Third Workstream meeting re Baseline Re-consultation and Substitution 12 September 2007

Recap of previous two workstream meetings (1)  Outlined the basis for Ofgem’s TPCR baselines  National Grid provided network analysis following Ofgem’s prescribed methodology  Based on 2008 network, average of three TBE scenarios (Auctions +, Transit UK and Global LNG) using supply substitution  Using least favourable node as supply balance  TPCR baselines were set based on:  ‘Baseflow’ under each scenario as starting point, then split remaining ‘unallocated’ entry capacity on 10YS forecast flows for 2008

Recap of previous two workstream meetings (2)  Resulted in aggregate baselines of 8814 GWh/d  Discussed alternative methods for splitting the unallocated capacity within Ofgem’s spreadsheet  National Grid asked for input from workstream members, in particular on:  Views on ‘re-cutting of the cake’ (i.e. aggregate the same, i.e GWh/d)  Vs setting higher baselines (aggregate greater)

Summary of responses

Where do we go from here?  No real consensus view from the industry  No particular comments on a methodology to apply  Consider the two alternative approaches:  ‘re-cutting of the cake’ (i.e. aggregate the same, i.e GWh/d)  Vs setting higher baselines (aggregate greater)

Re-cutting the cake – how do you allocate the 8814 GWh/d? (1)  Start with current level of capacity obligations (take maximum booked for April 2008 onwards from August 2007 report on website) (8210 GWh/d)  Take off the Incremental Obligated (IO) which has been sold in Sept 2006 QSEC auction (1310 GWh/d)  This leads to 6900 GWh/d having been allocated  If previously sold out at an ASEP, add back 20% previously reserved for S-T (based on old TPCR baseline)  This affects Cheshire, Easington, Hornsea and Isle of Grain (359 GWh/d)  This leads to 7259 GWh/d which would be allocated … this then leaves 1554 GWh/d of entry capacity unallocated

How do you allocate the 1554 GWh/d?  Believe need to take account of physical capability  New baselines should be constrained to not exceed previous obligations  Needs to be broadly commensurate with the buy-back target  Therefore, based on the above, need to preserve the zonal limits  Applied above logic and used four different ways of splitting the 1554 GWh/d  On existing obligated level;  2005 TYS;  2006 TYS;  Max flow seen over 2 winters, 2005/6 and 2006/7.

Possible sets of baselines (1) Obligated Allocation based on sold + 20% old TPCR baseline where sold out

Re-cutting the cake – how do you allocate the 8814 GWh/d? (2)  Start with the current level of capacity obligations (take maximum booked for April 2008 onwards from August 2007 report on website less Incremental Obligated) (6900 GWh/d)  Add back 20% previously reserved for S-T (based on old TPCR baseline) at all ASEPs (but cap resultant figure at the old TPCR baseline)  This leads to 8400 GWh/d being allocated … this then leaves 414 GWh/d of entry capacity unallocated:

Possible sets of baselines (2)

Zonal analysis of possible baselines (2)

Re-cutting the cake – how do you allocate the 8814 GWh/d? (3)  Alternative starting position - could use historical flow over the last two winters (subject to the old TPCR baseline)  Then adjust for the current level of capacity obligations  This leads to 7802 GWh/d being allocated … this then leaves 1012 GWh/d of entry capacity unallocated:

Alternative ‘re-cutting of cake’ – possible baselines (3)

Zonal analysis of possible baselines (3)

Alternative of higher baselines – Capex requirement  Can Use the TPCR agreed revenue drivers as proxy for capital expenditure  If baselines increased back to pre 2007 TPCR levels  Around £275m extra capex needed to provide the increased baselines

Alternative of higher baselines – Buyback modelling  Alternatively, can examine the incremental buyback risk. Preliminary results indicate that:  Just at Teesside, increasing the baseline back up to 70 mscm/d could lead to around £90m incremental buyback risk (mean level of £20m) per year (assuming that the incremental flow at Teesside is off-set by reduction of flow at Milford Haven)  Similar level of risk at Barrow of increasing baseline back to 66 mscm/d

Summary  Discussed how baselines were set  Presented feedback received from industry  Proposed alternative ways of ‘cutting the cake’  Demonstrated that going back to higher baselines means either:  significant capex needed  or that buy-back risk is likely to be high  Will provide a summary report to Ofgem in the next two weeks  Ofgem to commence their consultation