Download Setting revenues

RIIO-T1 impact on allowed
revenues and network
charges
6 September 2012
Introduction
• RIIO-T1 will set revenue controls for transmission network
companies 1 April 2013 – 31 March 2021
• July 2012: We published our Initial Proposals
• Engagement with stakeholders continues to be important to the
process
• Today’s presentation and discussion aims to:
– Focus on the specific RIIO impact set against the wider context
– Outline the ways that we and NGG can help manage the
impact on charges
– Detail the way that revenue will be recovered by NGG
including where it relates to a signal for extra capacity
• Consultation on Initial Proposals closes on 21 September 2012
• We intend to publish updated licence drafting in Autumn 2012
• Final Proposals December 2012
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Context
• NGG’s obligations and allowed revenues are subject to economic
regulation to ensure that energy consumers interests are
protected
• To recover its allowed revenues NGG set charges consistent with
its charging methodology statement. The methodology is subject
to the governance procedures of the UNC and is subject to
approval by Ofgem
• There are factors that affect the level and volatility of gas
transmission commodity charges which are independent of our
decisions in RIIO-T1
• This presentation focuses solely on the expected impact of RIIOT1
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RIIO
• RIIO is different to our previous approach to setting transmission
controls
• Differences include:
– Onus is on network companies to develop well-justified
business plans – including reflecting stakeholder input
– Comprehensive set of outputs against which delivery will be
monitored and in some cases financial incentives will be used
to encourage higher quality performance
– Treatment of capex and opex aligned so that companies
choose the most appropriate solution – allowable costs treated
as totex
– Aims to match returns more directly to the company’s
performance
– Preset proportion of totex allowed in the year (“fast money”)
with the remaining payments spread over life of asset (“slow
money”)
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OUR CONSULTATION ON
WAYS TO MANAGE
CHARGING VOLATILITY
5
We consulted on 5 options for mitigating volatility
Option
Assessment against
Assessment against
optimal risk allocation other criteria
Reduces risk to suppliers
1
Improved information
2
Restricting intra-year
charge changes
3
Lagging incentive rewards
/ penalties networks
recover via allowed
revenues
4
5
Lagging adjustments to
allowed revenues from
uncertainty mechanisms
Cap and collar allowed
revenue changes
No additional cash-flow risk
for NWOs
Reduces risk to suppliers
Low cost
Relatively easy to implement
Reduces complexity
Limited additional cash-flow
Reduces administration costs
risk for NWOs
Consultation view
Likely to be beneficial
Likely to be beneficial
Reduces risk to suppliers
Potentially weakens the
incentive regime and signals
Limited additional cash-flow
to investors
risk for NWOs
Reduces risk to suppliers
Potential additional cashflow risk for NWOs
Reduces risk to suppliers
Potentially weakens signals
to investors
Likely to be beneficial
Universal changes unlikely
to be beneficial. May
consider changes on
mechanism-by-mechanism
basis
Introduces complexity to the
regulatory regime
Potential material additional Could weaken incentive
cash-flow risk for NWOs
regime and signals to
investors
Unlikely to be beneficial
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Applying to gas transmission
• Improved information
– Recognise NGGT’s work to identify where stakeholders require better
information, including forum such as these
– 150 days indicative notice period and relationship with annual iteration
• Restricting charges to 1 April change
– Responses were supportive of all charge changes being 1 April, currently
capacity charge setting linked to the gas year (from 1 October)
– Welcome NGGT leading industry discussion on this
• Lagging incentives
– Where financial incentives are applied, eg stakeholder satisfaction,
natural lag built in as performance in year 1 reflected in charges in year 3
• Lagging uncertainty mechanisms
– Detailed design of mechanisms being finalised for RIIO-T1. Our initial
assessment favoured no lag on adjustments but a consideration of
individual mechanism requirements
• Caps and collars
– Do not favour this option, and see no reason why our assessment of
costs and benefits should be different from other network sectors
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SETTING REVENUES
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Setting revenue allowances for future years
• Licence model calculates allowed revenue for future years - ‘open’
for annual update of some variables
• Takes in actuals and compares with allowances
• Formally part of Licence regime reflecting Conditions and Handbook
Annual Iteration
• Run in November each year (so values need to be agreed before)
• Uses data mostly from regulatory year just ended in March
• Calculates adjustment to be applied in following year through
modification update licence term (MOD)
MOD
• Sum of differences (time adjusted) between
• i) Recalculated base revenues for all 8 years using this year’s
inputs and ii) recalculated base revenues for last year
• Reflects any changes/corrections to numbers previously used
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MOD overview
2015-16 MOD term calculation
•
•
There are two components of MOD.
Changes from years prior to the current year which have WACC applied
and an updated year t itself. These are added together and compared
with FP to calculate MOD.
2014
2015
Recalculated Base Revenue (2016)
2016
203.78
Recalculated Base Revenue Change
1.80
0.73
WACC-based carrying factors
1.21
1.10
x
"Catch-up" lump sum
x
2.98
+
Recalculated Base Revenue for 2016
203.78
Base Revenue for 2016
206.76
Less FP Base Revenue
203.07
MOD for 2016
FP Base Revenue
MOD
Base Revenue for charging
3.69
2014
2015
2016
169.11
186.27
203.07
-
-
3.69
169.11
186.27
206.76
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Revenue associated with new projects
Comparing TPCR4 with NGG business plan and our
Initial Proposals
• The next slide illustrates the different approaches to revenue
recovery following NGG’s business plan proposal; our high level
approach under our initial proposals; and TPCR4
• Annual iteration process should not limit agreement/ signals
• For example under NGG’s proposal NGG will not be constrained
from building in year 2017; at the worst case the funding will be
received 1 year in arrears (with financing costs)
• Our IP approach excludes any financing costs due to NGG for
earlier preconstruction expenditure
• Total revenue will vary each year from that in Final Proposals as
we update for actual totex and revised allowances
• TOTEX approach works whatever the outcome of the current
discussion about new commercial arrangements. We are not
prejudging the outcome of that process
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Potential revenue impacts of £50m project
2014
Allowed revenue IP
2015
736.7
Initiation
2016
2017
2018
2019
2020
2021
724.5
745.3
769.4
818.5
792.2
814.3
842.0
NGG proposal
Additional allowances (£m)
1
2.5
2.5
2.5
17.5
23
1
Assumed spend
1
2.5
2.5
2.5
17.5
23
1
Change in revenue
0.0
0.5
0.5
0.6
2.5
3.9
2.2
2.2
% change on base
0.0%
0.1%
0.1%
0.1%
0.3%
0.5%
0.3%
0.3%
10
40
IP Interim approach
Additional allowances (£m)
Assumed spend
Delivery
1
1
1
10
37
Change in revenue
0.0
0.0
0.3
1.6
5.6
2.1
1.1
2.2
% change on base
0.0%
0.0%
0.0%
0.2%
0.7%
0.3%
0.1%
0.3%
10
40
2.4
4.8
4.8
0.3%
0.6%
0.6%
TPCR4 system
Assumed capex (£m)
Change in revenue
% change on base
0.0%
0.0%
0.0%
0.0%
0.0%
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FURTHER DISCUSSION
AND QUESTIONS
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