Non-approved draft Transmission Workstream, 6th December 2007 Trades and Transfers Non-approved draft Transmission Workstream, 6th December 2007

Recap From Last Workstream 2 Broad consensus reached: 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, exchange rate maximised and allocations made Actual exchange rates calculated once bids have been seen so transfers are more efficient Timeline identified

Topics for this Workstream 3 Exchange Rate Calculation Draft Modification Proposal Key aspects Timeline Specific issues for discussion Draft Methodology Statement High Level Process Example

Exchange Rate Calculation Two main potential methods, for an auction based allocation: Generic Exchange Rates Generic exchange rates are determined and published ahead of an allocation mechanism, e.g. an auction, and cover a range of potential outcomes both in terms of the ASEPs, between which the trade or transfer is being transacted, and also the quantity of the trade or transfer. Fixed Generic exchange rates were used in the interim regime. Specific Exchange Rates Specific exchange rates are determined once the precise details, e.g. the ASEPs and quantity, of each trade or transfer are known. Specific exchange rates have been proposed for the enduring regime.

Pros & Cons Generic Exchange Rates Specific Exchange Rates Advantages Provides certainty of allocation mechanism outcomes, both in terms of quantity that could be moved to and from Recipient / Donor ASEP Allocation is relatively quick allowing the allocation mechanism to be close to the point of capacity release. Disadvantages Have to be calculated for a variety of potential trades and transfers, in terms of both ASEPs and quantities. As each trade or transfer has an impact on subsequent trade or transfers the process is extremely complex. Due to the number of assumptions that have to be made, the resulting exchange rates will be more conservative, leading to a less efficient allocation of capacity. Have to be calculated for a number of discrete quantities or other measures, e.g. NAMs & ZAMs implemented to manage the variability of exchange rates with quantity. This may artificially limit the exchange rates. Process is lengthy, time consuming and costly. Specific Exchange Rates Advantages Provide the best exchange rate for an individual trade or transfer and therefore lead to the most efficient capacity allocation. Process is relatively simple. It requires relatively few assumptions to be made and can be undertaken reasonably quickly. Disadvantages Does not provide certainty to Users of allocation mechanism outcomes, either in terms of the quantity that could be moved to a Recipient ASEP or the quantity that could be moved from a Donor ASEP. The allocation is a lengthier process as it requires network or risk analysis to be performed. Thus the allocation mechanism needs to be sufficiently in advance of the point of capacity release.

Application example Table opposite shows actual and theoretical TTSEC allocations for November 07. At the most constrained ASEP Easington, this could have resulted in over 60% more capacity being allocated.

How to address the disadvantages of Specific Exchange Rates? Uncertainty of amount of capacity that could be moved to and from Recipient / Donor ASEPs Undertake the process frequently e.g. monthly in order to provide indicative exchange rates for the following auction. Speed of allocation process Undertake the process frequently to improve process and “chunk up” the number of transactions to be dealt with at any one time.

Trades and Transfers: Draft Modification Proposal Transmission Workstream, 6th December 2007

Modification Proposal (1) Key Features 9 RMSEC to consist of four key processes Trade Initiation Process Users able to surrender capacity for reallocation in RMSEC Rolling Monthly Invitation Process as current RMSEC auctions Users bid for capacity at ASEPs where they want it Satisfied using unsold/surrendered capacity (“Available Capacity”) Initial Stage Allocation of Available Capacity at the ASEP where available Process consistent with current RMSEC allocations Allocation of Surrendered Capacity then unsold capacity. Unsatisfied bids will be considered in the Transfer and Trade Stage Transfer and Trade Stage Allocation of Available Capacity at different ASEPs

Overall Process Timeline 10 Publication of aggregate results on National Grid website Trade Initiation invitation Rolling monthly Invitation Allocations completed. User results visible on Gemini Last Business Day RMSEC auction Surrender Process <= 3 days 1 day Initial and Trade & Transfer Stages <= 2 days <= 5 days* >=5 days 1 day <=20 days * Business Days

Modification Proposal (2) Initial Stage: Key Features 11 For each ASEP Available Capacity (surrendered and unsold) will be allocated to the highest bidder. Surrendered allocated first. Highest Surrender Price first. In the event of insufficient Available Capacity Bids may be partially satisfied Equally priced bids will be allocated pro-rata Unsatisfied bids will cascade to the Transfer and Trade Process.

Modification Proposal (3) Transfer and Trade Stage: Key Features 12 For each ASEP with unsatisfied bids from the Initial Stage Bids will be grouped to improve potential Exchange Rates; and Will be ranked according to WAP For each group Available Capacity will be transferred from the most favourable Donor ASEP(s) Exchange Rate determined in accordance with Methodology Statement Partial allocations will be undertaken where necessary If a bid does not get satisfied, it drops down into the next group for that ASEP Allocations will progress through the Recipient ASEPs until: All bids are satisfied There is no more Available Capacity Any remaining bids can only be satisfied by breaching The upper Exchange Rate limit of 10:1 A Surrender Price Minimum quantities.

