Transitional Exit Capacity Proposals -Update

1. Transitional Exit Capacity Proposals-Update Offtake Agreement Workstream, 30 Nov 05 Dave Adlam

2. Update on NG transitional proposals • UNC Mod 0046 • With Ofgem for decision • IExCR, ARCA, SC4B • 25th August Consultation on IExCR, SC4B Statement and DN and DC ARCAs • 22nd Sept Consultation closes out • 25th Nov Final proposals issued on SC4B Re-consultation on IExCR • Early Dec Re-consultation on DN and DC ARCA anticipated

3. IExCR • Requirement to amend the existing IExCR to accommodate the release of incremental exit capacity in the transitional period • Proposed key principles • Simple, transparent and non-discriminatory processes • Clear obligation as to when it is appropriate to release incremental exit capacity • Any costs reasonably incurred by NG in system investments to deliver incremental exit capacity are appropriately renumerated

4. IExCR re-consultation • In light of representations, consider that re-consultation on IExCR appropriate on the following areas: • Definition of incremental exit capacity • ARCA governance • ARCA commitment • ARCA dispute resolution

5. Definition of incremental exit capacity • Respondents considered there was uncertainty as to exactly what constituted incremental exit capacity • Ofgem have therefore proposed changes to Special Condition C18 of our licence to clarify the definition of ‘initial volume allocation’ (IVA) and ‘incremental exit capacity’ • these proposed Licence amendments have been reflected in the revised proposed IExCR • IVAs for NTS/LDZ offtakes for transitional period to be included in IExCR with values consistent with Ofgem proposed incentive targets for each exit zone • 2008/09 IVA values taken from the 1 May Offtake Capacity Statement • 2009/10 IVA values derived by applying forecast growth rate to previous years IVA for each offtake

6. ARCA governance • Respondents expressed concern over lack of governance associated with ARCAs, and inability of Authority to approve form of ARCAs • As incremental exit capacity release linked to signature of ARCA, we have proposed set of high level principles on which NG will base any required ARCAs within IExCR • allows Authority to consider appropriateness of principles • provides improved transparency of the ARCA requirements

7. ARCA commitment • Ofgem have informed us that a financial commitment consistent with the Langage determination is not necessarily sufficient to ensure renumeration of investment costs • We will therefore need to offer ARCAs that would provide a financial underpinning of 100% of investment costs specific to a connection • Costs would exclude any reinforcement work that is likely to benefit other Users, either immediately or in the future • Commitment would be reduced in the future if unused reserved capacity is used by any other party

8. ARCA commitment • ARCA commitment becomes due in the event that the booked NTS Exit Capacity / NTS Offtake Capacity is lower than the level of reserved capacity in the ARCA and the revenue generated is less than the ARCA commitment • Amount due will be the difference between the booked level of capacity and the reserved level of capacity multiplied by the prevailing exit capacity rate

9. ARCA commitment - Example • Defining the period over which the commitment applies • Specific Reinforcement costs • £18m • Annual NTS Exit Capacity revenue (reserved incremental capacity x expected NTS exit charge rate) • £3m • Period over which the ARCA commitment would apply • £18m / £3m = 6 years

10. GAS YEARS Y Y+1 Y+2 Y+3 Y+4 Y+5 100 100 90 100 100 80 Actual Incremental Capacity Booked • User underbooks by 10 units • Accrued liability 10 * Prevailing • price • User underbooks by 20 units • Accrued liability 20 * prevailing • price • User reserves 100 • incremental capacity • units from year Y ARCA Commitment - Example E.g. £18m financial commitment over 6 years Annualassessment to establish whether £3m generated

11. ARCA Commitment - Example • If revenue generated < £18m then liability accrued in Y+5 would become due.

12. ARCA Dispute Resolution • In the event that the connectee or National Grid are unhappy with the terms and conditions of the ARCA offered by NG then it can be referred to the Authority for their determination under Gas Act

13. Way forward • IExCR re-consultation will close out on Friday 23rd December 2005 • Responses should be sent to: Dave Adlam NGT House Warwick Technology Park Gallows Hill Warwick CV34 6DA E-mail david.adlam@uk.ngrid.com