Operating Margins UNC Sub Group Tuesday 2nd December 2008

2 Principles of Section K Re-write Already Agreed Summary of Changes 1.Introduce flexibility to meet new Licence obligations (a) To facilitate procurement from non-storage providers, certain references to ‘Storage Year’ will need to be amended to ‘Operating Margins Requirement Period’  Note: Legal text has been amended to “Operating Margins Year’ (b) Operating Margins Facilities will need to include Supply Side Facilities and Demand Side Facilities (c) Operating Margins Gas Delivery Arrangements will need to be extended so that OM Services can be provided by NTS-connected supply and demand sources

3 Principles of Section K Re-write Already Agreed Summary of Changes continued. (d) Clarify role of ‘Relevant System Managers’ (e)Procurement Flexibility: National Grid Gas requires flexibility in the way it manages its OM holdings, whether that be by switching between different capacity arrangements, different delivery arrangements or between capacity and delivery arrangements. Following a switch from capacity arrangements, National Grid Gas may wish to terminate those capacity arrangements (hence relinquishing capacity) or sell on the capacity to a third party. 2. Add clarity to existing arrangements – make K easier to read

4 Further Potential Section K Changes Identified to be considered today 1. Sale of gas associated with Operating Margins Capacity Arrangements  Where National Grid NTS has entered into an Operating Margins Capacity Arrangement they can be terminated (as already in code), or Operating Margins Capacity sold or transferred (as proposed and agreed in an earlier workshop). 2. Buy gas associated with Operating Margins Capacity Arrangements  Where National Grid has switched to an Operating Margins Capacity Arrangement. Changes Proposed: Provides National Grid NTS with clearer guidelines regarding the disposal of any excess gas and purchase of gas to be held in storage. Changes reflected in Section 3.

5 Further Potential Section K Changes Identified to be considered today 3. Closing Margins Adjustment Charge (CMAC) Applies only to gas sold that had previously been held in storage under Operating Margins Capacity Arrangements Closing Margins Adjustment Charge is the sum of weighted average cost of gas in storage (which includes the original cost of gas & putting it into store) and any cost of sale minus the revenues received on the sale of the gas Recovered /paid by Users in proportion to their UDQIs and UDQOs Changes Proposed: It is proposed that the cost & revenues associated with pre-Storage Year transfers & or sale are also included in the CMAC Changes reflected in Sections 3 & 4 of Section K

6 Further Potential Section K Changes Identified to be considered today 4. Utilisation of Operating Margins  The utilisation of Operating Margins is currently restricted to the “Gas Day” on which damage to or failure of any part of the NTS (other than Programmed Maintenance) occurs. Note: This change is not required to facilitate Operating Margins Contestability and would not alter the level of bookings required for Operating Margins. Changes Proposed: Operating Margins can be used in these circumstances for up to 24 hours following the event. Change reflected within Section 2.

7 Further Potential Section K Changes Identified to be considered today Example: Current: 06:00 Gas Flow Day 1 05:00 Pipeline Incident 06:00 Gas Flow Day 2 06:00 Gas Flow Day 3 OM Utilisation 06:00 Gas Flow Day 1 05:00 Pipeline Incident 06:00 Gas Flow Day 2 06:00 Gas Flow Day 3 OM Utilisation up to 24 hours 05:00 Proposed:

8 Summary of Potential Additional Changes 1. Sale of gas associated with Operating Margins Capacity Arrangements 2. Buy gas associated with Operating Margins Capacity Arrangements 3. Costs & revenues associated with pre-Storage Year transfers and or sale of gas are included in the Closing Margins Adjustment Charge 4. Utilisation of Operating Margins for damage to or failure of any part of the NTS can be used for up to 24 hours following the event Does the group believe it to be beneficial to take these changes forward as part of this Review?

Proposed Consent to Modify

10 Consent to Modify – Revision to TPD Section K4.2 – Margins WACOG – paragraph  Incorrect cross references identified: Error introduced by MP 311 and compounded by 710 UNC: K Consent to Modify UNC K4.2.4 costs are (a) Carry over margins gas (b) Accrued OM gas purchased at entry or acquired as trade (c) Accrued from Storage Gas Transfer (d) OM transportation charges (e) OM balancing charges (f) Injection charges (g) User agent fees (h) Withdrawal charges associated with Carry Across Gas

11 Prevailing 2008 Summary of Code Text – post MP0311  (d) the amount payable by National Grid NTS (Margins) by way of Transportation Charges  (f) The amount paid or payable by National Grid NTS (Margins) by way of injection charges  (b) the amounts which have accrued due from National Grid NTS (Margins) pursuant to the Margins Gas Procurement Arrangements.  (c) the amounts which have accrued due from National Grid NTS (Margins) in respect of any Storage Gas Transfers 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.  (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 Code Comparison cross referenced the following provisions: 1996 Summary of Code Text – pre MP0311

12 Proposed Consent to Modify Section K4.2.4 a Consent to Modify Section K4.2.4 a “ (a) the quantity of relevant Carry-over Margins Gas multiplied by the Operating Margins WACOG and the amount of relevant Carry- Across Gas (in respect of which the relevant Storage Facility is the deficit facility) multiplied by the Operating Margins WACOG in respect of the surplus Storage Facility, in each case as at the last Day of such Storage Year.”

13 Proposed Second Consent to Modify Summary of proposed Section K CTM changes: refers to paragraph 4 should be (a) refers to paragraph should be (f)(i) & (f)(ii) refers to paragraph should be (a) delete “(i)” and “; and (ii)”

Walk Through the Draft Legal Text

15 Section K Draft Legal Text Legal Text Key:  In general, when reading the legal text use the following key: InsertionMoved to Deletion Style Change Moved deletionFormat change Moved from  Current Section K used to develop the draft legal text for contestability. To allow direct comparison.  Consent to modify changes have not been included at this stage, this is again to facilitate a direct comparison between current and proposed texts.

16 Next Steps  CTM1 – Sent to Ofgem  CTM2 – Under development/will sent to Ofgem shortly  Next Version of draft legal text to include CTM related changes  04 December: Report to Transmission Workstream  12 December: OM sub group meeting  18 December: UNC Modification Panel