1. Alternative Approach to Enduring Exit Flat Capacity & Revenue Recovery Gas TCMF 14 th December 2006

2. Issue  Indicative charges from NTS GCD 01 would recover approximately 45% of TO Exit revenue with the remainder recovered via commodity charges.  Responses consistently not in favour and suggest adjusting charges to collect majority of allowed revenue  How could we set Flat Capacity Charges to minimise any TO Commodity Charge?  Assumptions:  Zero Flexible Capacity Reserve Price  No Flexible Capacity target revenue

3. Enduring Capacity Allocation – Transportation Model Approach TypeProposal Prevailing NTS Exit (Flat) Capacity Pay prevailing charge for year of use Annual NTS Exit (Flat) Capacity Pay bid price, subject to reserve price equal to forecast price:  for Gas Year Y+1  for Gas Year Y+2  for Gas Year Y+3 Daily NTS Exit (Flat) Capacity Pay bid price, subject to reserve price equal to prevailing charge for the Gas Year Daily Interruptible NTS Exit (Flat) Capacity Pay bid price, subject to reserve price equal to 0 p/kWh

4. Proposal  Calculate target revenue (50% of TO Allowed Revenue) for Years Y, Y+1, Y+2, Y+3  Calculate Flat Capacity prices for Years Y, Y+1, Y+2, Y+3  Use additive adjustment as defined in NTS GCM 01  Redistribute Flexibility Capacity Revenue via negative (Flat) commodity charge.  NB Capacity Neutrality would create perverse incentive to procure excessive minimal priced capacity.

5. Option 1 - Reset prices each year  Calculate Flat Capacity price each year for Years Y to Y+3  E.g. In 2007 calculate Flat Capacity price for 2010  Recalculate 2010 Flat Capacity price in 2008 and 2009 and use for flat capacity auction Reserve price.  Calculate Prevailing 2010 Flat Capacity price in 2010  2008, 2009 & 2010 based on latest network, supply & demand and forecast TO revenue data  Retain network expansion cost estimates (Expansion Factor) from time of first application  e.g. use 2007 expansion factor to calculate 2010 prevailing prices and 2008 & 2009 auction reserve prices for 2010 capacity.

6. Option 2 – Only set prices once  Calculate Flat Capacity price each year for Year Y+3  E.g. In 2007 calculate Flat Capacity price for 2010  Use this price in 2008 and 2009 for flat capacity auction Reserve price.  TO Exit Commodity charge used to manage over/under recovery

7. Conclusions  Calculating Flat Exit Capacity charges to recover forecast TO revenue & Redistributing all Flexibility Capacity revenue through a negative commodity charge element should generate stable and cost reflective Flat Capacity charges.  While setting prices three years ahead of the relevant year (options 2) has merits, it might effectively prejudge the auction outcome and lead to less cost reflective charges. This would not be the case if charges were reset for each year (Option 1)  Retaining the network expansion cost estimates (Expansion Factor) from time of application would help to maintain stability & predictability