Update on Exit Capacity Substitution and Revision

1. Update on Exit Capacity Substitution and Revision Distribution Workstream 28 October 2010

2. Background • Licence Obligation • to “substitute unsold NTS baseline exit flat capacity between NTS exit points.…..such that the level of NTS obligated incremental exit flat capacity is minimised”; and • to “revise the level of NTS baseline exit flat capacity …… in the event that the release of incremental obligated entry capacity changes the availability of NTS exit capacity” • 4 industry workshops held, then • Informal consultation from 30th June to 6th August • Workshop 5 held in September • All workshop and consultation material can be found on our website at: http://www.nationalgrid.com/uk/Gas/Charges/statements/transportation/ExCapSubMS/ • Preference for a simple, transparent methodology. • General agreement on approach, but a few issues remain.

3. Issues – Substitution prior to Investment Lead-time. • Capacity may be released via ad-hoc and ARCA applications as early as M+7. • If these applications require release of incremental capacity they are likely to be rejected unless they can be satisfied through substitution. • National Grid NTS is considering whether substitution should apply to all enduring capacity applications or whether it should apply only to those with a release date of 1st October Y+4. • Advantage of Y+4 rule • Reduces risk to Users at donor exit points by limiting the time of reduced capacity at an exit point between substitution and recovery of baseline. • Disadvantage of Y+4 rule • May lead to some short-term capacity applications being rejected. Applicant will be reliant on off-peak capacity or project may be delayed. • This specific issue will be raised and put to the industry within the formal consultation on the proposed methodology.

4. Issues • Interconnectors • Some support for excluding interconnectors from substitution - impact of developing EU regulations and concerns over security of supply • Alternative view is that all offtakes should be treated equally, no discrimination and special arrangements should be avoided unless to comply with specific known legislation • Methodology to propose no special treatment for Interconnectors • Partial Substitution • Partial substitution leads to partial investment requiring a partial revenue driver • Consultation on generic revenue drivers to be issued by Ofgem shortly • Methodology to propose partial substitutions with a caveat to exclude partial substitutionif generic revenue driver is not agreed • Exchange Rate Collars • Industry opposed to collar - concerns a collar would reduce efficiency and transparency by increasing “spare” capacity • National Grid’s concern is whether there is sufficient time to undertake the necessary analysis work for substitution - applying a collar simplifies the process significantly. • Methodology to propose no collar

5. Indicative Timeline. 04/04/11 Submit ExCS for Approval 14 days after consultation and no later than 4th Jan 2011 7th SeptWorkshop 5 7th AprWorkshop 3 25th MayWorkshop 4 Consultation results 30th June to 6th Aug Informal consultation Approval or veto of proposed ExCS 5th Nov to 3rd DecFormal consultation Ofgem processes; including impact assessment