Claims Validation: Why, What and How
1 November 2007, AECC
This was the second of a regular series of informal lunch-time meetings to discuss topics relating to Hydrocarbon Allocation. We were very pleased to have a presentation from David Eastlake, the General Manager and sole executive director of Claims Validation Services Limited CVSL.
Introduction
Dave began by considering CVSL from the point of view of an independent consultant. What the consultant would see is a funny little virtual company, with no employees and no assets. They'd be surprised that this company could challenge, scale back, and adjust gas allocations. Delving further, the consultant would see that CVSL has a monopoly in this field. Looking at other liberalised gas markets, they wouldn't find a comparable organisation.
History
Justifying this, Dave started with a history lesson. In 1996 the UK was liberalising the gas markets and introducing the Network Code. British Gas was being broken up, and people were trying to work out how this was going to work. The transporter needed to know what gas was coming into the system, as this was the basis of the tariff, and there was a need for balancing. One option was to have shippers claiming their figures, and hope that producers would produce figures that matched. This wasn't going to work. A second option would have been to allow Transco to do it, but there might be issues of confidentiality, and Transco didn't find the idea of arbitrating disputes particularly appealing. The solution was to set up an independent body. This was reflected in the regulatory regime and in the network code. Storage onshore and offshore, and onshore production, are not part of CVSL's responsibilities.
The new regulatory regime introduced some interesting constraints. The entry allocation statement must never be later than fifteen days following the month, and if it's late then Transco will just apply nominations. Also, the entry allocation statement must match the DQ to the kWh or, again, nominations will apply. The application of nominations in either case would be a disaster commercially.
CVSL was set up to be independent, but it is a shipper organisation, and a limited company whose shareholders are the shippers. There are currently two directors, and there is a management committee which is nominally annually elected, but in reality is comprised of individuals invited by Dave.
Operations
Shippers' daily claims (daily activity logs) are sent to CVSL and must be matched to DQs. CVSL also handles roughly 1000 offshore trades each month.
There are three components. The CVSA (the agreement) obliges CVSL on behalf of all the shippers to make sure that an agent for each entry point exists, and that they will validate the gas claims at the entry point. The CVAA governs how discrepancies in gas reporting are handled. A mismatched trade will never be validated. Subterminals or entry points may be under-claimed, and this is reported as unclaimed gas (effectively free gas to the system and comes back to shippers through neutrality in the network balancing). However, with these two components alone it didn't really work, as information didn't come from producers. Producers were able to claim that they were constrained by confidentiality in giving information to CVSL. Sometimes there were over-claims of millions of kWh, and these couldn't be resolved by the agent. To address this problem, all through 1998 CVSL sought to get all shippers, producers and suppliers to agree to give CVSL all information. Involved 100+ companies, and was difficult, but this solved most of the problems. The final component, the CVIA (Claims Validation Information Agreement), was the result, and this removed confidentiality concerns and put an obligation on all suppliers to give a Daily Entitlement Statement. CVSL could compare this with Entry Point Statements from entry point operators, and thereby confirms the DQ from Transco. Dave has a golden rule: never accept a late daily entitlement statement unless it improves a an over-sold position in aggregate without detriment to any individual shipper.
In respect of mistakes, the DQ is sometimes in error, perhaps two to three days per month. Transco could transpose numbers, or inspection and maintenance might have revealed that something has been wrong with metering and allocation has been re-run but Transco has not been involved. Invariably, CVSL catches this and Transco updates their DQ.
One service they provide, which isn't really part of their actual responsibilities, is to re-run the D+7 numbers on the first business day of the month in order to provide a better view of shipper indebtedness, and avoid unnecessary cash calls on shippers if they are approaching their credit limit.
Information Technology
From an IT perspective, PWC built the current version of the software (CLAIM 2), a web-based system that is relatively easy to use and also supports transfer of information in XML. It works to banking levels of security and has very little downtime.
As a final question, Dave considered whether CVSL could be judged a success? The answer was an unequivocal "yes"! CVSL has never, ever failed to exactly match the DQ down to the kWh, and never failed to meet the M+15 deadline. When a new subterminal comes online, there is a chance to consider alternates but CVSL is always judged the best way. They have incorporated Interconnector, SEAL, Milford Haven terminals, and others, and this adoption process is straightforward. In 2006 they had 132,000 transactions and 12,000 trades, a significant proportion of which were revisions. In 2006, taking the total amount in aggregate of over-claim in the year as a proportion of sub-terminal day the result was, on average,151 kWh in error each day, which is infinitesimal. As for value for money, it costs less than £700k per year to run (only a small proportion of which is Dave's salary).
Q&A
The floor was then opened for questions:
- How many people does it take to provide this service?
CVSL have an operations team of four people in Birmingham, with backup from Cambridge.
- Does CVSL ever get audited?
Every time they change something significant, this is effectively audited. What the CVAA says must be done in the event of a mismatch is well established.
- What is done in the event of a sustained mismeasurement?
This problem does arise, but most problems have effectively been identified and removed from the system. In the event of a material discrepancy after close-out this is simply tough luck.
- Why is the UK unique in having this model?
On the continent, there is interest in the CVSL, but incumbent monopolies resist change. In the UK the liberalisation happened very suddenly, and this has helped the market. For example, up to 1000 offshore trades per month occur and this might not have happened without CVSL.
- Did negative gas prices cause any problems?
Price doesn't really have an impact, as they aremainly looking at volumes.
- For how long with GMSL act as agent?
PWC did the job for a long time, and now GMSL will probably be in post for a considerable time. It's a long-term relationship. The operational component of the GMSL business is completely separated and ring-fenced, geographically and commercially.