Revision of the UNC Post-Emergency Arrangements draft proposal July 2009

2 Background u Numerous proposals* have been made to the UNC Emergency Arrangements in relation to industry concerns  Ofgem’s 0149a decision letter advised it would welcome further proposals on: attracting non-UKCS supplies into the UK, the introduction of dynamic pricing and, mitigating the effects of potentially spiralling prices  National Grid mindful of concerns raised by the community and Ofgem during the progression of 0149/0149a  In February 2009, National Grid initiated an informal review through the Transmission Workstream (workshops) for stakeholders to consider pragmatic changes to the existing UNC post-emergency arrangements * (044 Revised Emergency Cash-out & Curtailment Arrangements; 061 Facilitating further demand-side response in the event that a Gas Balancing Alert is triggered; 0149/0149a “Gas Emergency Cashout Arrangements: Keeping the OCM open during a Gas Deficit Emergency)

3 Workshops u National Grid has facilitated four workshops between February – June 2009; attended by Users and Ofgem u Emergency Arrangements strawman (January 2009 Transmission Workstream) used to facilitate discussion within the workshops u Support from some attendees for the proposed changes however, National Grid is mindful of concerns raised with certain elements e.g. economic price assessment trigger (potential for manipulation), ‘rejected’ claims and nominations/renominations processes u Consideration of those concerns to be reflected in the proposal u National Grid believes that ‘do nothing’ is not an option

4 UNC Emergency Arrangements proposed revisions (1) Emergency cashout prices  No changes are proposed to the derivation of the emergency cashout prices (frozen at Stage 2) Post-Emergency Arrangements In addition to UNC section Q section 4.2.6: e.g. appointment of an individual claims agent:  In order to submit post-emergency claims, shippers will be required to have posted additional supplies and/or demand-side reduction (quantity and price) as offers to sell on the OCM physical market during a GDE  The OCM will display an indicative volumetric weighted average price of all Physical Market offers  Any offers remaining on the OCM at the end of each Gas Day of the GDE may be submitted as potential claims – however, only the Daily Imbalance surplus quantity (for each Gas Day of the GDE) can be claimed

5 UNC Emergency Arrangements proposed revisions (2) u All claims will be subject to a ‘mechanistic’ validation process (matching OCM offer, timing, location, quantity, price, etc) where claimed quantity is greater than Daily Imbalance surplus then scaled-back  a claim that passes the mechanistic validation will then undergo an economic price assessment test (trigger) e.g. price compared against all valid claims  All valid claims will be stacked in descending price order and an 80% factor applied to the total claimed volume: ‘economic price assessment trigger’.  Aggregation of each claimed quantity (lowest price first) within the stack: All claims with their quantity priced below the trigger will be assigned a status of ‘deemed approved’ (for payment); All claims with their quantity priced above the trigger will be assigned a status of requiring further economic price assessment (prior to payment) A claimed quantity might be split by the trigger in which case, the whole claim will be assigned a status of requiring further economic price assessment

6 UNC Emergency Arrangements proposed revisions (3) u Following the application of the trigger, all valid claims together with their status’ will be submitted to Ofgem for its oversight  All submitted claims will default as ‘valid for payment’ after 28 days following the submission date to Ofgem - unless National Grid is advised otherwise within that period  Where National Grid has been advised that a claimed price should be reduced, the User be informed and receive payment at the level of the economic price assessment trigger  In the event that a claimed price is reduced [or rejected], a User will continue to have a ‘right to appeal’ the decision under the existing UNC disputes process

7 UNC Emergency Arrangements proposed revisions (4) u 29 days after National Grid submitted the post-emergency claims to Ofgem, it will calculate a volume weighted average price (vwapec) based on the valid claims (including any scaled-back quantities or reduced prices* )  The User will receive payment for the cost of its claim taking into account any scaled-back quantity and/or reduced claim-price* )  A User with a Daily Imbalance deficit will incur an additional charge based on its deficit quantity * vwapec  Any remaining costs from post-emergency claims will be apportioned over Users based on their throughput  We anticipate that it will take approximately 3 months to process claims in this manner * Claimed price less SAP will be paid/taken into account

8 Advantages The emergency cashout price (s) remain unchanged u Addresses several concerns raised during the progression of 149/149a  Provides non-UKCS shippers with greater confidence they will receive payment for additional supplies of gas  Enhances the existing incentives for a shipper to address its short imbalance position  Utilising the OCM physical market in this manner facilitates the transparency of the prices and costs of gas during an emergency and allows shippers to estimate their commercial exposure  Ring-fences the costs of the emergency and extends the period over which the costs of the emergency are invoiced  Does not require any material changes to the NEC Safety Case nor, impinge on shippers’ obligations to comply with their safety obligations / NEC instructions

9 Disadvantages  Initial apportionment of emergency claim costs against those shippers with a short imbalance following a GDE might be viewed as inappropriate to the extent that a shipper has the ability to mitigate its risk  Utilisation of the OCM physical market during an emergency in this manner might be construed as discriminatory by certain Users e.g. those without physical capability  Delayed timescales for cost recovery (through Claims process) might continue to deter non-UKCS shippers from committing additional supplies to the UK during a GDE

10 Indicative timetable  Send draft Proposal to UNC Mod Panel (July 2009) - recommend to consultation  Final Mod Report August 2009 / Mod Panel  Ofgem decision September 2009  Implementation 1 st October 2009  Develop guideline (process/procedures & economic assessment) July/Oct 2009