1. Transfer & Trades Special Transmission Workstream 28-06-07

2. 2 Agenda  Background  Recap on Mods 150(a) and 151(a) and reasons for rejection  New proposals for transfer and trades  New proposal for interruptible services

3. Background

4. 4  Transmission Price Control Review (TCPR) proposed obligations on National Grid NTS to:  Facilitate Capacity Trades (Sold NTS Entry Capacity)  Facilitate Capacity Transfers (Unsold NTS Entry Capacity)  National Grid NTS brought forward 2 modification proposals on 10 th May 2007:  0150 – Introduction of the AMTSEC Auction (Unsold Capacity)  0151 – Transfer of Sold Capacity between ASEPs  Eon brought forward 2 alternative modification proposals:  0150A  0151A  All 4 proposals were rejected by Ofgem on 12 th June 2007

5. Reasons for Ofgem Decision re modifications 0150 & 0150A

6. 6 The efficient and economic operation of the pipeline system  Mod 0150  Lack of clarity re Transfer Rates:  Ex ante rates are only indicative  Firm rates are only applied during allocation process  Commitment to transfer without seeing firm rate would result in inefficient decisions by Users  Discourage Users from participating in the Transfer process  Timeframes for end to end process  Allocation process of 15 business days would limit proposed trading process under 0151  Mod 0150A  Transfer Rates:  Proposed rate of 1:1 is arbitrary  Proposed rate may result in perverse auction behaviour & expose Users to unlimited buy back costs  Does not fully account for specific factors affecting each individual transfer, may distort longer term signals given in auctions resulting in inefficient allocations

7. 7 The securing of effective competition between Shippers  Mod 0150  N/A  Mod 0150A  Sequencing of Trading of Sold Capacity prior to Transfer of Unsold Capacity  Positively discriminates in favour of those Users with greater existing amounts of capacity rights  Frustrate competition between those with large amounts of capacity and those with small

8. 8 The efficient and economic operation of the pipeline system  Mod 0151  Inefficient allocation of bids via fax based first come first served process:  Queue limits National Grid NTS to processing one request at a time, this may:  Limit number of transfers  Frustrate economic & efficient operation of the system  Result in less efficient transfers of capacity when first in the queue  Mod 0151A  Transfer Rates:  Proposed rate of 1:1 is arbitrary  Proposed rate may result in perverse auction behaviour & expose Users to unlimited buy back costs  Does not fully account for specific factors affecting each individual transfer, may distort longer term signals given in auctions resulting in inefficient allocations

9. 9 The securing of effective competition between Shippers  Mod 0151  Inefficient allocation of bids via fax based first come first served process:  Could result in less efficient trade being completed first  Favour those trades that are first in the queue over those that may be more efficient which could reduce the potential for competition  Could result in lengthy queues  Mod 0151A  As per mod 0151  Sequencing of Trading of Sold Capacity prior to Transfer of Unsold Capacity  Positively discriminates in favour of those Users with greater existing amounts of capacity rights  Frustrate competition between those with large amounts of capacity and those with small

10. 10 Principal Industry Concerns  Timing/Timeframes  Increase Regulatory Uncertainty  Proposals are hurried  Insufficient time to assess proposals  Unsuitable use of Urgent modification process  Complexity  Lead to less flexibility in the network  Deter other sources of gas from coming to market  May result in stranded gas  Transfer Rates >1:1  Lack of clarity  Not ex ante may deter Shippers from participating  Take too long to calculate  Inefficient, large use of capacity for minimal return

11. 11 So why bring forward new proposals?  We believe that it is important that the maximum amount of gas can flow on to the system this winter  It is consistent with our obligations and duties to operate an efficient and economic system and to facilitate competition  There is market demand for these new processes

12. 12 Additional Context  Many of the original concerns were expressed before the AMSEC, now there is greater certainty ahead of this winter.  National Grid NTS has published a significant amount of network data, which provides greater clarity.  Undertaking a process for this winter will provide valuable insight in developing enduring arrangements.  National Grid NTS will also bring forward an interruptible Mod to allow discretionary release of capacity above obligated levels.

