Modification proposal 0073 ‘Revision to the Notice Period regarding the implementation of changes to Transportation charges’ Transmission Workstream, 2 nd February 2006

Proposed Benefits of Modification  Proposal is to ‘increase the current notice period for changes to transportation charges from 2-months to 4- months’  Corona believes this mod will better facilitate competition between shippers, suppliers & DN operators - Licence, Relevant Objective A11.1 (d)  By allowing all suppliers to accurately factor into supply contracts the impacts of transportation charge changes  By reducing the need on suppliers to raise charges to cover risk of increases in transportation charges  However, Corona does recognise that this extension may also lead to increased under/over recovery and errors in charging levels

National Grid NTS’ position  National Grid NTS recognises the perceived benefits of greater notice periods for the purpose of agreeing end- user contracts  However, it is worth noting the following likely impacts if the proposal were implemented :

National Grid NTS’ position  Greater forecasting uncertainty There would be a greater margin for forecasting error at 4 month stage, relative to 2 month stage, brought about by :  Less certainty of current level of “k”. The level of carry over of “k” from previous financial year would not be known at time of setting charges for 1 Oct. This would mainly affect TO exit capacity charge  Less certainty of anticipated volumes (and hence predicted revenues). Outcome of NDM forecast data not known at time of setting charges for 1 Oct. Mainly affect TO exit capacity charge  Less certainty over predicted gas costs – this is the main cost driver for SO commodity charge, but also affects allowable revenue (for shrinkage)  Price Volatility Due to increased forecasting errors, levels of “k” would be expected to increase, leading to larger subsequent corrections in charges (the ‘seesaw’ effect)

National Grid NTS’ position ..contd.  Frequency of Price Changes As a result of greater volatility, it is more likely we would need to change charges twice per year  Price Certainty At 4-month stage, the confidence in the appropriateness of the published final prices would not be significantly greater than that for the 150-day (5 month) indicative notice. For example, the SO commodity charges for April ’06 were set at +3% with a range of –5% to +11%.

Assessment against relevant objectives  On balance, we do not believe implementation would further the relevant objectives, but rather would have a detrimental effect on them :  A11.1 (d) secure efficient competition between all Users 1. Earlier notice will result in less appropriate prices resulting in increased under/over recovery and greater volatility 2. Implementation would give rise to increased price uncertainty 3. These outcomes would be to the detriment of supply competition

Assessment against relevant objectives  A11.1 (c) Efficient discharge of Licensee's licence obligations 1. Cost Reflectivity (SSC A4) - setting charges earlier would lead to the use of less accurate data thus reducing cost reflectivity :  Using previous years NDM forecast data for 1 Oct prices  Forecast of anticipated gas costs less accurate 2. Allowable Revenues (SSC C8B (1)) - Transportation owner activity revenue shall not exceed the maximum allowed revenue  Earlier charge setting would lead to greater uncertainty of National Grid NTS recovering revenue in line with its maximum allowable revenue  Potential for price instability would therefore increase