Modification Proposal (4) Treatment of Surrendered Capacity and Charges 13 Where Surrendered Capacity is re-allocated: Transferor User shall remain liable for Capacity Charges The Available System Capacity of the Transferor User shall be reduced The Transferee User will pay as bid. Revenue will pass through to the Transferor User. The Transferor User will receive the Unit Offer Price, Unit Offer Price = Recipient bid price / Exchange Rate Unit Offer Price shall be averaged in respect of capacity re-allocated to satisfy more than one bid. National Grid will assign income in respect of unsold capacity to appropriate revenue streams. Potential for TO / SO over-recovery.

Issues (1) Upper limit on Exchange Rate 14 Upper limit on Exchange Rate Prevents excessive capacity destruction, Remaining Available Capacity available for daily auctions But limits potential capacity moved to where required. Proposal for a 10:1 limit; 6:1 suggested. Views? Withhold an amount of any Available Capacity remaining after the Initial Stage for daily auctions. Increases capacity available for short term adjustments Limits potential capacity moved to where required. Could be complex e.g. fixed quantity or percentage? How much?

Issues (2) 15 After the Transfer and Trade Stage have a “sweep up” without (or with a higher) Exchange Rate limit. Add to allocation process time Maximises potential capacity moved to where required Increases capacity destruction / removal of capacity from daily auctions. Views? Surrender Price must not be greater than prevailing reserve price. Prevents Users buying capacity at a “cheap” ASEP solely with a view to trade by setting a high reserve price and freezing out “incumbent” Users, but Prevents capacity being allocated to ASEPs where Users value it most. Ensures consistency with obligation to sell all available capacity at prevailing reserve price. Surrendered Capacity will be allocated before unsold capacity. Maximises capacity available for daily auctions

Discussion Issues…….?

Trades and Transfers: Draft Methodology Statement Transmission Workstream, 6th December 2007

Methodology Statement (1) 18

Methodology Statement (2): Example 19 Select test scenario Historic supply patterns at 350 mcmd +/- 10%. Select 5 most severe Average and rebalance at 350 mcmd Example Transfer and Trades for Nov. Supply patterns as below Identify demand level Historical and forecast demand 272 – 407 mcmd Test at 350 mcmd Identify recipient ASEP In accordance with UNC Teesside ASEP with bids 10 mcmd above the obligated level.   Demand level 350 mcmd. – Recipient Teesside Supply mcmd Ave. Re-balanced supply  St Fergus 110 120 95 130 107.2  Easington 100 97 94.6  Teesside 30 25 20 26 25.3  Bacton 80 70 79 77.0  Milford Haven 55 40 45 60 35 47 45.8  Total 375 365 330 385 340 359 349.9

Methodology Statement (3): Example 20

Methodology Statement (3): Example 21 Assume obligated and sold capacity levels ASEP Obligated level Mcmd Sold capacity mcmd St Fergus 117 100 Easington Teesside 30 Bacton 150 70 Milford Haven 60 Increase flow at Teesside to obligated level 25.3 to 30 mcmd Rebalance at least interactive ASEP Milford Haven 45.8 – 4.7 mcmd

Methodology Statement (4): Example 22 Identify most favourable donor ASEP St Fergus Adjust test scenarios Increase flows at recipient ASEP for the T&T Teesside, 30 to 40 mcmd Decrease obligated level at donor ASEP by the same amount St Fergus, 117 to 107 mcmd Impact on flow = 107.2 – 107 = 0.2 mcmd Rebalance network Decrease Milford Haven flows from 41.1 by 9.8 mcmd Test network If “pass”: Exchange Rate is 1:1

Methodology Statement (5): Example 23 Test network If “fail” re-adjust test scenario Adjust test scenarios Decrease (incrementally) the obligated level at donor ASEP No lower than sold level St Fergus: 107.0 to 100 mcmd Re-balance at Milford Haven 31.3 + 7 = 38.3 mcmd If “pass”: Exchange Rate is (117 – 100) : (40 – 30) 1.7 : 1

Discussion & Next Steps Issues…….? Assuming no major issues: Mod Proposal to be submitted to Mod Panel around 12th Dec; and Consultation on proposed Methodology Statement to commence around 20th Dec.

UNC Mod & Methodology Statement Approval Process 25 Methodology Statement UNC Modification 6 Nov T&T workshop 20 Dec Issued for consultation 20 Dec Mod Panel 21 Dec Issued for consultation 7 Feb Extraordinary Mod Panel held after Transmission workstream 8 Feb Sent to Ofgem 6 Dec Draft presented to Transmission workstream 17 Jan Deadline for representations 15 Jan Deadline for representations 15 bus. days 28 days 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 12 Dec Mod to Panel Implemented June for July allocations (manual workaround) Implemented November for December allocations (full system solution) 1 Feb Sent to Ofgem Drafting cons. report