13. 13 New Mod Proposals for Trades and Transfers  Core elements  Combined process for trades and transfers  Trades accounted for through a ‘surrender’ mechanism  Exchange rates based on the physical capability of the network, with greater clarity on exchange rate calculation and rates ahead of the auction  Allocation based on price & exchange rate  A minimum of one auction to handle all requests ahead of the winter  Utilises largely existing system functionality Addresses key concerns of:  Trade and transfers should occur simultaneously  Provides greater transparency on exchange rates  Quicker process, with no queuing  More efficient allocation

14. 14 National Grid NTS View  We have listened to and read the arguments of all stakeholders and have developed a concept that we believe should be consistent with the Licence Condition and which attempts to strike a balance between the concerns of all market parties.  The key features of the proposal in addition to the core elements are:  a within zone process before an out of zone process  the ability for users to bid at donor ASEPs in competition with users bidding at recipient ASEPs  extensive use of zonal capabilities and exchange rates between zones to simplify the process  process limited to this winter

15. 15 New Mod Proposals for Trades and Transfers  Variant elements  Within zone transfers could be undertaken before or at the same time as all transfers  Capacity can be bought for the same period at the donor ASEP, this could be:  Before the auction  After the surrender  More than one auction  Additional rounds  Re-run in December for Jan, Feb, Mar 08  [RMSEC brought forward and run monthly]

16. 16 Other options considered (not all directly related to Trade and transfer)  Commit to non-obligated capacity release based on look-up tables – demand, related ASEP supply, price related etc – min release of say x mcm non-obl for the winter  Intelligent smear – target smear on unflowed holdings (poss adj for WAP) / smear more on TT/non-obligated capacity/ capacity amnesty  Facilitate secondary trading market – eg active market maker role, 1:1 (or pre- set rates) within day, add in non-obl volume  Underrun/increase scheduling charge (enables within-day non-obl)  Bid-reflective baseline – hold auction to adjust baseline up/down over time/demand, reducing at other times – intelligent baseline  Related change to buyback regime – shippers obligated to offer, max offer price  SO Capacity trader model – buy capacity if justified, trade across ASEPs poss as mkt maker  T&T purchases conditional - buyer grants SO option to buyback on x days – shippers bid at fixed price but offer number of buyback days – we allocated highest no. of days first etc  Variants of 150/151 – eg nearer D, pre-qualify bids/ASEPs to reduce analysis

17. 17 Conceptual Overview (1)

18. 18 Conceptual Overview (2) – Zonal Capabilities Baseline set at peak (219 mcm/d)

19. 19 Conceptual Overview (3) – Buy-back risk

20. 20 Buy-back risk – Is it real?

21. 21 Conceptual Overview (4) Only sold out ASEP, with a potential flow above baseline

22. 22 Conceptual Overview (5) - January Note: Max flow for Teesside and Glenmavis capped at Baseline level Northern Triangle 0 50 100 150 200 250 300 209mcmd257mcmd351mcmd438mcmd566mcmd Demand Capability (mcm/day) Baseline Sales Max flow Exp Flow Min Max Range of buy- back risk

23. 23 Conceptual Overview (6) 1.For each month a zonal maximum is set, based on: current baselines and associated risks a demand level for the month the zonal maximums of other zones 2.Within zone transfers and trades are undertaken at a 1:1 exchange rate up to the zonal maximum and the specific nodal maximum 3.The zonal maximum can be increased / decreased due to transfer and trades between zones Fixed ex-ante exchange rates are provided for between zone transfer and trades, these may vary depending on exchange quantity

24. 24 Conceptual Overview (7) – Within zone process To avoid capacity “destruction” within zone transfer are performed before out of zone. So for Northern Triangle likely to be: 1 recipient Teesside and 2 donors; St. Fergus and Glenmavis Zonal capability set at X mcm/d for the available month All existing capacity holders can trade (surrender) their previously bought capacity, this may create “uncommitted capacity” i.e. the difference between the zonal capability and the new “sold” level. All users can then bid at any of the ASEPs for the uncommitted capacity up to the obligated level for non-sold out ASEPs and up to the nodal max for sold out ASEPs.

