Some potential issues with the CDCM

1. Some potential issues with the CDCM Franck LatrémolièreCDCM review workshop, 17 May 2011

2. Agenda • Objectives • High-level review of CDCM issues • Try to give a structure for your feedback • Attempt at a categorisation of issues • But remember that the CDCM is a package • Who might be affected by each issue?

3. Some categories of issues • Issues about the structure of tariffs • Issues about the structure of calculations • Issues about each step in calculations • Issues about predictability and volatility • Issues arising from wider developments

4. Structure of tariffs: Features • DUoS billing using industry data flows • EDCM/CDCM boundary • Non-locational tariffs • Demand: different structure for half hourly and non half hourly tariffs • Generation: fixed charges and unit credits

5. Structure of tariffs: Issues • Generation dominated areas • Unmetered supplies • Incentives near EDCM/CDCM boundary • Smart metering and elective half hourly settlement

6. Structure of calculations: Features • Use of 500 MW model for notional assets • Use of DNO forecasts for running costs • Separate model M for LDNO tariffs

8. Structure of calculations: Issues • Why are assets modelled on a reinforcement basis when other costs are based on forecasts? • Can revenue matching be cost-reflective? • Why is there a separate model M?

9. Step 1 cost analysis: Features • 500 MW model: hypothetical reinforcement • Service models: hypothetical replacement • Direct costs, indirect costs, network rates, and transmission exit: forecasts • Customer contribution percentages

10. Step 1 cost analysis: Issues • Are 500 MW models consistently constructed across DNOs? • Should most of the LV trenching costs be excluded from the 500 MW model? • Should a more detailed analysis of other costs (e.g. from RRP) be used? • Are customer contributions data robust?

11. Step 1 cost analysis: More issues • Is the 500 MW model about the cost of reinforcing an existing network or the cost of rebuilding a hypothetical network? • Should indirect costs be disaggregated? • Is capitalisation policy relevant? • Interaction with on-costs in 500 MW model?

12. Step 2 cost allocation: Features • 500 MW assets annuitised at 5.6% + RPI • Omit assets that would be contributed if first built under the current connection charging policy • Coincidence factors • Standing charge factors

13. Step 2 cost allocation: Issues • Half hourly and non half hourly tariffs • Only half hourly tariffs have capacity charges • Unrestricted and multi-rate tariffs may give inconsistent average unit rates • Impact on unmetered and elective half hourly • Standing charge factors • Discrepancy between LV and HV capacity charges?

14. Step 2 cost allocation: More issues • Should DUoS charges include a specific contribution to the costs of replacing customer-contributed assets? • Direct costs, indirect costs and rates account for a large opaque lump of money • Changing the rate of return from 6.9 to 5.6 per cent had a sizeable effect on tariffs

15. Step 3 revenue matching: Features • Compare forecast revenue from cost allocation with price control target • Discrepancy smeared across demand on peak-time unit rates • Downwards adjustment permitted, but negative charges are not allowed

16. Step 3 revenue matching: Issues • Can revenue matching be cost-reflective? • Revenue matching highlights other issues • Does the omission of replacement costs mean that HV users pay for LV costs? • Are there any specific issues with the way in which revenue matching works?

17. Step 4 LDNO model M: Features • Separate model to disaggregate price control revenue allowances between network levels • Used to calculate percentage discounts • LDNO tariffs are derived from all-the-way tariffs using these percentage discounts

18. Step 4 LDNO model M: Issues • Some issues go to the CDCM structure • Do the two models work well together? • Which costs do fixed and capacity charges in LDNO tariffs reflect? • Specific issues with workings of model M • FBPQ data sources for capital expenditure • Allocation rules in opex allocation • Differences with EDCM model M

19. Transparency: Features • Input data published in full • Additional five-year information published • Open-source spreadsheet • There is no password • All formulas can be inspected or changed • User manual

20. Transparency: Issues • Big and complicated • Perception of a “black box” • Tariffs appear to change unpredictably • Does CDCM governance work for you?

21. Wider developments • Sub-100 kW half hourly metering and smart metering roll out • Is the CDCM a barrier to progress? • Link with EDCM (FCP and LRIC) • Boundary issues • Treatment of generators

22. Which industry parties are affected • Suppliers may be mostly affected by • Predictability, transparency, governance • Interactions with wider industry issues • Generators may be mostly affected by • Generation dominated areas, EDCM • IDNOs and out-of-area DNOs are potentially affected by all the issues

23. How does this affect consumers? • Hard to foresee effect of CDCM changes because of interactions between tariffs • Revenue matching • Allocation of direct, indirect costs, rates • Impacts may be different for different users subject to the same tariff

24. A simple worked example • Simplified CDCM with only three tariffs • Domestic Unrestricted (PC1) • Domestic Two Rates (PC2) • HV Half Hourly (HV) • Hypothetical input data

25. Worked example: base case

26. Effect of adding a charge for replacement of contributed assets

27. Some customer characteristics that may drive the effect of changes • Balance between peak-time consumption and other network use (e.g. capacity) • Driven by customer group’s coincidence to DNO system peak • Network level of supply • Load profile data for the customer group

28. In which direction will charges move? • Sometimes easy to foresee effects on cost estimates or cost allocation • Hard to foresee effect on tariffs • Because of revenue matching and direct/indirect costs • No real substitute to experimentation

29. Feedback session • I will try to categorise issues and ideas • Issues about the structure of tariffs • Issues about the structure of calculations • Issues about each step in calculations • Issues about predictability and volatility • Issues arising from wider developments • There will be uncategorisable issues