EBCC MEETING 27th April 2012

AGENDA 1.0Introduction 2.0Minutes and Actions 3.0Operational Update 4.0Modification Proposals 5.0 Significant Code Review Update 7.0Presentation of Winter Operations 2011/ Proposed Review of Energy Balancing Credit Rules 9.0Update Deposit Deed 10.0Risk Register 11.0AOB - Lehmans -EU Update -Team Update 12.0Date of Next Meeting

Operational Update March 2012

Modification Update Market Operator Mod

Winter Operations Presentation 2011/2012

What went well Emergency EBCC convened in October/November 2011 for River Ter in accordance with Section X No Failures reported. Pro-active engagement with at risk parties and EBCC members. Review the Credit Framework Early engagement with Users in relation to MOD 640 Adjustments. Introduction of AMS Banking and the change of banking arrangements. Introduction of Non Registrable Deposit Deed

Lessons Learnt Be more aware of external factors when progressing change. –SCR has delayed progression of Modification 233v –Implementation of Non Registrable Deposit Deed Give clearly definitive instructions to external stakeholders.

FI Aggregate Limit Review April 2012

Background Case for Change Action Taken Rating Amendment Impact Contents Outlook Deposit Deeds Recommendations/Ways Forward Conclusions Appendices

Background In order to provide security for the purposes of Energy Balancing Activities a Financial Institute was required to hold a rating of A1/A+ or above. In 2011 the global economic climate deteriorate with the downgrading of a number of sovereign economies. As a result of that downgrading many Financial Institutions were also subject to a downwards rating change.

Background Rating Comparison Table Prior to November 2011: Ratings Comparison Aggregate Limit (Maximum exposure acceptable for an individual Financial Institution) Rating Action Moody’sS&P Aaa, Aaa1, Aaa2, Aaa3, Aa1, Aa2, Aa3 AAA, AAA- AA+, AA, AA- £62,000,000 Rating is acceptable provided that the maximum Aggregate Limit is not exceeded. A1,A+£25,605,000 Rating is acceptable provided that the maximum Aggregate Limit is not exceeded. A2, A3,A, A-,Zero Rating is not acceptable. In the event of a downgrade below A1 Moody’s or equivalent, The User(s) will be notified to provide alternative Security within 30 days. Failing to put in place Security 30 days after notice, the User(s) Secured Credit Limit will be set to zero and the Cash Call process will drive any indebtedness. Baa, Baa1, Baa2, Baa3 BBB+ BBB, BBB-, BB+ Zero Rating is not acceptable. In the event of a downgrade to below A3 Moody’s or equivalent rating, The User(s) Secured Credit Limit will be set to zero with immediate effect and the User(s) affected will be notified to provide alternative Security. The Cash Call process will drive any indebtedness. Ratings below A1 and A+ have a zero aggregate limit and are unsuitable for Security.

Case for Change 28.5% of FIs providing security were downgraded over 6 months. 26 Users affected in total. May Credit Agricole is downgraded below A1/A+. September Bank of America and Intesa Sanpaolo are downgraded below A1/A+. October National Westminster and Royal Bank of Scotland are downgraded below A1/A+. November 2011-Barclays Bank is downgraded to A+. % of impact frequency on affected Users

Action Taken Energy Balancing Credit Rules amended in November The rating boundary for the purposes of guaranteeing Security was lowered. A £25,605,000 aggregate limit became applicable to FIs with a rating of A2/A and A3/A-. 30 day time limit for Users to find alternative security was extended to 90 days to act as a moratorium.

Rating Amendment Ratings Comparison Aggregate Limit (Maximum exposure acceptable for an individual Financial Institution) Rating Action Moody’sS&P Aaa, Aaa1, Aaa2, Aaa3, Aa1, Aa2, Aa3 AAA, AAA- AA+, AA, AA- £62,000,000 Rating is acceptable provided that the maximum Aggregate Limit is not exceeded. A1, A2, A3, A+ A, A-, £25,605,000 Rating is acceptable provided that the maximum Aggregate Limit is not exceeded. Baa, Baa1, Baa2, Baa3 BBB+ BBB, BBB-, BB+ Zero Rating is not acceptable. In the event of a downgrade to below A3 Moody’s or equivalent rating, The User(s) Secured Credit Limit will be set to zero with immediate effect and the User(s) affected will be notified to provide alternative Security. The Cash Call process will drive any indebtedness. Ba1, Ba2, Ba3 or below BB+, BB, BB- or below Zero Rating is not acceptable. In the event of a downgrade to below A3 Moody’s or equivalent rating, The User(s) Secured Credit Limit will be set to zero with immediate effect and the User(s) affected will be notified to provide alternative Security. The Cash Call process will drive any indebtedness. Rating Comparison Table Post November 2011: £25,605,000 aggregate limit now includes ratings A2, A3 and A, A-

