Place your chosen image here. The four corners must just cover the arrow tips. For covers, the three pictures should be the same size and in a straight line. Action NTS0507: Potential impact of EU Framework Guidelines on GB Charging NTS Charging Methodology Forum (NTSCMF) 23 rd June 2014

2 Agenda  Overall aims  Overview and key assumptions  Analysis:  Scenarios  Potential impact of EU Framework Guidelines on GB Charging – December 2013 Scenarios (for reference)  Potential impact of EU Framework Guidelines on GB Charging – New Scenarios Analysis  Summary

3 Overall Aim (1)  Give potential impacts the Draft EU Tariff Code on the GB NTS Charging Arrangements  Help industry understand potential impacts of the EU Draft Tariff Code on GB NTS charging that may help inform any responses to the code consultation  To support Ofgem’s Gas Transmission Charging Review (GTCR) and the technical modelling workshops scheduled over the Summer

4 Overall Aim (2)  Considered two approaches  Minimal approach – just on Interconnection Points (CAM Points)  Impact on all of domestic entry and exit points (CAM and non-CAM Points)  Analysis provides indicative impacts – does not provide any forecasts  The options presented here are indicative and are not how we propose or suggest the Framework Guidelines be implemented

5 Overview: Summary of data used in Analysis  Analysis used formula year 2012/13 to look at what the potential impacts would have been if we applied the EU Tariff Code at:  Interconnection Points only (CAM Points);  All Entry and Exit points of GB (CAM and non-CAM Points)  Assumed no changes in bookings / behaviour / flows  Uses a number of assumptions due to uncertainties or areas that need consideration  Looks at the revenues that would be need recovered under the scenarios and how they might be recovered

6 Overview: Key Assumptions (1)  What we mean by implementing the EU Draft Tariff Code:  Where used, the commodity charge as per the EU Draft Tariff Code is to recover the cost to flow gas  We have used costs for shrinkage as a proxy for fuel costs  Cost Allocation Methodology for the charging regime for the calculation of charges using the LRMC methodology (“Virtual point variant A” in EU Draft Tariff Code) remains  Any targeted charges (linking to “Dedicated Services”) or specific charging arrangements (e.g. current arrangements for storage) assumed to remain in place

7 Overview: Key Assumptions (2)  Charges set to aim to recover the target allowed revenue for the year including a mechanism to recover any shortfall  When considering how revenue shortfalls could to be recovered in the different scenarios this could be:  Through a mix of capacity and commodity; and  Potentially recovered in either a uniform method across all GB points or via a dual methodology for CAM and non-CAM points

Place your chosen image here. The four corners must just cover the arrow tips. For covers, the three pictures should be the same size and in a straight line. Analysis

9 Analysis: Reminder of Current Methodology  TO allowed revenue recovered from capacity charges and commodity charges  Effective 50:50 split between Entry and Exit charges DN Pensions Deficit & NTS Metering Entry Capacity (All) Entry Commodity (All) Exit Commodity (All) Exit Flat Capacity (All) TO Charges TO Allowed Revenue SO Charges St Fergus Compression + Shorthaul +Legacy Incremental Entry/Exit* + Neutrality Entry Commodity (All) Exit Commodity (All) SO Allowed Revenue

10 Analysis: Scenarios to be covered

Place your chosen image here. The four corners must just cover the arrow tips. For covers, the three pictures should be the same size and in a straight line. Action NTS0507: Potential impact of EU Framework Guidelines on GB Charging – December 2013 Scenarios (for reference)

12 Scenario 1 (Dec 2013 analysis) Overview: Apply EU FGs at CAM Points only  TO Revenues / charges  Allowed revenues unchanged  Same charging methodology for capacity as now  No changes to Capacity charges / revenues  EU FG Commodity charge (shrinkage) for all  Commodity charges recover shortfall  Apply to domestic only (Non-CAM Points) as exclude IPs (CAM Points) under EU FGs  Therefore use a smaller charging base to recover commodity  Targeted charges / pass through items remain as is

13 Entry Capacity (All) Scenario 1 – Implementing EU FGs at IPs (CAM Points) only DN Pensions Deficit & NTS Metering TO Charges Exit Commodity (Non-CAM only) Exit Flat Capacity (All) Entry Commodity (Non-CAM only) SO Charges St Fergus Compression + Shorthaul + Legacy Incremental Entry/Exit* + Neutrality Entry Commodity (Non-CAM) Exit Commodity (Non-CAM) Commodity (All)

14 Scenario 1: TO Analysis (Entry and Exit Commodity) /13 16% Increase 5% Increase

15 Scenario 1: SO Commodity Analysis – Entry and Exit 2012/13 10% Increase 70% Decrease

16 Scenario 2 (Dec 2013 analysis) Assumptions: Apply EU FGs across all GB  Total allowed revenues unchanged (combined TO+SO)  SO Commodity charge only recovers shrinkage  Apply to all points with any under recovery on what we have as remaining SO Commodity would move onto TO Capacity charges  Same charging methodology for capacity as now  Capacity charges (Entry and Exit) would need to be adjusted on top of those calculated using the Transportation Model to collect allowed revenue (TO+SO)  There are a number of options that could be applied to achieve this  Targeted charges / pass through items remain as is

