Governance and Charging Methodology for User Pays Services

1
Governance and Charging Methodology for User Pays
Services

• 10th 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
  xoserves 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 Metered 10
• Non Daily Metered, Industrial Commercial 5
• Non Daily Metered, Domestic 1
• 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.