A regulatory framework for gas quality treatment facilities: recap and update

2 GB regulatory framework DTI Regulatory authority for offshore Licensing for offshore exploration Liaise with HSE on G(S)MR HSE Safety regulatory authority – all GB gas activities Sets G(S)MR limits Sets & monitors compliance with safety case requirements Ofgem Regulatory authority for GB gas market Sets and monitors compliance with regulatory framework Ofgem to work together with HSE and DTI on any options developed

3 Ofgem - work so far Ofgem Workshop in September 06 Gas Quality is a material issue Ofgem led two workstreams (Sep-Dec 2006) Scenario development workstream– considered the extent of issue Economic Regulation workstream – considered possible regulatory framework to support construction of a gas processing facility Conclusions document published 30 January Work in Europe Gas interoperability ERGEG Taskforce

4 What is the extent of the issue? Future Source and spec of gas – Highly Uncertain… More continental LNG terminals ~ avail of import for GB Mkt Norwegian supplies delivered; high prices prompt UKCS dev Gas supplies diverted to Continent ~ increase GB demand High gas prices lead to increase development of UKCS All import facilities and UKCS flow to full capacity ~realistic? High imports flows to UK lead to exports to continent Depressed GB prices; limited dev of UKCS 2009/10 – earliest period to consider dev. scenarios 2013/14 – uncertainty regarding supply/demand balance Bacton most suitable terminal; upper wobbe focus Parameters Set Transit UK Global LNG Equilibrium Design Limits

5 Economic Regulation – What was considered Unregulated approach NGG builds facility Investment potentially included in RAB subject to user commitment meeting 100% NPV Costs recovered through user charges Pure regulated approach User commit approach Not favoured due to concerns over timeliness of investment. Favoured but with scope to allow NGG to add capacity above the level of user commitment at its own risk (i.e. not automatically included in the RAB) Not favoured as risk of asset stranding would be smeared across all gas customers. No regulation of facility Pure commercial incentives apply NGG builds facility Investment included in the RAB Costs smeared across all gas customers NOW FURTHER DEVELOPING THIS REGULATORY MODEL Economic regulation workstream considered three broad approaches

6 Proposed regulatory approach – summary Third party approaches NG to conduct feasibility study NGG refuses Possible licence route of appeal to Auth NG offers terms and conditions for feasibility study Third party refuses Third party accepts NG invests in capacity if bids cover 100% of facility cost NG undertakes study and asks third party whether to proceed to auction based on the study Third party accepts Third party rejects Third party pays for study NG offers service to market through auction NG can invest in additional capacity NG earns a regulated rate of return NG can earn higher or lower return

7 Next consultation document (May) Flesh out main issues in the allocation of risks among parties –e.g. competition impacts, balancing risks to consumers, etc. Present initial views on how risks might be allocated & the associated regulatory framework –Taking into account submissions to Workstream Conclusions Industry feedback key –Framework to rely on strong user signals

8 Next consultation doc published 31 May Draft Proposals published late July/early Aug Ap r Jun JulAug Sep May LICENCE AMENDMENTS NGG DEVELOPS UNC MOD PROPOSALS NGG First Workshop 23 Apr Panel Recommendation Sep Ofgem decision Oct Feasibility study potentially being conducted Oct Final proposals early Oct Responses due early Sep Responses due early July Workstream completes dev July

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