Operating Margins

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Competitive Provision of Operating Margins

Change to National Grid Gas’s Transporter Licence which:

Introduced Special Condition C25 Which requires use of reasonable endeavours to promote competition in the provision of Operating

Margins (OM) services by 1st April 2009

Progress to date:

Initial consultation exercise March and May 2008 Detailed the need for the OM Service

Considered options for further competitive provision of OM

Second consultation concluding September 2008 Presented conclusions on how the OM Service could be delivered by Potential Service Providers

Considered the barriers to provision for each Potential Service Provider

Considered how to procure the OM Service

Looked at how to incentivise Operating Margins going forward

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What are Operating Margins (OM)?

OM gas is only used in exceptional circumstances to:

Allow time for National Grid Gas to reschedule the NTS or for the market to deliver additional supply

Protect against the need to declare emergency conditions so that normal commercial market operation can be maintained where possible

Primarily, OM will be used in the immediate period following operational

stresses/shocks:

Supply Loss

Unexpected pipeline and/or plant failure

Demand Forecast Error

Facilitate orderly rundown (partial or full)

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What makes a good OM Provider?

Must be able to deliver a physical change in gas offtake or delivery of gas onto the NTS

Rapid response

Measurable, demonstrable service

Must be available for NGG to call on at all times declared in advance (day or night)

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Current OM Service Providers

Short Range Storage

Medium Range Storage

Long Range Storage

LNG Importation Terminals with Storage

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Potential OM Service Providers

OM Provision from NTS Connected Demand:

NTS connected demand, such as Combined Cycle Gas Turbine (CCGT) Power Stations and other Very Large Daily Metered Customer (VLDMCs) could provide an OM service by rapidly reducing gas offtake from the NTS at exit points

OM Provision from Offshore Supply & Importation:

Offshore supplies could provide an OM service by increasing gas input into the NTS at entry points

DNs

Distribution Networks could provide an OM service by reducing gas offtake from the NTS at exit points

More information available on the National Grid website

http://www.nationalgrid.com/uk/Gas/OperationalInfo/GasOperatingMargins

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Impact on Section K Operating Margins

Current Section K: Operating Margins

Current provisions in Section K envisages provision from storage sites & LNG Importation Terminals only via

Capacity arrangements (National Grid NTS holds capacity and gas for use when required), and

Delivery arrangements (3rd party holds capacity and gas for use when required)

Section K currently complex

Propose to rewrite Section K Operating Margins:

Aim to add clarity, and

Facilitate provision of the service from a wider pool of providers to open up more competitive and efficient procurement

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Process going forward

Request the establishment of a Sub Group to the Transmission Workstream

Sub Group activity to review and agree business rules to facilitate competition in the provision of Operating Margins

NGG NTS to subsequently raise Modification Proposal

Aim for 1st April 2009 implementation in line with Licence

Proposed Consent to Modify section K4.2.6 WACOG Margins

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Consent to Modify

Consent to Modify – Revision to TPD Section K 4.2 - Margins WACOG - paragraph 4.2.6

Incorrect cross references Identified: Error introduced by MP 311 and compounded by 710.

UNC : K 4.2.6

"For the purposes of this paragraph 4 "Net Margins WACOG" is:

Operating Margins WACOG calculated in accordance with this paragraph 4.2 but on the basis that the amounts under paragraphs 4.2.4(cd) and (ef) are excluded from such calculation, and that in respect of amounts under paragraphs 4.2.4 [(a), and (b) and (c)] an appropriate deduction shall be made to remove amounts reflected in the value of the gas or gas-in-storage acquired for Operating Margins Purposes attributable to Transportation Charges and injection charges at the rates applicable at the start of the relevant Storage Year."

UNC K4.2.4 costs are: (a) Carry over margins gas (b) Accrued OM gas purchased at entry or acquired as trade (c) Accrued from storage transfer (d) OM transportation charges (e) OM balancing charges (f) Injections charges (g) User agent fees (h) Withdrawal charges

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Code Comparison

4.2.6 cross referenced the following provisions:

Prevailing Summary of Code Text – post MP0311

(c) the amounts which have accrued due from National Grid NTS (Margins) in respect of any Storage Gas Transfers.

(e) Amounts incurred by National Grid NTS (Margins) by way of balancing charges payable to National Grid NTS.

(a) the quantity of the relevant Carry-Over Margins Gas multiplied by the Operating Margins WACOG as at the last Day of such Storage Year;

(b) the amounts which have accrued due from Transco (Margins) pursuant to the Margins Gas Procurement Arrangements.

1996 Summary of Code Text – pre MP0311

(e) the amounts payable by Transco (Margins) by way of Transportation Charges.

(g) the amounts paid or payable by Transco (Margins) by way of injection charges.

(a) the amounts (if any) paid by Transco (Margins) to the Top-up Manager.

(b) ) the quantity of the relevant Carry-Over Margins Gas multiplied by the relevant Operating Margins WACOG as at the last Day of such Storage Year;

(c) the amounts which have accrued due from Transco (Margins) pursuant to the Margins Gas Procurement Arrangements.

(d) the amounts which have accrued due from Transco (Margins) in respect of any Storage Gas Transfers

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What is the financial impact?

A retrospective re-calculation of WACOG based on difference

between current UNC text and the pre UNC Modification 311 text

demonstrates that;

If current UNC text was upheld then the over-recovered amount from 1999 to date would be just under £38k and NG NTS would be disincentivised from purchasing gas “in store” from other storage Users despite this being potentially the most efficient option.

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Proposed Consent to Modify section K4.2.6 WACOG Margins

NG NTS believe it is appropriate to raise the proposed Consent to correct the WACOG cross references and relevancy prior to commencing the review of K so that the starting basis is correct.