Optimisation of Entry Capacity Strawman

1. Optimisation of Entry Capacity Strawman Transmission Workstream 4th May 2006

2. Current Arrangements • Under the current regime we are obliged to release up to baseline levels at all ASEPs until a clearing allocation has been held. • In the last AMSEC auction we had some ASEPs that had sold out and were oversubscribed whilst others had unsold capacity. • We can release non-obligated capacity • If the revenue generated from releasing this capacity is not exceeded by the forecast costs associated with the release i.e. entry constraints and buy backs. • Historically we have only released non-obligated capacity in the constrained period close to the gas day.

3. Issues • This can create a scenario where capacity is effectively sterilised • In the event that we did look to release non-obligated capacity at more than one ASEP we do not have a non discriminatory process by which it could be achieved • These proposals look to address these issues

4. Optimisation of Entry capacity – Key Features The process for optimisation of entry capacity can be broken down into 5 key areas;- • Identification of recipient ASEPs • This establishes which ASEPs require additional capacity • Identification of donor ASEPs • This establishes which ASEPs have capacity available for transfer • Identify demand for transferable capacity • This identifies the amount of capacity required at the recipient ASEP • Exchange Rate • This establishes the cost of transferring capacity between from the donor ASEP(s) to the recipient ASEP(s) and therefore indicates the value required to successfully bid for capacity. • Allocation methodology • This establishes how the capacity is allocated between competing recipient ASEPs and competing Users.

5. Identification of recipient ASEPs • Identification of recipient ASEPs • It is proposed that ASEPs which have demand for capacity in excess of baseline levels would become the ‘recipient ASEPs’ • This would take place after the AMSEC auction and would look at the period April to March

6. Identification of Donor ASEPs - Options • All ASEPs • This would make every ASEP with unsold capacity or with capacity being offered back to National Grid a donor ASEP. • ASEPs within local vicinity • This would identify only ASEPs in the same geographical area as the donor ASEP(s) • Donor ASEPs will have a physical interaction with recipient ASEP. • Lowest cost ASEP • This would identify only one ASEP as the donor and would be based on the cheapest capacity available to transfer to the recipient ASEP • In the event that this donor ASEP didn’t have enough capacity to meet demand then the next lowest cost ASEP would then be selected.

7. Transferable Capacity The proposals for identifying capacity available for transfer are as follows:- • Unsold Capacity • After completion of the AMSEC auction any unsold capacity at the donor ASEP(s) would be available for transfer. • Sold Capacity • After completion of the AMSEC auction we could hold a tender at the donor ASEP to buy back firm capacity and if a User wished to sell then this capacity would become available for transfer

8. Identify demand for transferable capacity • This would be done by holding an AMTSEC auction for the identified recipient ASEPs. • Auction rules would be similar to existing AMSEC • Pay as bid • Applications could be for [April] to [March] • The invitation could include:- • The [1] date on which the auction would be held • The reserve price for the recipient ASEP(s) • The recipient ASEP(s) • Indicative exchange rate • Valid bids would identify level of demand for transferable capacity at the recipient ASEPs.

9. Exchange Rates • There is a requirement to establish the value of the transferable capacity, this accounts for; • the expected change in supply profile • the buy back risk of transferring the capacity between ASEPs. • The exchange rate sets the value of transferring the capacity between the donor ASEP and the recipient ASEP.

10. Allocation methodology • The basis of the allocation process is to maximise the release of the transferable capacity. This is achieved by; • Assessing the cost of transferring the capacity from the donor ASEP (through the exchange rate) • Assessing the value of the bids for the transferable capacity at the recipient ASEP (through the AMTSEC auction) • Allocate capacity until the cost of transferring the capacity exceeds the value of the bids for the capacity • This is relatively straight forward if there is one donor ASEP and one recipient ASEP. • High degree of complexity when there are multiple donor and recipient ASEPs

11. Treatment of costs and revenues It is proposed that the costs and revenues would be managed through the existing incentive mechanism • The revenues generated by the sale of the capacity are based on the forecast cost of transferring capacity • Impact on Users through neutrality and impact on incentive should be minimal

12. Commercial Framework • The following amendments have been identified as being required to facilitate the process • UNC • Amendments to facilitate ‘new’ AMTSEC auction and allocation process • Amendment to move current AMSEC auction • Licence • Amendment to change the obligation to release baselines and/or clearing allocation

13. Timetable (option 1- post AMSEC) Nov LTSEC Allocation confirmed Issue Invitation letter for AMSEC Dec Hold AMSEC auction Identify recipient ASEP(s) Identify donor ASEP(s) Issue invitation letter for AMTSEC Issue buy back tender for donor ASEP(s) Jan Hold AMTSEC auction Feb – Mar Complete allocation process Mar Confirm allocations (including successful buy back tender) Apr – Mar Capacity transfer effective

14. Timetable (option 2 – pre AMSEC) AMSEC auction completed Identify recipient ASEP(s) Identify donor ASEP(s) Nov Issue invitation letter for AMTSEC Issue buy back tender for donor ASEP(s) Dec Hold AMTSEC auction Dec – Feb Complete allocation process Feb Confirm allocations (including successful buy back tender) Apr – Mar Capacity transfer effective

15. Timetable • NG to consider bringing forward a draft UNC proposal to June Workstream • Submit Mod Proposal to July Mod Panel