Review Group 221 Session 3: 13 October 2008

2 Introduction  During this presentation we will seek views on the following questions.  What should the industry be securing against? Capacity Auction Bid Level (Actual Revenue) Revenue Driver Value (Allowed Revenue) Overall project Value  What level of security should be provided during the investment period (default 42 months lead time)?  How far in advance of the capacity release obligation should security be required?  Should level of security across the investment period be profiled? Note: Security to cover the period post capacity release obligation is scheduled to be discussed in Session 5 on 10 th November.

3 Current Arrangements - Reminder Lead time (default 42 months) Security Release Obligation Starts Costs Proposal to Authority and capacity allocated to Shipper User provides security for next 12 months capacity payments. Assuming that same level of capacity booked for each quarter then User has to provide £1.04m security for each month - £12.5m for each 12 monthly assessment Capacity Release Obligation & Capacity charges invoiced Liability Auction signal received for incremental capacity User commits to pay ~50% of estimated project value over 8 years = £100m Estimated project value = £200m

4 What should the industry be securing against?  Potential options have been identified as; Capacity Auction Bid Value (Actual Revenue) Revenue Driver Value (Allowed Revenue) Overall Project Value  Does the Group believe there are any others?  Which option does the Group believe industry should secure against?  Should there be a split between the % secured by the capacity holder and the community e.g. 50/50, 75/25 etc?

5 Advantages/Disadvantages of Potential Value Options AdvantagesDisadvantages Auction Bid Value  Clarity of requirement as this is related to known quantity for each capacity holder.  Secures recovery of full auction revenue.  Might not cover all investment costs or revenue driver so any shortfall recovered from Community. Revenue Driver  Aligned to allowed revenue so no additional recovery from other Users.  May reduce risk to Community.  Need to be clear how these values apportioned to multiple auction bidders. Project Value  Potentially covers full value of investment.  May reduce risk to Community.  Project value may vary within investment period.  Possible difference between project & driver values so any shortfall recovered from Community.  Need to be clear how these values apportioned to multiple auction bidders.

6 How Far in Advance is Security Needed?  How far in advance of the capacity release obligation should security be required?  Currently security is put in place 12 months prior to release obligation starting.  Should this be extended to cover greater portion of investment period i.e. 24, 36, 42, etc. months?

7 Timing of Security Prior to Release Obligation Capacity Release Obligation & Capacity charges invoiced Lead Time (default 42 Months) Release Obligation Starts Costs Current timing of security Possible timing of security

8 Should Security be Profiled?  What level of security should be provided during the investment period?  Flat Profile e.g. [x]% throughout the period following capacity allocation  Stepped Profile (increasing profile as investment costs are expended)

9 Flat or Stepped Profile Lead Time (default 42 Months) Release Obligation Starts Costs Capacity Release Obligation & Capacity charges invoiced Liability User provides increasing level of security up to Release Obligation User provides same level of security up to Release Obligation

10 Advantages/Disadvantages Advantages  Demonstrates further User Commitment than in Status Quo  Reduced risk of investments not being allowed into RAV.  Reduces risk of any resulting costs falling on other Shippers.  May provide additional encouragement to developers to ensure that planning permissions are put in place to develop site.  Aligns security with current NPV test (if 50% level is chosen) Disadvantages  Shippers may consider that additional commitment is unnecessary and an inefficient use of funds.  Potential barrier to entry into long term capacity auctions.  May discourage new source(s) of gas coming onto the system.  Projects may be delayed or cancelled as a result of increased User Commitment.  Shippers might not signal far enough in advance to allow NG NTS to make necessary system developments. Incremental capacity triggered: [X%] of Liability (Bid or Driver or Project Value) secured across investment period in either Flat or Stepped Profile

11 Summary of questions addressed QuestionExample Answer What value measure should we secure against? Auction Bid, Revenue Driver, Project Value What proportion of security should be provided by capacity holders and community? 50/50, 75/25 etc. How far in advance of Release Obligation should security be put in place? 12, 24, 36, 42 ….months Should the security put in place be flat or stepped across the investment period? Flat, profiled