Commercial Arrangements For Gas Quality Service – Process UNC Transmission Workstream 23 rd April 2007

Development of Commercial Arrangements - Overview  To implement the commercial arrangements for a gas quality service we would need to consider changing the UNC to include  definition of the gas quality service  registration mechanisms to allow Users to access the product  charging arrangements  liability arrangements  We envisage having a series of workshops to gather the User requirements in each of these areas.  Following completion of the workshop schedule National Grid NTS will raise a UNC Modification Proposal via the normal change process.

Timeline  Proposed workshop schedule  Workshop 1: Define gas quality service – May 2007  Workshop 2: Define registration mechanisms – June 2007  Workshop 3: Define charging arrangements – July 2007  Workshop 4: Define liability arrangements – August 2007  There may be scope to amalgamate later workshops if early progress is made.  UNC change process schedule  Assume a 4 month change cycle.  If UNC Proposal submitted by National Grid NTS on September 12 th, Panel recommendation can be made to Ofgem by 21st January  However, if UNC Proposal submitted by National Grid NTS on August 16 th, Panel recommendation on Proposal can be made to Ofgem by 21st December  We would suggest discussing this at the end of the presentation

Assumptions  NGG will carry out feasibility studies only after being approached by an interested party.  The feasibility study will be paid for by the interested party.  NGG will offer services to the market via an open season process based on information from the feasibility study.  The UNC Modification proposal will be developed on the basis of the hybrid 2 model i.e. the plant is built based on User commitment and NGG has an opportunity to build above User signal  GS(M)R limits are unlikely to be amended before 2020.

Gas Quality Services - Context  At the last Ofgem Scenario’s workstream meeting, NGG presented some data on the likely costs associated with building a nitrogen ballasting plant at Bacton.  Headline numbers:  Capital costs could be in the range of £200m  Operational costs could be in the order of £20m per annum  A feasibility study that would allow NGG to hold an open season, would require detailed design work. Typically these types of studies represent 3% of the capital cost i.e. potentially £6m.

Key Issues - Gas Quality Service  What service are we offering?  Wobbe reduction service or service based on other gas quality factors e.g. enrichment, total sulphur, dew point  Basis of product e.g Wobbe adjustment * volume * duration?  Single product or multiple product e.g. daily, monthly, annual?  Firm or interruptible services?  Lead times on delivery e.g. interactions between plant operations and gas flow nominations timescales.  Upstream considerations  UIOLI  Location of service delivery?  Who will purchase service – single party or shippers?  Method of delivering service: ballasting, blending loops, storage etc.  How much of these arrangements will reside within the Transporter Licence, UNC or Ancillary documents?

Key Issues - Gas Quality Service  Any questions, views, comments or suggestions for additional items to be included?

Key Issues - Access Mechanisms  How can we ensure that an open season can be held based on a feasibility study potentially specified by only a single party?  How will we ensure that prices derived in the feasibility study will be applicable to larger/smaller sized plants?  How will we reconcile the differing requirements of users e.g. what if each user wants a different level of plant resilience?  What if the User specification does not meet the NGG risk profile?  Should an open season be held at the feasibility stage to obtain firm requirements (& funding) from all users?

Key Issues - Access Mechanisms  How the open season will be run then needs to be considered;  Should the open season be limited to the shippers that participated in the feasibility study?  How much of the ‘product’ will be offered for sale?  Single or multiple tranches? What period between tranches?  How will auction results be turned into a signal to build.

Key Issues - Access Mechanisms  Any questions, views, comments or suggestions for additional items to be included?

Key Issues - Charging Arrangements  Should costs of feasibility study be securitised, paid for in advance or discounted if the plant construction goes ahead?  Should plant lifetime be set to 2020?  Capital costs of plant focussed on users (of the plant) via capacity charges  Operational costs of plant focussed on users (of the plant) via commodity charge  Should users pay 100% of plant costs or pass an NPV test?  If there is any spare capacity how should this be charged for?  If NGG builds any additional capacity how should this be sold?  Should there be UIOLI? And if so how should we charge for it?

Key Issues - Charging Arrangements  Any questions, views, comments or suggestions for additional items to be included?

Key Issues - Liability Arrangements  NGG liabilities  It is anticipated that NGG would earn a standard rate of return, therefore the risk of the assets would need to be the same as our existing assets.  If NGG is unable to deliver contracted service what would we need to buy-back?  The gas quality service for out of spec gas but within specification gas would still flow, or  Entry capacity at that entry point, or  Gas quality service and entry capacity?  NGG’s liabilities would to some extent be influenced by user requirements on resilience etc. NGG would therefore seek to have input to the plant build specifications or would need a mechanism to offset this risk.

Key Issues - Liability Arrangements  User liabilities  Overrun charges  How could we identify overruns at an individual user level?

Key Issues - Liability Arrangements  Any questions, views, comments or suggestions for additional items to be included?

Summary & Next steps  Hopefully demonstrated that there is a lot to be defined before raising a UNC Mod, hence our proposal to have gas quality as a topic for discussion in the Transmission Workstream.  At the start we put forward an initial timetable, if this is acceptable, here are some potential dates:  May: Monday 21 st  June: Monday 18 th, Tuesday 19 th, Monday 25 th, Wednesday 27  July: Friday 27 th