1. Initial Thoughts on the Release of Non Obligated NTS System Entry Capacity Transmission Workstream 3 rd April 2008

2. Background (1)  Concept of releasing strips of Non Obligated NTS System Entry Capacity first raised November 2007.  Discussions with the Industry reached consensus to postpone until such time as could be considered in more depth.  National Grid NTS have now been asked to revisit and bring ideas forward to April 08 Transmission Workstream with a view to introduce a new product in time for Winter 08/09.  The timeframes involved rule out the introduction of new system functionality, any solution will be based on manual processes utilising existing functionality where possible.  In light of timeframes available we are providing 3 options to form the basis of the discussion.

3. Background (2)  Some Shippers want monthly blocks released ahead of the winter.  Some Shippers want sub monthly released close to the time of usage.  Both groups would like Firm System Entry Capacity or as a minimum an incentive on National Grid NTS to not interrupt the capacity i.e. some degree of buy-back.  The above products are very different in terms of the complexity involved in developing them through to implementation.

4. Background (3)  To satisfy either product request National Grid NTS believe a mechanism to release non-obligated system entry capacity outside of the existing auction processes is needed.  National Grid NTS have chosen to focus on the longer term product as:  National Grid NTS have seen a clear demand for the product;  Ability to potentially implement ahead of this winter;  National Grid NTS believe that due to a number of new investments it may be possible to release additional non-obligated capacity this year.  We have put together 3 initial options for discussion at April 08 Transmission Workstream.

5. Option A – Ad-hoc Release of Non Obligated System Entry Capacity  Ad-hoc Auction Process - National Grid NTS creates new auction to release Firm System Entry Capacity ahead of the winter.  Sold in 1m blocks, more than one month in advance and less than a year ahead.  Quantity made available to be based on a risk assessment at those ASEPs where there was unsatisfied demand at the AMSEC auction.  May require less complex enabling UNC modification.  Potentially minimal system intervention required (expected to be held off-line).  Will be taken into account in the calculation of Trade and Transfer exchange rates (once the capacity has been sold it becomes Obligated Firm System Entry Capacity).  Price paid for the capacity to be equal to or greater than the corresponding MSEC Reserve Price – otherwise there may be significant charging implications.

6. Option B - Ad-hoc Release of Non-Obligated System Entry Capacity with Buy-Back  Ad-hoc Auction Process.  Sold in 1m blocks, more than one month in advance and less than a year ahead.  May require less complex enabling UNC modification.  Potentially minimal system intervention required (expected to be held off-line).  Associated buy-back e.g. 1 day of capacity to have 1 day of corresponding buy-back.  Not taken account of in calculation of Trade and Transfer exchange rates.  Price paid for the capacity to be equal to or greater than the corresponding MSEC Reserve Price – otherwise there may be significant charging implications.

7. Option C - Scheduled Release of Non-obligated System Entry Capacity with Buy-Back  Ongoing Auction Process.  System Entry Capacity Released twice per annum [August & March].  Sold in 1m blocks.  Would require detailed UNC modification proposal.  Associated System Entry Capacity Buy-Back e.g. 1 day of capacity to have 1 day of corresponding Buy-Back.  Not taken account of in calculation of Trade and Transfer exchange rates.  Price paid for System Entry Capacity to be equal to or greater than the corresponding MSEC Reserve Price – otherwise significant charging implications.

8. General Issues  There are a number of issues that will need to be resolved:  Can any of the options be achieved for this year (08/09)?  Do these options have any real value thereafter 2009+?  How would auction interact with Trade and Transfer.  System Requirements  Unable to incorporate into Gemini release pre winter 08/09  How would ad-hoc processes be initiated?  Criteria for determining which ASEPs would participate in these auctions.  What quantities should be released as part of a scheduled or ad hoc release?

9. Specific issues for System Entry Capacity with associated Buy-Back (1)  Product Classification  Neither Firm nor Interruptible System Entry Capacity  Will need to be included in the SMPS  Assumption being that any associated Buy-Back would be utilised after Interruptible Capacity had been scaled  Revenues/Costs  Impact upon National Grid NTS Entry Capacity Buy-Back incentive  Impact upon existing mechanisms  Use It Or Lose It  Discretionary Interruptible  Overrun Price  Neutrality

10. Specific issues for System Entry Capacity with associated Buy-Back (2)  Accrued Rights;  Can Capacity be traded?  May undermine the development of the Secondary Market;  Need to assess charging implications;  How would Shippers value the System Entry Capacity as the Trade and Transfer process will move “Firm” System Entry Capacity over and above this release of capacity.

11. Summary AdvantagesDisadvantages Option A  Potential for additional revenue to be passed to Shippers  Less complex to implement i.e. minimal system set up costs  Firm Product  Will impact upon the Trade and Transfer process  Potentially less Entry Capacity available than in options B and C Option B  Potential for additional revenue to be passed to Shippers  Impact upon Trade and Transfer process is minimised  Increased Entry Capacity may be made available  Not linked to Trade and Transfer process, increased likelihood of Buy-Back being called  Significantly more complex than Option A, as it is a new product Option C  Potential for additional revenue to be passed to Shippers  Impact upon Trade and Transfer process is minimised  Increased Entry Capacity may be made available  More formal and codified process  Not linked to Trade and Transfer process, increased likelihood of Buy-Back being called  More complex than Option B  Embeds an additional process into an already congested schedule  Systems need to be developed to support on-going process

12. Way Forward  Request Industry view on all 3 options  Views on any alternative approaches