Modification Proposal 115 – ‘Correct Apportionment of NDM Error’

Contents Process Walkthrough Overview of Measurement Issues & Incentives Reconciliation EUC charging bands Next steps

End to End Process Walkthrough 1 2 3, 4 5 6 7 Supplier Inputs Throughout the supply chain there are a number of areas where inaccurate measurement can occur. LDZ Off-take metering System leakage End user Theft Unregistered sites Supply point metering Supplier inputs e.g. AQ Review process Deeming algorithms

Overview of Measurement Issues and Incentives Potential Measurement Issue Measurement risk borne by SSP sector Evidence of Measurement more prevalent in SSP sector Incentives LDZ Off-take Metering Yes No Incentive on GDNO’s to gain reward by maximising throughput. System Leakage Shrinkage cost incentive on GDNO’s. Rewards under estimation of shrinkage methodology. End User Theft Perverse incentive on LSP shippers. Penalises detection of theft. Unregistered Sites No incentive upon LSP Shippers to identify unregistered sites. Supply Point Metering There are stronger incentives on SSP shippers. Supplier Inputs e.g. AQ Review process Greater perverse incentives on LSP shippers to use inappropriate behaviours. Deeming Algorithms

Reconciliation The normal effect of a reconciliation is to correct a discrepancy between deemed energy (derived from AQ’s) and actual usage (derived from meter readings). The net effect of LSP NDM reconciliations over the past 9 years have consistently resulted in net debits to RbD. Figures relating to last three years are: 2006 13.62 TWH 2005 11.03 TWH 2004 11.80 TWH This supports a view that there is a tendency for AQ’s to be over deemed. There are NO known reasons why SSP AQ’s would not be at least as over deemed as LSP AQ’s There is however stronger incentives on the SSP sector to prevent under deeming – because of the RbD mechanism itself There is no evidence of any under deeming of AQ’s in the SSP sector

Reconciliation (continued) The effect of a reconciliation to the SSP sector should be the application of a credit and not a charge. The RbD charge is a consequence of the various measurement deficiencies described earlier. The output from Domestic Monitor Panel, suggested that for gas years 2002/3, 2003/4 and 2004/5 there was c500 kwh per customer verification variance. This equates to c2.5% to 3% of underlying unverified SSP volumes being allocated each year. This is consistent with the results of our own analysis which we have undertaken internally.

Key Messages Throughout the supply chain there are multiple potential measurement failure points. The consequences of such measurement failures are borne by the SSP sector. There is no reason why the SSP sector should bear any more risk or reward than the LSP sector. There are numerous perverse incentives prevalent in the current arrangements. There is no evidence whatsoever that the outcome of any SSP reconciliations would result in the application of a charge to the SSP sector. On the contrary, DMP data, market sector analysis and extensive Centrica portfolio analysis all support the view that RbD should be borne equally by both the LSP and SSP sector.

EUC Charging Bands Transportation charges comprise a comparatively small proportion of the charges associated with RbD Three options where considered viable and analysis was undertaken, for the application of these charges to the LSP sector: Charge all sectors the same rate (i.e. SSP charge) This would have be consistent with the application of charges under the Mod 640 mechanism All sectors would receive equal treatment Charge the LSP sector an average of all SSP and LSP charging rates Charge the LSP sector an average of all LSP charging rates Initial analysis suggested that the vast majority of the LSP market would receive a rate equal or lower than it’s average charge rate. Centricas initial preference is for option (1) but is prepared to support either of the 3 options should a clear preference from the group exist.

Next Steps Completion of Workstream Report at March Distribution Workstream. Provision of Workstream Report to April Modification Panel for consideration and issue for consultation.