1. Long Term Entry Capacity & User Commitment Review Group 0221 11 th September 2008

2. Introduction This presentation provides:  an overview of the current Gas Entry Auction and security arrangements.  highlights areas of the arrangements that we consider need reviewing

3. Gas Entry – Example Costs Auction signal received for incremental capacity

4. Gas Entry – Example Costs User commits to pay ~50% of estimated project value over 8 years = £100m Auction signal received for incremental capacity

5. Gas Entry – Example Costs Proposal to Authority and capacity allocated to Shipper Auction signal received for incremental capacity User commits to pay ~50% of estimated project value over 8 years = £100m

6. Gas Entry – Example Costs Proposal to Authority and capacity allocated to Shipper Liability Auction signal received for incremental capacity User commits to pay ~50% of estimated project value over 8 years = £100m

7. Gas Entry – Example Liability Lead time (default 42 months) Release Obligation Starts Costs Proposal to Authority and capacity allocated to Shipper Estimated project value = £200m Auction signal received for incremental capacity User commits to pay ~50% of estimated project value over 8 years = £100m

8. Gas Entry – Example Lead time (default 42 months) Security Release Obligation Starts Costs Proposal to Authority and capacity allocated to Shipper Liability Auction signal received for incremental capacity User commits to pay ~50% of estimated project value over 8 years = £100m Estimated project value = £200m

9. Gas Entry – Example Lead time (default 42 months) Security Release Obligation Starts Costs Proposal to Authority and capacity allocated to Shipper User provides security for next 12 months capacity payments. Assuming that same level of capacity booked for each quarter then User has to provide £1.04m security for each month - £12.5m for each 12 monthly assessment Capacity Release Obligation & Capacity charges invoiced Liability Auction signal received for incremental capacity User commits to pay ~50% of estimated project value over 8 years = £100m Estimated project value = £200m

10. Current Issues - QSEC Credit There is currently no security or credit required to be lodged at the time a user makes a financial commitment in a QSEC auction auction commitment may be effectively unsecured depending on the nature of Shipper If insufficient credit is in place within 12 months of the first gas day then we strip all QSEC rights (across all ASEPs) “for the relevant quarters”. However NG would still be required to make capacity available for the next quarter. Therefore where a User is a single entry point User they are able to defer capacity commitments 12 months prior to the event – and keep on deferring each quarter.

11. Issues Highlighted  The Single Entry Point User scenario highlights the need to review the credit/security arrangements that underpin commitments made in auctions.  Current UNC credit/default arrangements may be appropriate for larger portfolio players, but don’t have the same impact on single point Users.

12. Review Group Proposal – Draft TOR  We see the purpose of the Review Group as to:  Consider whether the current credit and security arrangements are sufficiently robust to underpin User commitments effectively. For example; lead time, duration, level of credit cover, types of credit mechanisms, type of capacity covered by any new arrangements.  Consider whether the current arrangements unduly impact existing Users to a greater or lesser extent than they do for new Users.  Identify any necessary changes to current credit default or User termination rules.  Identify solutions to any issues derived from the deliberations of the above key points.  Develop, by consensus, relevant UNC Modification Proposals to deliver any proposed changes to the current arrangements.  Identify the impact on processes and procedures associated with the implementation of any identified solutions.

13. Initial Thoughts on Areas to Address 1. Do the current Default/Termination rules operate effectively and equitably? 2. Under Default/Termination conditions is the balance of the risk shared between New and Existing Users, large and small portfolio players and the wider Community appropriate? 3. What should we be securing against?  Overall project value, revenue driver value or capacity auction bid value. 4. How far in advance of the capacity release obligation should security be required?  What level of security should be provided during this period and, for example, should it be flat or stepped across period? 5. What level of security is needed post capacity release obligation?  Flat, tapered etc? 6. Which Security tools are acceptable and should the same tools be available to all Users (New/Existing)?  If not, who should be arbiter of what tools are available to each party?