Industry Dialogue on xoserve Services Progress Report for Ofgem

1
Industry Dialogue on xoserve ServicesProgress
Report for Ofgem

• 5th December 2006

2
Terms Workgroup

• The Workgroup is expected to cover five key
  areas
• Features of xoserves systems
• Cost requirements
• xoserve funding arrangements
• Service standards
• Governance
• The intention is to describe what we have done
  and direction of Workgroup thinking in each of
  these areas.

3
Approach Taken

• Four Industry Meetings
  
  
• Well attended by Shippers, GTs, xoserve
• xoserve provided majority of material
• Possible model presented by group of Shippers
• Followed agreed Workplan to ensure all
  deliverables considered

4
Features of xoserves Systems

• The existing ASA service lines have been reviewed
  to identify any new service lines, modifications
  to existing service lines or services lines that
  are no longer required.
• The high level features of UK-Link replacement
  have been documented, together with the
  underlying assumptions that support the features.
• It was recognised that new or modified service
  lines are likely to be required at the point when
  the UK Link Replacement business requirements are
  agreed (2010).
• However

5
Features of xoserves Systems

• The potential new or modified services cannot be
  specified in sufficient detail at this stage to
  enable costs estimates to be made for inclusion
  in price control allowances.
• The Workgroup considered it would be desirable to
  have a mechanism to adjust price control
  allowances in order to remove barriers to
  implementing future developments.
• It was recognised that the timescales of the
  current dialogue are insufficient to fully define
  the business requirements for UK Link.
• Shippers welcomed the commitment to undertake
  industry consultation on UK Link business
  requirements prior to detailed design commencing
  in 2010.

6
Cost Requirements - Replacement

• The UK Link high level features are consistent
  with the replacement cost estimates already
  provided to Ofgem by xoserve.
• For commercial reasons, xoserve did not share the
  replacement cost estimates with the Workgroup,
  but did give an indication of the cost of the
  complete investment programme over the next seven
  years.
• Shippers considered that they were not in a
  position to assess the reasonableness of
  replacement costs.
• The Workgroup considered that economically and
  efficiently incurred replacement costs should be
  funded by price control allowances.

7
Cost Requirements - Operating

• Following the replacement of a significant
  system, it is unlikely that operating cost
  savings will be achieved in the first year of
  operation because of the time required to embed
  modified processes and to rectify any
  implementation issues.
• As UK Link replacement is targeted for
  implementation in 2012, any operating
  efficiencies are likely to be realised beyond the
  end of the next price control period.
• Therefore, the Workgroup took the view that any
  operating cost reductions due to the replacement
  of UK Link were outside the scope of the current
  dialogue.

8
xoserve Funding Arrangements Criteria

• The Workgroup has developed an initial set of
  criteria for identifying candidate user pays
  services
• The key stakeholders are Users and
• Users have discretion on either whether or how to
  use the service and
• The cost of the service line is usage dependent.
• xoserve applied the criteria to all of the ASA
  service lines and twelve service lines were
  reviewed in detail by the Workgroup.
• The application of the criteria to all nineteen
  of the high level service lines was reviewed by
  the Workgroup.

9
xoserve Funding Arrangements Application of
Criteria to Existing Services

• The high level service lines identified as user
  pays candidates were
• Provide Query Management
• User Admission Termination
• Must Reads
• Provision of Services in Relation to Obligations
  under GT licence
• Provision of user reports and information.
• The Workgroup noted that
• Not all service lines within the above high level
  lines would be appropriate for user pays.
  Similarly, some user pays service lines may exist
  within non-user pays categories.
• Service lines identified as user pays candidates
  can have a significant fixed cost element, which
  the Workgroup considered should be funded by
  price control allowances.
• Additional criteria are required to reflect the
  materiality of the service line, recognising that
  the cost of implementing a user pays approach
  could be greater than any benefit gained.
• Discussions have not been concluded in this area.

