Further consultation on NTS entry baselines Nienke Hendriks Head of Gas Transmission Policy, Compliance and Enforcement 14 August 2007

2 Agenda 27 July 2007 Ofgem Open Letter Reasons for revising baselines as part of TPCR Ofgem modelling request to NGG in TPCR TPCR consultation documents: Modelling outputs and baseline figures Approach to modelling TPCR September Updated Proposals - December Final Proposals: treatment of ‘free increments’ Overall TPCR package and final TPCR baseline numbers

3 27 July 2007 Ofgem Open Letter 30 March 2007 Section 23 on new NTS entry capacity baselines as part of TPCR Now reconsulting on these baseline figures Issue an impact assessment

4 Reasons for revising baselines as part of TPCR Baselines to reflect physical capability of the network –i.e. the maximum capacity that can be released at each entry point at system peak given the current intact network and assuming flows at nearby entry points are also relatively high Reducing the risk of consumers facing high buyback costs Recognising that gas flow patterns are changing Addressing concerns in relation to sterilised capacity

5 Ofgem modelling request to NGG NGG NTS to carry out network modelling using its existing Graphical Falcon software –model network capability for initially 2007/08 and 2008/09 but ultimately only for 2008/09 –use “load absorption”, "supply substitution" and a combination of the two, to balance the network assess network capability on a nodal basis, including potential new entry points in the analysis –Include sensitivity based on minimum LNG scenario –assume 2005 TYS physical network for 2008/09 –model "1 in 20 winter peak" demand for 2008/09 (as per 2005 TYS) –on the supply side, model "Transit UK", "Global LNG" and “Auctions+“ from 2005 TYS for 2008/09 –estimate reinforcement costs for four different "increment sizes", ie increases in capacity at individual entry points, namely 25 GWh/d, 100 GWh/d, 500 GWh/d and 1,000 GWh/d

6 TPCR consultation documents: Modelling outputs and baseline figures March 2006 Third consultation document – most results for Transit UK scenario (Appendix 10) June 2006 Initial Proposals – Global LNG, Auctions +,Transit UK load absorption and supply substitution results and initial proposals for gas entry baselines based on supply substitution (table 11.6) September 2006 Updated Proposals – presented June Initial Proposals baseline figures versus NGG proposed baseline numbers October 2006 Addendum - presented June Initial Proposals baseline figures but adjusted for already sold capacity and made offsetting zonal adjustments

7 Supply Scenarios Transit UK – This scenario assumes an aggressive, phased build-up of imports from Norway and LNG. It assumes that international LNG players decide to use the UK as a ’gateway to Europe’ with appreciable exports to the Continent primarily during the summer and shoulder months, thereby increasing NTS throughput significantly. Global LNG – This scenario assumes a situation where the majority of the LNG potentially destined for the UK is shipped to alternative markets as a result of stronger gas prices outside of the UK. To meet the supply shortfall the UK receives relatively high volumes from Norway and, to a lesser extent, from the Continent, where the Interconnectors are assumed to operate on a more seasonal basis. Auctions + - In Auctions+, auction results have been used as a guide in projecting the supply profile across the entry points, with individual terminal and storage flows constrained by the respective obligated capacity levels where necessary. As a result, this scenario is characterised by modest levels of imports at Bacton in the short to medium term, a significant build up in Norwegian imports at Easington from 2006/07 and very high imports of LNG through Milford Haven from 2007/08. Source: National Grid Gas Transportation 2005 Ten Year Statement

8 September Updated Proposals - December Final Proposals: treatment of ‘free increments’ (1) After publishing Initial Proposals, NGG was concerned that Ofgem was overestimating network capability by double counting ‘free increments’ (i.e. the maximum additional capacity that could be released at each entry point at system peak) NGG argued that given that the base network had been balanced using a merit order approach, least helpful supply substitution to balance the incremental network would still overestimate network capability by double counting the so called ‘free increments’ Separate zonal analysis that NGG submitted to Ofgem indicated significantly lower estimates of maximum network capabilities In the September document we published both our and NGG’s numbers

9 September Updated Proposals - December Final Proposals: treatment of ‘free increments’ (2) October baseline addendum was based on 90% of (average) free increment to average baseflow of the three scenarios Final proposals were based on 90% of highest free increment in a zone, this amount of capacity was smeared over all entry points in that zone 3 approaches for smearing free increment were considered: –TYS –Sold capacity –Pre-TPCR baselines

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11 Overall TPCR package and final TPCR baseline numbers Final baseline numbers were proposed as part of overall TPCR package, taking account of responses to the previous consultation documents The overall TPCR package included: (i) cost of capital; (ii) capex allowance; (iii) opex allowance; (iv) pensions and tax allowances; (v) revenue drivers; (vi) buy back allowance and exposure; (vii) other incentives and obligations New obligation on NGG to introduce capacity trade, transfer and substitution to reduce the risk of sterilised capacity and to reduce the risk of inefficient investment

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