Proposal to Enhance Energy Balancing Security Process

1. Energy Balancing Credit Proposal MOD 315To Enhance Section X of the UNC Transportation Principal Document to improve the Energy Balancing Further Security Process UNC Panel Meeting 21st October 2010 Loraine O'Shaughnessy

2. Background • Following failure of Lehman’s and unprecedented economic factors in financial markets EBCC carried out review of the UNC section X and the Energy Balancing Credit Rules. • This Proposal is one of several modification requirements that were identified: • Implemented : • 0234 - To Correct Drafting Inconsistencies between Sections X and V of the UNC in Respect of User Default and Termination • 0235 - Recovery of Debt and Smearing of Revenues via Energy Balancing Neutrality • In progress: • 0233V - Changes to Outstanding Energy Balancing Indebtedness Calculation: working with EBCC to develop alternative proposal • 0315 - To Enhance Section X of the UNC Transportation Principal Document to improve the Energy Balancing Further Security Process : Panel recommendation 21st Oct

3. Proposal • The aim of this proposal is to enhance the Further Security Process to minimise the potential risk to the community where Users have insufficient Security in place for their Energy Balancing Activities. It aims to:- • Extend the provisions under Section X2.10 to make provision for the utilised value (Cash Call Limit) of the User’s existing Security held to be scaled back by a percentage. (initially proposed to be 20% ) note that it is proposed that EBCC will review this % on a regular basis • It is further proposed that the provisions of Section X2.4 and X2.2 be amended to provide for the relationship between the User’s Cash Call Limit and Secured Credit Limit to be revised to facilitate such scale back. • To act as an adequate Incentive for Users to maintain the correct level of Security to accommodate the level of their Energy Balancing Activities and provides additional protection to all members of the Community of bearing the costs of any mutualised debt.

4. Drivers • Following failure of Lehman’s and the unprecedented financial climate change. The total number of Further Security Requests rose quite significantly in 2008 bringing more into the spotlight Users who had insufficient Security in place. • Proposal aims to minimise the potential risk of avoidable financial exposure to other Users who have sufficient Security in place.

5. Benefits • Minimises financial exposure of mutualised debt to Community. • Incentivises Users to ensure adequate Security is in place to accommodate their Energy Balancing Activities. • Opens lines of communication to the Energy Balancing Credit Committee earlier. • Maintains Users confidence that risk of default is being managed effectively.

6. Evidence to support the Materiality of the Issues and Questions raised at the UNC Modification Panel on 16th September 2010. • How often does a Further Security Request happen? • What Values are involved? • What is the overall risk? This is difficult to quantify. The values detailed in the following slides represent the behaviour experienced by a small User however it highlights the risk that a large User could operate in the same way. This in mind the financial risk could be significant e.g. Communities exposure to Lehman’s debt > £5m a day. • There appears to be no value placed on a new entrant to the market?

7. How often does it Happen – Analysis 2008

8. How Often does it happen? – Analysis 2009

9. How often does it happen? – Analysis 2010

10. What Values are involved? • Analysis 2008 - Financial value highlights the potential risk to Community and is the main driver to the Mod - significant increase in Further Security Requests issued. £11,533,000.00 • Analysis 2009 - Although financial figure significantly reduced, highlights during Winter months an increase in Further Security Requests issued.£ 420,000.00 • Analysis 2010 – Demonstrates financial figure has already significantly rose from 2009 and approaching the winter period which will only increase risk to Community further. £ 563,000.00

11. What is the overall risk? • The overall risk to the Community would be reduced if Users had adequate Security in place to accommodate their Energy Balancing Activities. • The risk to an individual User receiving Further Security Requests increases if:- • Users do not balance daily. • If Users do not react proactively following repeated Cash Calls and Further Security Requests. • If Users have insufficient Security in place to accommodate Energy Balancing Activities. • This proposal would only come into force if the user has failed to react appropriately in the aforementioned circumstances • Mod aims to address:- • Repeated behaviours of Users using the Further Security Request process as a means to putting in Security • Financial risk to the Shipping Community.

12. There appears to be no value placed on a new entrant to the market? • Users who enter the Market must have Security in place to meet their Energy Balancing Activities. Therefore, the Mod would not cause any barrier to entry as it is currently a requirement and has not changed. • Security requirements for new users: - is based on 3 days non-deliverability at 12 months average SAP price to give a figure which represents 85% of the Secured Credit limit – based on an estimate of projected annual throughput. • Security for existing Users:- is based on 75% utilisation of peak indebtedness over last months to give a figure which represents 85% of the Secured Credit limit. • In any event:- Users will be required to maintain a minimum level of security at all times which is currently set at £10,000.

13. Next Steps • Review Energy Balancing Credit Rules with revisions to support Mod. • Issue proposal to go to consultation.