Jacqui Russell Ofgem 10 South Colonnade Canary Wharf London, E14 4PU Ibex House 2 nd Floor 42-47 Minories London EC3N 1DY cc. SEC Parties 8 June 2018 Dear Jacqui, Notice of proposed amendment to Service Charges for Regulatory Year ending 31 March 2019 Summary In accordance with Condition 19.9(a) and 19.11 of the Licence 1 DCC (Smart DCC Ltd) hereby gives Notice to the Authority of an amendment to DCC Service Charges for RY (Regulatory Year) ending 31 March 2019. We propose that the amended Charging Statement comes into effect on 8 September 2018. This results in a total Notice period of three months. This Notice reflects the following changes to the Charging Statement for RY2018/19: 1. Introduction of new DBCH 2 charges 2. Introduction of new Communications Hub Fixed Revenue category and corresponding changes to Fixed Charges 3. Removal of regional differentiation of charges for Non-Domestic Premises 4. Breakdown of explicit charges for Test Communications Hubs (dual band and instrumented). 1 Smart Meter Communication Licence 2 Dual Band Communications Hubs Page 1 of 6
Changes 1, 2 and 3 reflect the changes made by BEIS to the Charging Methodology (Section K of the SEC 3 ) which came into effect on 31 May 2018 (SEC v5.16) 4. These changes are set out in the draft revised Charging Statement for RY2018/19 (Issue 1.1, see enclosed), which we provide to the Authority as part of this Notice and in accordance with Condition 19.13 of the Licence. Background We set charges for one year at a time, and these are usually refreshed in April each year. The Charging Statement currently in effect for RY2018/19 was published on 29 March 2018 5, which reflects the Charging Methodology 6 in effect at that time. In 2017, BEIS consulted on three key changes to the charging methodology (Sections K of the SEC). BEIS concluded on these proposals on 27 March 2018, at which time they were laid in parliament before they took effect on 31 May 2018. These SEC changes result in an in-year amendment to the Charging Statement. We are also now including an indicative breakdown of Explicit Charges relating to Test Communications Hubs for both dual band and instrumented. Charging Statement amendments We are proposing to implement all three changes in a single in-year amendment to the RY18/19 Charging Statement. A summary of the changes to the Charging Methodology and the resulting impact on the Charging Statement is set out in Table 1 in Appendix A. The key factor that has led us to conclude that an additional amendment is necessary is that Section K of the SEC was been amended by BEIS and formally came into effect on 31 May 2018. The reason we could not take account of the above, when giving Notice in December 2017, to implement the annual refresh of charges, is because that Notice was given before the changes to the SEC had taken effect. In addition, we are providing further clarity on Explicit Charges for Test Communications Hubs, which was not available to us in December 2017 7. We set out further detail on the three key changes below. 1.1.1 DBCH Charges In this revised issue of the Charging Statement we are including the new Fixed DBCH Charge as required under Section K6A of the SEC. This will be charged per 3 SEC - Smart Energy Code 4 SECAS, 31 May 2018, SEC 5.16 : https://smartenergycodecompany.co.uk/download/6810 5 DCC, 29 March 2018, Charging Statement RY1819 Issue 1.0 : https://www.smartdcc.co.uk/media/454705/charging_statement_ry1819_-_issue_1.0 final_.pdf 6 DCC, 28 September 2016, Charging Methodology-Issue 4.0 : https://www.smartdcc.co.uk/media/405466/2016_08_18_sec-4-15-section-k---charging-methodology.pdf 7 Under Licence condition 19.11 (a) DCC must state the factors that have led it to conclude that an additional amendment is necessary, explaining in particular why it did not (or could not) take account of those factors when giving Notice under paragraph 19.9 with respect to the immediately preceding amendment of Service Charges. Page 2 of 6
Enrolled Smart Metering System similar to the Fixed SBCH 8 Charge. For each Enrolled Smart Metering System, customers will pay either a SBCH or a DBCH charge, not both. The new Fixed DBCH Charges for RY2018/19 are set out in Table 3 of the draft revised Charging Statement for RY2018/19 (Issue 1.1, see enclosed). In July 2017, we stated that DBCH units would cost approximately 16-18 more than a SBCH unit (excluding finance costs and indexation), which is still the case for RY18/19. However, over time this difference increases because the SBCH unit cost will decrease more than DBCH as unit prices vary from year to year due to volumes discounts and financing periods coming to an end earlier than DBCH. There may also be additional Fixed DBCH Charge volatility reflecting potential exchange rate fluctuation, the premium for which was removed by the CSP as we considered it to be more economic and efficient for that risk to be borne by customers. Appendix B sets out the whole life unit costs for both SBCH and DBCH. We will shortly be publishing the indicative Fixed DBCH Charge for RY2019/20 in the July 2018 issue of the indicative Charging Statement, which will provide the forecasted Fixed DBCH Charge for next year. 1.1.2 CH Fixed Revenue The recent changes to the SEC now require DCC to publish a new sub-category of External Costs that relate to CH fixed costs i.e. not unit costs. It also amends the Fixed Charge methodology such that the CH Fixed Revenue is recovered from Charging Groups 1, 2 and 3 only. This change does not adjust the total DCC costs for RY2018/19. On a like for like 9 basis, the net effect of this change is: an increase to the Fixed Charges for Import Suppliers (Charging Group 1) of 0.002 no change to the Fixed Charges for Import Suppliers (Charging Group 2) an increase to the Fixed Charges for Gas Suppliers (Charging Group 3) of 0.002 an decrease to the Fixed Charges for Electricity Distributors (Charging Group 4) of 0.004 no change to the Fixed Charges for Import Suppliers (Charging Group 5). The updated Fixed Charges are set out in Table 1 of the draft revised Charging Statement for RY2018/19 (Issue 1.1, see enclosed). 8 Single Band Communications Hub 9 When comparing against the original RY18/19 Fixed Charges after removing the regional differentiation Page 3 of 6
