1. Transitional offtake arrangements – Ofgem Initial Proposals on transitional incentives
6 October 2005

2. Introduction
June 2005: Authority decision to delay implementation of enduring offtake arrangements by two years
More time for development of enduring offtake
More time to consider entry-exit interaction as part of NTS price control review
Need to develop transitional offtake arrangements for the period Oct 08 – Oct 10
Interim
offtake arrangements
Transitional
offtake arrangements
Enduring
offtake arrangements
October 2008
October 2010
May 2005

3. Proposed transitional offtake arrangements
Relates to periods for which investment by Transco NTS may be undertaken to satisfy requests for NTS capacity
Modification proposal 0046: DNs request NTS offtake rights for the gas year 2008/09 in October 2005 and for gas year 2009/10 in June/July 2006
NTS direct connects booking arrangements remain unchanged
Where investment is necessary, ARCA may be required

4. Transitional incentives – initial proposals
will be determined at the next TPCR (2007)
greater set of performance data in context of wider price control agreeement
but there is a downside…
NTS incentives
necessary to mitigate DNs’ rational tendency to over-request capacity
therefore set now (form similar to interim incentives)
>15 days DN interruption incentives reviewed at GDPCR
DN incentives

5. Why are DN incentives needed?
Natural tendency for DNs to overrequest NTS exit capacity
3-year ahead capacity requests
If triggers investment, mitigated by terms of ARCA (assuming costs cannot be passed through to customers)
Requests for amendments within 3-year lead time
Tendency to overrequest NTS exit capacity
If entered into an ARCA, terms of agreement may provide incentive not to reduce capacity requests
DN INCENTIVES NEED TO BE SET

6. Form of DN transitional incentives
Standard “sliding scale” form, with a defined incentive cost target and a cap and collar
Parameters rolled forward from interim incentives
Defined for the transitional period (from 1 October 2008 to 30 September 2010)
Cap and Collar (% of each DN target)
Sharing factors
Cap
Collar
Upside
Downside
Proposed incentive parameters
7.5%
-7.5%
100%

7. DN transitional incentives - targets
Allocated volume
Outturn price x
Level of NTS offtake flat and flexibility capacity that the DNs would be expected to require
Consistent with 1 in 20 obligation
Most appropriate (methodology likely to be reviewed)
Outturn price of flat capacity reference price for flexibility

8. DN transitional incentives – volume element
Ofgem invited individual DNs to provide their view of the targets for the transitional period
Baseline: NTS capacity requests submitted by DNs to Transco NTS for 2007/08 for each LDZ exit zone
LDZ specific, annual growth rates (consistent with Ten Year Statement) were applied to the baseline
When the volume target derived is higher than target requested to Ofgem (at LDZ level), the latter was adopted in order to protect customers
It should not be assumed that, in the future, past behaviour will be used for the derivation of incentive targets

9. DNs also switching their offtake profiles
Flat capacity
Year 1
Year 2
Year 3
Some DNs have opted to switch offtake profile dramatically in response to incentive scheme and exposure to NTS prices

10. Way forward Responses to be received by 19 October 2005.
Final Proposals (with S23) published in early November.
Transitional incentive schemes finalised by end of November.
Offtake arrangements finalised on a similar timescale.
Potential licence drafting, consistent with Initial Proposals, circulated for comment.

11. Promoting choice and value for all gas and electricity customers