Transitional Exit Capacity Proposals -Update Offtake Agreement Workstream, 2 Nov 05

Transitional Proposals - Update UNC Mod 0046 With Ofgem for decision IExCR/SC4B Consultation completed on proposed revisions DN and DC ARCA

Respondents IExCR SC4B ARCA Northern Gas Networks X Scotia Gas Networks Scottish and Southern Transco Distribution Association of Electricity Producers (AEP) Chemical Industries Association (CIA)

IExCR – Key Issues (1) Lack of clarity of definition of “incremental capacity” and difference between IExCR and Licence definitions Ofgem intend to clarify definition of “incremental capacity” for both interim and transitional periods as part of final proposals on DN Incentives “Initial Volume Allocation” for NTS/LDZ offtakes over transitional period to be stated in IExCR Requires re-consultation on IExCR

IExCR – Key Issues (2) Desire for NG NTS to publish available capacity at each exit point to understand whether a request would trigger investment Determination of available level of incremental capacity in advance of capacity requests is complex due to interdependence between capacity requests and hence the number of scenarios that could affect the level of capacity being made available Any estimate of availability may therefore be difficult to interpret and may not meaningfully inform user requests Only once the request has been made can the level of available capacity be determined with sufficient accuracy

IExCR – Key Issues (3) DNO view that ARCA not required for incremental capacity requests as already have sufficient Licence obligations to ensure don’t overbook We require ARCAs to demonstrate that “large” investments have been undertaken in response to a sufficiently strong “market signal” Therefore consider appropriate that same principles applied to all NTS Exit Points

IExCR – Key Issues (4) DNO view that ARCAs should not be required for 1 in 20 load growth In most cases we do not expect such requests to trigger Specific Reinforcement and hence would not require an ARCA However we believe that the definitions of Specific and General Reinforcement defined in SC4B should be applicable to any NTS Exit Point Under the exceptional circumstances that an ARCA was required in respect of a request due to 1 in 20 load growth, then as the DNO has a Licence obligation to meet such requirements then it should meet ARCA commitment

IExCR – Key Issues (5) We require assurance that if we incur investments costs by following the IExCR that we would be appropriately renumerated Ofgem view is that the level of commitment in the Langage determination (1 year’s Exit Charges paid over 2 years) would not necessarily be sufficient to justify all system investment costs and may prejudice the operation of DN incentives Discussions with Ofgem ongoing as to the appropriate level of financial commitment to justify our investment costs We may therefore propose a set of principles within the IExCR itself in respect ARCAs and the appropriate level of financial commitment

ARCA – Key Issues View that delay to capacity delivery date should be approved by the Authority similar to new process in place at entry The ARCA is a commercial agreement between National Grid NTS and the connecting party and is governed by English Law. Hence, where the counter party considers that National Grid NTS has not justified any extension to the delivery date then they can make a challenge through the courts It will then be for a judge to decide, based on the available evidence, whether National Grid NTS is justified, in accordance with the terms of the ARCA, in extending the delivery date

Way forward Anticipate to commence re-consultation on IExCR next week with 14 day consultation period (subject to Authority approval) Include Initial Volume Allocations for NTS/LDZ offtakes over transitional period and ARCA principles Also plan to issue consultation reports on previous consultations and final proposed versions of SC4B and ARCAs