User Pays Funding – Potential Licence Mechanism

Simon Trivella – January 21st 2010

Governance Workstream

Background

• (Shipper) User Pays funding for [Development] costs

– User Pays Charge

– Invoiced to defined parties [upon implementation]

– Previously suggestions for alternatives

• “Pot” of allowed cash for DNs

• Include in service / transaction charges

– WWU suggested potential license mechanism

Special Condition E3

• Distribution Network allowed pass-through items (Ft)

“The purpose of this condition is to provide for the calculation of adjustments to the maximum Distribution Network Activity Revenue to reflect certain costs that can be passed through to customers of the licensee”

(Ft) = (RBt) + (LFt) + (PDt) + (TGt) + (TPWIt) + (MPt)

Special Condition E3

• RBt = business rates adjustment

• LFt = licence fee adjustment

• PDt = NTS pensions deficit charge adjustment

• TGt = ToG reasonable endevours payments (SC7)

• TPWIt = FTSG SoP payments for 3rd party damage and water ingress

• MPt = Miscellaneous pass-through (as directed)

Potential Licence Modification to E3

• Include new term UPt

– Cost included in allowed revenue in the following Formula Year

– Charged through Transportation Charges

– No requirement for additional invoices (40+)

– Greater flexibility for Shipper pass-through

– Remains transparent (can still be identified)

Potential Licence Modification to E3

• Include new term UPt

– Ofgem direction on Modification Proposal also used to determine qualification for inclusion in UPt

– In simplest form would only work for all Shipper changes

• How material is this ?

– Potential for cost targeting by SSP/LSP or AQ band

• Additional complexity that may not be justified ?

– Allows for simple “impact” measure of percentage change

Potential Licence Modification to E3

• Example

– User Pays change with £2m Development / Implementation costs

– Cross industry benefit and therefore UPt applied

– Approximate Transportation Charge increase of 0.067%

– Approximate consumer cost of £0.08 per annum

Similar NTS License Mechanism

• SC C8G (NTS SO internal incentives, costs and revenue)

– Covers Agency costs that are not User Pays or not funded• IT Systems and development costs;

• Provision of services as a result of industry framework changes;

• Entry capacity baseline swapping;

• 0.52p/kWh limit on incremental capacity buy-back;

• Energy balancing changes;

• European driven changes (limited);

• 20% of costs attributable to major changes to the RbD process;

• Shipper driven UNC Modification Proposals (100% gemini, 11% of other)

– Total amount of logged up costs not to exceed £10.5m (04/05) prices

User Pays Funding – Potential Licence Mechanism

Simon Trivella – January 21st 2010

Governance Workstream