for loads to reassess SOQSOQ May reduce impact for DM loadsMay reduce impact for DM loads

SummarySummary Proposal is more cost reflectiveProposal is more cost reflective Will give more stable chargesWill give more stable charges Will largely eliminate weather Will largely eliminate weather

uncertaintyuncertainty Will give more predictable chargesWill give more predictable charges Impact for domestic transportation: very Impact for domestic transportation: very

smallsmall Interruptible discounts maintainedInterruptible discounts maintained Implement in 2008 in line with Implement in 2008 in line with

interruption reforminterruption reform

Next StepsNext Steps Report on responses to DNPD02Report on responses to DNPD02

Early JuneEarly June Consultation paperConsultation paper

JulyJuly 28 days for responses28 days for responses Ofgem impact assessment – 3 months?Ofgem impact assessment – 3 months?

Next DCMFNext DCMF July?July?

London Price IncreaseLondon Price Increase

Table 1 – Typical annual domestic transportation charges

Network 2005/6 2006/7 2007/8 Average

Actual (£) Actual (£) Indicative (£) (£)

West Midlands 86.92 97.31 118.13 100.79

East of England 91.88 103.17 106.16 100.40

London 87.54 76.46 125.39 96.46

North West 75.55 90.22 110.61 92.13

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

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