Total xoserve income £(a)m (ASA services – includes element for transporter funded changet)

Transporter funded change budget built into service charge £(y)m

2005 Funding Model

Principal activities– Supply Point Registration & Switching– Supply Point Register Maintenance– Transportation Volumes and Invoicing– Energy Balancing and Settlement– Demand Estimation and Forecasting– Information Provision & Query Management

£(a - y)m

Key Points:Ofgem propose & transporters accept allowancesNo specific systems or change allowance – transporters bear all costs through ASAIf transporters decide to invest they bear cost and gain benefitsChanged for 2008 -2013…………

GDPCR – Final Proposals (Dec 2007, Section 8.9)

Total xoserve income £ a (includes base lined services & change budget)

Transporter funded change budget £(y)m• e.g Pricing changes

2008 – 2013 Funding Model

£(a-y)m

£(y)m

Total xoserve income £ a (includes base lined services & change budget)

Transporter funded change budget £(y)m• e.g Pricing changes

Day 1 Code User Pays £(b)m• Must Reads• AQ amendments• Shipper Agreed Reads• User Admission

£(a-y)m

£(y)m

£(b)m

+ b

2008 – 2013 Funding Model

Total xoserve income £ a (includes base lined services & change budget)

Transporter funded change budget £(y)m• e.g Pricing changes

Day 1 Non-code User Pays £(c)m• IAD (SCOGES)• Bespoke reports

Day 1 Code User Pays £(b)m• Must Reads• AQ amendments• Shipper Agreed Reads• User Admission

£(a-y)m

£(y)m

£(b)m

£(c)m

+ b + c

2008 – 2013 Funding Model

Total xoserve income £ a (includes base lined services & change budget)

Transporter funded change budget £(y)m• e.g Pricing changes

Day 1 Non-code User Pays £(c)m• IAD (SCOGES)• Bespoke reports

Day 1 Code User Pays £(b)m• Must Reads• AQ amendments• Shipper Agreed Reads• User Admission

£(a-y)mNew Code User Pays £(x)m

• Incremental Service Lines• USRV resolution (Mod 192)

• Development Cost Reclaims• Mod 224 development cost

£(y)m

£(b)m

£(c)m

+ b + c + x

£(x)m

Key Points:Incremental change funded by incremental revenueBetter cost targetingAlthough PCR forecast allowance mechanism remains for bulk of xoserve funding

2008 – 2013 Funding Model

GDPCR – Final Proposals (Dec 2007, Section 8.9)

£(a)m

£(b)m £(c)m

£(x)m

4.50 Non Operational capex includes GDN expenditure on System operations, IS systems, xoserve, tools and vehicles. Our consultants have reviewed the proposed levels of expenditure considering historical expenditure by the GDNs and project specific expenditure for projects above a materiality threshold of £0.5 million.

CAPEX

What did the Final Proposals say ……

So how does Capex work in practice?Capex allowances were set by Ofgem during GDPCR1

Working from the PCR submission gives £40m - £45m allocated to xoserve from Capex Budget (all DNs) (Not just Nexus – includes “Tech Refresh”, Conquest / IAD / IXN Replacements, as well as new UK-

Link Hardware)Forecast capital spend is added to RAV during period & then reconciled (“trued-up”) to actuals after 5 years

What does that mean for year-on-year income?We get 1/45 of per year as depreciation plus our RoR on the RAV - recovered through transportation charges

So have we had the money?No!!! Its not like Opex, capex allowances aren’t recovered year on year through transportation incomeAll capital has to be raised through markets (debt / equity) and recovered over 45 years.

What happens to any Over / Under-Spend?All capex must be necessary and efficiently incurred – otherwise there is a risk of disallowance.Symmetrical sharing for over & under spends – for NGG the sharing factor is 36%

• Over-spend: shareholders bear the loss of return and depreciation for the first 5 years ……• Under-spend: shareholders benefit from the recovery of return and depreciation based on the allowed

capex for 5 years …...…… before the allowance is replaced by actual spend in the RAV

Why do it this way?Simple: to set the correct incentives:Risk / Reward framework is designed to incentivise efficient CapEx forecasting and spendingSets a financial incentive to ensure investment is only made once requirements are clear & regulatory sign-off achieved

CAPEX - FAQ