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Licence Conditions and Charge Setting

Licence Conditions and Charge Setting. DNCMF Meeting – 28 th June 2011. Charge Setting SC E2. 2.

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Licence Conditions and Charge Setting

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  1. Licence Conditions and Charge Setting DNCMF Meeting – 28th June 2011

  2. Charge Setting SC E2. 2 • “The licensee shall use its best endeavours in setting its charges to ensure that in respect of any Formula Year t the DN Transportation Activity Revenue (Rt) covered by this condition shall not exceed the maximum DN Transportation Activity Revenue (MRt) in that year.”

  3. Allowed Revenue SC E2. 5 • This Condition defines the Allowed Revenue (MRt) as: • MRt = (Zt x RPIt)+Ft-Kt+MSRAt+Ext+IAEt+Sht +EEt+DRSt+IFISDt+LMt

  4. Definition of K SC E4 • “The purpose of this condition is to provide for the calculation of adjustments to the maximum DN Transportation Activity Revenue in Formula Year t to take account of any under or over recovery of DN transportation Activity Revenue from the previous Formula Year t-1.” • K is defined as: • Kt = (Rt-1 – MRt-1) x (1+(I+PRt)/100)

  5. Potential Licence Conflict with Mod 368 • Under-recovery in Year t-1 – No conflict • Over-recovery in Year t-1 – Potential conflict

  6. Under-recovery in year t-1 • Year t-1:-Under-recovery = £20mn • Year t: Allowed Rev before K = £500mn • Year t: Allowed Rev after K: • Licence Mod 368 • £520mn £505mn • Under SC E2.2 charges could be set to recover £505mn. As this is below the £520mn allowed by the Licence there would be no conflict.

  7. Over-recovery in year t-1 • Year t-1:-Over-recovery = £20mn • Year t: Allowed Rev before K = £500mn • Year t: Allowed Rev after K: • Licence Mod 368 • £480mn £495mn • Under SC E2.2 charges must be set not to exceed £480mn. If Mod 368 required charges to be set to recover £495mn there would be a conflict.

  8. Charge Change Dates SSC D11 1.(b) • places a “reasonable endeavours” obligation on the DNs not to make changes to the charges more than once per year and from 31 March 2009 to make such changes on 1 April each year. • DNs can change charges at other times, so long as they inform Ofgem either before or within 3 months of the event.

  9. Notice Periods for Price Changes SSC A4 2. • Licence: • Indicative Notice:150 days before the planned implementation date • Final Notice: One month before the planned implementation date • UNC • Final Notice: Two months before the planned implementation date (TPD B 1.8.2 (a))

  10. Over-recovery ThresholdsSC E2. 3 • 4% over-recovery in one year: • No increase in prices the following year unless the DN has demonstrated to Ofgem that it would be unlikely to exceed the Allowed Revenue • 6% over-recovery over two consecutive years: • Ofgem can ask the DN to adjust its prices in the following year

  11. K Interest Adjustment SC E4 2. • Interest (I) is added to K whether it is under- or over-recovery: • If K is <3% (+ or -) of Allowed Rev then I is the Barclays Base rate plus 1.5 • If K is 3% or more above Allowed then I is Barclays Base rate plus 3.0 • If K is 3% or more below Allowed then I is Barclays Base rate.

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