BackgroundtoCDCMrevenuematching.docVIP

Background to CDCM revenue matching by Franck Latrémolière on Thursday 25 August 2011[edited on Friday 18 May 2012 to correct some dates] CDCM charges include an element known as “revenue matching” or “scaling”. The revenue-matching element is included in unit charges for demand (p/kWh and p/kVArh) only. There is nothing similar in standing charges (p/kVA/day and p/day), generator excessive reactive power charges (p/kVArh), or generator credits (p/kWh). In the CDCM models published in February 2011, the effect of revenue matching on charges varied from an 11 per cent reduction (UKPN LPN, HV HH Metered, unit rate 1) to a 1550 per cent increase (CE NEDL, HV Sub HH Metered, unit rate 1). Thus, the revenue-matching element represents up to 94 per cent of the charges for units distributed at peak time. The inclusion of revenue matching also goes a long way to explain the magnitude of variations in prices between DNO areas. Old history Revenue matching arises from a discrepancy between the costing methods underpinning the details of a tariff structure and an overall financial target applied at the level of the DNO as a whole. In the 1984 tariff formulation manual (a document distributed to nationalised electricity boards), the issue is explained as follows: [Paragraph?4001] [… The income from applying long-run marginal cost tariffs] may not be that implied by the Board’s financial target in a particular year, which can be based on quite different political exigencies. [Paragraph?4002] There must therefore be some deliberate process of reconciliation between the results from the application of marginal costing to every tariff class load and the financial target set for the Board. The methods discussed in the 1984 tariff formulation manual are mostly expressed in terms of reductions in tariffs. A main recommendation (paragraph 4010) was that adjustments should be made to standing charges rather than unit rates. This was on the basis that a reduction in standing charges