RG0252 UNC Credit Proposals Overview of UNC Modification Proposals to be raised by Gas Transporters reflecting recommendations of Review Group 0252 Review of Network Operator Credit Arrangements Transmission Workstream : 3 rd June | Energy Networks Association

Background to RG0252 Review of Network Operator Credit Arrangements Raised by WWU in April 2009 to review current credit arrangements and processes within UNC TPD Sections V3 and V4, to determine if they were still appropriate, coherent and relevant 11 meetings in 2009/10 Active Transporter / Shipper / Ofgem participation Some elements already shared with Transmission Workstream in 2009 Largely non contentious Individual proposals (as opposed to one large proposal) to allow Users to more easily identify issues affecting them Evolution not revolution 2 | Energy Networks Association

Timeline Presentations to Distribution and Transmission Workstreams (May/June 2010) Proposals to June 2010 UNC Modification Panel To consultation (with suggested legal text) with extended period of 7/8 weeks (due to volume of proposals) Opportunity for discussion at Workstreams during Consultation period –June & July Distribution & Transmission Workstreams Implementation October 2010 – December | Energy Networks Association

Key Recommendations from RG0252 Raise series of UNC Modification Proposals 1.Amend & remove UNC TPD Section V3 text inconsistencies, errors and bi–lateral insurance clause (Proposal 0298) 2.Alignment of portfolio sanctions across UNC TPD Sections V & S (Proposal 0299) 3.Introduction of Fitch as an allowable Credit Rating Agency for the purposes of Code Credit Arrangements (Proposal 0300) 4.Removal of the use of Specially Commissioned Ratings for the purposes of obtaining an Unsecured Code Credit Limit (Proposal 0301) 5.Definition of Regulatory Asset Value (RAV) when calculating Maximum Unsecured Credit (Proposal 0302) 6.Obligation for Users to maintain a Code Credit Limit and at a reasonable level (Proposal 0303) 4 | Energy Networks Association

Key recommendations cont.. 7.Introduction of a rating table for independent credit rating agencies for use with Independent Assessments (Proposal 0304) 8.Unsecured Credit Limit allocated through Payment history (Proposal 0305) 9.Administration of Shipper Credit Security Contact Details (Proposal 0306) 10.Alignment of Defaulting User Threshold with Insolvency Act (1986) Threshold (Proposal 0307) 11.Appropriate use of the terms Surety and Security in UNC TPD Section V (Proposal 0308) 12.Timeframes for establishing and extending Guarantees and Letters of Credit (Proposal 0309) 13.Removal of DNO Users from UNC TPD V3.3.4 (Proposal 0310) 13a. Removal of DNOs as Users from UNC TPD V3 & V4 (Proposal 0311) 5 | Energy Networks Association

RG0252 Proposal 1: Amend & remove UNC text inconsistencies, errors and bilateral insurance clause Bi-lateral term removed from UNC, as not a facility any Transporter can offer Appropriate interpretation of Ofgems best practice guidelines (BPG) in respect of increased security requirements from Users due to unforeseen events (e.g. supplier of last resort) - Material change not linked to a 20% increase in Transportation charges as current UNC dictates Removal of 80% of 80% rule. 6 | Energy Networks Association

RG0252 Proposal 2: Alignment of portfolio sanctions across UNC TPD Section V & S Current UNC UNC Section S if a payment of £10,000 overdue…portfolio sanctions may be applied (within one business day) UNC Section V3.3.2…if User receives a 100% VAR notice …portfolio sanctions may be applied (after 5 business days) Proposed UNC in both instances, the Transporter may impose portfolio sanctions within one business day (currently five in respect of VAR), should the User breach either of these two UNC clauses. 7 | Energy Networks Association

RG0252 Proposal 3: Introduction of Fitch as an allowable Credit Rating Agency for the purposes of Code Credit Arrangements UNC 0252 recommended that long term ratings provided by Fitch Ratings be allowed in addition to those provided by Standard & Poors and Moodys Investment Service for the purposes of obtaining unsecured Code Credit Limit based on Investment Grade Rating > Proposal introduces defined term Credit Rating Agency (CRA) > Table to map credit ratings for clarity and consistent application > Consistent with GT Licence SSC A38 > Consistent with CUSC 8 | Energy Networks Association

