Transitional Exit Capacity Proposals-Update

Offtake Agreement Workstream, 30 Nov 05Dave Adlam

Update on NG transitional proposals

UNC Mod 0046 With Ofgem for decision

IExCR, ARCA, SC4B 25th August Consultation on IExCR, SC4B

Statement and DN and DC ARCAs 22nd Sept Consultation closes out 25th Nov Final proposals issued on SC4B

Re-consultation on IExCR Early Dec Re-consultation on DN and DC ARCA

anticipated

IExCR

Requirement to amend the existing IExCR to accommodate the release of incremental exit capacity in the transitional period

Proposed key principles Simple, transparent and non-discriminatory processes Clear obligation as to when it is appropriate to release

incremental exit capacity Any costs reasonably incurred by NG in system

investments to deliver incremental exit capacity are appropriately renumerated

IExCR re-consultation

In light of representations, consider that re-consultation on IExCR appropriate on the following areas:

Definition of incremental exit capacity ARCA governance ARCA commitment ARCA dispute resolution

Definition of incremental exit capacity

Respondents considered there was uncertainty as to exactly what constituted incremental exit capacity

Ofgem have therefore proposed changes to Special Condition C18 of our licence to clarify the definition of ‘initial volume allocation’ (IVA) and ‘incremental exit capacity’

these proposed Licence amendments have been reflected in the revised proposed IExCR

IVAs for NTS/LDZ offtakes for transitional period to be included in IExCR with values consistent with Ofgem proposed incentive targets for each exit zone

2008/09 IVA values taken from the 1 May Offtake Capacity Statement 2009/10 IVA values derived by applying forecast growth rate to previous

years IVA for each offtake

ARCA governance

Respondents expressed concern over lack of governance associated with ARCAs, and inability of Authority to approve form of ARCAs

As incremental exit capacity release linked to signature of ARCA, we have proposed set of high level principles on which NG will base any required ARCAs within IExCR

allows Authority to consider appropriateness of principles provides improved transparency of the ARCA

requirements

ARCA commitment

Ofgem have informed us that a financial commitment consistent with the Langage determination is not necessarily sufficient to ensure renumeration of investment costs

We will therefore need to offer ARCAs that would provide a financial underpinning of 100% of investment costs specific to a connection

Costs would exclude any reinforcement work that is likely to benefit other Users, either immediately or in the future

Commitment would be reduced in the future if unused reserved capacity is used by any other party

ARCA commitment

ARCA commitment becomes due in the event that the booked NTS Exit Capacity / NTS Offtake Capacity is lower than the level of reserved capacity in the ARCA and the revenue generated is less than the ARCA commitment

Amount due will be the difference between the booked level of capacity and the reserved level of capacity multiplied by the prevailing exit capacity rate

ARCA commitment - Example

Defining the period over which the commitment applies

Specific Reinforcement costs £18m

Annual NTS Exit Capacity revenue (reserved incremental capacity x expected NTS exit charge rate)

£3m Period over which the ARCA commitment would apply

£18m / £3m = 6 years

ARCA Commitment - Example

GAS YEARS Y Y+1 Y+2 Y+3 Y+4 Y+5

• User reserves 100 incremental capacity units from year Y

Actual IncrementalCapacity Booked

100 100 100100 90 80

• User underbooks by 10 units• Accrued liability 10 * Prevailingprice • User underbooks by 20 units

• Accrued liability 20 * prevailingprice

E.g. £18m financial commitment over 6 yearsAnnual assessment to establish whether £3m generated

ARCA Commitment - Example

END PERIOD RECONCILIATION

GAS YEAR Y Y+1 Y+2 Y+3 Y+4 Y+5

CAPACITY BOOKED

100 100 90 100 100 80

REVENUE GENERATED

(£m)

3 3 3 3.1 3.1 2.8 18

LIABILITY ACCRUED

(£m)

0 0 10 * Prevailing Price

0 0 20 * Prevailing Price

0

• If revenue generated < £18m then liability accrued in Y+5 would become due.

ARCA Dispute Resolution

In the event that the connectee or National Grid are unhappy with the terms and conditions of the ARCA offered by NG then it can be referred to the Authority for their determination under Gas Act

Way forward

IExCR re-consultation will close out on Friday 23rd December 2005

Responses should be sent to:

Dave AdlamNGT HouseWarwick Technology ParkGallows HillWarwickCV34 6DAE-mail david.adlam@uk.ngrid.com