Code Governance Review Major Policy reform Proposals Gas Customer Forum 26 January 2009

2 Introduction Review initiated in November workstrands: –Governance of Charging methodologies; –Environment and code objectives This presentation: –Major Policy Review (including self governance) –Role of code administrators & participation of small participants and consumer representatives

3 Background Some codes have been in place for some time. Governance arrangements have facilitated incremental changes well. Plethora of change mechanisms Encountered problems with major policy reform – TAR Public policies are impacting on the industry more than ever.

4 Industry Changes Regulatory changes –Sustainable development / environment, –Better regulation, –Appealibility of code decisions, –Requirement to undertake Impact Assessments. Market changes –New smaller participants, –Renewables / distributed generators, –Future changes – Smart Metering? European Policies

5 Current Code Governance Arrangements What are we trying to answer; –Can current arrangements accommodate public policy reform? –Do current arrangements promote inclusivity? –Are current arrangements flexible enough to deal with future challenges?

6 Good governance principles Promote inclusive, accessible and effective consultation Governance rules and processes transparent and easily understood Rules administered in independent and objective fashion Provide rigorous and high quality analysis Cost effective Rules and processes flexible to allow effective change management Deliver in a manner that places a proportionate regulatory burden

7 Ofgem initiates review Third party raises mod proposal Categorisation / filtering Merits appeal to Ofgem Ofgem-led policy review process Policy / principles decision – legally- binding Mod proposals developed to implement conclusions Ofgem decision Consultation and Panel recommendation PATH 2 – IMPROVED STATUS QUO PATH 3 – SELF GOVERNANCE PATH 1 – POLICY REVIEW Standard CC merits appeal Consultation and Panel decision Ofgems Reform Proposals

8 Key Issues (1) Categorisation / Filtering – First consider if a modification should proceed down path 1, –If not, by applying a further set of criteria to determine if it should proceed along path 2 or 3. Filtering mechanism –Option A – Ofgem allocates modification –Option B – Industry allocates modification with Ofgem ability to veto

9 Key Issues (2) Self Governance Key questions relating to the design of self governance: –Who should be the decision maker for the modification? –What voting procedures should apply governing decisions? –Should there be mechanisms to send proposals to Path 2 (‘Improved status quo’)? –What appeal rights should exist?

10 Key issues Self Governance Panel Structure –Independent or representative ? –A mixture? Voting mechanism –Thresholds? –Constituency voting? –Majority ?

11 Implementing the outcome of major policy reviews

12 Safe Guards Appeals Mechanism –Whichever option was adopted for the ‘outcome of the policy review’ High Level binding conclusions Detailed Binding Conclusions Ofgem prepares modification and legal text –At the end of the ‘outcome’ phase, we consider the Energy Act appeals mechanism would be applicable

13 Next Steps Ofgem workshop: 11 February, Victoria, London. Deadline for consultation responses: Friday 27 February. QUESTIONS / OBSERVATIONS.