DNPD02 DISCUSSION PAPER LDZ System Charges Capacity/Commodity Split and Interruptible Discounts

The Proposals Restructure the LDZ system charges target capacity/commodity split from 50:50 to 95:5 Introduce partial capacity charges for Interruptible supply points Target Implementation date 1 April 2008

Why Change the Cap/Com Split Improve Cost Reflectivity Improve the stability of charges Improve competition

Cost Reflectivity Recent cost analyses by the DNs show that only about 5% of a DN’s cost base varies with throughput 95% of a DN’s cost base are either capacity related or indirect costs Therefore appropriate to reflect these proportions in the charging structure

More Stable Charges Difficult to accurately forecast throughput volumes The higher the proportion of commodity based charges in the charging structure the more chance adjustments will be needed The greater the difference between the commodity elements of collected revenue and allowed revenue the more chance adjustments will be needed

Structure of DN Transportation Charges Charges pre-1 April 2007 Proportion of revenue recovered from: LDZ System Charges Customer Charges Total % Capacity 35 2 37 Commodity 28 63 70 30 100

Structure of DN Transportation Charges Charges post 1 April 2007 Proportion of revenue recovered from: LDZ System Charges Customer Charges Total % Capacity 35 30 65 Commodity 70 100

Structure of DN Transportation Charges Charges post 1 April 2008 Proportion of revenue recovered from: LDZ System Charges Customer Charges Total % Capacity 66.5 30 96.5 Commodity 3.5 70 100

Capacity Charges for Interruptibles Interruptibles currently receive discounts of approx 50% of LDZ system charges If they continue not to pay the capacity charges under the proposed 95:5 capacity commodity split they would pay only 5% of the LDZ system charges It is proposed that interruptibles pay part of the new capacity charges so as to maintain the discount they receive at its current level

Impact of the Change (Indicative and provisional only) Based on a selected Network MWh Firm LF % %Change 20 31.5 0.4 200 31.8 0.2 2,500 34.7 -1.5 37.0 -5.8 4,000 37.2 -3.7 38.0 -5.2 20,000 42.0 -6.7 40.0 -3.3 400,000 60.7 -17.9 70.0 -24.9

Impact of the Change (Indicative and provisional only) Based on a selected Network MWh Interruptible LF % %Change 20,000 42.0. -6.1 40.0 -3.0 100,000 47.8 -11.8 -1.5 400,000 60.7 -25.0 70.0 -30.3

Key Points for Discussion Should the Charging Methodology be changed to set the capacity based LDZ System charges to recover around 95% of LDZ System revenues? Should this change be made effective 1st April 2008? Should Interruptible customers pay a proportion of the increased LDZ capacity charge such that their effective discount on total LDZ Firm charges maintains the status quo? Should the DNs consider any other factors in their review of the LDZ system charges split between capacity & commodity?

Responses Responses should be sent to enquiries@gasgovernance.com By close of play on Friday 18 May