Modification Proposal 0246: Quarterly NTS Entry Capacity User Commitment Chris Shanley

2 Modification Proposal 0246: Entry Capacity User Commitment – “The Concept” Long Term Entry Capacity Car Value - £1.3bnValue - £40,000 Security - £?Deposit - £1000

3 Timeline  RG221 was established in September 2008  Main questions:  Is the balance of investment risk right between existing and new shippers and National Grid NTS?  How do you mitigate the risk of “default”*.  Modification Proposal 0246 to the UNC Panel in March  Aim is to put new arrangements in place prior to the next Long Term Entry Capacity Auction (QSEC)  Ofgem Impact Assessment is highly likely. * “default” = payment for allocated capacity is not received at the time expected

4 Issues discussed by Review Group  Currently no security required at time of long term capacity auction.  Security called for 12 months prior to the start date of the entry capacity – potentially long after system investment made.  User currently able to defer capacity commitments 12 months prior to use and keep deferring without penalty.  Incremental Capacity auction allocations lead to fixed additional allowed revenue to National Grid.  If a User “defaults” = Allowed revenue shortfall is recovered through wider Transportation charges

5 Proposal – General terms agreed  Provision of security  To cover auction allocations – inc. past auctions  Amount of security – sufficient to deter speculative auction bidding  Aspiration for annual cost of security to be proportionate to the risk to the Shipper Community of a User Default  Security tools  Only Letter of Credit (LoC) or deposit allowed.  Default rules  Y2 to Y16 Entry Capacity at all ASEPs is withdrawn from User and User incurs cancellation fee equivalent to security provided by that User

6 Allocated Capacity Value (ACV) – Options considered

7 Entry Capacity Risk Assessment  ACV = Years Y2 to Y16 * [0.1]  Modification 0246 proposes that the ACV derived will be further reduced depending on the Users credit rating risk (between 30% and 100% of the ACV)  User Security Value (USV) = ACV * UCR + VAT  During legal drafting for Mod 0246 concerns have been raised by our Legal representatives  Charging a different cancellation fee when cancelling the same quantity of capacity, could be considered as unduly discriminatory  We propose to remove UCR  User Security Value (USV) = ACV + VAT

8 Barrier to Entry ‘vs’ Community Risk Proposal seeks to strike a balance  LoC costs to cover aggregate USV estimated at around £4m per annum  Risk of a project or major User failure has been estimated at ~£20m per year – this figure is based on current levels of capacity holdings and not historic defaults  Views are sought on whether an appropriate balance has been met, i.e. should the 10% ACV figure be amended or not?

9 Security Tools and Operating Costs For the purposes of long term entry capacity, only the following types of security shall apply : “ Deposit Deed” “Letter of Credit” Note: Users with poor credit ratings may choose to use a deposit deed as a cheaper option

10 Security Required – Across Users

11 When should security be put in place? – Options Considered

12 Options - Pros and Cons  No consensus reached  Option One – 14 days before auction proposed within Mod 0246  Option Three - Post auction favoured by some Review Group Members AdvantagesDisadvantages Option 1 No impact on current auction processes or timetables Removes unsecured bids prior to allocation. Involves estimating the value of your successful auction bids Potential barrier to entry for smaller developers due to financing difficulties Option 3Provisional Allocations known before security is called for Aligns better with project financing processes. “default” = Potential effect on other bidders at multi user ASEPs

13 QSEC – Bid Window Amendment  Issues identified with removing a Users bids prior to allocation (option 1) - potential effect on other bidders at multi user ASEPs Current QSEC Bid window:  Opens at 08:00 and closes at 17:00. Bid Windows must be held between 1st Sept - 30th Sept.  Open for 10 consecutive Business Days (stability can be met from day 2 and auction closes early).  The bid window closes 17:00 and auction information is sent to Users by 20:00 on each day  Now proposing that we check the security after each bid window and remove any bids where the USV > security provided.  This will require us to amend the QSEC auction to have a day between each bid window and reduce the number of windows to 8.

14 Example of a User’s Security Value QSEC ACV = Years Y2 to Y16 * [0.1]

15 Example of a User’s Security Value QSEC ACV = Years Y2 to Y16 * [0.1]

16 Default Rules  Long term entry capacity “events of default” will be:  Security < USV  The security tool (LOC/Bank Deed) is about to expire (less than 28 days).  The User is Terminated (UNC Section V4) for other reasons under UNC.

17 Default Rules - process  User will be notified and given 10 business days to rectify (except where Termination is for other reasons under UNC).  If not rectified: Invoice will be raised for the Secured amount (cancellation fee) NG will call on the USV pending payment of the above invoice. The User loses the right to acquire entry capacity NG will re-call the User’s QSEC capacity at all entry points across all years (Y2 – Y16). NG offer Capacity to trading party (UNC B5.4) NG will resell the capacity in subsequent auctions