Ofgem’s decision on UNC modification proposal 044 Sonia Brown

06 October 2005 Modification Proposals 042/044 E.ON UK Proposal: UNC 042 “Revision of the Emergency Cash-out price”  Emergency Cash-out Price = Prevailing SAP Transco NTS Proposal: UNC 044 “Revised Emergency Cash-out & Curtailment Arrangements”  Emergency Cash-out Price = SMP Buy  Emergency Curtailment Quantity (ECQ)

06 October 2005 Considerations the Authority considered:  It’s assessment of the modifications against the relevant objectives -Standard Special Condition A11 (a), (b), (d), (e)  its Wider Statutory Duties -Protecting customers -Security of Supply  Procedural issues associated with modification 042 and 044

06 October 2005 UNC 042/044 Decision Ofgem considered that:  Both mod 042 and mod 044 better facilitated the achievement of the relevant objectives of the UNC, as set out under Standard Special Condition A11 of the relevant gas transporters’ licences as compared with the existing provisions of the UNC However: Modification proposal 044 better facilitated these objectives as compared with modification proposal 042

06 October 2005 Relevant Objectives (1) Standard Special Condition A11 (a) – the efficient and economic operation of the pipeline system to which this licence relates Price  increases incentives on shippers to balance – reducing likelihood of an emergency/duration.  encourages price sensitive gas into the GB market.  incentivises long and short shippers to trade at a price up to the SMP buy price (OTC trading not suspended). Volume  holding shippers neutral increases incentives on shippers to contract for commercial interruption.  no discrimination between firm and interruptible customers  disputes mechanism

06 October 2005 Relevant Objectives (2) Standard Special Condition A11 (d) – securing of effective competition between the relevant shippers and suppliers Price  044 removes the issue of collective insurance by ensuring costs are appropriately targeted to prevent distortion of competition  dual cash out prices better reflect market value and remove all collective insurance – therefore UNC 044 is a better facilitation of the relevant objectives than UNC 042 Volume  044 ensures there are more competing sources of gas and demand side response in the market in run up to an emergency.

06 October 2005 Further Considerations  Wider statutory duties protecting consumers oenhancement of economic and efficient operation of the system opromotion of competition security of supply omore appropriate economic incentives – during and prior to an emergency  Procedural issues ourgency oimpact Assessment

06 October 2005 Issues for Development –de minimis volumes: SMPS, DSWG –progressive vs. rapid emergency –ECQ methodology –operational issues: P70 Process –information asymmetries –demand side response initiatives –cash out review - emergency sub-group

06 October 2005 Promoting choice and value for all gas and electricity customers