Gas Transmission Charging Review: Final Capacity Charging Proposal Gas TCMF 14 th December 2006

Entry and Exit Capacity Charging - Options (NTS GCM 01) Included options in consultation paper:  Option 1 – Enhanced Transcost approach  A) Mscm/d increment  B) 6 Mscm/d increment for Entry  Both include spare capacity  Option 2 – Transportation Model  A) Caters for spare capacity - entry prices set using forecast flows such that charges decrease as forecast decreases below baseline  B) Fully excludes spare capacity – entry prices set using baseline/obligated capacity

Treatment Of Spare Capacity ObjectiveInclude Spare CapacityExclude Spare Capacity Cost reflectivity  Users pay for incremental investment costs i.e. based on what happens to be installed locally  Recovery of previous sunk costs socialised leading to cross-subsidy – arguably in contravention of EU Gas regulations  All Users pay for capacity they utilise i.e. no locational benefit of spare capacity  …but concern over potential asset stranding if Users clearly discouraged from using spare capacity Stable and predictable charges  Undermines due to transient nature spare capacity (unless considered sufficiently static)  Meets Transparency  Determination of location and amount and hence which Users obtain benefit subjective  Meets

Industry Views RespondentAbbr. View Transportation Model Transcost Total E&P UK PlcTOTALSupport: Option 1 ExxonMobil Gas Marketing Europe Limited EXXON Support: Option 2a (Base Case) Mulberry Capital LimitedMCL Support: Option 2b (Obligated Baseline) Scottish and Southern Energy plcSSE EDF EnergyEDF RWE npowerRWE Statoil UKSTUK The Association of Electricity ProducersAEP The Chemical Industries AssociationCIA Support Option 2 International PowerIP Scotia Gas NetworksSGN National Grid UK DistributionUKD No Rebalancing of Exit Charges -- Wales & West UtilitiesWWUComments-- Total101

Key Industry Responses  Desire for stable predictable prices  “consider that it would not be desirable to increase the TO commodity charge further as this leads to poor cost targeting.”  Transcost shown not to be future proof  “The Transcost model does not appear to be future proof to changes in flow directions arising from new entry flows at Milford Haven and the Isle of Grain”  Don’t believe prices will influence where gas is landed  “ would expect any new fields or incremental supply would utilise existing offshore infrastructure which should also develop spare capacity as existing fields decline.  Don’t believe there should be a spare capacity discount  “believe that shippers at a terminal with spare capacity already receive a significant benefit in relation to their ability to ‘catch up’ later in the day after system failures, thus avoiding imbalance and scheduling charges.”

Indicative Exit Capacity Prices (Gas Year 2006/7) Transcost results in significant increase in Scotland & the North

Indicative Entry Capacity Baseline Reserve Prices (Gas Year 2007/8) Effect of “Spare Capacity” NB. Based on current baselines – analysis requires updating for new baselines

Factors Effecting Terminal Selection  Gas market  Stable Framework  Wholesale price of gas  Regime stability  Off-shore Infrastructure  Offshore Cost  Offshore Capacity  NTS Entry Pricing  NTS Entry Capacity prices  NTS Entry Commodity Prices  Price Stability  Regime Stability  NTS Capacity Availability  Baseline or Incremental (+4 years?)

Gas Forward Prices in UK, Belgium & Netherlands

Offshore Infrastructure  Building offshore is more expensive (+50%) than onshore  £1.25M> £1.5M onshore cf £2M to £2.25M offshore  Offshore Capacity may already be available  If an NTS terminal is declining then offshore capacity must also be becoming available.

Licence Relevant Objectives  Where transportation prices are not established through an auction, prices calculated in accordance with the methodology should:  1)Reflect the costs incurred by the licensee in its transportation business;  2)So far as is consistent with (1) properly take account of developments in the transportation business;  3)So far as is consistent with (1) and (2) facilitate effective competition between gas shippers and between gas suppliers.  Where prices are established by means of auctions, either  4)No reserve price is applied or  5)Reserve prices are calculated at a level that promotes efficiency, avoids undue preference in the supply of transportation services and promotes competition between gas shippers and between gas suppliers.

EC Regulation 1775/2005  EC Regulation 1775/2005 on conditions for access to the natural gas transmission networks (binding from 1 July 2006) states that the principles for network access tariffs or the methodologies used to calculate them shall:  Be transparent  Take into account the need for system integrity and its improvement  Reflect actual costs incurred for an efficient and structurally comparable network operator  Be applied in a non-discriminatory manner  Facilitate efficient gas trade and competition  Avoid cross-subsidies between network users  Provide incentives for investment and maintaining or creating interoperability for transmission networks  Not restrict market liquidity  Not distort trade across borders of different transmission systems.

Conclusion  Industry View: Transportation Model  Baseline Entry Capacity Reserve Prices based on analysis at Baseline level  Justification:  Single transparent model which can be made available easily (promotes competition)  Cost reflective (Reflective of costs incurred - rather than incremental costs)  Minimises cross subsidies (avoids undue preference)  Risk of Asset Stranding  Offshore costs and offshore capacity availability along with wholesale gas prices will influence where gas is landed more than entry prices