Some potential issues with the CDCM

Franck LatrémolièreCDCM review workshop, 17 May 2011

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Agenda

• Objectives– High-level review of CDCM issues

– Try to give a structure for your feedback

• Attempt at a categorisation of issues– But remember that the CDCM is a package

• Who might be affected by each issue?

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Some categories of issues

• Issues about the structure of tariffs

• Issues about the structure of calculations

• Issues about each step in calculations

• Issues about predictability and volatility

• Issues arising from wider developments

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Structure of tariffs: Features

• DUoS billing using industry data flows

• EDCM/CDCM boundary

• Non-locational tariffs

• Demand: different structure for half hourly and non half hourly tariffs

• Generation: fixed charges and unit credits

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Structure of tariffs: Issues

• Generation dominated areas

• Unmetered supplies

• Incentives near EDCM/CDCM boundary

• Smart metering and elective half hourly settlement

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Structure of calculations: Features

• Use of 500 MW model for notional assets

• Use of DNO forecasts for running costs

• Separate model M for LDNO tariffs

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Structure of calculations: Issues

• Why are assets modelled on a reinforcement basis when other costs are based on forecasts?

• Can revenue matching be cost-reflective?

• Why is there a separate model M?

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Step 1 cost analysis: Features

• 500 MW model: hypothetical reinforcement

• Service models: hypothetical replacement

• Direct costs, indirect costs, network rates, and transmission exit: forecasts

• Customer contribution percentages

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Step 1 cost analysis: Issues

• Are 500 MW models consistently constructed across DNOs?

• Should most of the LV trenching costs be excluded from the 500 MW model?

• Should a more detailed analysis of other costs (e.g. from RRP) be used?

• Are customer contributions data robust?

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Step 1 cost analysis: More issues

• Is the 500 MW model about the cost of reinforcing an existing network or the cost of rebuilding a hypothetical network?

• Should indirect costs be disaggregated?– Is capitalisation policy relevant?

– Interaction with on-costs in 500 MW model?

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Step 2 cost allocation: Features

• 500 MW assets annuitised at 5.6% + RPI

• Omit assets that would be contributed if first built under the current connection charging policy

• Coincidence factors

• Standing charge factors

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Step 2 cost allocation: Issues

• Half hourly and non half hourly tariffs– Only half hourly tariffs have capacity charges

– Unrestricted and multi-rate tariffs may give inconsistent average unit rates

– Impact on unmetered and elective half hourly

• Standing charge factors– Discrepancy between LV and HV capacity

charges?

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Step 2 cost allocation: More issues

• Should DUoS charges include a specific contribution to the costs of replacing customer-contributed assets?

• Direct costs, indirect costs and rates account for a large opaque lump of money

• Changing the rate of return from 6.9 to 5.6 per cent had a sizeable effect on tariffs

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Step 3 revenue matching: Features

• Compare forecast revenue from cost allocation with price control target

• Discrepancy smeared across demand on peak-time unit rates

• Downwards adjustment permitted, but negative charges are not allowed

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Step 3 revenue matching: Issues

• Can revenue matching be cost-reflective?

• Revenue matching highlights other issues– Does the omission of replacement costs

mean that HV users pay for LV costs?

• Are there any specific issues with the way in which revenue matching works?

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Step 4 LDNO model M: Features

• Separate model to disaggregate price control revenue allowances between network levels

• Used to calculate percentage discounts

• LDNO tariffs are derived from all-the-way tariffs using these percentage discounts

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Step 4 LDNO model M: Issues

• Some issues go to the CDCM structure– Do the two models work well together?

– Which costs do fixed and capacity charges in LDNO tariffs reflect?

• Specific issues with workings of model M– FBPQ data sources for capital expenditure

– Allocation rules in opex allocation

– Differences with EDCM model M

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Transparency: Features

• Input data published in full

• Additional five-year information published

• Open-source spreadsheet– There is no password

– All formulas can be inspected or changed

• User manual

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Transparency: Issues

• Big and complicated

• Perception of a “black box”

• Tariffs appear to change unpredictably

• Does CDCM governance work for you?

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Wider developments

• Sub-100 kW half hourly metering and smart metering roll out– Is the CDCM a barrier to progress?

• Link with EDCM (FCP and LRIC)– Boundary issues

– Treatment of generators

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Which industry parties are affected

• Suppliers may be mostly affected by– Predictability, transparency, governance

– Interactions with wider industry issues

• Generators may be mostly affected by– Generation dominated areas, EDCM

• IDNOs and out-of-area DNOs are potentially affected by all the issues

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How does this affect consumers?

• Hard to foresee effect of CDCM changes because of interactions between tariffs– Revenue matching

– Allocation of direct, indirect costs, rates

• Impacts may be different for different users subject to the same tariff

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A simple worked example

• Simplified CDCM with only three tariffs– Domestic Unrestricted (PC1)

– Domestic Two Rates (PC2)

– HV Half Hourly (HV)

• Hypothetical input data

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Worked example: base case

Rate 1 Rate 2 Rate 3 Fixed Capac. React.

PC1 2.358 8.53

PC2 3.164 0.083 8.53

HV 9.217 0.246 0.005 175.65 5.58 0.214

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Effect of adding a charge for replacement of contributed assets

Average change

Why?

PC1 + 2.7% Fixed charge up 58%Unit charge down 16%

PC2 – 6.9% Fixed charge up 58%Unit charges down 17%

HV – 8.6% Capacity charge up 19%Unit charges down 33%

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Some customer characteristics that may drive the effect of changes• Balance between peak-time consumption

and other network use (e.g. capacity)– Driven by customer group’s coincidence to

DNO system peak

• Network level of supply

• Load profile data for the customer group

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In which direction will charges move?

• Sometimes easy to foresee effects on cost estimates or cost allocation

• Hard to foresee effect on tariffs– Because of revenue matching and

direct/indirect costs

• No real substitute to experimentation

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Feedback session

• I will try to categorise issues and ideas – Issues about the structure of tariffs

– Issues about the structure of calculations

– Issues about each step in calculations

– Issues about predictability and volatility

– Issues arising from wider developments

• There will be uncategorisable issues