Capacity trade and transfer mechanism and the next AMSEC auction Nienke Hendriks Head of Gas Transmission Policy, Enforcement and Compliance 9 May 2007

2 Outline TPCR Revision of baselines New obligations on NGG as part of TPCR - to introduce mechanisms to transfer and trade capacity Mod 138 decision

3 Potential impact of the Transmission Price Control Review ( ) on the next AMSEC auctions Revision of baselines at a number of entry and exit points Two new obligations on NGG: –to introduce capacity trade mechanism –to introduce capacity transfer mechanism

4 Revision of baselines To reflect physical capacity of the network at peak  whilst assuming relatively high flows at near-by entry points  conservative but realistic view To reduce buyback exposure of consumers compared with the price control arrangements

5 Entry capacity baselines

6 Introduction of two new obligations Introduction of two new obligations to put capacity trade and transfer mechanisms into place The purpose of the new obligation to enable the transfer of capacity is to guard against the risk that capacity is 'sterilised' at an entry point where it is not needed by reducing the obligation at that entry point and making additional capacity available elsewhere The purpose of the new obligation to enable the trade of capacity is to increase the economic and efficient operation of the NTS by increasing the scope for shippers to have access to capacity where they value this most

7 Obligation to introduce capacity transfer mechanism new obligation on NGG to facilitate the transfer of unsold capacity to meet demands for capacity elsewhere upon request and ahead of an auction NGG shall provide a shipper with a rate of transfer that would enable it to buy entry capacity at one point but use it at another the transfer rates would be specific to each individual request

8 Obligation to introduce capacity trade mechanism new obligation on NGG to facilitate the transfer of sold capacity to meet demands for capacity elsewhere upon request and ahead of an auction NGG shall provide shippers with a rate of transfer that would enable shippers to transfer sold capacity between entry points

9 Capacity trade and transfer methodology NGG is required to establish a methodology which would need to be consulted on with interested parties, and approved by Ofgem for calculating trade and transfer rates In calculating these rates it would be reasonable for NGG to factor in any changes in buy back risk as a result of the trade and transfer It is also reasonable for NGG's methodology to result in a zero capacity trade or transfer rate where this reflects genuine physical constraints on the network We expected NGG to submit its proposed methodology to Ofgem by the end of February 2007

10 Ofgem decision on UNC Mod 138 Ofgem decision to reject mod 138 Reasons: The proposal only implements a small subset of the capacity trade mechanism and does not introduce the associated mechanism for the transfer of unsold capacity. Without this mechanism it is unclear that introducing capacity trading on its own will lead to a more efficient and economic operation of the NTS (i.e. does not meet objective (a) the efficient and economic operation of the pipe-line system to which this licence relates) The proposal (introducing a restricted set of trading in a once a year window) would not seem to meet the objectives Ofgem currently anticipates introducing into the licence of NGG in accordance with the TPCR proposals. Although NGG has now produced a draft capacity trade methodology, Ofgem has not yet indicated whether it would be minded to accept this proposed approach. Although the capacity trade methodology is not a necessary prerequisite for a decision in favour of this modification proposal it would be a necessary precondition for the modification proposal to have any effect (i.e. does not meet objective (c) so far as is consistent with sub paragraphs (a) and (b) the efficient discharge of the licensee's obligations under this licence) The proposal introduces a trade mechanism only within the portfolio of a given shipper. Ofgem shares the concerns expressed by some respondents that a restricted mechanism of this sort will have different effects on different shippers (for instance those who already have a diversity portfolio of capacity holdings). Ofgem is therefore concerned that this may unduly distort the competitive market between shippers (i.e. does not meet objective (d) so far as is consistent with sub paragraphs (a) to (c) the securing of effective competition: (i) between relevant shippers; (ii) between relevant suppliers; and/or (iii) between DN operators (who have entered into transportation arrangements with other relevant gas transporters) and relevant shippers)

11