Impact Further 8.6%of FIs suffered downgrades from December 2011 without impact to the 3 Users with security in place totalling £7.7 Million. Currently 26% of FIs are rated below the previous A1/A+ boundary. FI Ratings April 2011 FI Ratings April % 43%52% 26% 48%

Outlook 87% Possible Downgrade 13% Not on Watch 39% Negative 61% Stable Moody’s Outlook S & P’s Outlook 87% 13% 39%61%

Outlook Aggregate secured credit by rating band 70, ,792,00026,070,000214,417, ,244,000 32,489,050 92,849, ,613,

Outlook Sovereign creditworthiness is expected to continue deteriorating during A number of FIs providing security have interests in high risk areas and will be reviewed by Moody’s for potential downgrade. Risk Area No. of FIs Significantly Exposed Aggregate Credit Secured by LOC % of Total Credit Secured by LOC* Greece4£108,065, % Italy2£72,562, % Spain1£10,562, % Ireland1£19,528, % * Total security held as LOC is £319,376,000

Deposit Deeds Growing use of deposit deeds. Success in terms of offering customers an alternate method of security to a LOC. Removes administration and associated costs involved in obtaining a LOC every year. Assists rationalisation of accounts. Users may not be able or wish to hold large amounts of cash.

Recommendations/Ways Forward Alert customers when FIs are subject to a possible downgrade. Amend Energy Balancing Credit Rules to include specific conditions on a sliding 90 day time limit for providing alternative security. Consider further possibilities for Deposit Deeds. Increase awareness of FIs able to provide security within the new boundary change. Make customers more aware of alternative security measures.

Conclusions 28.5% of FIs exceeded their aggregate limit from April 2011 to November 2011 due to downgrades. Further downgrades are expected during Although the economic atmosphere is generally negative the support of central banks makes failures less likely. Change to rating requirements has maintained a stable risk position and assisted increasing overall spread of risk. Increasing the aggregate limit is not necessary. A proactive approach with Users should be explored. Sliding timescale for providing alternative security necessary

Appendix 1 Financial Institute Prevailing Rate Moody’s OutlookAggregate Limit Secured Credit Value (CL) No. of Customers Head Room Banco Bilboa Vizcaya Argentina APossible Downgrade£25,605,000£600, % Bank of Tokyo- Mitsubishi UFJ Ltd A+Not on Watch£25,605,000£902, % Barclays Bank plcA+Possible Downgrade£25,605,000£10,562, % BNP ParibasAa3Possible Downgrade£62,000, % Citibank N.AAPossible Downgrade£25,605,000£1,030, % Credit Agricole Corp & Investment APossible Downgrade£25,605,000£13,800, % DBS Bank LtdAA-Possible Downgrade£62,000,000£500, % Deutsche Bank AGA+Possible Downgrade£25,605,000£25,165, % DNB Bank ASAA+Possible Downgrade£25,605,000£2,100, % HSBC Bank plcAA-Possible Downgrade£62,000,000£60,502, % ING Bank N.VA+Possible Downgrade£25,605,000£11,550, %

Appendix 1 Cont. Financial Institute Prevailing Rate Moody’s OutlookAggregate Limit Secured Credit Value (CL) No. of Customers Head Room JPMorgan Chase Bank NAA+Possible Downgrade£25,605,000£8,680, % Lloyds TSB Bank plcAPossible Downgrade£25,605,000£19,528, % Mizuho Corporate Bank LtdA1Possible Downgrade£25,605,000£250, % National Westminster Bank plc A2Not on Watch£25,605,000£155, % Nordea Bank Finland plcAA-Not on Watch£62,000,000£4,752, % Rabobank NederlandAAPossible Downgrade£62,000,000£26,070, % Santander UK plcA1Possible Downgrade£25,605,000£7,256, % Skandinaviska Enskilda Banken AB A1Possible Downgrade£25,605,000£9,000, % Societe GeneraleAPossible Downgrade£25,605,000£7,100, % Standard Chartered BankA1Possible Downgrade£25,605,000£6,064, £ Sumitomo Mitsui Banking Corporation A1Possible Downgrade£25,605,000£11,320, % Svenska Handdelsbanken AB Aa3Possible Downgrade£62,000,000£30,500, %

Appendix 2 Currently a majority of customers rely on a LOC from a FI, although there has been a rise in Deposit Deed registration.

Appendix 3

Energy Balancing Credit Rules Proposed Review

Background The EBCR have been subject to ongoing amendment, however the document has not been reviewed in its entirety for a year. The appearance and performance of the EBCR is not at full potential. Users are not making use of the EBCR as intended.