17 Scenario 2 – Implementing EU FGs Charges (FG) – Step 1 DN Pensions Deficit & NTS Metering Entry Capacity (All) Entry Commodity (All) Exit Commodity (All) Exit Flat Capacity (All) Entry SO Shortfall (All) Exit SO Shortfall (All) Charges (FG) – Step 2 DN Pensions Deficit & NTS Metering Entry Capacity (All) Exit Flat Capacity (All) Entry Shortfall (All) Exit Shortfall (All) Recalculation of Exit Capacity Charges

18 Scenario 2 – Potential Impact on Entry and Exit Revenues – 2012/13

Place your chosen image here. The four corners must just cover the arrow tips. For covers, the three pictures should be the same size and in a straight line. Action NTS0507: Potential impact of EU Draft Tariff Code (DTC) on GB Charging – New Scenarios

20 Overview – New Scenarios  The following scenarios follow on from the analysis done in December 2013  Analysis used formula year 2012/13 to look at what the potential impacts would have been if we applied the EU Draft Tariff Code  Assumed no changes in bookings / behaviour / flows  Uses a number of assumptions due to uncertainties or areas that need consideration  All key assumptions within the December 2013 analysis are applicable to this analysis

21 Scenario 3 – Apply EU DTC at all points with TO and SO split  Total allowed revenues unchanged (combined TO+SO)  SO Commodity charge only recovers shrinkage  Apply to all points with any under recovery on what we have as remaining SO Commodity would move onto TO charges  Capacity Floating and Floating Regime (split by TO and SO)  Targeted charges / pass through items remain as is

22 Scenario 3 – Apply EU DTC at all points with TO and SO split SO Charges St Fergus Compression + Shorthaul + Legacy Incremental Entry/Exit* + Neutrality Entry Commodity (All) Exit Commodity (All) Entry Capacity (All) DN Pensions Deficit & NTS Metering Exit TO and SO Shortfall Exit Flat Capacity (All) Entry TO and SO Shortfall TO Charges

23 Scenario 3 – Apply EU DTC at all points with TO and SO split £190m £50m £340m

24 Scenario 4 - Apply EU DTC at all points with CAM and Non-CAM split  Revenue Amount - Values based on model and what is allocated to IPs (CAM Points) and non IPs (Non CAM Points)  New Capacity Rates at both IP’s (CAM Points) and Non IPs (Non- CAM Points)  Total Revenue split by CAM and Non-CAM points  Commodity charge only recovers shrinkage  Revenue not collected would need to be collected from Capacity  Floating Regime (CAM and Non-CAM split)  Targeted charges / pass through items remain as is

25 Scenario 4 - Apply EU DTC at all points with CAM and Non-CAM split CAM Commodity Non-CAM Commodity CAM Capacity (All) DN Pensions Deficit & NTS Metering Non-CAM Shortfall Non-CAM Capacity (All) CAM Shortfall St Fergus Compression + Shorthaul + Legacy Incremental Entry/Exit* + Neutrality

26 Scenario 4 - Apply EU DTC at all points with CAM and Non-CAM split £195m £44m £6m £30m £44m £145m £6m £17m

27 Scenario 5 – Apply EU DTC at all points (mix of Capacity/Commodity)  Fixed regime is today for IP’s (CAM Points) and Non- IP’s (Non-CAM Points)  Remove Shrinkage Revenue from the SO Commodity Revenue  The shortfall in SO Commodity Revenue needs to be collected by an alternative Commodity Charge  The TO Commodity Revenue needs to be collected by an alternative Commodity Charge

28 Scenario 5 – Apply EU DTC at all points (mix of Capacity/Commodity) SO Charges St Fergus Compression + Shorthaul + Legacy Incremental Entry/Exit* + Neutrality SO Entry Alternative Commodity SO Exit Alternative Commodity Commodity (All) Entry Capacity (All) DN Pensions Deficit & NTS Metering TO Exit Alternative Commodity Exit Flat Capacity (All) TO Entry Alternative Commodity TO Charges

29 Scenario 5 – Apply EU DTC at all points (mix of Capacity/Commodity) £220m £120m £45m £145m

30 Summary (1)  Where considering floating charges, capacity charges could be subject to an additional adjustment to aim to recover target allowed revenues for the year (e.g. on top of any existing adjustments)  Could include revenue uplift (like Exit), inflation adjustments or other  Options include taking revenue shortfall recovering based upon:  Adjusting using baselines or obligated levels  Adjusting using forecast bookings  Issues to consider would be:  Application of any uplift considering (amongst other items):  The methodology to be applied in the Transportation Model  The application of discounts for short term capacity  How to apportion any uplift or adjustment

31 Summary (2)  EU Draft Tariff Code gives some flexibility in the adoption of fixed or floating tariffs  Becomes a GB discussion about optimal balance between charges and points to recover revenue  Ofgem’s GTCR and modelling workshops will be looking at this in some detail and there will be assumptions within this work on the EU Draft Tariff Code

32 Questions  Any Questions?