Review Group 0221 Session 4: 28 th October 2008

2 Introduction  Agenda item 4.1 Focus Session: “Who/What capacity holders should be captured by these requirements and how should this be assessed?” ie: by incremental capacity only; all new capacity bookings, including obligated; all new and existing capacity holdings based on a credit risk assessment; or a combination of the above Who/How would such a credit assessment be completed and what would be the route for appeal?  Agenda item 4.3 Question: Should any revision to security arrangements be applied to previous auction allocations that are yet to reach the capacity release date?

3 Who/What capacity holders should be captured by these requirements and how should this be assessed?  The Authority delivered its decision to reject CUSC Amendment CAP131 on 13 th October.  The decision paid particular attention to the issue of undue discrimination between new & existing generators where undue discrimination consists of treating relevantly similar parties differently or relevantly different parties in the same way without objective justification.  In this case the Authority did not consider that sound reasons for the apparent discrimination between new and existing generators had been demonstrated.  In this context does the Group consider that the decision assists in answering this question i.e. does this suggest that bullet point 3 is the most appropriate?  If not, what are the objective differences between parties and types of capacity?

4 Who/How would such a credit assessment be completed and what would be the route for appeal?  UNC Section V: Security required is based on = VAR – Unsecured Credit Limit VAR = Aggregate amount invoiced but unpaid (excluding EB Charges) + 20 * daily average rate invoiced in previous month. Unsecured credit limits are based on ‘Best Practice Guidelines for Gas and Electricity Network Operator Credit Cover’ and include the following elements. Method Unsecured Credit Limit (Maximum = 2% of RAV) Approved Credit Rating e.g. Moody’s or S&P Moody’s Assessment = Aaa/Aa Unsecured Credit Limit = (100% * 2% * RAV) = ~£60M = 15% or ~£9M) Independent Security Assessment e.g. Dun & Bradstreet Independent Assessment Score = 10 Unsecured Credit Limit = (20% * 2% * RAV) =~£12M Payment HistoryPayment History over 5 years Unsecured Credit Limit = (2% * 2% * RAV) =~£1.2M

5 Who/How would such a credit assessment be completed and what would be the route for appeal? Credit Assessment  There already exists a number of measures which could be used to develop a methodology to assess security requirements at, or around, the QSEC auction time. Are there any other measures which could be included in the assessment?  What issues need to be addressed if this assessment is to be carried out at or around this time?  Proxy for VAR ahead of invoice period. e.g. value of auction bids.  What should the security requirement cover? e.g. auction bid values (4 yrs, 8yrs or other) over period from Capacity Allocation to Release Obligation?  Potential reassessment of levels of unsecured credit i.e. is it currently too high/low?  Who should make the initial assessment? If its near to or within the Incremental Capacity Allocation Proposal process could this be part of the Authority’s assessment?  How should ongoing assessment of security requirement be carried out? Role for National Grid/Xoserve?  Appeals against initial assessment could be to Authority but for appeals arising after the initial period is there a role for National Grid/Xoserve similar to current dispute processes?

6 4.3 Question: Should any revision to security arrangements be applied to previous auction allocations that are yet to reach the capacity release date? Existing CapacityIncremental Capacity All pending capacity obtained via future QSEC / AMSEC auctions Apply to pending incremental capacity triggered in future QSEC auctions (a). All pending capacity obtained via future RMSEC / DSEC auctions Apply to pending incremental capacity with a release date after implementation of proposals but triggered in an earlier QSEC auction (b). All current and pending capacity obtained via previous QSEC / AMSEC or short-term auctions Apply to current incremental capacity with a release date before implementation of proposals but where the QSEC auction bids that triggered release extend after the date of implementation (c). QSEC auction (option c) Changes implemented QSEC auction (option a) QSEC auction (option b) Capacity release option b Incremental Capacity – Relevant QSEC auctions for various implementation options Capacity release option c Time Options available for re-allocation of financial risk in respect of entry capacity could include: