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

2. 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

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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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?

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