Credit Arrangements During a Prolonged Emergency

Mark Cockayne and Jayne McGlone11 December 2006

Whilst all reasonable efforts have been made to verify the information in this presentation, it can only ever be a high level summary of some of the key provisions in the Uniform Network Code and the Energy Balancing Credit Rules relating to the termination and discontinuance process. This presentation is not a substitute for reading the detailed provisions of the Uniform Network Code and the Energy Balancing Credit Rules, and must not be relied upon when making any contractual business or other decision. Nothing in this presentation or any supporting documentation has any contractual or legal force whatsoever and no representation or warranty is made as to the accuracy or completeness of the information contained herein. Without prejudice to any of the above, all and any warranties whether express or implied, statutory or otherwise are expressly excluded and all and any liability of xoserve Limited is excluded to the maximum permitted at law. No liability for fraudulent misrepresentation is excluded by the above.

Agenda

Introduction and background to meeting

Current Energy Balancing Credit Arrangements Role of the EBCC Current process for managing credit risk Emergency arrangements Triggers for Termination Curtailment of ongoing exposures

Open Discussion Update and background to Winter Issues Working Group

Agree issues to be carried forward and assign to owners

AOB

Role of the EBCC

• The EBCC is a body of industry representatives with rights and responsibilities related to Energy Balancing Credit Risk.

• The Committee meets on a monthly basis where decisions are made by a simple majority, only elected members are entitled to vote.

• Members are subject to limited liability for acts of good faith, except where there is evidence of negligence.

• Powers of the EBCC:

Powers of the EBCC are primarily concerned with Energy Balancing, Security, Cash Calls and authorisation of the Trading System Operator. It is in these areas that the EBCC must make the decision concerning terminations.

Credit Risk Management EnergyCredit Risk Management Energy

Power

Section X

Initiate revisions to Secured Credit Limits Release Security Identify current Energy Balancing Indebtedness Issue Cash Call Notices Respond to Cash Call Appeals Release surplus Cash Call Account funds Issue Notices of Failure to Pay Cash Call Issue Failure to Make Payment Notices Issue Termination Notices for services pursuant to Section X of the UNC Recover outstanding indebtedness including realising security Issue Request to Provide Further Security Notices Respond to Request to Provide Further Security Appeals

X2.2.6 X2.3.4 X2.5.1 X2.6.1 X2.7.1 X2.8.6 X2.9.1 X3.2.1

X 2.9.3 & X3.2.2

X3.3.1 & X3.4

X2.10 X2.10

Where a User becomes a party to the UNC they become responsible for the financial implications of balancing their daily gas flow and assume a share of the credit risk associated with other Users’ Energy Balancing activity. National Grid Gas plc is responsible for managing the Energy Balancing Regime. However, in accordance with UNC Section V, National Grid has discharged its responsibility for managing the activities of Section X of the UNC by appointing a Transporter Agency. Currently xoserve Limited are appointed as the Transporter Agency. They are vested with several powers in Section X. A list of these powers can be found below.

Cash Collection

EBCC

EBCC

EBCC

EBCC

Accounts Receivable

Exposure MonitoringSecurity

Management

Current Credit Arrangements

Emergency Arrangements

Mod 44 – Revised Emergency Cash-out and Curtailment Arrangements

Mod 61 – Facilitating further demand-side response in the event that a Gas Balancing Alert is triggered

Mod 62 – Introduction of a Gas Balancing Alert

Mod 71a – User Compensation for NEC Storage Curtailment

Triggers for Termination Triggers for Termination

• Failure to Pay Cash Call (E)

• Failure to Supply Further Security (E)

• Failure to Pay Energy Balancing Invoice (E)

• Exceeding 100% of Code Credit (T)

• Outstanding Debts >£10,000 (T)

• Material Breach of Code (E&T)

• Licence Revocation (E&T)

• User is Unable to Pay Debts/ Insolvent (E&T)