UNC 0252 concluded that the use of Specially Commissioned Ratings (SCR) was inconsistent with UNC monitoring requirements and as a result introduced additional risk to both Transporters and Users Current drafting refers to daily monitoring which cannot be achieved with this product Snapshot not an appropriate tool for continuous monitoring Proposal removes SCR as an acceptable credit tool Independent Assessment considered more economical and efficient alternative 9 | Energy Networks Association Proposal 4: Removal of the use of Specially Commissioned Ratings for the purposes of obtaining an unsecured Code Credit Limit

Regulatory Asset Value (RAV) definition used in determining Users credit limit Currently one moment in time, however Transporters and Users better served by using most up to date RAV position New proposal to utilise updated RAV as published periodically by Ofgem –the Regulatory Asset Value is the value of the relevant Transporters regulated assets as prescribed by the Authority, which will be published by the Transporter for use in determining a Users Code Credit Limit. 10 | Energy Networks Association RG0252 Proposal 5: Definition of Regulatory Asset Value (RAV) when calculating Maximum Unsecured Credit

Closing a loophole which potentially places User community at increased risk of bad debt Currently (post User acceptance criteria being satisfied), Shippers can withdraw or reduce credit security arrangements to an unreasonable level Modification Proposal will require any User being issued 100% VAR notices in 2 consecutive months to securitise to the value of highest of the 2 VAR notices Until security in situ, portfolio sanctions may be put in place Implementation no earlier than December | Energy Networks Association RG0252 proposal 6: Obligation for Users to maintain a Code Credit Limit and at a reasonable level

RG0252 Proposal 7: Introduction of a rating table for independent credit rating agencies for use with Independent Assessments UNC 0252 recommended that clarity on the application of use of Independent Assessments be provided. Discussion at Transmission and Distribution Workstreams outlined the options available > Proposal to extend the mapping table (UNC TPD V3.1.7) to provide clarity on its application > Defines which independent agencies are acceptable for the purposes of obtaining an unsecured Code Credit Limit > Provides clear rules on the treatment of independent credit assessment reports > Broadly consistent with DCUSA approach 12 | Energy Networks Association

A User can be allocated an Unsecured Credit Limit based upon the period of time that the User has paid all their invoices by the payment due date (on time) Accessible after the User has paid 1 months invoices Maximum of 2% of 2% of the relevant gas transporters Regulatory Asset Value (RAV) after 5 years Payment of >£250 is paid late = Credit Limit reset to £0 Limited use of payment history as a UNC credit tool Good payment history under the UNC is not always a useful means of gauging if an applicant is fully credit worthy Independent assessment credit tool contains a wider payment history assessment Some small Users considered that its removal could impact on competition - difficult to obtain a full independent assessment until they have been trading for a period of time 13 | Energy Networks Association RG0252 Proposal 8: Unsecured Credit Limit allocated through Payment History

Payment History should be retained as a credit tool but be restricted to new entrants Only available upto the 2nd anniversary of the User acceding to the UNC All other credit tools available in Section V, such as independent assessment, Deposit Deed, etc. would continue to be available to the User Amend UNC to allow for administration errors inline with CUSC For a payment that is received upto and incl. 2 days after the payment due date Interest would be charged on the late payment The amount of unsecured credit would not increase that month However, should a further late payment be received within a rolling 12 calendar month period then the unsecured credit amount would be reset to zero Should a payment be received more than 2 days late the Users Unsecured Credit allowance reverts to zero straight away and interest is charged on the late payment 14 | Energy Networks Association

RG0252 Proposal 9: Administration of Shipper Credit Security Contact Details Current Each Transporter and Shipper maintain their own register of Shipper Credit Security contact details for credit purposes No requirement to maintain details post User acceptance criteria Proposed UNC It would be beneficial to recommend that all parties provide and maintain their contact details with a central co-ordinating agent such as xoserve xoserve Will utilise existing processes within xoserve (currently operate User Emergency contacts process) 15 | Energy Networks Association

