1. Trades and Transfers Workshop, 6 th November 2007

2. Recap From Last Workshop  After looking at the positives and negatives of the interim process, a proposal for an enduring solution was suggested:  Process carried out on an ASEP to ASEP basis  Capacity surrender allowed before RMSEC (with reserve price)  RMSEC moved to earlier in month, any unsatisfied bids go forwards into T&T process  Bids are ranked, best exchange rate identified and allocations made  Actual exchange rates calculated once bids have been seen so transfers are more efficient

3. Feedback Received  At last week’s workshop, there was a broad level of support for the proposed approach particularly for the monthly frequency, simplicity and the surrender process  ScottishPower subsequently expressed support for the proposal, noting in particular:  Prevention of gaming  Non-discriminatory approach using an existing auction  Prices remain ASEP specific  One Shipper gave further feedback on the allocation of bids and also preference for ex-ante exchange rates  We have looked to address the comments received in our updated proposal

4. Calculation of exchange rate (1) 1. Select test scenario 2. Determine recipient to be examined:  e.g. Easington 3. Increase recipient to obligated level  i.e. move Easington to 98 mcm, increase of 6.8 mcm 4. Rebalance network  Reduce St. Fergus flows by equal amount i.e. 6.8 mcm 5. Consider potential capacity increase  i.e. up to nodal max 116 mcm, an increase of 18 mcm

5. Calculation of exchange rate (2) 6. Select donor  e.g. Bacton 7. Additional data required  Sold level – 65 mcm  Obligated level – 165 mcm 8. Reduce flow level at Bacton by 18 mcm i.e. to 147 mcm – no flow impact 9. Rebalance network at St Fergus i.e. reduce flow by 18 mcm 18 mcm

6. Calculation of exchange rate (3) 11. Test if network fails  If yes, seek to further reduce Bacton flow level  If no, exchange rate 1:1 12. Potential result  Bacton reduced to sold level i.e. 65 mcm  Easington flow increased to 108 mcm  Exchange rate 10/100 = 10:1 The approach is relatively simple with minimal assumptions – only really the test scenario

7. Calculation of exchange rate (4) Now let’s re-look at the above, but from an ex-ante perspective  If 5 mcm is bought at Bacton in the RMSEC, the exchange rate would most probably be reduced……....therefore would need to introduce exchange rate bands.  If Theddlethorpe offers a better exchange rate and Easington obligated level is increased to 106 due to a Theddlethorpe trade and transfer, the exchange rate would most probably be reduced  So should we assume that the Theddlethorpe trade / transfer takes place and offer a lower exchange rate from Bacton?  But then what if all the Theddlethorpe capacity is bought in the RMSEC?  So what do you offer as an ex-ante exchange rate? The problem is now an order of magnitude greater and requires many assumptions to be made, leading to less efficient exchange rates.

8. Overall Process Surrender Invitation Letter Surrender Process * Business Days 2 days* When surrendering, the User will specify: - Reserve Price, with the maximum being the applicable reserve price and the minimum being 0.0001 - Quantity - Minimum eligible quantity - ASEP - Confirmation of holding for the whole of the month The Surrender Process will be carried out in the same manner as the interim process, via Gemini 1 day

9. Overall Process Surrender Invitation Letter Surrender Process * Business Days 2 days* RMSEC invitation letter will be extended to cover Trade and Transfer information, including but not limited to: - Details of capacity that has been surrendered - The allocation period and process for publication of results - A reminder that bids not satisfied in RMSEC will be carried forward into the Trade and Transfer process 1 day RMSEC Invitation Letter 2 days

10. Overall Process Surrender Invitation Letter Surrender Process * Business Days 2 days* RMSEC auction will be moved to early – mid month A User will still have to bid a minimum of the reserve at the ASEP A User should only bid at the ASEP where they want capacity Limit of 20 bids per ASEP, as now 1 day RMSEC Invitation Letter 2 days RMSEC 5 days 1 day (7 calendar days – UNC)

11. Overall Process Surrender Invitation Letter Surrender Process * Business Days 2 days* 1 day RMSEC Invitation Letter 2 days RMSEC 5 days Trade & Transfer Process Maximum 15 days 1 day (7 calendar days – UNC) It is intended that this process become more streamlined once the full system solution is in place

12. Allocation Process  At the end of the RMSEC allocations, divide all Recipient ASEPs into 25% batches by unsatisfied bid volume  If a bid is split across two batches, the whole bid should be included in the higher batch  All bids in that batch are considered together  Calculate the WAP for each of the 25% batches  Rank all the batches by WAP, starting with the highest  If two batches have the same WAP they shall be ordered by 1) highest individual bid 2) quantity of the batch 3) timestamp of the first bid in the batch  Each ASEP will appear 4 times in the list, sometimes with two batches occurring concurrently (if so these will be assessed together)  Then for each batch in order (starting with the highest ranked) transfer capacity to the recipient ASEP from applicable donors, working from the lowest to highest exchange rate up to the maximum level  Limit placed on T&T exchange rate of [10:1]  If a bid does not get satisfied, it drops down into the next batch for that ASEP  The bids in the next batch are then considered as above  Pro-rating of allocations will be undertaken where necessary

13. Exchange Rate Limit  Proposed that a limit be placed on exchange rates, in order to optimise capacity usage  Suggested starting rate of 10:1 included in previous presentation, but this is open to discussion  May be useful to have a facility whereby this limit could be altered if it was found to be unnecessarily limiting transfers. What would be the options for doing this?  UNC  Methodology Statement  National Grid NTS discretion?

14. Overall Process Surrender Invitation Letter Surrender Process * Business Days 2 days* Users are informed of the applicable exchange rate and their allocation 1 day RMSEC Invitation Letter 2 days RMSEC 5 days Trade & Transfer Process 15 days 1 day Allocations completed and User Results Visible On Gemini (7 calendar days – UNC)

15. Overall Process Surrender Invitation Letter Surrender Process * Business Days 2 days* Information provided to all Users on the outcome of the RMSEC and T&T process, including (but not limited to): - all exchange rates applied - the order in which batches were satisfied The exchange rates will become indicative for the next month but if the order in which batches are satisfied changes or there are specific circumstances to take account of for the next month, the exchange rates may change 1 day RMSEC Invitation Letter 2 days RMSEC 5 days Trade & Transfer Process 15 days 1 day Allocations completed and User Results Visible On Gemini 1 day Publication Of Aggregate Results on National Grid Website (7 calendar days – UNC)

16. UNC Mod & Methodology Statement Approval Process Methodology Statement UNC Modification 6 Nov T&T workshop 6 Dec Draft presented to Transmission workstream 20 Dec Issued for consultation 20 Dec Mod to Panel 21 Dec Issued for consultation 7 Feb Extraordinary Mod Panel held after Transmission workstream 8 Feb Sent to Ofgem 28 days 29 Feb Deadline for Ofgem response 29 Feb Last day for approval in order to achieve Nov Gemini release 2 June Deadline for M/S revision Implemented June for July allocations (manual workaround) Implemented November for December allocations (full system solution) 17 Jan Deadline for representations 15 Jan Deadline for representations 15 bus. days 28 days 1 Feb Sent to Ofgem Drafting cons. report

17. Discussion & Next Steps  Issues?  Please provide any comments by end of this week via Joint Office  Assuming no show stoppers expect draft Mod at Transmission Workstream