1.1.3 Removal of regional prices The final change is the removal of the requirement to set the Fixed Charge and Fixed CH Charge for Non-Domestic Premises by Region. The charges for Domestic and Non-Domestic Premises will now be identical. This change is shown in Table 1 and 3 of the draft revised Charging Statement for RY2018/19 (Issue 1.1, see enclosed). 1.1.4 Test communications Hubs (dual band and instrumented) In an effort to be more transparent, we are now setting out the indicative Explicit Charges for different types of Test Communications Hubs for both dual band and instrumented units. The draft revised Charging Statement for RY2018/19 (Issue 1.1, see enclosed) now includes indicative Explicit Charges for: Dual Band Test Communications Hubs (DB TCH) Single Band Instrumented Test Communications Hubs (SB ITCH) Dual Band Instrumented Test Communications Hubs (DB ITCH). Next steps The draft revised Charging Statement for RY2018/19 (Issue 1.1) is enclosed with this letter and will take effect on 8 September 2018. As we charge in arrears this means that customers will see the revised charges take effect from the invoices issued from 3 October 2018 onwards. A copy of this Notice will be shared with SEC Parties, pursuant to Licence Condition 19.9(b) and it will also be available to download from the DCC website. If you have any questions on any part of this Notice or the enclosed draft revised Charging Statement please contact finance@smartdcc.co.uk. Yours sincerely, Ekta Sareen, Pricing and Insight Manager, DCC Enclosures: Charging Statement RY1819-Issue 1.1 (DRAFT FOR NOTICE).pdf Page 4 of 6
Appendix A: Summary of Charging Statement changes Table 1 below sets out a summary of the changes to the Charging Statement. Place in document Table 1 Monthly Fixed Charges by Charging Group for RY2018/19 applicable from September 2018 onwards Table 3 Monthly Fixed CH Charges by Charging Group for RY2018/19 from September 2018 onwards Table 4 Set Explicit Charges for RY2018/19 Table 5 Indicative Explicit Charges applicable in RY2018/19 Table 6 Explicit Charges yet to be determined Change Removal of regionally differentiated charges for Non-Domestic Premises Small increase in Fixed Charges for Charging Groups 1, 2 and 3 Small decrease in Fixed Charges for Charging Group 5 Removal of regionally differentiated charges for Non-Domestic Premises Introduction of new Fixed CH Charge for DBCH Introduction of new CH stock level charge (DBCH) Introduction of CH returned and redeployed charge (DBCH) Introduction of CH returned not redeployed charge (DBCH) Test Communications Hubs (TCH) indicative charge is now broken down by the following categories: Single Band Test Communications Hubs (SB TCH) Dual Band Test Communications Hubs (DB TCH) Single Band instrumented Test Communications Hubs (SB ITCH) Dual Band instrumented Test Communications Hubs (DB ITCH) Removal of CH Variant Charge Inclusion of category: Total Communications Hubs Fixed Revenue Table 7 Estimated Allowed Revenue for RY2018/19 Renaming of Communications Hub Revenue to Communications Hub Device Revenue Inclusion of new sub-totals for further clarity Inclusion of category: Regional Communications Hubs Fixed Revenue Table 8 Estimated Fixed Revenue for RY2018/19 Renaming of Communications Hub Revenue to Communications Hub Device Revenue Inclusion of DBCH revenue Inclusion of new sub-totals for further clarity Inclusion of category: Total Regional Communications Hubs Fixed Revenue Table 9 Estimated Fixed Revenue by category for RY2018/19 Renaming of Communications Hub Revenue to Communications Hub Device Revenue Inclusion of DBCH revenue Inclusion of new sub-totals for further clarity Appendix D Worked examples Revised worked examples to reflect changes to charges (see above) Table 1 Summary of Charging Statement amendments Page 5 of 6
Appendix B: Communications Hubs whole life unit costs Tables 2 and 3 set out the whole life unit costs for both SBCH and DBCHs for each year of the DCC Licence. Both include our current assumptions on rollout volume and assume a constant GBP:USD exchange rate. Table 2 below sets out the whole life unit costs for both SBCH and DBCHs, excluding indexation and financing. 17/18 18/19 19/20 20/21 21/22 22/23 23/24 24/25 25/26 SBCH /unit 37 35 32 31 30 30 30 30 30 DBCH /unit 53 53 53 52 51 51 51 51 51 Difference 16 18 21 21 21 21 21 21 21 Table 2 CH whole life unit costs excluding indexation and financing Table 3 below sets out the whole life unit costs for both SBCH and DBCHs, including indexation and financing. 17/18 18/19 19/20 20/21 21/22 22/23 23/24 24/25 25/26 SBCH /unit 51 47 43 41 40 40 39 39 38 DBCH /unit 72 71 70 68 67 66 66 65 65 Difference 21 24 27 27 27 26 27 26 27 Table 3 CH whole life unit costs including indexation and financing Page 6 of 6