Arrangements for Gas and Electricity network operator credit cover

1. Arrangements for Gas and Electricity network operator credit cover :-Trdarrindcde/Ind Code Dev/Presentations/Credit Cover Seminar Nick Simpson Director, Industry Codes Development 25 April 2003

2. The credit arrangements context • Developing competition, new entrants and company failures have changed the credit context • We are in a very different world with different relationships • From vast vertically integrated players down to small niche players • We are seeking industry input into determining the specifics of best practice • Credit arrangements need to be:- • Workable • Provide adequate protection at lowest cost • Avoid undue discrimination against certain types of player Industry Codes

3. Issues with the current arrangements • Company failures impact upon industry parties and ultimately consumers • Consumers exposed to threat of disconnection • Barriers to competition • Disparity between (and within) industries Industry Codes

4. Principles • The right incentives need to be placed upon NWOs to manage debt efficiently • Credit arrangements must not be unduly discriminatory or distort competition • Should provide secure and stable environment • Should protect consumers from loss of supply Industry Codes

5. Pass through of bad debt • Customers should not bear the cost of inefficient management of credit risk • NWO’s can be incentivised to manage exposure in two ways • ex-ante allowance at time price control is set • no allowance - full exposure to bad debt, but possibility of recovery where debt incurred efficiently • Agreed best practice would provide guidance and increase certainty of future pass through Industry Codes

6. No undue discrimination • Does not mean all parties must be treated the same way • Does mean that similar transactions with parties of equivalent standing should be offered similar conditions • Differences in conditions offered should be reasonable, based on objective, transparent criteria and applied consistently • Guidance to be based on comparable competitive industries Industry Codes

7. Security and Stability • Arrangements should be sufficiently robust that a company failure does not create domino effect • Measures should be proactive rather than reactive, but: • Escalation procedures should not be precipitous - turning difficulties into a failure that could have been avoided • Shippers and Suppliers are expected to meet their obligations on time and should bear the consequences of failure to do so Industry Codes

8. Disconnection of consumers • Must be absolutely the last resort, following all appropriate escalation measures • Alternatives include appointment of Supplier of Last Resort • Disconnection not ruled out where, for example, consumer fails to take appropriate action, by: • Switching to another supplier within a reasonable period • Signing end-user agreement Industry Codes

9. Way Forward • Working groups to produce a report on best practice guidelines and recommendations detailing what changes necessary to adopt best practice • Ofgem to publish criteria for assessment of pass through of bad debt • Industry parties to put forward modifications in order to facilitate recommendations, as appropriate Industry Codes

10. Interim arrangements • Gas balancing to be secured by Cash and LoCs (Mod 572) • Parties need to comply with contractual requirements of the day • should not breach contract in anticipation of what workgroups may recommend • should modify behaviour to the extent contractual arrangements allow • Determinations or incremental code improvements to be considered/progressed as usual and considered by Ofgem against the relevant objectives and Ofgem’s Statutory Duties • Helpful if future credit proposals take into account the workgroup deliberations • Pass through to be handled as previously Industry Codes

11. Promoting choice and value for all gas and electricity customers Industry Codes