Structure of Electricity Distribution Charges Update and Proposals

1. Structure of Electricity Distribution ChargesUpdate and Proposals Martin Crouch Director, Distribution

2. Introduction • Background • June 2003 ‘Initial conclusions’ document – key proposals • Implementation • Links with other work

3. Background The structure of charges project has three key aims: • To review the charging principles established by the Electricity Council in the early 1980s; • To establish a transparent and consistent boundary between connection and use of system charges for all network users; and • To establish a robust framework for generator distribution use of system (‘GDUoS’) charges.

4. Background - continued • December 2000 – initial consultation document setting out the main background and key themes • March 2002 – proposals on interim measures for DG • October 2002 – structure of charges update document • February 2003 – industry workshop • June 2003 – ‘Initial conclusions’ document

5. Background - continued • Workshops – today and 24 July in Glasgow • Responses to June 2003 document requested by 8 August • Project enters ‘implementation’ stage

6. ‘Initial conclusions’ document Key themes: • Charging principles • Charging methodologies • Connection boundary • Use of system • Transitional arrangements • Implementation

7. ‘Initial conclusions’ document Charging principles • October 2002 document proposed that common charging principles should be recognised and applied across similar networks: - cost reflectivity; - simplicity; - ease of implementation; - transparency; and - predictability • Responses to the document supported these principles

8. ‘Initial conclusions’ document Charging methodologies • June document proposes that DNOs should be required by licence to set out a methodology that: - facilitates competition in the generation, transmission, distribution and supply of electricity; - leads to changes which, as far as reasonably practicable (taking into account implementation costs and the impact on competition) reflect the costs and benefits incurred by DNOs in such a way as to encourage efficient decisions by network users; and - is capable of evolution over time to reflect changing network characteristics and commercial arrangements

9. ‘Initial conclusions’ document Connection Boundary • Previous consultation responses have indicated strong support from industry for: - common boundary applying to all connections - shallower connection charges for DG • Guided by the common principles, the June document proposes: - ‘shallow’ charges for EHV (33kV and above) connections and locationally varying use of system tariffs - ‘shallowish’ charges for HV and LV (less than 33kV) connections – retaining locational signals – and simple use of system tariffs

10. ‘Initial conclusions’ document Connection Boundary(2) – Issues: • Define reinforcement contribution rule for ‘shallowish’ connections - de minimis rule e.g. if connectee does not exceed 25% of existing capacity no reinforcement contribution - when de minimis rule exceeded: - connectee charged for the proportion it uses of marginal increase in capacity? - connectee charged for the proportion it uses of the total capacity? - other? • Need for contribution rules for other impacts e.g. upon fault level? • Abolish Tariff Support Allowance and Capitalised Operation & Maintenance • Further discussion this afternoon in work group A

11. ‘Initial conclusions’ document Use of system • Shallower charges will require the remainder of the connection and O&M charges to be recovered via ongoing use of system charges • June document proposes the introduction of use of system charges for generation (‘GDUoS’) • Issue: who pays – suppliers or generators? No change to the balance except where cost reflective • Issue: network services – what services should GDUoS recover? • Issue: should charges reflect forward or backward looking costs? Different signals to users require charges based on forward-looking costs • Implementation stage of project will deal with these issues in detail • Further discussion this afternoon in work group B

12. ‘Initial conclusions’ document Transitional arrangements • Options for a transitional regime - no exemptions after April 2005 - exempt pre-existing generators for a period of time e.g. until 2010 or for 15 years - make pre-existing generators liable for GDUoS from April 2005, but offset the charge with a lump sum or annualised rebate of the reinforcement and capitalised O&M elements of their connection charge - another option?

13. Implementation • Important interaction with DPCR4 – structure of charges proposals scheduled to come into effect April 2005 • ‘Implementation Steering Group’ (ISG) to be established in August and to hold first meeting in September • Ofgem’s October 2003 ‘Initial decision’ document will firm up the proposals in the June document, and discuss the issues of GDUoS, transitional arrangements and implementation in detail

14. Implementation Steering Group • Group to be chaired by Ofgem • Ideally group will consist of approximately 12 individuals (plus Ofgem), representing all industry sectors and representatives of all DNO groups • First meeting of the group in September 2003 • Agenda • Terms of reference • DNOs to set out proposed approach • All parties to discuss requirements of Ofgem • Second meeting in October 2003 • Thereafter group to meet approximately bi-monthly • Further discussion in work group C and in the ‘next steps’ discussion at the end of today

15. Links with other work • DPCR4 - structure of charges proposals will affect DPCR 4 decisions • Distributed Generation Co-ordination Group - joint Ofgem/DTI group that is aiming to facilitate the achievement of the Government’s targets for renewable generation and CHP

16. The remainder of today……… • Industry perspectives • Q&A panel session • Lunch • Work groups • Feedback/discussion session

17. Promoting choice and value for all gas and electricity customers