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Governance and Charging Methodology for User Pays Services 10 th January 2007.

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Presentation on theme: "Governance and Charging Methodology for User Pays Services 10 th January 2007."— Presentation transcript:

1 Governance and Charging Methodology for User Pays Services 10 th January 2007

2 Governance Approach  A framework for user pays services is included as an ancillary document in the Uniform Network Code.  Provides governance and reassurance to stakeholders.  A Charging Methodology is agreed between GTs/xoserve and Users.  Provides protection for Users against anti-competitive behaviour.  Users contract with xoserve for the delivery of services.  Provides flexibility for the delivery of services.  Note: Scope is limited to services delivered in a non- competitive environment.

3 Framework Within UNC  Standard terms and conditions.  Process for contracting.  Requirement to publish a charging methodology.  Requirement to publish charges consistent with the charging methodology.  Duty on transporters to ensure Transporter Agency enters into contracts.  Rights of appeal or determination.  Will require a UNC Modification to implement.  Could be modified through UNC modification process.

4 Charging Methodology Principles  Charges will be based on additional costs incurred plus a proportion of fixed costs.  A margin will be applied to all base charges.  Charges will be non-discriminatory.  Charges will not be used to recover investment to sustain UK Link systems.

5 Charging Methodology Process  The Charging Methodology would be published each year with a period for responses from Users.  A revised Charging Methodology would be published, together with details of action taken on each response.  A Charging Statement would be published giving the charge applying to each user pays service for the coming year, together with information to support the level of the charge.

6 Contract With xoserve  Standard contract concentrating on the delivery of the service rather than the specification of the service.  At start-up, contracts are the same for all Users.  Potentially there would need to be a requirement to sign a contract if the service relates to a licence or UNC activity.

7 Charging Methodology Applied to Scenarios

8 Approach for Existing Services  xoserve cost forecasts are reviewed by Ofgem and an allowance is set for each year in the price control period.  Apportionment of costs to service lines undertaken using an agreed methodology.  Division of total costs into fixed and variable.  Variable costs, a proportion of fixed costs, and forecast volumes are used to derive a unit charge.

9 Apportionment of Costs  Costs incurred as a direct result of delivering a particular service line.  Employee costs of staff involved with activity.  Other costs directly associated with the service line (e.g. Shipper Information Service telephone costs).  Support costs, either employee costs or bought in services, are allocated in proportion to staff directly involved in the activity (service lines and projects).  IS costs are allocated to applications and subsequently to the service lines delivered by each application.

10 Variable and Fixed Costs  Variable costs are those which can be adjusted to meet the demand for a particular service within a two year time horizon.  These will be a mixture of employee costs and readily terminable contracts.  Fixed costs are those which can only be reduced on a longer- term basis, eg property  On this basis, approximately a quarter of xoserve’s costs are variable.

11 Charge Calculation  The charge for a particular service line would be calculated as:  A = the proportion of fixed costs covered by a user pays charge.  Volume = The forecast number of units in the period that the charge will apply.  Margin is the profit on the service. This should reflect the risks associated with a user pays regime. Charge = A * Fixed Costs + Variable Costs Volume * (1 – Margin)

12 Transitional Issues  The incentive introduced with user pays charges could be expected to reduce the volume of activity.  One-off exercise required to agree initial set of user pays services and charges.  Unclear how a service could be ‘converted’ during the price control period.

13 Change  Change can be of two forms:  One-off development to change the way an existing service operates or to provide a new service.  A new or modified service that incurs enduring costs.  Either type of change could be triggered by a UNC modification or User request.  If a UNC modification, the approach to cost recovery could be determined by UNC governance.  If a User request, then those users involved will agree the cost recovery approach.

14 Change Cost Recovery  Currently transporters do not receive any additional funding for change.  If the cost of change has not been allowed for, a mechanism is required to fund the change to central systems.  The options are:  An allowance/incentive adjustment mechanism similar to that proposed by NGG.  Treat the costs as an Income Adjusting Event.  Additional charge to users.  The remaining slides only consider the last option.

15 Development Costs  If the development costs have not been or cannot be included in allowances, then the alternative options to fund the change are:  Additional charge(s) to Users based on an agreed methodology.  Alternatively, if usage of the modification can be measured, additional user pays charge.  If not all Users are funding the development cost, then a ‘buy- in’ arrangement would be required for late entrants.  There is a risk that industry developments will be delayed without clarity of governance.

16 Development - Apportionment  The additional charge needs to be apportioned to Users and optionally over time.  An example methodology that could be applied:  Market sectors impacted are identified.  Costs apportioned by supply point across impacted market sectors.  Weighting applied to market sectors to reflect different nature of market, for example:  Daily Metered10  Non Daily Metered, Industrial & Commercial5  Non Daily Metered, Domestic1  Methodology could be included in the UNC framework or Charging Methodology.

17 Development – Usage Recovery  Charge set to recover costs over an agreed period.  Similar methodology as that used for existing services could be applied.  Would be complex to vary user base.  Where development costs are recovered over a period, greater uncertainty over recovery implies a higher margin should be applied.

18 New or Modified Enduring Services  If there is an appropriate usage measure for the new or modified service, the costs could be recovered by a usage charge evaluated using the same methodology as for existing services.  Where there is no appropriate usage charge, the costs for a period could be recovered as a one-off charge, similar to the development cost arrangement.  Enduring costs may go down, in which case the charge would be a credit.

19 Summary

20 Summary  Governance Approach  Framework within UNC  Charging Methodology  Users contract with xoserve  Charging Methodology  Existing Services - Variable costs, proportion of fixed costs and forecast volume used to calculate charge.  Change - Upfront development and/or enduring costs, recovered as a usage charge or apportioned additional charge.

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