Distribution Charging Methodologies Forum

DCC Charging Methodology

4th April 2013

A Prelude... Before exploring the full excitement of the DCC / SEC charging regime, it worth understanding the nature of the task facing the DCC

DCC Charging Methodology 2

• One person is tasked to organise a night out for 20 colleagues• At the end of the meal the bill is £660 and the organiser needs

to recover this across the 20 of them ...• £35 each (which includes an overall tip of £40) is

straightforward approach but isn’t entirely “equitable” because– 3 people didn’t drink any of the wine– 7 people had a starter– 10 people had a desert and ½ of these also had coffee with it– 1 person objected in principle to paying the tip!

• So the other extreme is for the organiser to go through the bill item by item and allocate the relevant share of each cost item accordingly but– it will be complex and time consuming– it must be supported accurate records of activity

• Thus the challenge for the organiser is to find the middle ground that is both broadly cost reflective and reasonably straightforward to implement

DCC Charging Methodology 3

Overview

• The DCC / SEC charging regime is designed to ensure the recovery of revenue allowable under the price control licence conditions– Based on the charging objectives– Charges will be mixture of fixed and explicit charges (i.e. usage) to DCC

Users– The overall amount based on the selected DCC, DSP and CSPs– Balance between fixed and explicit charges also depends on chosen DCC,

DSP and CSPs

The DCC’s financial circumstances are changing over time and the DCC / SEC charging regime will evolve to reflect these changes

• From DCC Licence award– DCC only recovers its own costs and governance costs (i.e. those of the SEC

Panel / secretariat) via fixed per meter charges for domestic premises– Service Providers will incur set up costs but these are internalised

• From the start of market proving i.e. once service providers have their systems ready to operate– Recovery of Service Provider Costs (including financing charges) commences– Service providers levy service related charges start of e.g. a charge per

communication service response– DCC charging recovers both DCC’s own costs and payments to service providers

• Explicit charges – related to service usage based on DCC’s variable costs• Fixed costs – on a per meter basis (domestic irrespective of enrolment + non-

domestic enrolled) across charging groups• Enduring regime i.e. rollout complete

– DCC reaches a steady state with stable payments to service providers

DCC Charging Methodology 4

DCC Charging Methodology 5

The charging regime for the DCC is captured in a number of areas within the regulatory framework

• The DCC’s licence contains the charging principles, snappily titled as the Relevant Policy Objectives of the Charging Methodology (see next slide).

• Revenue restriction set out in the DCC price control licence conditions sets the DCC’s allowed revenue in each year.

• SEC contains the charging methodology (SEC Section K) as the embodiment of these principles i.e. how the DCC’s charges are determined.

• The charging methodology will be subject to the SEC industry modification process whereby the amended charging regime is considered to better facilitates the charging principles.

• Annual charging statement calculated consistent with the charging methodology setting out the DCC’s charges for the year ahead (reflecting service provider costs) and published each year three months in advance

• Other commercial terms (SEC Section J) e.g. Application of VAT / Invoicing / Bad Debt Socialisation / Emergency Funding / Data Estimation & Publication / Interest / Pay First & Dispute Later

Relevant Policy Objectives of the Charging Methodology – NB the plain English version

• 1st Objective – the charges for the provision of services (other than elective / value added) for domestic premises are uniform i.e. do not vary by location across Great Britain

• 2nd Objective – subject to the 1st Objective the charges should on balance– facilitate effective competition in the supply of energy– not restrict, distort, or prevent competition in the provision of energy metering

services and energy efficiency services– not disincentive early rollout by suppliers– as far as is reasonably practicable be cost-reflective (based on the costs seen by

DCC) and non-discriminatory

• NB these are set out in DCC Licence Condition 18 and repeated in SEC Section C for completeness

DCC Charging Methodology 6

DCC Charging Methodology 7

Implementation within SEC

• The SEC contains Explicit Charges based on usage (Section K7.5)– Current drafting limited to a fee for a detailed quote for elective services – Will be expanded for other usage charges e.g. per monthly meter reading

• Excluding bilateral Elective Services, anything not covered by an Explicit Charge will be funded via the DCC’s Fixed Charges. Fixed charges are payable by suppliers and networks in respect of their meters (domestic irrespective of enrolment and non-domestic where enrolled) based on the Charging Group Weighting Factors– Five charging groups (SEC Section K3.8)

• g1 - import electricity suppliers• g2 - export electricity suppliers• g3 - gas suppliers• g4 - electricity distributors• g5 - gas transporters

• Charging Group Weighting Factors– Specify the ratios of prices for each charging group– Set based on the costs related to the relevant proportions of electronic message types for

each class of DCC users to provide a broadly cost reflective allocation of fixed costs

Simple Worked Example

8

• This example illustrates the calculations of fixed per meter charges for each charging group within the charging methodology.

