Review of the UNC Post-emergency Claims Arrangements Strawman February 2009

2 Background  Several proposals have been made to the UNC Emergency Arrangements in relation to industry concerns:  044 "Revised Emergency Cash-out & Curtailment Arrangements“ (ECQ)  061 "Facilitating further demand-side response in the event that a Gas Balancing Alert is triggered“ (GBA)  0149a “Gas Emergency Cashout Arrangements: Keeping the OCM open during a Gas Deficit Emergency (GDE)”  Ofgem’s 0149a decision letter advised it would welcome further proposals on:- attracting non-UKCS supplies into the UK, the introduction of dynamic pricing and, mitigating the effects of potentially spiralling prices  Mindful of concerns raised by the community and Ofgem during the progression of 149/149a  National Grid strawman drafted to consider pragmatic changes to the existing UNC Claims process  Note: proposed changes would have no effect on the role of the NEC nor shippers’ GSMR obligations

3 Objectives To facilitate and, recognise shippers which:  Put in place commercial arrangements prior to a GDE taking place  Provide additional supplies into the UK with a fair expectation that they will receive appropriate financial recompense where appropriate  Provide additional firm demand-side reduction prior to entering into, or during, a GDE Stage 3  Seek to address their imbalance To introduce:  Ring-fencing of the costs of providing additional supplies/reducing demand during a GDE  Dampened cost apportionment as a result of revised post-emergency claims arrangements  Market transparency (of costs and prices) through the use of OCM Physical Market Offers during a GDE

4 UNC Emergency Arrangements prevailing arrangements Emergency cashout prices  Users’ daily imbalances are cashed-out utilising the frozen prices (Stage 2) on the following basis; Short imbalance – shippers SMP Buy Long imbalance – shippers SAP Post-emergency Arrangements - claims  UNC section Q section states; Where a User (the "claimant") believes that it will suffer a financial loss by reason of being paid only the relevant price in respect of any gas delivered to the Total System on a Day during a Gas Deficit Emergency (at Stage 2 and higher) (but not in respect of a quantity of gas which exceeds the amount of the claimant's Daily Imbalance if any under paragraph 4.2.2(a)):”  The Claimant is required to submit a claim  Provide details regarding the basis for the claim  Claim (s) only relevant to gas over-delivered by that shipper during the GDE (daily balance)  National Grid will appoint an independent claims reviewer  The Claimant will make available information and cooperate with the claims reviewer  Recommendations of the independent claims agent will require oversight and subsequent approval by the Authority

5 UNC Emergency Arrangements potential changes Emergency cashout prices  No changes are proposed to the derivation of the emergency cashout prices (frozen at Stage 2) Post-emergency Arrangements - claims In addition to UNC section Q section 4.2.6: e.g. appointment of an individual claims agent:  In order to submit emergency claims, shippers will be required to have posted additional supplies and/or demand-side reduction (quantity and price) as offers to sell on the OCM physical market during the GDE  These physical offers might be taken as trades by shippers that are short – cleared through existing OCM rules and therefore would not be eligible for progression through the revised claims arrangements  Any offers remaining on the OCM at the end of each Gas Day of the GDE can be submitted as potential claims – however, only the quantity of gas over-delivered by that shipper (for each Gas Day) for the duration of the GDE (daily balance) can be claimed  The costs of the Σ claims will be targeted against shippers that have a short imbalance position; based on the weighted average price (p/kWh) of all valid emergency claims multiplied by the shipper’s short imbalance quantity (kWh)  Any under-over recovery of emergency claims costs will be smeared across all shippers through Balancing Neutrality

6 Overview of process Emergency cashout (Daily imbalance) SMP Buy SAP Prices GDE Stage 2 Daily emergency cashout and emergency claims process following a GDE (Stage 2+) Emergency Claims (1) cost targeting (Short imbalance) “Emergency Claims Neutrality Charge” (wapoec * imbalance qty) Emergency Claims (2) under/over recovery of costs If any under/over- recovery of emergency claims cost from previous step then residue is apportioned through Neutrality No UNC changes are proposed Proposed UNC changes to post emergency claims arrangements Valid OCM physical offers (not taken as trades)

7 Business rules – overview (1) During a GDE (Stages 1 – 4):  a shipper must place the quantity and price that it might wish to claim (additional supply and/or demand-side reduction) on the OCM as a physical offer  the offer must remain on the OCM (unless the offer is accepted as a trade) for the Gas Day(s) declared as a GDE  APX to display ‘weighted average price’ of OCM Physical Offers as a real-time value during GDE  APX to provide National Grid with details of all offers outstanding for each Gas Day of the GDE Emergency claims submission:  the claim must have been registered (and remain) as a physical offer on the OCM until it is time-expired for the Gas Day(s) of the GDE  the claimant shipper must have an allocated ‘long’ daily imbalance position and its UDQI > UDQO  the emergency claim cannot exceed the quantity of the shipper’s daily imbalance quantity (physical or commercial?)  the shipper must submit the claim within a specified period GDE +[14] Days  all claims will be cleared through the existing emergency arrangements and within [x] months of a GDE

8 Business rules – overview (2) Emergency Claims/Neutrality process:  National Grid will appoint an independent claims agent (existing UNC)  All valid emergency claims will be paid through these arrangements (existing UNC)  A weighted average price based on valid emergency claims (for each Gas Day of a GDE) will be derived  A ‘short imbalance’ shipper will incur an ‘emergency claims cost charge’ = imbalance quantity * weighted average price of emergency claims  Any under- or over- recovery of the total cost of the emergency claims will be apportioned through the Balancing Neutrality charges

9 Advantages The emergency cashout price (s) remain unchanged u Addresses several concerns raised during the progression of 149/149a  Provides non-UKCS shippers with greater confidence they will receive payment for additional supplies of gas  Enhances the existing incentives for a shipper to address its short imbalance position  Utilising the OCM physical market in this manner facilitates the transparency of the prices and costs of gas during an emergency and allows shippers to estimate their commercial exposure  Ring-fences the costs of the emergency and extends the period over which the costs of the emergency are invoiced  Does not require any material changes to the NEC Safety Case nor, impinge on shippers’ obligations to comply with their safety obligations / NEC instructions

10 Disadvantages  Cost targeting of emergency claims against those shippers with a short imbalance following a GDE might be viewed as inappropriate to the extent that a shipper has the ability to mitigate its risk  Utilisation of the OCM physical market during an emergency in this manner might be construed as discriminatory by certain Users e.g. those without physical capability  Delayed timescales for cost recovery (through Claims process) might continue to deter non-UKCS shippers from committing additional supplies to the UK during a GDE

11 Suggested timetable  Discuss/develop strawman at Transmission Workstream (Feb-April 2009)  Send draft proposal to UNC Mod Panel (May 2009) … recommend to consultation  Final Mod Report [June/July] 2009 / Mod Panel  Ofgem decision August 2009  Implementation 1 st October 2009