Open letter on Development of the regime ahead of winter 2007/8 Nienke Hendriks Head of Gas Transmission Policy, Enforcement and Compliance 28 June 2007

2 Outline Reasons for open letter Publication of data NGG’s role Ofgem view on capacity trade and transfer Capacity trade and transfer this winter Way forward

3 Open letter Objective: To address shippers concern that there might be physical constraints on the network this winter, through –asking NGG to publish zonal and nodal information on network capability To address concerns in relation to capacity trade and transfer for this winter, through –Clarifying NGG’s role –Restating Ofgem’s view on buyback risk in the context of capacity trade and transfer –Clarifying Ofgem’s expectations on process and timetable to enable capacity trade and transfer for this winter

4 Publication of zonal and nodal information NGG has now published information on zonal network capability NGG will be publishing information on nodal network capability by 6 July 2007  this should provide greater clarity on the physical capability of the NTS this winter NGG and shippers to consider whether –this type of information should be published annually or for the next few years? –there is a need for additional information?

5 NGG’s role Section 9 of the Gas Act (amended): –NGG has a duty to develop and maintain an efficient and economical pipeline system for the conveyance of gas NTS GT licence –Section 23 consultation on proposed licence modifications to implement TPCR Final Proposals published 25 June 2007  consultation closes on 23 July 2007 –NGG has licence obligation to operate an economic and efficient pipeline system –Introduction of new obligations on entry capacity trade and transfer

6 Ofgem view on Capacity trade and transfer mechanisms Reduce the risk of underutilised assets by enabling capacity that is not being used at a certain entry point of the network to be moved to another point on the network where users value it most We expect NGG to submit a trade and transfer methodology for determining exchange rates in line with its licence obligations Reasonable for NGG to factor in any changes to buyback risk as a result of trades and transfers – this does not mean zero incremental buyback risk! We have indicated in our open letter that even if a proposal materially changes NGG’s risk profile, as long as it would result in a more economic and efficient operation we would be prepared to consider and potentially implement, subject to consultation, changes to NGG’s incentive package

7 Capacity trade and transfer: this winter Ofgem expects NGG to implement these mechanisms before this winter through –Raising relevant and implementable UNC modifications to enable capacity trade and transfer –Submitting an appropriate capacity trade and transfer methodology to Ofgem which takes into account concerns raised by Ofgem and interested parties  We recognise that the mechanisms being put in place for this winter might provide a short- term solution whilst a more enduring approach to entry capacity trade and transfer is being developed  Important role for shippers to propose alternative UNC modifications to ensure that full consultation can take place in limited timeframe Ofgem expects NGG to submit an appropriate methodology for calculating exchange rates. Such a methodology should not result in physical capacity being withheld from the network

8 Way forward Challenging timeline Helpful to consider a range of feasible options rather than just one option Role for NGG but also for shippers to raise variants to enable full consultation in spite of tight timeline NGG to ensure that appropriate capacity trade and transfer methodology is in place no later than the date on which the Authority makes the decision to give effect to the relevant licence conditions

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