• This calculation applies for the regulatory year (t) and takes the costs to be recovered via fixed charges (EFRt) divided by the number of months (NMt) and shares it across each charging group (EMSMSgt) weighted by the charging group weighting factor (agt) to give a per meter charge for each charging group (FCgt).

DCC Charging Methodology

Total Annual Costs (EFRt)

£120

Number of Months

(NMt)12

Charging Groups

Number of Meters

(EMSMSgt)

Charging Group

Weighting Factors

(agt)

Fixed Charge - £ per meter

(FCgt)

Cost Allocation(EMSMSgt

×FCgt

×NMt)

Cost Allocation

(% of Total)

g1electricity suppliers

3 50% £2.50 £90.00 75%

g2gas

suppliers1 50% £2.50 £30.00 25%

100% £120.00 100%

Section K4.3 - Calculation of Fixed Charge Per Meter

ggtgt

gt

t

tgt EMSMSNM

EFRFC

aa

Worked Example – Enduring Regime

DCC Charging Methodology 9

Charging Groups (K3.8)

Region (r=1)

Region (r=2)

Region (r=3)

Region (r=1)

Region (r=2)

Region (r=3)

Region (r=1)

Region (r=2)

Region (r=3)

Region (r=1)

Region (r=2)

Region (r=3)

cost % of Total

g1 - import electricity suppliers

80 60 50 2 3 5 82 63 55 190 10 200 0.4500 £0.192 £0.114 £0.206 £0.296 46.5%

g2 - export electricity suppliers

1 0 0 0 3 1 1 3 1 1 4 5 0.0100 £0.004 £0.003 £0.005 £0.007 0.0%

g3 - gas suppliers 55 40 50 1 1 3 56 41 53 145 5 150 0.0500 £0.021 £0.013 £0.023 £0.033 3.9%

g4 - electricity distributors

80 60 50 2 3 5 82 63 55 190 10 200 0.4500 £0.192 £0.114 £0.206 £0.296 46.5%

g5 - gas transporters

55 40 50 1 1 3 56 41 53 145 5 150 0.0400 £0.017 £0.010 £0.018 £0.026 3.1%

271 200 200 6 11 17 277 211 217 671 34 705 £941.08 £5.77 £15.46 £37.69 100.0%

Domestic Totals by

group SrEDSMSgrt

Non-Domesitc Totals by

group SrENSMSgrt

Totals by group

SrESMSgrt

Charging Weighting

Factors agt

(K3.12)

Domestic Fixed

Charge -

DFCgt

(K6.4)

NB - the data is illustrative to demonstrate the algebradata in yellow are key inputs and the text in red are the SEC references

Regulatory Year (t)

Non Domestic enrolled smart meters by region -

ENSMSgrt (K6.2)

Total enrolled smart meters by region -

ESMSgrt (K6.2)

Non Domestic Fixed

Charge - NFCgrt (K6.3)

Region (r=1)

Region (r=2)

Region (r=3)

Regional Fixed Revenue - RFRrt (K3.7)

Domestic enrolled smart meters by region -

EDSMSgrt (K6.2)

£200

£300

£400

CHECK that Prices x Volumes equals revenue

CHECK that total is equal to 1 (K4.4)

TRUE

TRUE

Number of Months in

Regulatory Year - NMt

Estimated Allowed

Revenue - EARt (K2.1)

£100National Fixed Revenue -

NFRt (K3.7)

Estimated Fixed Revenue -

EFRt (K2.6)

Estimated Explicit Charges

Revenue - EECRt (K2.4)

Estimated Elective Service

Revenue - EESRt (K2.2)

£2,000

12

£400

£600

£1,000

ggrtgt

gt

t

rt

gr grtgt

gt

t

tgrt ESMSNM

RFR

ESMSNM

NFRNFC

aa

aa

(K6.3)

gr grtgt

gt

rggrtgrtgt EDSMS

EDSMSNFCDFCa

a(K6.4)