25. 25 Conceptual Overview (8) – Out of Zone Process

26. 26 Conceptual Overview (9) – Out of Zone Process

27. 27 Conceptual Overview (10) – Out of Zone Process South East is only zone with an individual ASEP sales significantly below flow expectations used in “credible scenarios” Through contractually reducing the ability of the zone to flow, this will reduce the potential for certain “credible scenarios” and thus improve the minimum capability in other zones

28. 28 Conceptual Overview (11) – Out of Zone Process All unsatisfied bids following the within zone process are considered in the outer of zone process. Bid stacks are created for each donor ASEP according to the bid price multiplied by the exchange rate and allocated according to the highest bid value. The allocation continues until all the uncommitted zonal capability is allocated.

29. 29 Process – Registration process initiation 1: Mod implementation date 2 2. AMTSEC recipient ASEP selection process initiated Business days NGG provides Users with a list of sold out ASEPs “recipients” on a monthly basis, where there is head room above the existing obligated level First AMTSEC will cover period Oct 2007 – March 2008 Total = 2 days

30. 30 Process – Recipient ASEP registration 1: Mod implementation date 2 3. Users register interest 2 Users register interest for specific sold out ASEPs in the AMTSEC Total = 4 days Business days 2. AMTSEC recipient ASEP selection process initiated

31. 31 Process – Trade Invitation 1: Mod implementation date 2 3. Users register interest 2 Total = 6 days Business days 2. AMTSEC recipient ASEP selection process initiated 2 4: Trade invitation NGG invite Users to Trade sold capacity in the auction and NGG publish: Definitive list of recipient ASEPs Information on relevant zonal and nodal capabilities at each recipient ASEP For within zone donors, NGG will provide a merit order of preferred donors Exchange rates between zones Available months

32. 32 Process – Trade Registration 1: Mod implementation date 2 3. Users register interest 2 Total = 8 days Business days 2. AMTSEC recipient ASEP selection process initiated 2 4: Trade invitation 2 5: Trade registration Users register the maximum amount of capacity per ASEP that they want included in the auction process.

33. 33 Process – Auction Invitation 1. Mod implementation date 2 3. Users register interest 2 Total = 13 days Business days 2. AMTSEC recipient ASEP selection process initiated 2 4: Trade invitation 6: Auction invitation 5 NGG invite Users to participate in the AMTSEC auction and NGG publish: Definitive list of recipient ASEPs List of donors within zone List of donors out of zone Exchange rates for within zone transfers Exchange rates for out of zone transfers [may be different rates for different amounts up to a zonal max] Available months Day of auction 2 5: Trade registration

34. 34 Process – Auction Invitation 1: AMSEC results or Mod implementation date 2 3. Users register interest 2 Total = 15 days Business days 2. AMTSEC recipient ASEP selection process initiated 2 4: Trade invitation 52 7. Auction held See next slide for auction details 2 6: Auction invitation 5: Trade registration

35. 35 Auction details Users can place, amend and withdraw bids on the day of the auction from 08:00-17:00. Information required: Identity of user Recipient ASEP or Donor ASEP Available month Amount of entry capacity kWh/day Minimum amount of entry capacity kWh/day (must be more than minimum eligible amount) Bid price in p/kWh, which must not be less than reserve price at ASEP Maximum 3 bids per User at anyone time for each ASEP and available month

36. 36 Process – Allocations 1: Mod implementation date 2 3. Users register interest 2 Total = [30] days Business days 2. AMTSEC recipient ASEP selection process initiated 2 4: Trade invitation 52 7. Auction held 2 6: Auction invitation 5: Trade registration 8. Allocations provided to users [15] NGG provide following information to Users that have been allocated capacity: Available month ASEP Capacity amount (kWh/day) Price paid (p/kWh NGG provide following information to Users that have had traded capacity allocated: Available month ASEP Reduced amount Average price paid at ASEP (p/kWh) See next slide for allocation process

37. 37 Allocation Process – Within Zone 1.All bids are ranked in terms of price irrespective of ASEP. 2.Bid price is to 4 decimal places 3.Where there are equal priced bids the earliest submitted valid bid will be processed first 4.All uncommitted zonal capability is allocated in descending price order. 5.Limitations on satisfying a bid are: Insufficient zonal capability Nodal maximum at recipient reached Obligated level at donor Less than user specified minimum amount available 6.Obligations at donor ASEPs reduced according to ASEP capacity allocated via a merit order

