1. Fundamental review of entry charging principles UNC Transmission Workstream - 6 th August 2009

2. 2 Introduction  National Grid is launching a fundamental review of entry charging principles.  This is in response to growing industry concern about the increasing rate of the TO entry commodity charge.

3. 3 Background (1): Summary of Entry Experience Early Experiences (1998 - 2002)  Bidding behaviour for entry capacity auctions resulted in significant over recovery  This may have been due to; northern constraints and competition for St Fergus capacity, and limited experience of entry auctions  This resulted in charging methodology proposals that looked at resolving over recovery and reducing entry capacity floor/reserve prices.

4. 4 Background (2): Summary of Entry Experience Recent Experiences (2002 - Present)  Over recent years, auctions have resulted in under recovery, other than when a constraint became material in the Easington area.  This may be due to; Increased experience of auctions and lack of locational competition for capacity Increased certainty of capacity availability associated with baselines Profiling of capacity across the year The clearing obligation and zero reserve prices  This has resulted in the introduction of the TO Commodity Charge and its increasing rate over the years

5. 5 Background (3): Shipper Concerns with the Prevailing Charging Structure Shippers have an incentive to ‘wait and see’ due to entry capacity price discounts on day ahead (33%) and within day (100%) auctions. Shortfall in recovery of revenues by National Grid through entry charges is picked up through the Commodity Charge paid by all shippers.  This means that short term capacity buyers are having their costs paid by shippers who have previously paid the longer term rate for capacity.  It could be argued that this creates: cross subsidies between shippers who buy long term rather than short term cross subsidies between shippers who buy firm rather than interruptible effectively creates firm capacity from interruptible if firm capacity remains unsold. potential undue discrimination for new entry points which have no access to zero priced capacity as there are no short term auctions.

6. 6 Fundamental review required  All of the above would suggest it is time to make changes and a number of potential solutions have been proposed e.g:  Remove day ahead and on the day discounts  Introduce different commodity rates depending on the price paid for capacity  Reduce the relative price of long term capacity  However as we have seen, with the constraint at Easington, it is possible to quickly move from under to over recovery.  Therefore we need to take a measured but timely approach, otherwise we could simply lurch from under to over recovery

7. 7 Fundamental review – what does this mean?

8. 8 Initial Analysis 2008/09 (FY) – TO Entry Revenue  National Grid has started to analyse the existing and future potential usage / bookings at entry points: Draft information for discussion purposes only

9. 9 Initial Analysis 2009/10 (FY) – TO Entry Revenue (forecast) Draft information for discussion purposes only

10. 10 Initial Analysis 2008/09 (FY) – TO Revenue by ASEP Draft information for discussion purposes only

11. 11 Initial Analysis 2008/09 (FY) – St. Fergus Draft information for discussion purposes only

12. 12 Initial Analysis 2008/09 (FY) - Easington Draft information for discussion purposes only

13. 13 Initial Analysis 2008/09 (FY) - Bacton

14. 14 First thoughts  Not sure how many issues are generic – may be demand only?  Therefore most analysis will need to be undertaken at an entry point / sub terminal level  Obviously at an entry point level we may quickly reach issues of confidentiality  Views?  Other data worth analysing?

15. 15 Charging Objectives In addition to the Licence obligations in relation to setting charges, what other factors should be taken into account?  Encourage long term bookings  Maximise use of existing entry points  Recover TO revenue through capacity rather than commodity charges  Other….. Which is the most important?

16. 16 Process Going Forward An entry charging review leading to revised NTS Entry Capacity charging arrangements may require  NTS Charging Methodology changes  Licence changes  UNC modifications Initial discussions have taken place at the Gas Transmission Charging Methodologies Forum (Gas TCMF) which normally meets following the UNC Transmission Workstream National Grid invites views on the process for taking these issues forward. Options include:  Continue within the Gas TCMF?  Raise a UNC Review Proposal?  Organise separate workshops?  Other?