1. Presented by : Steven J Edwards, Head of Income and Pricing, Wales & West Utilities GDN Allowed and collected revenue awareness presentation for Shippers Monday 17 th Sept 2007

2. 2 Topics to cover The Gas Transporter Licence Allowed revenue setting process with Ofgem The elements of Allowed revenue The elements of collected revenue Relationship between Allowed revenue and collected revenue Example calculations – areas that contribute to pricing fluctuations Summary

3. 3 Disclaimer This presentation is given to the Shipper community with the sole objective of increasing awareness of the community of the elements of GDN Allowed Revenue and its relationship with collected revenue. This presentation is a high level view of the Price Control conditions of the GDN to which specific reference should be made. The presenter, Wales & West Utilities and other GDNs will not be responsible or liable for any use of this document or the excel examples used. All figures are fictitious and are used for illustrative purposes only.

4. 4 The Gas Transporter licence Standard Special section A : Applies to all ex Transco Gas Transporters, Transmission and Distribution, Standard Special section D: Applies to all ex Transco Distribution Networks Special Condition section E: Is specific to each Licensee Special condition E2B contains the algebra that defines GDN allowed Revenue There are obligations in all sections around charging and pricing that Transporters must adhere to when applying charging methodologies and price changes.

5. 5 Allowed Revenue setting process with Ofgem Consultation process prior to a Price control period and at the end of a Price control period. GDNs submit data as requested by Ofgem and provide responses to “ Narrative “ questions as required by Ofgem Ofgem, GDNs and wider industry all engaged in this transparent process Ofgem propose an outcome and GDNs agree or not GDN Licence modified to reflect that outcome and is in place for the period of the Price control period GDNS are allowed to collect the revenue agreed via the PCR process with licence conditions around over / under recoveries Once an outcome is accepted it is in principle in place for the period of the Price control review

6. 6 The Elements of Allowed Revenue ( 1 ) “ K” brought forward. The under or over recovery from the previous period Logging up process / any other outcomes of previous price control. The accepted outcome of the forthcoming Price control review. The 2002/3 to 2006/7 PCR, The interim 2007/8 PCR The 2008/9 to 2012/13 PCR

7. 7 The Elements of Allowed Revenue ( 2 ) An allowance is developed for the Price control period which is underpinned by allowances for each year. Within the Algebra in E2B, the Revenue Allowance for the period ( normally 5 years ) is translated into an opening year 1 Core Allowed Revenue. This is then rolled forward and adjusted each year for the following items : RPI X Any volume driver Cost Pass through Incentives - currently : Repex, Shrinkage, Exit Capacity

8. 8 The Elements of Collected Revenue ( 1 ) Licence conditions to ensure that charges are set to recover allowed revenue Licence conditions to ensure that charges are cost reflective Licence conditions about notification periods and publication of charges All DNs use single entity Xoserve as billing interface with Shippers UNC defines Shipper / DN relationship

9. 9 The Elements of Collected Revenue ( 2 ) Actual collected revenue is influenced by : Allowed revenue Charge Types Number of loads, SOQs, AQs The rates for each of the charge types The price changes that occur in a year Actual Volume throughputs Reconciliation income Other events : Meter errors etc

10. 10 The Relationship between Allowed and collected revenue ( 1 ) Each year the DNs have a requirement to return to Ofgem their annual comparison on Allowed and Collected Revenue Allowed revenue will vary from year to year due to :  K brought forward from a previous period  The end of a formula period, Closure and start changes  Any volume driver applied  Incentive revenues

11. 11 The Relationship between Allowed and collected revenue ( 2 ) Collected revenue will within a year and from year to year due to :  Actual volumes, AQs, SOQs and Loads  The level of Price change implemented Remember collected follows Allowed therefore collected also varies due to  K brought forward from a previous period  The end of a formula period, Closure and start change  Incentive revenues Key Point : Collected Revenue follows Allowed Revenue

12. 12 The Relationship between Allowed and collected revenue ( 3 ) What are ( have been ) the causes of price changes from year to year ?  The non alignment of the volume driver in allowed revenue to the impact volumes have had on annual actual collected  The unpredictability of actual volumes and their differing impact on Allowed Revenue and collected revenue, then the subsequent impact on K  The high dependency of collected revenues on volumes  End of a price control period, start of an interim period – i.e changes in allowed revenues from year to year.  The timing of an Oct price rise also means that your price change is generally higher than would be needed with an April price change as the Oct price change is designed to collect an annual allowed amount over 6 months as opposed to 12 months Key Point : DNs are allowed to collect their annual allowed Price Control Revenues. Any under or overs fall into K the following year

13. 13 The Relationship between Allowed and collected revenue ( 4 ) Excel examples

14. 14 Summary Allowed Revenues are a licence output and subject to Price control process Collected revenue follows Allowed Revenue DNs aim to collect annual Allowed revenue within the same year The more stable year on year Allowed revenue is the more stable the price changes will be The more stable / predictable collected revenue is the more stable price changes will be The more the volume impacts on Allowed and collected are aligned the less likelihood there is of large K factors impacting the following year A reduction / removal of actual volume impacts on Allowed and collected will reduce price instability

15. 15 GDN Allowed and Collected Revenue Any Questions ?