Transitional Exit Capacity Proposals -Update

1. Transitional Exit Capacity Proposals-Update Transmission Workstream, 1 Dec Nov 05

2. Update on NG transitional proposals • UNC Mod 0046 • With Ofgem for decision • IExCR, ARCA, SC4B • 25th August Consultations on IExCR, SC4B • 9th September Consultation on DN and DC ARCAs • 22nd Sept Consultations closed • 25th Nov Final proposals issued on SC4B Re-consultation on IExCR • Early Dec Re-consultation on DN and DC ARCA anticipated

3. IExCR • Require to amend IExCR to accommodate release of incremental exit capacity for use over 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 disputes

5. Definition of incremental exit capacity • Respondents considered there was uncertainty as to exactly what constituted incremental exit capacity • Ofgem have 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 NTS investment costs • We will therefore need to offer ARCAs that would provide a financial commitment of 100% of investment costs specific to a connection • Costs would exclude any reinforcement work that is expected to benefit other Users • Commitment to be met over “n” years, where • n = ARCA Commitment / Annual expected exit capacity revenue

8. ARCA commitment • ARCA commitment met if, over “n” years, • booked NTS exit capacity at level greater than or equal to reserved capacity each year; and/or • actual exit capacity revenue greater than or equal to the ARCA commitment • ARCA commitment reduced if any “unused” reserved capacity utilised by another User

9. ARCA commitment - Example • Reserved capacity • 100 GWh/d • 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. Scenario 1. Not booked reserved capacity, no price change NG would reduce liability if another user utilising “spare capacity” by additional revenue received

11. Scenario 2. Not booked reserved capacity, price increase

12. Scenario 3. Not booked reserved capacity, price decrease NG would reduce liability if another user utilising “spare capacity” by additional revenue received

13. ARCA Dispute • Clarified in IExCR that if connectee not prepared to commit to terms and conditions of the ARCA offered by National Grid then it can be referred to the Authority for their determination under Gas Act

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