1. Review of NTS entry charge setting arrangements - IA 1 July 2010

2. 2 Background Concerns that revenue from entry capacity auctions declining TO commodity charge accounting for majority of TO allowed revenue –Level of TO commodity charge also volatile Review group established to investigate current charging arrangements –Aim to identify charging or UNC mods which maximise TO allowed revenue collected through auctions, maximise long term bookings and incentivise security of supply amongst others One charging mod and two UNC mods proposed by NGG as a result of review

3. 3 Main reasons for under recovery Price paid –Reserve price discounts Model changes –Transcost prices were generally lower than transportation model Amount of capacity –Shippers don’t book in line with Ten Year Statement at full reserve price

4. 4 GCM19 summary Removal of daily entry capacity reserve price discounts –33% reserve price discount for day ahead daily system entry capacity (DADSEC) –100% reserve price discount for within day daily system entry capacity (WDDSEC) Eight responses to consultation; five in support, three against

5. 5 Industry views - GCM 19 Pros –Removal of discounts could increase auction revenue –Increase long term booking and improve network planning –Prevent cross subsidisation of short term Shippers by Shippers who book medium and long term capacity –Improves cost reflectivity Cons –Could reduce market liquidity by reducing volume of short term capacity available to traders –Could further undue preference for Shippers at existing entry points –Implementation could increase regulatory uncertainty

6. 6 UNC 284 UNC 284 necessary to facilitate GCM 19 changes in UNC –Requires GCM 19 to be approved Proposes to remove zero auction reserve price for WDDSEC –Removes references to zero reserve price in the UNC Zero reserve price for daily interruptible capacity will still apply

7. 7 Industry views - UNC 284 Pros –Arguments similar to GCM 19 –Could encourage longer term capacity bookings –Better distribution of charges Cons –Not consistent with zero price auction licence obligation –No profiling of impacts on different classes of Shipper –Effect on declining North Sea fields –Substitution, transfer and trade increased risk long term capacity not available

8. 8 UNC 285 UIOLI capacity released based on daily unutilised firm capacity –Available to Shippers with zero reserve price UNC 285 limits UIOLI release to when no more than 10% of firm baseline entry capacity is unsold –Threshold calculated after monthly auction No change to ability for NGG to release discretionary interruptible capacity

9. 9 Industry views - UNC 285 Pros –Incentivise purchase of long term capacity –Facilitate secondary market trading –Remove preference for users of existing capacity –Increase likelihood non-firm capacity interrupted Cons –Risk interruptible capacity not released –Reduce attractiveness of UK market

10. 10 “Proposal 3” Proposal to reallocate on the day sales of baseline capacity as TO revenue –Removes these revenues from buy back incentive and capacity neutrality mechanism IA contains high level assessment of likely impact against UNC objectives and Ofgem statutory duties

11. 11 Ofgem view – GCM 19 Promoting efficiency and avoiding undue preference –Current system exposes all shippers to the marginal costs of their actions No undue preference implied by zero reserve price –Imposition of price barriers could hinder the efficient use of the system Facilitate competition –No evidence GCM 19 would improve price predictability –But little effect on liquidity or competition either

12. 12 Ofgem view – GCM 19 contd Cost reflectivity –MC of providing short term capacity low –Reflective of costs of providing that capacity Developments in transportation business –Proposal reacts to increasing commodity element of allowed revenues –But question whether it take other important developments into effect Provisionally preferred approach is to veto GCM 19

13. 13 Ofgem view – UNC 284 Consequential modification –Required if GCM 19 implemented Do not consider UNC 284 in its own right meets UNC relevant objectives Provisional view is to veto UNC 284

14. 14 Ofgem view – UNC 285 Efficient and economic operation of NTS –Likelihood that no on the day capacity available due to UNC 285 is low –NGG still required to provide firm on the day zero reserve price capacity –Interruptible users do not impose costs on the system and contribute to system costs via commodity charge Efficient discharge of licence obligations –Current interruptible price set through auctions – complies with EU regulations Effective competition –Limited effect on secondary market trading –Overall limits amount of capacity available to market –Negative impact on short term liquidity Provisional view is to veto UNC 285

15. 15 Ofgem view – proposal 3 Efficient discharge of licence obligations –Does not take account of allocation of TO/SO activities at price control Would need further analysis Securing effective competition –Decrease in TO commodity charge insignificant Protecting consumers –Unlikely to have any effect as amount of TO allowed revenue will not change

16. 16 Other issues IA also considers: –Interaction of options to approve/veto combinations of proposals –Qualitative factors None of these offer compelling reasons to change our view with respect to the proposals

17. 17 Next steps IA consultation finishes 22 July GCM19 will come into effect if not vetoed prior to 1 August Ofgem looking to issue a decision by 30 July In view of timeline, early responses appreciated!

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