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

Background Licence Obligation 4 industry workshops held, then 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.

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.

Issues Interconnectors Partial Substitution Exchange Rate Collars 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 substitution if 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

Submit ExCS for Approval Ofgem processes; including impact assessment Indicative Timeline. 04/04/11 Submit ExCS for Approval 14 days after consultation and no later than 4th Jan 2011 7th Sept Workshop 5 7th Apr Workshop 3 25th May Workshop 4 Consultation results 30th June to 6th Aug Informal consultation Approval or veto of proposed ExCS 5th Nov to 3rd Dec Formal consultation Ofgem processes; including impact assessment Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11