1. Gas Transmission Charging Review: Final Capacity Charging Proposal Gas TCMF 14 th December 2006

2. Entry and Exit Capacity Charging - Options (NTS GCM 01) Included options in consultation paper:  Option 1 – Enhanced Transcost approach  A) 2.834 Mscm/d increment  B) 6 Mscm/d increment for Entry  Both include spare capacity  Option 2 – Transportation Model  A) Caters for spare capacity - entry prices set using forecast flows such that charges decrease as forecast decreases below baseline  B) Fully excludes spare capacity – entry prices set using baseline/obligated capacity

3. Treatment Of Spare Capacity ObjectiveInclude Spare CapacityExclude Spare Capacity Cost reflectivity  Users pay for incremental investment costs i.e. based on what happens to be installed locally  Recovery of previous sunk costs socialised leading to cross-subsidy – arguably in contravention of EU Gas regulations  All Users pay for capacity they utilise i.e. no locational benefit of spare capacity  …but concern over potential asset stranding if Users clearly discouraged from using spare capacity Stable and predictable charges  Undermines due to transient nature spare capacity (unless considered sufficiently static)  Meets Transparency  Determination of location and amount and hence which Users obtain benefit subjective  Meets

4. Industry Views RespondentAbbr. View Transportation Model Transcost Total E&P UK PlcTOTALSupport: Option 1 ExxonMobil Gas Marketing Europe Limited EXXON Support: Option 2a (Base Case) Mulberry Capital LimitedMCL Support: Option 2b (Obligated Baseline) Scottish and Southern Energy plcSSE EDF EnergyEDF RWE npowerRWE Statoil UKSTUK The Association of Electricity ProducersAEP The Chemical Industries AssociationCIA Support Option 2 International PowerIP Scotia Gas NetworksSGN National Grid UK DistributionUKD No Rebalancing of Exit Charges -- Wales & West UtilitiesWWUComments-- Total101

5. Key Industry Responses  Desire for stable predictable prices  “consider that it would not be desirable to increase the TO commodity charge further as this leads to poor cost targeting.”  Transcost shown not to be future proof  “The Transcost model does not appear to be future proof to changes in flow directions arising from new entry flows at Milford Haven and the Isle of Grain”  Don’t believe prices will influence where gas is landed  “ would expect any new fields or incremental supply would utilise existing offshore infrastructure which should also develop spare capacity as existing fields decline.  Don’t believe there should be a spare capacity discount  “believe that shippers at a terminal with spare capacity already receive a significant benefit in relation to their ability to ‘catch up’ later in the day after system failures, thus avoiding imbalance and scheduling charges.”

6. Indicative Exit Capacity Prices (Gas Year 2006/7) Transcost results in significant increase in Scotland & the North

7. Indicative Entry Capacity Baseline Reserve Prices (Gas Year 2007/8) Effect of “Spare Capacity” NB. Based on current baselines – analysis requires updating for new baselines

8. Factors Effecting Terminal Selection  Gas market  Stable Framework  Wholesale price of gas  Regime stability  Off-shore Infrastructure  Offshore Cost  Offshore Capacity  NTS Entry Pricing  NTS Entry Capacity prices  NTS Entry Commodity Prices  Price Stability  Regime Stability  NTS Capacity Availability  Baseline or Incremental (+4 years?)

9. Gas Forward Prices in UK, Belgium & Netherlands

10. Offshore Infrastructure  Building offshore is more expensive (+50%) than onshore  £1.25M> £1.5M onshore cf £2M to £2.25M offshore  Offshore Capacity may already be available  If an NTS terminal is declining then offshore capacity must also be becoming available.

11. Licence Relevant Objectives  Where transportation prices are not established through an auction, prices calculated in accordance with the methodology should:  1)Reflect the costs incurred by the licensee in its transportation business;  2)So far as is consistent with (1) properly take account of developments in the transportation business;  3)So far as is consistent with (1) and (2) facilitate effective competition between gas shippers and between gas suppliers.  Where prices are established by means of auctions, either  4)No reserve price is applied or  5)Reserve prices are calculated at a level that promotes efficiency, avoids undue preference in the supply of transportation services and promotes competition between gas shippers and between gas suppliers.

12. EC Regulation 1775/2005  EC Regulation 1775/2005 on conditions for access to the natural gas transmission networks (binding from 1 July 2006) states that the principles for network access tariffs or the methodologies used to calculate them shall:  Be transparent  Take into account the need for system integrity and its improvement  Reflect actual costs incurred for an efficient and structurally comparable network operator  Be applied in a non-discriminatory manner  Facilitate efficient gas trade and competition  Avoid cross-subsidies between network users  Provide incentives for investment and maintaining or creating interoperability for transmission networks  Not restrict market liquidity  Not distort trade across borders of different transmission systems.

13. Conclusion  Industry View: Transportation Model  Baseline Entry Capacity Reserve Prices based on analysis at Baseline level  Justification:  Single transparent model which can be made available easily (promotes competition)  Cost reflective (Reflective of costs incurred - rather than incremental costs)  Minimises cross subsidies (avoids undue preference)  Risk of Asset Stranding  Offshore costs and offshore capacity availability along with wholesale gas prices will influence where gas is landed more than entry prices