10
xoserve Funding Arrangements - Models

• For services that meet the user pays criteria,
  two models were considered by the Workgroup
• Model A (Regulatory Model) utilises the existing
  UNC and ASA contractual arrangements and was the
  early preference expressed in the 2nd GDPCR
  Consultation Document.
• Model B (Direct Contracting) reflects the current
  arrangements for non-ASA services.
• The Workgroup expressed a clear preference for
  Model B subject to sufficient transparency and
  governance arrangements to allow scrutiny of
  charges.

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xoserve Funding Arrangements Model A
UNC
Pay for Service
GTs
User
Excluded Service Invoice
Service Provision
Charges
Service Request
ASA
xoserve
12
xoserve Funding Arrangements Model B
GTs
User
Invoice and Pay for Service
ASA
Request and Provide Service
Recognition of use of assets shared with users.
Contract
xoserve
13
xoserve Funding Arrangements Model Comparison
ü
X
X
ü
14
xoserve Funding Arrangements Model Variant

• Some Shippers suggested services with volume
  driven costs should be charged for based on usage
  and a variant of Model A was considered where a
  new Agency transportation charge was introduced
  on this basis.
• The GTs charging methodology would include an
  element of usage charging for the services taken
  by individual users, with the remaining costs
  being recovered on a portfolio basis, similar to
  the current arrangements for apportioning Agency
  costs.
• This approach created concerns because of the
  additional complexity of transportation
  invoicing, the indirect relationship between
  Users and xoserve and the lack of clarity over
  incentives.
• However, xoserve charges under Model B could be
  on a volume driven basis.

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xoserve Funding Arrangements - Summary
Criteria
Funding Model
Services
Consultation Document and Workgroup preference.
Formula
Excluded
Portfolio
Not discussed.
Direct
Not discussed.
User Pays
Option considered. Must Reads
Formula
Volume
Consultation Document Preference Model A
Excluded
Workgroup Preference - Model B
Direct
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xoserve Funding Arrangements Application to
Change and New Services
All future UNC mods will need to be defined as
core or user pays when they are raised
xoserve income/ costs
Existing Services Core User Pays
UNC User Pays
UNC Core (unknown at PC outset)
UNC Core (known at PC outset)
Total xoserve income
User Requested (either individual or group)
User Pays (Sharing factor, refunding mechanism
to all users)
ve Price Control adjustment
-ve Price Control adjustment
Funding Mechanism
Users defined at Mod stage
Price Control
Requesting user(s)
Contract Mechanism
Model A
Model B
17
xoserve Funding Arrangements Key Points

• For candidate user pays services, a clear
  preference was expressed by Shippers and GTs for
  Model B.
• Shipper concerns over transparency of xoserve
  costs and governance arrangements considered
  under governance key area.
• Initial Model B further developed to address
  concerns over additional value being generated
  from already funded activities and assets
  additional flow added from xoserve to GTs and
  Users to reflect this factor.
• Allowance adjusting mechanism required for
  unforeseen change/new service costs and sharing
  of additional value generated from already funded
  activities and assets.

18
Service Standards

• Relevant service standards were categorised into
  three areas
• Transportation Standards - Defined in the Uniform
  Network Code.
• Availability and recovery standards Defined in
  the UK Link Manual.
• Volume constraints Defined both in the UNC and
  UK Link Manual.
• The service standards relating to UK-Link were
  reviewed and no changes are being proposed.
• The Workgroup recognised that if there was
  dissatisfaction within the community,
  Modification Proposals would already have been
  raised.

19
Governance

• For Model B to operate effectively, all parties
  within the Workgroup recognised the importance of
  transparent governance.
• Concerns were expressed about xoserves position
  as a monopoly supplier for many services.
• Governance options considered
• A user board to oversee cost of services
• Framework within UNC covering terms conditions
  and rights to information
• Rights to audit on appeal.
• No proposal to utilise SPAA.
• Discussions have not been concluded in this area.

20
Progress with Deliverables
21
Outstanding Issues and Next Steps

• In order to inform the final proposals, further
  work is required in the following areas-
• Materiality of candidate service lines.
• Governance arrangements.
• Allowance adjusting mechanisms.