Review of NTS entry charge setting arrangements - IA

1. Review of NTS entry charge setting arrangements - IA 1 July 2010

2. Background • Concerns that revenue from entry capacity auctions declining • TO commodity charge accounting for majority of TO allowed revenue • Level of TO commodity charge also volatile • Review group established to investigate current charging arrangements • Aim to identify charging or UNC mods which maximise TO allowed revenue collected through auctions, maximise long term bookings and incentivise security of supply amongst others • One charging mod and two UNC mods proposed by NGG as a result of review

3. Main reasons for under recovery • Price paid • Reserve price discounts • Model changes • Transcost prices were generally lower than transportation model • Amount of capacity • Shippers don’t book in line with Ten Year Statement at full reserve price

4. GCM19 summary • Removal of daily entry capacity reserve price discounts • 33% reserve price discount for day ahead daily system entry capacity (DADSEC) • 100% reserve price discount for within day daily system entry capacity (WDDSEC) • Eight responses to consultation; five in support, three against

5. Industry views - GCM 19 • Pros • Removal of discounts could increase auction revenue • Increase long term booking and improve network planning • Prevent cross subsidisation of short term Shippers by Shippers who book medium and long term capacity • Improves cost reflectivity • Cons • Could reduce market liquidity by reducing volume of short term capacity available to traders • Could further undue preference for Shippers at existing entry points • Implementation could increase regulatory uncertainty

6. UNC 284 • UNC 284 necessary to facilitate GCM 19 changes in UNC • Requires GCM 19 to be approved • Proposes to remove zero auction reserve price for WDDSEC • Removes references to zero reserve price in the UNC • Zero reserve price for daily interruptible capacity will still apply

7. Industry views - UNC 284 • Pros • Arguments similar to GCM 19 • Could encourage longer term capacity bookings • Better distribution of charges • Cons • Not consistent with zero price auction licence obligation • No profiling of impacts on different classes of Shipper • Effect on declining North Sea fields • Substitution, transfer and trade increased risk long term capacity not available

8. UNC 285 • UIOLI capacity released based on daily unutilised firm capacity • Available to Shippers with zero reserve price • UNC 285 limits UIOLI release to when no more than 10% of firm baseline entry capacity is unsold • Threshold calculated after monthly auction • No change to ability for NGG to release discretionary interruptible capacity

9. Industry views - UNC 285 • Pros • Incentivise purchase of long term capacity • Facilitate secondary market trading • Remove preference for users of existing capacity • Increase likelihood non-firm capacity interrupted • Cons • Risk interruptible capacity not released • Reduce attractiveness of UK market

10. “Proposal 3” • Proposal to reallocate on the day sales of baseline capacity as TO revenue • Removes these revenues from buy back incentive and capacity neutrality mechanism • IA contains high level assessment of likely impact against UNC objectives and Ofgem statutory duties

11. Ofgem view – GCM 19 • Promoting efficiency and avoiding undue preference • Current system exposes all shippers to the marginal costs of their actions • No undue preference implied by zero reserve price • Imposition of price barriers could hinder the efficient use of the system • Facilitate competition • No evidence GCM 19 would improve price predictability • But little effect on liquidity or competition either

12. Ofgem view – GCM 19 contd • Cost reflectivity • MC of providing short term capacity low • Reflective of costs of providing that capacity • Developments in transportation business • Proposal reacts to increasing commodity element of allowed revenues • But question whether it take other important developments into effect • Provisionally preferred approach is to veto GCM 19

13. Ofgem view – UNC 284 • Consequential modification • Required if GCM 19 implemented • Do not consider UNC 284 in its own right meets UNC relevant objectives • Provisional view is to veto UNC 284

14. Ofgem view – UNC 285 • Efficient and economic operation of NTS • Likelihood that no on the day capacity available due to UNC 285 is low • NGG still required to provide firm on the day zero reserve price capacity • Interruptible users do not impose costs on the system and contribute to system costs via commodity charge • Efficient discharge of licence obligations • Current interruptible price set through auctions – complies with EU regulations • Effective competition • Limited effect on secondary market trading • Overall limits amount of capacity available to market • Negative impact on short term liquidity • Provisional view is to veto UNC 285

15. Ofgem view – proposal 3 • Efficient discharge of licence obligations • Does not take account of allocation of TO/SO activities at price control • Would need further analysis • Securing effective competition • Decrease in TO commodity charge insignificant • Protecting consumers • Unlikely to have any effect as amount of TO allowed revenue will not change

16. Other issues • IA also considers: • Interaction of options to approve/veto combinations of proposals • Qualitative factors • None of these offer compelling reasons to change our view with respect to the proposals

17. Next steps • IA consultation finishes 22 July • GCM19 will come into effect if not vetoed prior to 1 August • Ofgem looking to issue a decision by 30 July • In view of timeline, early responses appreciated!