RG 0252 Proposal 10: Alignment of Defaulting User Threshold with Insolvency Act (1986) Threshold Current Under existing UNC Transporters are entitled to Terminate a User where the aggregate amount unpaid by the Invoice Due Date is £10k or more User owing up to £50k across all Transporters, but if all less than £10k per Transporter, no termination option available, potentially exposing the User community. Proposed UNC To link the limit with the current Insolvency Act (currently £750) This will provide a trigger where suitable action can be taken Benefits Reduce risk to DNs and ultimately the end-user. This would close a loophole whereby a shipper can pay the minimum amount to keep the debt just below the £10K threshold Able to implement sanctions or termination earlier 16 | Energy Networks Association

RG 0252 Proposal 11: Appropriate use of the terms Surety and Security in UNC TPD Section V Consistent terminology when using surety and security in Section V of the UNC For example UNC V3.1.3 (b) to be changed to … Subject to paragraph 3.1.3(c), where a Qualifying Company or Parent Company provides security surety in respect of a User in the form of a Guarantee (the Security Surety Provider), then the Approved Credit Rating of such Surety security Provider may be used in place of the Users to calculate such Users Unsecured Credit Limit.. Instrument of CreditForm Letter of creditSurety GuaranteeSurety Prepayment agreementSecurity Deposit deedSecurity 17 | Energy Networks Association

RG0252 Proposal 12: Timeframes for establishing and extending Guarantees and Letters of Credit A Guarantee can reasonably be deemed valid for the purposes of a Code Credit Limit up until the date of its expiry, but is a risk for future debt if not replaced or extended prior to its expiry. A LOC should be deemed valid for the purposes of a Code Credit Limit until 30 days prior to its expiry to allow time to make any claim. Note- this is formalising existing custom and practice LOC value £1M end dated 31/10/10 Guarantee value £1M end dated 31/10/10 VALUE FOR CODE CREDIT 30/09/10£1M£1m VALUE FOR CODE CREDIT 01/10/10NIL VALUE FOR RECOVERING INVOICED UNPAID 31/10/10 £1M but too late to claim on LOC £1M VALUE FOR RECOVERING INVOICED UNPAID NIL£1M relating to pre 31/10 18 | Energy Networks Association

RG0252 Proposal 13: Removal of DNO Users from UNC TDP V3.3.4 The effect of V is to require Users (inc DNO Users) to provide, with effect from 1 October 2010, credit cover equivalent to the cost of 12 months Exit (Flat) Capacity charges in addition to usual VAR calc In the case of DNO Users this is unnecessary and represents an increase in costs for which there is no clear offsetting benefit V also introduces differential treatment between NG Distribution and the iDNOs in respect of credit arrangements with NG NTS Proposal 13 seeks to remove DNO Users from V which would have the effect of removing both the additional cost and the differential treatment between NG Distribution and the iDNOs 19 | Energy Networks Association

RG0252 Proposal 13a : Removal of DNOs as Users from UNC TPD V3 and V4 Proposal 13 SGN Proposal 13a WWU Removal of 12 month securitisation requirement for NTS Exit Capacity charges YES Removal of circa 51 days securitisation requirement for all applicable charge types (2 2012) NOYES Removal of requirement for IDNs to securitise against DN Pension charges NOYES Removal of unworkable DN Termination facility in UNC V4 NOYES Removes unintended consequences of Mods 116, 127, 195AV and any future DNO charges PARTIALLYYES Removes differential treatment of DNs by NTS in V3 and V4 PARTIALLYYES Removes potential increased security cost pass through to Shippers due to UNC requirements above. PARTIALLYYES 20 | Energy Networks Association

Summary Proposals raised on the basis of Review Group 0252 recommendations Consistent with intent of BPG as a living document Close loopholes Greater clarity Consistency Removal of redundant/incorrect terms Appropriate credit/security terms for all 21 | Energy Networks Association