Optimisation of Entry Capacity Modification Proposal

1. Optimisation of Entry Capacity Modification Proposal Transmission Workstream 7th September

2. Optimisation of Entry Capacity • Why is this required? • Under the current regime we are obliged to release up to baseline levels at all ASEPs until a clearing allocation has been held. • This can create a scenario where capacity is effectively sterilised • 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. • 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 • The Modification Proposal looks to address these issues

3. Optimisation Proposal • The proposal looks to provide a non-discriminatory process that allows the optimisation of capacity between ASEPs, within a zone, in the constrained period • If one ASEP has demand in excess of supply then ‘spare’ capacity from another ASEP can be transferred • By transferring capacity rather than simply releasing non-obligated it is possible to reduce the cost of purchasing capacity at the ASEP. • The transfer of capacity will allow the optimisation of entry capacity within a zone until constraint costs are forecast to occur.

4. Optimisation of Entry capacity – Key Features • The process for optimisation of entry capacity can be broken down into 7 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 • Identification of capacity available to transfer • This establishes the amount of capacity available to transfer within a zone • Nodal Maxima • This establishes the maximum level of capacity that can be transferred to the Recipient ASEP before it will start to generate costs through the management of subsequent constraints. • Annual Monthly Transferable System Entry Capacity Auction • This allows the User to bid for capacity which, if successful, will be transferred from a Donor ASEP. • Allocation methodology • This establishes how the capacity is allocated between competing recipient ASEPs and competing Users. • Capacity Transfer • This establishes, in the event of there being more than one possible Donor ASEP, which Donor ASEP the capacity is transferred from

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 be established after the AMSEC auction.

6. Identification of Donor ASEPs • Identification of Donor ASEPs • ASEPs within the same zone • 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. • This would make it possible that more than one ASEP could transfer capacity to the recipient ASEP. • The zones have been determined by establishing that there is a 1:1 physical interaction between the Donor and Recipient ASEP • Our PCR submission for Nodal baselines has established a basis for the zones within the Network.

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 Donor ASEP(s), within the same zone as the Recipient ASEP, would be available for transfer.

8. Nodal Maxima • This establishes the maximum level of capacity that can be transferred to the Recipient ASEP prior to generating the risk of constraints. • This will be calculated after the AMSEC auction has completed. • A Nodal Maxima will be established for each month that a Recipient ASEP has sold out.

9. AMTSEC auction • An Annual Monthly Transferable System Entry Capacity auction (AMTSEC) will be held for each recipient ASEPs and for each month that the Recipient ASEP has sold out. • Auction rules would be similar to existing AMSEC • Pay as bid • Applications would be for [April] to [March] • The invitation would include:- • The [1] date on which the auction would be held • The transfer zones • The recipient ASEP(s), and for each Recipient ASEP; • The reserve price • The months for which capacity can be applied for • The available capacity based on the nodal maxima / available transferable capacity • The Donor ASEP(s), and for each Donor ASEP; • The amount of unsold capacity available to transfer • Valid bids would identify level of demand for transferable capacity.

10. Allocation methodology • The available capacity will be allocated on a price basis, with the highest priced bid allocated first. • In the event there is more than one Recipient ASEP in a zone competing for capacity; • then all valid bids from all the Recipient ASEPs will be considered together with the highest priced bid allocated first.

11. Allocation example

12. Transfer of Capacity • Once the allocation has been completed the baseline at the Donor ASEP will be deemed sold to reflect the additional capacity sold at the Recipient ASEP. • This will be done on a 1:1 basis • For every unit sold at the Recipient ASEP 1 unit will be deemed sold from the Donor ASEPs baseline. • In the event that there is more than one Donor ASEP where the capacity can be transferred from then the Donor ASEP with the lowest reserve price will have the capacity transferred first.

13. Treatment of revenues • All revenues generated from the sale of capacity in the AMTSEC auction will be treated in the same manner as for AMSEC auctions.

14. Timetable • Raise UNC Modification Proposal • Submit to September Mod Panel • 1St December implementation date

15. Preferred Timetable Nov 06 LTSEC Allocation confirmed Dec 06 Issue Invitation letter for AMSEC Jan 07 Hold AMSEC auction Feb 07 Establish Nodal Maxima Issue invitation letter for AMTSEC Mar 07 Hold AMTSEC auction Complete allocation process Publish allocations Apr 07 – Mar 08 Capacity transfer effective

16. Alternative Timetable • If Mod Proposal implemented later than December 06 Feb 06 AMSEC held M+2 AMTSEC held Complete allocation process Publish allocations M+3 – Mar 08 Capacity Transfer effective for remaining relevant months in capacity year 07/08