Complaints received from potential New Users/Users that calculations are not explained with sufficient clarity. Formatting is irregular. Dense text and paragraphs is off-putting to readers. Difficult to search document/ locate areas of interest. Key information is not up to date. Notices overly detailed/unclear. Summary of Findings

Case for Change Text heavy pages are not User friendly. Individual requirements are not listed in a manner that makes them easy to identify. Information is repeated unnecessarily.

Case for Change Cont. Information has not been updated Formatting/grammatical errors.

Case for Change Cont. Explanations of calculations are not clear, particularly to New Users. No references provided to enable Users to find the information necessary to perform their own calculations.

Case for Change Cont. Notices are very lengthy. Level/type of information included can be misunderstood.

Conclusion EBCR document requires streamlining. Should be updated in line with Xoserve’s current branding. Text requires review for amendment/simplification. Notices should be reviewed for clarification. Request User Feedback.

Deposit Deed Update

Conclusion Security is a moving target Total number of Users 193 Total Security in place £349,064,500 Number of Deposit Deeds in place 55 ( £17,845,000) Number of Letter of Credits in place 112 (£322,162,000) Cash Deposits still in progress 26 (£9,057,500)

Risk Register Update

Register Part 1 Risk Register as at 26/4/12 : RiskLikelihood - commentsLikelihood H1 loss of Gemini system - sustained loss for 1 working day or more Once in 10 years – to date Gemini over 2 years Gemini has had 1 short overnight outage. Also due to Oracle Software Upgrade, Gemini affected between 22nd and 25th October. Loss of Gemini on 14th and 15th May due to Server problems.2 H2 Calculation for IMS is found to be incorrect. Has happened in Dec 05 and also recently when during Oracle OS upgrade UAT it was found that accruals not included in a D-1 or D- 2 recalculation – twice in last 6 to 7 years – once in 5 years. April 08 data was uploaded incorrectly.3 H3 APX Gas files containing system prices and trades arrives late. Pre Gemini IMS this used to stop PIMS jobs running – since introduction of Gemini IMS this has not happened – once in 5 years. Controls and monitors are now in place to ensure files are received.3

Register Part 2 Risk Register as at 26/4/12 : RiskLikelihood - commentsLikelihood H8 User’s unable to provide CVA data due to the CVA system / website being down This happened once on 13/03/07 – Once in 5 years. Controls in place that would receive notification from CVA.3 H9 In the absence of being unable to adjust the ABI calculation the industry could be unduly exposed to avoidable financial debt. Should NGD be aware of more up to date information. Due to SCR Mod 233 this was put on hold to await outcome of SCR consultations.3 H10 Due to the current European financial climate, there is a risk that the number of FI’s meeting the relevant criteria to provide security could reduce significantly. Moodys are currently have a schedule to review all FI’s current rating in June

Lehman’s Update

Update Court Order in the US to reduce and allow claim for the discounted amount of $15,874, held on 22 nd March Time for appeal has elapsed. Xoserve are working with NG Legal and Skaddens to finalise a Termination Agreement – This is no longer required. Working in conjunction with National Grid’s Treasury department to sell the claim.

EU Third Energy Package Update

Collection of three European Regulations and two European Directives. Aims to create a harmonised market for gas and electricity within the European Union. Creates a new institutional framework: Agency for the Cooperation of Energy Regulators (ACER); the European Transmission System Operators for Gas (ENTSOG); and the European Transmission System Operators for Electricity (ENTSO-E). Background

Developing European Network Codes Development of binding Network Codes across 12 areas is required: –Capacity Allocation Management –Energy Balancing –Tariffs –Interoperability Rules –Trading Rules –Third Party Access –Security and Reliability –Network Connection –Data exchange and Settlement –Operational Procedures in an Emergency –Energy Efficiency –Transparency Rules

Current Position Draft Network Code for Capacity Allocation Mechanisms was delivered on 06 March 2012 and submitted for review and comitology. Initial draft Network Code for Balancing submitted for consultation on 13 April Scoping documents for Tariffs FG development issued on 08 February 2012, ACER to produce FG based on responses by June Draft FG for Interoperability issued for consultation on 16 March 2012, consultation is due to close mid May 2012.

Potential Change CAM Network Code redefines the Gas Day. Requirement for capacity to be allocated as ‘Bundled Capacity’ at interconnection points. Nominations at interconnection points will be a single transaction to nominate for both sides of the connection. Draft Balancing Code redefines current UNC definitions. Invoicing methodologies and tariffs possibly amended. Overriding requirement that national contracts cannot pose undue burdens on New Users.

Potential Impact Areas Implications for Gemini and invoicing. Change in Gas Day affects all reliant time periods ie submission of data, scheduling files etc. External pressures to change existing Credit arrangements.

Way Forward Ongoing analysis to take place. EU monitoring to continue. Maintenance of a Watching Brief.

AOB QUESTIONS?