Capacity Methodology Statements: Impact of Mod 452 Tx Workgroup Meeting 1st August 2013

Background The NTS Gas Transporter Licence sets obligations on National Grid to produce seven statements setting out various capacity methodologies. We have amalgamated some obligations, such that we have five statements: ExCR: Exit Capacity Release ECR: Entry Capacity Release ExCS: Exit Capacity Substitution and Exit Baseline Revision ECS: Entry Capacity Substitution T&T: Entry Capacity Transfer and Entry Capacity Trade We are seeking to keep the Mod 0452 Methodology Statement changes minimal.

Entry and Exit Capacity Substitution We are not proposing to change any of the fundamental rules of the substitution processes. The process for substitution analysis (i.e. network analysis) is not affected by the changes proposed in Mod 452. But there are four key areas of change to the substitution processes being considered.

Entry and Exit Capacity Substitution: Specific Changes Substitutable Capacity will be redefined to exclude capacity reserved (at the time of the analysis) pursuant to a PARCA. References to ARCAs will be retained on a Transitional basis. Capacity can be reserved from a donor point for substitution to a recipient. Substitution proposals are subject to non-veto by the Authority Proposals currently submitted to the Authority at allocation. To provide certainty to planning processes, substitution proposals for PARCA’s need to be submitted to the Authority earlier, i.e. prior to reservation.

Exit and Entry Capacity Release Principles No new PCA and ARCA contracts will be agreed and will be replaced with PARCAs. Introducing the concept of capacity “reservation”. Incremental capacity will not normally be released through existing processes (QSEC / July Window). Substitution will be possible. Changes will align to the proposed PARCA process e.g. Application of the NPV test for incremental entry release at the reservation and allocation stages.

Exit Capacity Release: Summary of Changes The ExCR identifies three ways to obtain Enduring Annual NTS Exit (Flat) Capacity PARCA Process Annual Window Ad-Hoc Process Removal of most references to PCAs and ARCAs. Existing agreements continue in effect. Annual Window and Ad-hoc Application largely unaltered Revenue Drivers only needed for PARCA applications must be agreed and published before progressing to Phase 2. Inclusion of new NTS Exit Points in the Licence Currently considering whether this could be changed to an external document so as to take this step out of the critical path.

Exit Capacity Release: PARCA Process Inclusion of references to PARCAs. Definition, consistent with Mod proposal Clarification that only with a PARCA will there be certainty of incremental capacity release. High level description of what a PARCA is, how it is funded, and the rights and obligations created under one, e.g. National Grid will reserve and allocate capacity National Grid will identify capacity substitution opportunities National Grid will publish information on agreed PARCA in advance of (and after) reserving capacity. Capacity may be reserved from a donor Exit Point pending substitution, (subject to non-veto by the Authority).

Exit Capacity Release: Summary of Changes Annual and Ad-hoc applications Will be accepted where the application can be satisfied through (or in combination): Unsold Capacity (including Substitution) Non-obligated capacity. Therefore can only be used where a Revenue Driver is not required.

Exit Capacity Release: Summary of Changes User Commitment associated to formal capacity booking Does not apply to reserved capacity Does not apply to Reservation Parties, Is based on the indicative price at the time of allocation (not reservation). Default lead time 24 months from the next 1st October after allocation. Applies to all enduring annual allocation processes although in practice only PARCAs lead to incremental release. Removal of references to the Permit scheme. Other potential change: New chapter on Long Term Non Firm Capacity.

Entry Capacity Release: Summary of Changes The ECR identifies the PARCA as the only way to guarantee the release of Firm Entry Capacity in excess of the prevailing Obligated Entry Capacity level. Entry and Exit PARCAs follow the same principles. Capacity is reserved for later allocation (including from donor ASEPs) March QSEC Auction process is largely unchanged Bids will be accepted where they can be satisfied through (or in combination): Unsold capacity (including substitution) Non-obligated capacity. Removal of references to the ad-hoc QSEC auction Other entry capacity auctions: no change.

Entry Capacity Release: Specific Changes Removal of most references to PCAs and ARCAs. Existing agreements continue in effect. Inclusion of references to PARCAs. As described for ExCR Inclusion of ASEP in Licence As for ExCR, we are currently considering whether this could be changed to an external document. Revenue Drivers only needed for PARCA applications and must be agreed and published before progressing to Phase 2. Other potential change: New chapter on Long Term Non Firm Capacity.

Entry Capacity Release: Specific Changes User Commitment / NPV Test The NPV test will be carried out at the time of capacity reservation based on the User’s / Reservation Party’s capacity profile and current prices (these prices are indicative). For National Grid to proceed to the Phase 2 PARCA Works; either The test must be passed if capacity above available unsold is required If NPV test is not required then capacity must be requested for at least 16 of 32 quarters. The NPV test will be repeated using the latest (actual) price at the time of allocation. The [Nominated] User may be able to revise their bid profile (but not the incremental quantity) to ensure the test is passed. Default lead time 24 months from the next 1st October after allocation. Removal of references to the Permit scheme.

Timetable Consultation on the various methodology statements is expected to broadly follow the timetable outlined below. Timeline for “RIIO” ECR & ECS. Applicable from Feb 2014 AMSEC. Review and update Proposal with the Authority for approval Consultation Timeline for ECR / ECS & ExCR / ExCS updates for PARCA. Applicable from May 2014. AUG SEP OCT NOV DEC JAN FEB MAR APR MAY Potential informal consultation Proposal with the Authority for approval Consultation Review and update