Winding Up TimelinesWinding Up TimelinesMinimum Time Period Between Issuing a Statutory Demand and Obtaining a Winding Up Order for an EB Debt

↓ ↓ ↓ ↓ ↓ D1 D2 D3 D24 D25 D33 No Defined Time Date of

winding up+1

↓ ↓ ↓

(1) Notice Payment due date

(3) Statutory Demand Served

(5) Winding Up Petition Issued by Solicitors to the courts, User issued with a copy

(6) Petition advertised between issue date +7 and court date -7. Shipper’s account frozen

(4) Failure to pay Statutory Demand

(2) EBCC Meeting

(9) Shipper Licence revoked, Ofgem appoint a SoLR

(7) Court hearing date

(8) Winding Up Order made

Supplier Undertaking TimelineSupplier Undertaking Timeline

Minimum Exposure Period for Condition 22B Supplier Undertaking

↓ ↓ ↓

D1 D35 D36

Shipper Terminated, Condition 22B Undertaking enforced.

Supplier notifies xoserve or the NWO of new shipper.

If supplier cannot find a new shipper then Ofgem may instigate enforcement action.

Supplier of Last ResortSupplier of Last Resort

Network Operator or iGT

Shipper A Shipper B Shipper C

Supplier X

Supplier 3

Supplier 2 Supplier C

Supplier 1

Supplier of Last ResortSupplier of Last Resort• Where a company acting as both Shipper and Supplier fails and is terminated, Where a company acting as both Shipper and Supplier fails and is terminated,

Ofgem may appoint a Supplier of Last Resort.Ofgem may appoint a Supplier of Last Resort.

• Ofgem are not obliged to appoint an SoLR and it is likely in many cases that they Ofgem are not obliged to appoint an SoLR and it is likely in many cases that they will not need to as the failing User will have arranged a portfolio sale with will not need to as the failing User will have arranged a portfolio sale with another User.another User.

• A SoLR can only be appointed after a supplier licence has been revoked.A SoLR can only be appointed after a supplier licence has been revoked.

• Usually the SoLR will be appointed within 24 hours of the licence revocation or Usually the SoLR will be appointed within 24 hours of the licence revocation or slightly later to accommodate the 6am start to the gas flow day, however they slightly later to accommodate the 6am start to the gas flow day, however they can also be retrospectively appointed.can also be retrospectively appointed.

• If they are retrospectively appointed then it is likely that this would be by no If they are retrospectively appointed then it is likely that this would be by no more than 24 hours.more than 24 hours.

• The maximum time period that a SoLR can be in use is 6 months.The maximum time period that a SoLR can be in use is 6 months.

• Guidance on the SoLR procedure can be found on the Ofgem website Guidance on the SoLR procedure can be found on the Ofgem website www.ofgem.gov.uk

SoLR TimelineSoLR Timeline

Minimum Exposure Period for SoLR Process

↓ ↓ ↓ D1 D3 No Definite Time

(1) User deemed to be insolvent

(2) SoLR appointed by Ofgem. Security requested to be put in place as soon as possible. (3) User begins portfolio transfer.

(4) Portfolio transfer to SoLR completed.

The timeline below represents only a very basic example of the time periods The timeline below represents only a very basic example of the time periods involved with a SoLR. Ofgem may give either 24 hours or 30 days notice to involved with a SoLR. Ofgem may give either 24 hours or 30 days notice to revoke a supplier licence, depending on the cause, and a SoLR may only be revoke a supplier licence, depending on the cause, and a SoLR may only be appointed after revocation. Although Ofgem advise that the SoLR should be appointed after revocation. Although Ofgem advise that the SoLR should be appointed on the day of revocation they do not guarantee that this will be the appointed on the day of revocation they do not guarantee that this will be the case. Further, Ofgem cannot give a guarantee that they will automatically case. Further, Ofgem cannot give a guarantee that they will automatically revoke a licence upon satisfaction of conditions laid out in schedule 2 of the revoke a licence upon satisfaction of conditions laid out in schedule 2 of the licence. licence.