1. July 2003 Structure of Electricity Distribution Charges Update and Proposals Martin Crouch Director, Distribution

2. July 2003 Introduction Background June 2003 Initial conclusions document – key proposals Implementation Links with other work

3. July 2003 Background The structure of charges project has three key aims: To review the charging principles established by the Electricity Council in the early 1980s; To establish a transparent and consistent boundary between connection and use of system charges for all network users; and To establish a robust framework for generator distribution use of system (GDUoS) charges.

4. July 2003 Background - continued December 2000 – initial consultation document setting out the main background and key themes March 2002 – proposals on interim measures for DG October 2002 – structure of charges update document February 2003 – industry workshop June 2003 – Initial conclusions document

5. July 2003 Background - continued Workshops – today and 24 July in Glasgow Responses to June 2003 document requested by 8 August Project enters implementation stage

6. July 2003 Initial conclusions document Key themes: Charging principles Charging methodologies Connection boundary Use of system Transitional arrangements Implementation

7. July 2003 Initial conclusions document Charging principles October 2002 document proposed that common charging principles should be recognised and applied across similar networks: -cost reflectivity; -simplicity; -ease of implementation; -transparency; and -predictability Responses to the document supported these principles

8. July 2003 Initial conclusions document Charging methodologies June document proposes that DNOs should be required by licence to set out a methodology that: -facilitates competition in the generation, transmission, distribution and supply of electricity; -leads to changes which, as far as reasonably practicable (taking into account implementation costs and the impact on competition) reflect the costs and benefits incurred by DNOs in such a way as to encourage efficient decisions by network users; and -is capable of evolution over time to reflect changing network characteristics and commercial arrangements

9. July 2003 Initial conclusions document Connection Boundary Previous consultation responses have indicated strong support from industry for: -common boundary applying to all connections -shallower connection charges for DG Guided by the common principles, the June document proposes: -shallow charges for EHV (33kV and above) connections and locationally varying use of system tariffs -shallowish charges for HV and LV (less than 33kV) connections – retaining locational signals – and simple use of system tariffs

10. July 2003 Initial conclusions document Connection Boundary (2) – Issues: Define reinforcement contribution rule for shallowish connections -de minimis rule e.g. if connectee does not exceed 25% of existing capacity no reinforcement contribution -when de minimis rule exceeded: -connectee charged for the proportion it uses of marginal increase in capacity? -connectee charged for the proportion it uses of the total capacity? -other? Need for contribution rules for other impacts e.g. upon fault level? Abolish Tariff Support Allowance and Capitalised Operation & Maintenance Further discussion this afternoon in work group A

11. July 2003 Initial conclusions document Use of system Shallower charges will require the remainder of the connection and O&M charges to be recovered via ongoing use of system charges June document proposes the introduction of use of system charges for generation (GDUoS) Issue: who pays – suppliers or generators? No change to the balance except where cost reflective Issue: network services – what services should GDUoS recover? Issue: should charges reflect forward or backward looking costs? Different signals to users require charges based on forward-looking costs Implementation stage of project will deal with these issues in detail Further discussion this afternoon in work group B

12. July 2003 Initial conclusions document Transitional arrangements Options for a transitional regime -no exemptions after April 2005 -exempt pre-existing generators for a period of time e.g. until 2010 or for 15 years -make pre-existing generators liable for GDUoS from April 2005, but offset the charge with a lump sum or annualised rebate of the reinforcement and capitalised O&M elements of their connection charge -another option?

13. July 2003 Implementation Important interaction with DPCR4 – structure of charges proposals scheduled to come into effect April 2005 Implementation Steering Group (ISG) to be established in August and to hold first meeting in September Ofgems October 2003 Initial decision document will firm up the proposals in the June document, and discuss the issues of GDUoS, transitional arrangements and implementation in detail

14. July 2003 Implementation Steering Group Group to be chaired by Ofgem Ideally group will consist of approximately 12 individuals (plus Ofgem), representing all industry sectors and representatives of all DNO groups First meeting of the group in September 2003 –Agenda Terms of reference DNOs to set out proposed approach All parties to discuss requirements of Ofgem Second meeting in October 2003 Thereafter group to meet approximately bi-monthly Further discussion in work group C and in the next steps discussion at the end of today

15. July 2003 Links with other work DPCR4 -structure of charges proposals will affect DPCR 4 decisions Distributed Generation Co-ordination Group -joint Ofgem/DTI group that is aiming to facilitate the achievement of the Governments targets for renewable generation and CHP

16. July 2003 The remainder of today……… Industry perspectives Q&A panel session Lunch Work groups Feedback/discussion session

17. July 2003 Promoting choice and value for all gas and electricity customers