Third Workstream meeting re Baseline Re-consultation and Substitution

1. Third Workstream meeting re Baseline Re-consultation and Substitution 12 September 2007

2. Recap of previous two workstream meetings (1) • Outlined the basis for Ofgem’s TPCR baselines • National Grid provided network analysis following Ofgem’s prescribed methodology • Based on 2008 network, average of three TBE scenarios (Auctions +, Transit UK and Global LNG) using supply substitution • Using least favourable node as supply balance • TPCR baselines were set based on: • ‘Baseflow’ under each scenario as starting point, then split remaining ‘unallocated’ entry capacity on 10YS forecast flows for 2008

3. Recap of previous two workstream meetings (2) • Resulted in aggregate baselines of 8814 GWh/d • Discussed alternative methods for splitting the unallocated capacity within Ofgem’s spreadsheet • National Grid asked for input from workstream members, in particular on: • Views on ‘re-cutting of the cake’ (i.e. aggregate the same, i.e. 8814 GWh/d) • Vs setting higher baselines (aggregate greater)

4. Summary of responses

5. Where do we go from here? • No real consensus view from the industry • No particular comments on a methodology to apply • Consider the two alternative approaches: • ‘re-cutting of the cake’ (i.e. aggregate the same, i.e. 8814 GWh/d) • Vs setting higher baselines (aggregate greater)

6. Re-cutting the cake – how do you allocate the 8814 GWh/d? (1) • Start with current level of capacity obligations (take maximum booked for April 2008 onwards from August 2007 report on website) (8210 GWh/d) • Take off the Incremental Obligated (IO) which has been sold in Sept 2006 QSEC auction (1310 GWh/d) • This leads to 6900 GWh/d having been allocated • If previously sold out at an ASEP, add back 20% previously reserved for S-T (based on old TPCR baseline) • This affects Cheshire, Easington, Hornsea and Isle of Grain (359 GWh/d) • This leads to 7259 GWh/d which would be allocated … this then leaves 1554 GWh/d of entry capacity unallocated

7. How do you allocate the 1554 GWh/d? • Believe need to take account of physical capability • New baselines should be constrained to not exceed previous obligations • Needs to be broadly commensurate with the buy-back target • Therefore, based on the above, need to preserve the zonal limits • Applied above logic and used four different ways of splitting the 1554 GWh/d • On existing obligated level; • 2005 TYS; • 2006 TYS; • Max flow seen over 2 winters, 2005/6 and 2006/7.

8. Possible sets of baselines (1) Obligated Allocation based on sold + 20% old TPCR baseline where sold out

9. Re-cutting the cake – how do you allocate the 8814 GWh/d? (2) • Start with the current level of capacity obligations (take maximum booked for April 2008 onwards from August 2007 report on website less Incremental Obligated) (6900 GWh/d) • Add back 20% previously reserved for S-T (based on old TPCR baseline) at all ASEPs (but cap resultant figure at the old TPCR baseline) • This leads to 8400 GWh/d being allocated … this then leaves 414 GWh/d of entry capacity unallocated:

10. Possible sets of baselines (2)

11. Zonal analysis of possible baselines (2)

12. Re-cutting the cake – how do you allocate the 8814 GWh/d? (3) • Alternative starting position - could use historical flow over the last two winters (subject to the old TPCR baseline) • Then adjust for the current level of capacity obligations • This leads to 7802 GWh/d being allocated … this then leaves 1012 GWh/d of entry capacity unallocated:

13. Alternative ‘re-cutting of cake’ – possible baselines (3)

14. Zonal analysis of possible baselines (3)

15. Alternative of higher baselines – Capex requirement • Can Use the TPCR agreed revenue drivers as proxy for capital expenditure • If baselines increased back to pre 2007 TPCR levels • Around £275m extra capex needed to provide the increased baselines

16. Alternative of higher baselines – Buyback modelling • Alternatively, can examine the incremental buyback risk. Preliminary results indicate that: • Just at Teesside, increasing the baseline back up to 70 mscm/d could lead to around £90m incremental buyback risk (mean level of £20m) per year (assuming that the incremental flow at Teesside is off-set by reduction of flow at Milford Haven) • Similar level of risk at Barrow of increasing baseline back to 66 mscm/d

17. Summary • Discussed how baselines were set • Presented feedback received from industry • Proposed alternative ways of ‘cutting the cake’ • Demonstrated that going back to higher baselines means either: • significant capex needed • or that buy-back risk is likely to be high • Will provide a summary report to Ofgem in the next two weeks • Ofgem to commence their consultation