A regulatory framework for gas quality treatment facilities: recap and update

1. A regulatory framework for gas quality treatment facilities: recap and update

2. GB regulatory framework • HSE • Safety regulatory authority – all GB gas activities • Sets G(S)MR limits • Sets & monitors compliance with safety case requirements • DTI • Regulatory authority for offshore • Licensing for offshore exploration • Liaise with HSE on G(S)MR • Ofgem • Regulatory authority for GB gas market • Sets and monitors compliance with regulatory framework Ofgem to work together with HSE and DTI on any options developed

3. Ofgem - work so far Ofgem Workshop in September 06 • Gas Quality is a material issue Ofgem led two workstreams (Sep-Dec 2006) • Scenario development workstream– considered the extent of issue • Economic Regulation workstream – considered possible regulatory framework to support construction of a gas processing facility • Conclusions document published 30 January Work in Europe • Gas interoperability • ERGEG Taskforce

4. High imports flows to UK lead to exports to continent • Depressed GB prices; limited dev of UKCS Transit UK • Gas supplies diverted to Continent ~ increase GB demand • High gas prices lead to increase development of UKCS Equilibrium • All import facilities and UKCS flow to full capacity ~realistic? Design Limits • More continental LNG terminals ~ avail of import for GB Mkt • Norwegian supplies delivered; high prices prompt UKCS dev Global LNG • 2009/10 – earliest period to consider dev. scenarios • 2013/14 – uncertainty regarding supply/demand balance • Bacton most suitable terminal; upper wobbe focus Parameters Set What is the extent of the issue? Future Source and spec of gas – Highly Uncertain…

5. Economic Regulation – What was considered Economic regulation workstream considered three broad approaches • No regulation of facility • Pure commercial incentives apply Unregulated approach Not favoured due to concerns over timeliness of investment. • NGG builds facility • Investment included in the RAB • Costs smeared across all gas customers Pure regulated approach Not favoured as risk of asset stranding would be smeared across all gas customers. • NGG builds facility • Investment potentially included in RAB subject to user commitment meeting 100% NPV • Costs recovered through user charges Favoured butwith scope to allow NGG to add capacity above the level of user commitment at its own risk (i.e. not automatically included in the RAB) User commit approach NOW FURTHER DEVELOPING THIS REGULATORY MODEL

6. Third party approaches NG to conduct feasibility study Possible licence route of appeal to Auth NGG refuses NG offers terms and conditions for feasibility study Third party refuses Third party accepts NG undertakes study and asks third party whether to proceed to auction based on the study Third party pays for study Third party rejects Third party accepts NG offers service to market through auction NG invests in capacity if bids cover 100% of facility cost NG earns a regulated rate of return NG can invest in additional capacity NG can earn higher or lower return Proposed regulatory approach – summary

7. Next consultation document (May) • Flesh out main issues in the allocation of risks among parties • e.g. competition impacts, balancing risks to consumers, etc. • Present initial views on how risks might be allocated & the associated regulatory framework • Taking into account submissions to Workstream Conclusions • Industry feedback key • Framework to rely on strong user signals

8. LICENCE AMENDMENTS NGG DEVELOPS UNC MOD PROPOSALS Feasibility study potentially being conducted Draft Proposals published late July/early Aug Final proposals early Oct Next consultation doc published 31 May Responses due early Sep Responses due early July Apr May Jun Sep Oct Jul Aug Ofgem decision Oct Workstream completes dev July NGG First Workshop 23 Apr Panel Recommendation Sep