UNC Proposal 329 – Review of Industry Charging & Contractual Arrangements - DM SHQs and DM SOQs Joel Martin – 21/09/10

2 Introduction – Review Group 329 Background to the Proposal. Nature of the Proposal. Terms of Reference. Suggested meeting timeline & topics.

3 Background to the Proposal. UNC Modification 090 – Interruption Reform. Scotland Gas Networks GDPCR Re-opener. Ofgem decision letter – published 26/03/10.

4 Background to the Proposal – cont… Ofgem decision letter – published 26/03/ The contractual UNC Supply Point Hourly Quantities (SHQs) of customers can be significantly higher than their recent maximum peak hourly loads. If the recent maximum peak hourly values (rather than contractual UNC SHQ) were used by SGN for network planning, then no reinforcement was required in zone 3 and reinforcement in zone 2 would be reduced by at least 0.54km. However, since SGN said that in order to ensure security of supply their network planning had to incorporate their contractual obligation to meet the UNC SHQ load…

5 Background to the Proposal – cont… Ofgem decision letter – published 26/03/ However we consider that this has highlighted an issue that the GDNs need to consider and review. We are concerned that the existing charging and contractual arrangements may not place appropriate incentives on customers to declare accurate SHQs and this issue does not appear to have been adequately addressed through existing industry governance arrangements. If customers do not have appropriate incentives to consider the level of SHQ they require, this could lead to over investment in the pipeline system.

6 Background to the Proposal – cont… Ofgem decision letter – published 26/03/ We think the GDNs need to review this situation. If they do not we may conclude at subsequent reviews that either forecast or incurred capital expenditure was inefficient. We may disallow all (or part) of such expenditure where the GDN cannot demonstrate that their contractual and charging arrangements place appropriate incentives on customers to accurately declare their SHQ requirements.

7 Nature of the Review Proposal. Review current UNC rules relating to the provision of SOQs and SHQs for DM Supply Points (UNC TPD Section G 5.4.1). NTS Supply Points – out of scope (separate arrangements). Review of UNC rules relating to the increase and reduction of SOQs and SHQs (MOD 0275).

8 Suggested Terms of Reference. 1.Impact on DN investment decisions resulting from the current and any future SPOR/SPC nomination process. 2.Potential changes to UNC rules governing the setting of Supply Point Offtake Rates and Supply Point Capacity to incentivise Users to provide actual required usage volumes (to include a review of the Supply Point Ratchet regime) 3.Impact on DN Transportation charges and recovery of such charges in relation to any changes to the SPOR / SPC regime. 4.Potential changes to the current process establishing the dynamic between the Supply Point Offtake Rate and the Supply Point Capacity, specifically the rule specified in UNC TPD Section G (SPC = 24 x or 4 x the SPOR).

9 Suggested Terms of Reference – cont... 5.The process for reducing both the Supply Point Offtake Rate and the Supply Point Capacity. 6.The process for increasing both the Supply Point Offtake Rate and the Supply Point Capacity rate. 7.Direct impact on end users of any changes. 8. Monitoring accuracy of SPORs and SPCs on an ongoing basis. 9.Safety issues in relation to Users exceeding SPORs and incentives to minimise any such occurrence.

10 Suggested meeting timeline and topics. 1.Meeting 1 – 21 September 2010 – agree terms of reference / topics etc. 2.Meeting 2 – 19 October Impact of SOQ/SHQ on DN Investment decisions. To include:- overview of SGN planning process. impact of SOQ / SHQ on SGN planning decisions. impact of SOQ / SHQ on SGN physical network operation. overview of current UNC rules on setting SOQ / SHQ.

11 Suggested meeting timeline and topics – cont... 3.Meeting 3 – 23 November 2010 – Potential changes to UNC rules governing the setting of SOQs / SHQs. To include:- the current SOQ / SHQ relationship (G 5.4.1). the current SOQ Ratchet regime. 4.Meeting 4 – 13 December Impact on DN Transportation charges and recovery of such charges in relation to any changes to the SPOR / SPC regime. 5.Meetings 5 & 6 – January / February 2011 – The process for increase and decrease of SOQ / SHQ. To include:- the monitoring of SOQ / SHQs on an ongoing basis.

12 Suggested meeting timeline and topics – cont... 6.Meeting 7 & 8 (?) – March / April 2011 – Conclude Review Group Report.

13 End. Any Questions?