Operating Margins

2 Competitive Provision of Operating Margins Change to National Grid Gas’s Transporter Licence which:  Introduced Special Condition C25 Which requires use of reasonable endeavours to promote competition in the provision of Operating Margins (OM) services by 1 st April 2009 Progress to date:  Initial consultation exercise March and May 2008 Detailed the need for the OM Service Considered options for further competitive provision of OM  Second consultation concluding September 2008 Presented conclusions on how the OM Service could be delivered by Potential Service Providers Considered the barriers to provision for each Potential Service Provider Considered how to procure the OM Service Looked at how to incentivise Operating Margins going forward

3 What are Operating Margins (OM)? OM gas is only used in exceptional circumstances to:  Allow time for National Grid Gas to reschedule the NTS or for the market to deliver additional supply  Protect against the need to declare emergency conditions so that normal commercial market operation can be maintained where possible Primarily, OM will be used in the immediate period following operational stresses/shocks:  Supply Loss  Unexpected pipeline and/or plant failure  Demand Forecast Error  Facilitate orderly rundown (partial or full)

4 What makes a good OM Provider?  Must be able to deliver a physical change in gas offtake or delivery of gas onto the NTS  Rapid response  Measurable, demonstrable service  Must be available for NGG to call on at all times declared in advance (day or night)

5 Current OM Service Providers  Short Range Storage  Medium Range Storage  Long Range Storage  LNG Importation Terminals with Storage

6 Potential OM Service Providers OM Provision from NTS Connected Demand:  NTS connected demand, such as Combined Cycle Gas Turbine (CCGT) Power Stations and other Very Large Daily Metered Customer (VLDMCs) could provide an OM service by rapidly reducing gas offtake from the NTS at exit points OM Provision from Offshore Supply & Importation:  Offshore supplies could provide an OM service by increasing gas input into the NTS at entry points DNs  Distribution Networks could provide an OM service by reducing gas offtake from the NTS at exit points More information available on the National Grid website 

7 Impact on Section K Operating Margins Current Section K: Operating Margins  Current provisions in Section K envisages provision from storage sites & LNG Importation Terminals only via Capacity arrangements (National Grid NTS holds capacity and gas for use when required), and Delivery arrangements (3 rd party holds capacity and gas for use when required)  Section K currently complex Propose to rewrite Section K Operating Margins:  Aim to add clarity, and  Facilitate provision of the service from a wider pool of providers to open up more competitive and efficient procurement

8 Process going forward Request the establishment of a Sub Group to the Transmission Workstream  Sub Group activity to review and agree business rules to facilitate competition in the provision of Operating Margins  NGG NTS to subsequently raise Modification Proposal  Aim for 1 st April 2009 implementation in line with Licence

Proposed Consent to Modify section K4.2.6 WACOG Margins

10 Consent to Modify Consent to Modify – Revision to TPD Section K Margins WACOG - paragraph  Incorrect cross references Identified: Error introduced by MP 311 and compounded by 710.

11 Code Comparison cross referenced the following provisions: Prevailing Summary of Code Text – post MP0311  (c) the amounts which have accrued due from National Grid NTS (Margins) in respect of any Storage Gas Transfers.  (e) Amounts incurred by National Grid NTS (Margins) by way of balancing charges payable to National Grid NTS.  (a) the quantity of the relevant Carry-Over Margins Gas multiplied by the Operating Margins WACOG as at the last Day of such Storage Year;  (b) the amounts which have accrued due from Transco (Margins) pursuant to the Margins Gas Procurement Arrangements Summary of Code Text – pre MP0311  (e) the amounts payable by Transco (Margins) by way of Transportation Charges.  (g) the amounts paid or payable by Transco (Margins) by way of injection charges.  (a) the amounts (if any) paid by Transco (Margins) to the Top- up Manager.  (b) ) the quantity of the relevant Carry-Over Margins Gas multiplied by the relevant Operating Margins WACOG as at the last Day of such Storage Year;  (c) the amounts which have accrued due from Transco (Margins) pursuant to the Margins Gas Procurement Arrangements.  (d) the amounts which have accrued due from Transco (Margins) in respect of any Storage Gas Transfers

12 What is the financial impact? A retrospective re-calculation of WACOG based on difference between current UNC text and the pre UNC Modification 311 text demonstrates that;  If current UNC text was upheld then the over-recovered amount from 1999 to date would be just under £38k and NG NTS would be disincentivised from purchasing gas “in store” from other storage Users despite this being potentially the most efficient option.

13 Proposed Consent to Modify section K4.2.6 WACOG Margins  NG NTS believe it is appropriate to raise the proposed Consent to correct the WACOG cross references and relevancy prior to commencing the review of K so that the starting basis is correct.