Modification Proposal 0246: Quarterly NTS Entry Capacity User Commitment

1. Modification Proposal 0246: Quarterly NTS Entry Capacity User Commitment Chris Shanley

2. Modification Proposal 0246: Entry Capacity User Commitment – “The Concept” • Long Term Entry Capacity Car • Value - £1.3bn Value - £40,000 • Security - £? Deposit - £1000

3. Timeline • RG221 was established in September 2008 • Main questions: • Is the balance of investment risk right between existing and new shippers and National Grid NTS? • How do you mitigate the risk of “default”*. • Modification Proposal 0246 to the UNC Panel in March 2009. • Aim is to put new arrangements in place prior to the next Long Term Entry Capacity Auction (QSEC) • Ofgem Impact Assessment is highly likely. * “default” = payment for allocated capacity is not received at the time expected

4. Issues discussed by Review Group • Currently no security required at time of long term capacity auction. • Security called for 12 months prior to the start date of the entry capacity – potentially long after system investment made. • User currently able to defer capacity commitments 12 months prior to use and keep deferring without penalty. • Incremental Capacity auction allocations lead to fixed additional allowed revenue to National Grid. • If a User “defaults” = Allowed revenue shortfall is recovered through wider Transportation charges

5. Proposal – General terms agreed • Provision of security • To cover auction allocations – inc. past auctions • Amount of security – sufficient to deter speculative auction bidding • Aspiration for annual cost of security to be proportionate to the risk to the Shipper Community of a User Default • Security tools • Only Letter of Credit (LoC) or deposit allowed. • Default rules • Y2 to Y16 Entry Capacity at all ASEPs is withdrawn from User and User incurs cancellation fee equivalent to security provided by that User

6. Allocated Capacity Value (ACV) – Options considered

7. Entry Capacity Risk Assessment • ACV = Years Y2 to Y16 * [0.1] • Modification 0246 proposes that the ACV derived will be further reduced depending on the Users credit rating risk (between 30% and 100% of the ACV) • User Security Value (USV) = ACV * UCR + VAT • During legal drafting for Mod 0246 concerns have been raised by our Legal representatives • Charging a different cancellation fee when cancelling the same quantity of capacity, could be considered as unduly discriminatory • We propose to remove UCR • User Security Value (USV) = ACV + VAT

8. Barrier to Entry ‘vs’ Community Risk • Proposal seeks to strike a balance • LoC costs to cover aggregate USV estimated at around £4m per annum • Risk of a project or major User failure has been estimated at ~£20m per year – this figure is based on current levels of capacity holdings and not historic defaults • Views are sought on whether an appropriate balance has been met, i.e. should the 10% ACV figure be amended or not?

9. Security Tools and Operating Costs • For the purposes of long term entry capacity, only the following types of security shall apply: • “Deposit Deed” • “Letter of Credit” Note: Users with poor credit ratings may choose to use a deposit deed as a cheaper option

10. Security Required – Across Users

11. When should security be put in place? – Options Considered

12. Options - Pros and Cons • No consensus reached • Option One – 14 days before auction proposed within Mod 0246 • Option Three - Post auction favoured by some Review Group Members

13. QSEC – Bid Window Amendment • Issues identified with removing a Users bids prior to allocation (option 1) - potential effect on other bidders at multi user ASEPs • Current QSEC Bid window: • Opens at 08:00 and closes at 17:00. Bid Windows must be held between 1st Sept - 30th Sept. • Open for 10 consecutive Business Days (stability can be met from day 2 and auction closes early). • The bid window closes 17:00 and auction information is sent to Users by 20:00 on each day • Now proposing that we check the security after each bid window and remove any bids where the USV > security provided. • This will require us to amend the QSEC auction to have a day between each bid window and reduce the number of windows to 8.

14. Example of a User’s Security Value - 2008 QSEC ACV = Years Y2 to Y16 * [0.1]

15. Example of a User’s Security Value - 2009 QSEC ACV = Years Y2 to Y16 * [0.1]

16. Default Rules • Long term entry capacity “events of default” will be: • Security < USV • The security tool (LOC/Bank Deed) is about to expire (less than 28 days). • The User is Terminated (UNC Section V4) for other reasons under UNC.

17. Default Rules - process • User will be notified and given 10 business days to rectify (except where Termination is for other reasons under UNC). • If not rectified: • Invoice will be raised for the Secured amount (cancellation fee) • NG will call on the USV pending payment of the above invoice. • The User loses the right to acquire entry capacity • NG will re-call the User’s QSEC capacity at all entry points across all years (Y2 – Y16). • NG offer Capacity to trading party (UNC B5.4) • NG will resell the capacity in subsequent auctions