38. 38 Allocation Process – Out of Zone 1.For each zone a bid stack is created. 2.All recipient bids are ranked in terms of price multiplied by exchange rate for each zone, this will be compared with bids directly at donors within the zone. 3.Bid price is to 4 decimal places 4.Where there are equal valued bids the earliest submitted valid bid will be processed first 5.All uncommitted zonal capability is allocated in descending value order, where more than one donor is in the same zone, the Obligations at each donor ASEP is reduced according to capacity allocated via a merit order 6.Limitations on satisfying a bid are: Insufficient zonal capability Nodal maximum at recipient reached Obligated level at donor reached Less than user specified minimum amount available

39. 39 Process – Publication of results 1: AMSEC results or Mod implementation date 2 3. Users register interest 2 Total = [32] days Business days 2. AMTSEC recipient ASEP selection process initiated 2 4: Trade invitation 52 7. Auction held 2 6: Auction invitation 5: Trade registration 8. Allocations provided to users [15] 9. Publication of results See next slide for publication details 2

40. 40 Results Publication  in respect of each ASEP for each Available Month:  the highest, lowest and weighted average price of all accepted capacity bids;  the aggregate amount of Monthly NTS Entry Capacity allocated;  the total number of Users that submitted capacity successful bids;  the total number of Users that submitted capacity unsuccessful bids;  in respect of each Donor ASEP for each Available Month:  the amount by which the Unsold NTS Entry Capacity was changed; and  the remaining amount of Unsold NTS Entry Capacity. Potentially seek to incorporate in existing reports (Mod137)

41. 41 Open discussion & Variants  Is there anymore information required?  Variant elements  Within zone transfers undertaken before or at the same time as all transfers  Capacity can be bought for the same period at the donor ASEP, this could be:  Before the auction  After the surrender  More than one auction  Additional rounds  Re-run in December for Jan, Feb, Mar 08  [RMSEC brought forward and run monthly]

42. 42 Next Steps  National Grid NTS will take on board all feedback today and tomorrow  We will then draft a Mod to be presented at the meeting next week for discussion, before submitting on an urgent basis.  Anticipated timeline  Send to JO6/7  Ofgem grant urgency9/7  Issue consultation10/7  Closed for responses20/7  Final Mod report23/7  Mod Panel31/7  Ofgem decision6/8  Implementation7/8  Produce work plan to develop enduring solution

43. Proposed Interruptible Arrangements for this Winter

44. 44 Introduction  National Grid NTS believes that as part of the current changes being proposed to the Entry Regime for this winter, we should also focus on providing additional flexibility in the Entry interruption arrangements.  We believe that this would support and protect long term User commitments whilst maximising what can be delivered for this winter.  Based on feedback received at the last Transmission Workstream we have limited our proposal to the existing Daily Interruption process.

45. 45 Current Interruptible Capacity Product - (DISEC)  Daily Interruptible capacity is offered on the day before the gas day, the rationale being that it is a tool designed to overcome potential hoarding of Entry Capacity.  Quantity Fixed by Algorithm Use it or Lose it calculation  Made available via a Day ahead auction  Pay as Bid  Allocate highest bid first  Discounted Reserve Price (Zero)  National Grid NTS can scale back at No cost

46. 46 Proposal  Will expand on the current DISEC process  National Grid NTS will mirror the current UNC terms for the discretionary release of non obligated capacity i.e. have the right to release any additional interruptible capacity (in addition to that released through UIOLI) that it may choose to make available for that day.  The additional Interruptible Capacity be released at those ASEPs that have Sold out or where insufficient capacity is available.  The existing UIOLI calculation will be retained as a minimum level of release.  The Reserve Price will be zero.  Will consider process for restoration of Capacity rights post interruption

47. 47 Proposal  Currently the definition of ‘Available Interruptible Capacity’ at an ASEP in UNC B2.5.10 is: “an amount of NTS Entry Capacity equal to the daily average unutilised firm capacity” National Grid NTS proposes that this be amended to include: “& any additional interruptible NTS Entry Capacity that National Grid NTS may in its sole discretion choose to make available for the day (if any)”