Market Differentiation: Changing Definitions and Processes

1. Project Nexus Market Differentiation Topic Workgroup 14th & 15th July 2009

2. Market Differentiation Issues • Two issues identified during the consultation: • 1. Changing definitions & market split to ‘Usage’ rather than ‘AQ’ • 2. Distinct processes for different sectors of the market • Charging regime for market sectors

3. Changing Definitions & Market Sector Split

4. 2. Market Definitions • Consultation comments for this area included: • Presently a contention between the Utilities Act definition of business and domestic customers and dated industry I&C/Domestic thresholds • A separation of I&C processes from Domestic, i.e. Market Sector based on “usage” as defined in the Supply Licences rather than by any other means • The UNC works on the distinction between SSP and LSP, based on AQ. This is inconsistent with the Gas Licence. Project Nexus gives the opportunity to align definitions as currently it can result in differing applications & management of customers. • Areas we have looked at for this workgroup: • Existing definitions • Processes • Issues • Stats

5. Existing Definitions • Annual Quantity (used by UNC & Gas Act) • Small Supply Points (SSP) – AQ <73,200 Kwh • Large Supply Points (LSP) – AQ >73,200 Kwh • Usage (used by Shipper & Supplier Licences & Utilities Act) • Domestic – Gas is taken wholly or mainly for domestic purposes • Non-Domestic – Gas taken wholly or mainly for non-domestic purposes

6. Processes that Use AQ • Currently 44 sub processes use the AQ • Main processes are: • Meter Point / Supply Point Creation • Supply Point Transfers • AQ Review • Reconciliation • Demand Estimation • Reporting • AQ used generally to classify the site or for validation purposes (e.g. system validates using AQ)

7. AQ vs Market Sector Flag Based on Portfolio Report dated 1st June 2009

8. Summary of Stats • 46,500 ‘Domestic’ Supply Points in the LSP market (14% of total) • 380,000 ‘I&C’ Supply Points in the SSP market (1.8% of total) • More ‘I&C’ in SSP market than the LSP market (280,400 I&C in LSP) • 60% of I&C sites reside in the SSP market • Market Sector Flag is blank for 33% of sites

9. Issues • Conflicting definitions with UNC & Licences • Inconsistent reporting • Market Sector Flag (MSF) is incomplete for 33% of sites • Flag not used for any UNC processes therefore not challenged or verified • AQ is calculated based on data held in the Supply Point Register (consumption) & can be easily validated • How can MSF be validated? Governance? Potential for gaming?

10. Distinct Processes for Different Sectors of the Market

11. Distinct Processes • Consultation comments for this area included: • The relationship between value, cost & risk varies tremendously per supply point warranting segmented processes for these different customer classes • Ability to enable charging transportation & energy costs across different supplier portfolio • Differing requirements between domestic and I&C markets, opportunity to provide an increased domestic performance • Domestic & non-domestic supply points vary and so would benefit from having different processes to manage them. Existing anomalies would be improved by either separating them into two different areas or by removing the dividing line • Areas we have looked at for the workgroup: • Processes affected • Related issues

12. Distinct Processes • Currently 67 sub processes are treated differently if LSP or SSP, by MRF, NDM or DM and Unique Sites or by Firm/Interruptible • Main processes are: • Supply Point Transfers • AQ Review • Reconciliation • Reporting • Was the separation of markets introduced to simplify processes for SSP’s or purely due to volume? • Although charges on invoices may be separated costs & allocations are not aligned to markets

13. Supply Point Transfers • Nomination process not required for existing SSP • Supply Point Offer issued for LSP (or new SSP) • Different information required on the Nomination for DM than NDM • Ratchets & BSSOQ change could potentially void the Offer for DM sites • For NDM sites, the Offer is revised as a result of AQ review • Different information required on the Confirmation for DM than NDM • Confirmations may be Cancelled for SSP

14. AQ Review • Different timescales for DM & NDM • Principles of calculating the AQ is different for DM & NDM • DM calculated using daily reads over 12 month period • NDM calculated using reads of over a max period of 3 years • As a result of the AQ review, the value calculated for NDM sites will go live on the 1st October • The Shipper is required to ‘Confirm’ the revised values for DM sites • Threshold crosses from NDM to DM or vice versa are processed differently.

15. Reconciliation & Invoicing • Meter Point Reconciliation for LSP • Filter Failure process for LSP • Reconciliation by Difference (RbD) for SSP • Charges for LSP’s are split based on AQ band the site falls into whereas SSP have flat rates • Different services available for LSP or DM, e.g. Interruptible transportation, IFA, Optional Tariff

16. Reporting • Reports are generally required to be split by AQ or Supply Type. • Ofgem reports are generally required by ‘Domestic’ & ‘I&C’

17. Issues • Not all processes are separate for different markets (SSP/LSP, NDM/DM) • Costs are not allocated to markets sectors • Mod 213 seeks to allocate costs • Not all transportation invoices are separated by markets