1. Modification Proposal 115 – ‘Correct Apportionment of NDM Error’

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

3. End to End Process Walkthrough1 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

4. 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

5. 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:
TWH
TWH
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

6. 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.

7. 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.

8. 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.

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