Transmission Workgroup 4th October 2012 Update on NGG’s response to Ofgem’s IPs relating to the provision of incremental capacity Transmission Workgroup 4th October 2012

Background Ofgem issued its Initial Proposals (IPs) for the price control settlement to apply for RIIO-T1 period on 27 July 2012 NGG responded to the consultation on 21 September 2012 and highlighted a number of concerns regarding details within the IPs, particularly around the proposals relating to the provision of incremental capacity In order to enable drafting of the licence changes needed for implementation on 1 April 2013, it is important that there is agreement regarding the proposed way forward We want to ensure that Users are aware of the changes being proposed and have included the main points in the following slides

Main points raised – Concerns around the process Within the IPs, Ofgem did not comment on details of NGG’s business plan, but we believe that it is essential that guidance regarding the proposed regulatory changes is provided in order to ensure the efficient development of the commercial regime. We welcome confirmation that Ofgem will be actively involved in changes to the commercial framework We continue to believe that most of our business plan proposals could be implemented without changes being needed to the commercial regime: The change to the obligated lead-time is the only one which could not be included without a specific change

Main points raised – Setting of revenue drivers IPs was not clear regarding the timing or means of how the revenue drivers would be set We have sought further clarity from Ofgem regarding their proposals. Our current understanding is that: Revenue drivers should be in place in the licence in a timely manner to ensure that anyone wishing to bid for incremental capacity can do so We proposed using a Generic Revenue Driver Methodology (GRDM) to determine the appropriate allowances Ofgem supports this proposal in principle, but wants a contingency in case it is not in place for the start of the RIIO-T1 period Licence can be drafted to use this if consulted on and agreed in time, but would also need to ensure that provisions are made if not We need to ensure all Users are aware of our proposed approach, so that we determine appropriate allowances for all Users’ incremental capacity requirements

Main points raised – Funding arrangements Additional revenue associated with the provision of incremental capacity will be provided via the application of the Price Control Financial Model (proposed for November in each year) 20% of a calculated revenue allowance adjustment will be made in year T-2 (where T is the year of capacity delivery) and 80% in year T-1 This will be split 90% ‘slow’ money Added to the RAV and provided over 45 year asset lifetime And 10% ‘fast’ money As an allowance within that formula year Hence generality of Users will start to fund incremental capacity before the connecting party pays any capacity charges (via the TO price control) But when that party connects, other Users’ charges should be lowered

Process going forwards Within Annex B to our May 2012 SO External incentives submission, we included a draft of the Generic Revenue Driver Methodology We plan to issue this for consultation with Industry parties in the near future, so that it can be in place for the start of the RIIO-T1 period As was the case for the initialisation of revised Exit arrangements (post Mod 0195AV), we will write to all Users to ask that they contact us to let us know as soon as possible if they intend to bid for incremental capacity: Particularly for the July 2013 Application Window But also for the March 2014 QSEC Or for capacity at any New NTS Exit Point or New ASEP