Entry Capacity Transfer and Trade

1. Entry Capacity Transfer and Trade Bogdan Kowalewicz Senior Manager, Gas Transmission Policy 30 October 2007

2. Introduction • TPCR Final Proposals settlement included new obligations on capacity • Transfer • Trade • Substitution • June 2007 Open letters clarified the new obligations agreed in TPCR • Interim arrangements for capacity trade and transfer were put in place to enable capacity transfer for this winter • Key objective: better utilisation of existing network assets through reducing the level of sterilised capacity on the network

3. TTSEC Auction • Two rounds of auction held on 27 September and 10 October • Capacity traded for November 2007 – March 2008 • Good participation in the auction with sold and unsold capacity being moved to where it is valued most

4. Interim arrangements for this winter • Additional capacity sold to where shippers value it most • Increase in Aggregate Capacity Holdings after TTSEC • November 2007 62 GWh/day • December 2007 134 GWh/day • ‘Within Zone’ Allocation in Northern Zone • Reallocation of capacity to where valued most without capacity loss • Better utilisation of existing network assets (i.e. reduction in sterilised capacity) Good progress has been made, but

5. Considerable scope for improvement … • Ofgem outlined a number of concerns in its decision letter on the capacity transfer and trade methodology • Shippers outlined a number of concerns in their responses to the NGG capacity transfer and trade methodology consultation • Lessons to be learned from initial TTSEC auctions and interim process

6. Ofgem decision letter on the Entry capacity transfer and trade methodology (6 September 2007) • Methodology assessed against objectives set out in the licence • Ensuring that trade and transfer is effected in a manner which makes best use of existing network • Avoiding material increases in costs (including constraint management costs) • Facilitating effective competition • We expect to issue a direction requiring NGG to review the entry capacity transfer methodology and to use all reasonable endeavours to have in force by 2 June 2008 an approved methodology statement which has been subjected to this review

7. Way forward: enduring arrangements (1) • Transparency • Sterilised Capacity • Capacity Degradation

8. Way forward: enduring arrangements (2) • Greater transparency in determination of NAMs, ZAMs ACfAs, and interzonal exchange rates; • Need for greater transparency with respect to underlying assumptions and data used; • Provision of a rationale for the choice of data; • Provision of a rationale for the 150% cap rule; • Provision of a rationale for the definition of zones; • Desirability of an audit to review how effective the arrangements have been for this winter and what improvements should be made in the light of this experience.

9. Entry capacity arrangements for this winter • Ofgem 19 June 2007 Open letter on the development of the regime ahead of winter 2007/08: • NGG has a range of tools at its disposal to release capacity in response to changing shipper demand (eg sale of additional firm and interruptible capacity, forward or option contracts to buyback capacity, etc.) • We will monitor NGG to ensure that they act in accordance with their duties and obligations • We will investigate where there are reasons for concern and take enforcement action where necessary • We will be asking NGG to present a monthly update on capacity outlook and actions NGG has taken to maximise available capacity to shippers through the appropriate forums • We have asked NGG to provide Ofgem with weekly updates on capacity released to market