Ofgem has rejected an amendment to the Uniform Network Code (UNC) that would allow gas shippers to adjust consumption estimates for some non-domestic customers to reflect their drop in usage as a result of the coronavirus pandemic.
The regulator said the modification would shift costs onto households, many of which have been using more gas during the lockdown, and could also be abused by shippers to gain an advantage over competitors.
UNC721 would extend the circumstance under which shippers can submit revised estimates of the annual quantities (AQs) for non-daily-metered supply points within end user category (EUC) bands 2 through 9. AQs are used to calculate daily consumption estimates for non-daily metered supply points for the purposes of gas settlement.
These EUC bands cover supply points consuming more than 73,200KWh each year, meaning they rarely include domestic customers. Nevertheless, the changes would affect around 250,000 meters in total.
Although the amendment has been introduced as a response to the coronavirus pandemic, Ofgem said “there is nothing to restrict the use of this process to only the worse affected supply points, rather than those which have seen a reduced consumption for some unrelated reason.”
The central data services provider, Xoserve, would be able to exercise discretion over which revisions are accepted, but the regulator said there would be little to stop the process being misused in practice.
Revisions to AQs are currently made on the basis of a rolling average to ensure they reflect long-term usage and are not skewed by unrepresentative short-term fluctuations.
Prior the introduction of new gas settlement arrangements as part of Project Nexus, revisions were derived from a pairing of meter reads selected at the discretion of gas shippers, which according to the Competition and Markets Authority created an opportunity for gaming. Ofgem raised concerns that UNC721 would “re-introduce some of the detrimental features of the previous regime”.
The regulator noted that whilst the modification would allow for an immediate reduction in AQs, “there is no requirement to similarly expedite an upward revision” when demand returns. Shippers may be incentivised to drag out readjustments. In the meantime, the resulting deficit would contribute to the calculation of unidentified gas, the costs of which are spread across the entire market and already suffer from volatility.
The modification proposal suggested that the Performance Assurance Committee for the UNC could put in place arrangements to address these concerns. However, Ofgem argued it would take to long to set up the necessary reporting and assurance processes.
The main focus of the proposal was on gas allocation but AQs are also used to calculate gas distribution charges. Ofgem said UNC721 could therefore lead to the under-recovery of charges and cash flow problems for gas distribution networks (GDNs).
It said any reduction in gas distribution charges would not be reflective of consumers’ impact on costs which are driven by long-term capacity requirements rather than short-term consumption. The deficit would be eventually recovered, but from all consumers and not just those benefiting from the change.
The regulator said there would be a “greater and more enduring impact” if the temporarily adjusted AQs feed into the calculation of charges for the following year: “For instance, if aggregate AQs for the EUC2-9 (typically non-domestic) supply points are adjusted through the UNC721 process and remain suppressed when the AQ snap shot is taken 1 December 2020, this could result in a greater proportion of the GDNs allowed revenue being allocated to EUC1 (typically domestic) supply points.
“This redistribution of cost could be compounded if EUC1 supply points were to also see a temporary increase in consumption as a result of the lock-down, leading to an atypically high AQ at the time of the snapshot.”
UNC721 is one five modifications to emerge so far from an emergency meeting of the UNC distribution workgroup in April. Ofgem approved three of the modifications – UNC722, UNC723 and UNC724 – around the middle of May but rejected UNC725 earlier this week.