Transitional Exit Capacity Proposals Update Offtake Agreement Workstream

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

Update on NG transitional proposals ® ® UNC Mod 0046 ® With Ofgem for decision IEx. CR, ARCA, SC 4 B ® 25 th August Consultation on IEx. CR, SC 4 B Statement and DN and DC ARCAs ® 22 nd Sept Consultation closes out ® 25 th Nov Final proposals issued on SC 4 B Re-consultation on IEx. CR ® Early Dec Re-consultation on DN and DC ARCA anticipated

IEx. CR Requirement to amend the existing IEx. CR 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

IEx. CR re-consultation ® In light of representations, consider that reconsultation on IEx. CR appropriate on the following areas: ® Definition of incremental exit capacity ® ARCA governance ® ARCA commitment ® ARCA dispute resolution

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 C 18 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 IEx. CR ® IVAs for NTS/LDZ offtakes for transitional period to be included in IEx. CR 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 ®

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 IEx. CR ® ® allows Authority to consider appropriateness of principles ® provides improved transparency of the ARCA requirements

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

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

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

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

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

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

Way forward IEx. CR re-consultation will close out on Friday 23 rd December 2005 ® Responses should be sent to: ® Dave Adlam NGT House Warwick Technology Park Gallows Hill Warwick CV 34 6 DA E-mail david. adlam@uk. ngrid. com