Performance Assurance Framework (‘PAF’): A possible approach to CBA (action PA01/01) 20 March 2013

CBA should be integral and drive the solution, not a separate exercise Previous mods such as UNC421 suggest that there needs to be a holistic approach – not focus on a specific data item or measure unless its relative importance can be demonstrated: “FMR did not provide a compelling case that UNC421 would materially improve AQ Review performance, or that in order to improve AQ accuracy, it is best to target the AQ Review”; “little evidence to justify the proposed 85% figure”; “[Ofgem] expect to see a case made that the performance standard delivered sufficient market benefits to exceed the costs to shippers”; This suggests that full range of options should be assessed Which ‘drivers’ of AQ accuracy can be achieve greatest improvement at least cost; What is optimum performance target for each ‘driver’; What are relative impacts on other parties of under/over achievement; etc. UNC modification rules, which are geared towards development and assessment of a single established proposal, may not be best suited to such an approach: Relatively long timescales, yet figures on which assessments are based may become quickly redundant; Once a measure is fixed in code it tends to stick

A need for something new? UNC (rightly) a relatively static document, Fairly high burden of proof for modifications Modification process typically takes several months Long standing concerns over the enforceability of UNC provisions Especially where no impacts upon GTs In contrast, electricity operates a performance assurance regime with a Board accountable to the Panel Many UNC Shippers therefore already familiar with such a regime Are (comparable) standards considered to be higher? Seems to be a consensus around the need for improved PA in gas however, discussion (and disagreement) has focused on WHO would sit on such a body and with what mandate

We need to outline the framework before focusing on the details... “I keep six honest serving-men (They taught me all I knew); Their names are What and Why and When And How and Where and Who.” ... i.e. it should become clearer who should carry out activities once we know more about what those activities are

“Issue spotting” “Solution giving” Monitoring Gather data on outcomes and compliance Identify issues for analysis Conduct research and ‘horizon scanning’ Develop monitoring framework Output: issues for analysis Analysis Test issues against assessment framework and policy objectives Establish whether there is a material problem needing action Develop analytical methods Output: well-articulated issues for ‘policy’ attention Policy maintenance & development Apply current governance framework (eg mods, additional reporting, etc) Develop and impact assess policy options/solutions to problems identified Output: ‘policy’ decisions Policy implementation Implement policy decisions e.g. through sanctions, revised rules Develop policy evaluation frameworks Output: reformed arrangements Static, transparent and codified Dynamic, quick to react Mixture of the two? Use discretion within established parameters

Roles and responsibilities It is possible, if not likely, that the roles associated with each stage of the chain may be carried out by different organisations It would seem sensible to make best use of existing resources: Much of the data needed for a gas performance already held by Xoserve Opportunity to use (or possibly rationalise) existing groups Ofgem will retain existing role but we are a ‘nuclear’ option Compliance and enforcement Only serious systemic abuses likely to attract licence enforcement; There is a need for a non-regulatory “scalpel” – industry “self governance” of enforcement; Development of meaningful (but proportionate sanctions and remedies) - quickly applied with means of escalation if required

Conclusions Whatever ‘body’ is established to oversee the performance assurance regime should be: Independent yet accountable Operate within clear parameters – deliver industry ‘objectives’ Proportionate, but effective A PAF mod and associated CBA should focus on the establishment of the framework: Set up costs – not costs of compliance Benefit may be limited to the value placed on the assurance it provides rather than anticipation of any subsequent impacts Policies and actions of the PAF body should have full regard to systemic impacts of each target relative to costs of compliance: Focus on greatest impacts and/or “biggest bang for buck” Two way street – opportunity to remove costs of unnecessary targets Potential for a (proportionate) CBA for every target Identify issues at source: May need to extend beyond UNC to assure rigour of whole data chain