Operating Margins UNC Sub Group

Tuesday 4th November 2008

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Agenda

OM Contestability Update

UNC Section K: Operating Margins

How it works currently

What we are looking to change

Next Steps

Business Rules and Legal drafting

Aim of Next Meeting

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Competitive Provision of Operating Margins

Change to National Grid Gas’s Transporter Licence which:

Introduced Special Condition C25

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 - May 2008

Detailed the need for the OM Service

Considered options for further competitive provision of OM

Second consultation September 2008

Presented our 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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OM Contestability Update (1)

Provider Suitability Next StepsStorage As current OM providers, new sites should be

encouraged to consider OM provision

LNG Importation

As current OM providers, new sites should be encouraged to consider OM provision

NTS Demand

Potential OM providers. UNC changes required. Safety Case principles (for equivalent storage robustness) to be set out, but decisions on a case-by-case basis

DNs Potential OM providers. UNC changes required. DN Safety Case changes required/principles (for equivalent storage robustness) to be set out.

Offshore Supply/

Importation

Unlikely OM providers – for supply, depends on load factor, offshore linepack and time of flight of product. For importation, significant legislative barriers

Current and Potential OM Providers:

National Grid Gas View

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OM Contestability Update (2)

Provider Suitability Next Steps

NTS Demand

Most likely potential OM providers, although little interest expressed in providing service at this stage. Design of product will be key.

DNs Potential OM providers. Numerous barriers to service provision. Limited response to DN interruption tenders does not bode well.

Offshore Supply/

Importation

Unlikely OM providers – respondents generally sceptical regarding ability or desire to participate in OM provision

In light of consultation responses, initial focus from a service design perspective is on OM provision from NTS Demand

Potential OM Providers: Consultation Responses

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UNC Section K: Overview

Currently, Section K: Operating Margins covers the following:

Sources of Operating Margins: Storage Sites & LNG Importation Terminals

Procurement Mechanisms 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)

Cost Recovery Mechanisms Value of gas-in-storage (for both capacity and delivery arrangements)

Treatment of costs associated with OM utilisation

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Operating Margins Sub Group

Established to consider modifications to Section K:

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

Add clarity to existing arrangements

We are also in discussions with Ofgem regarding ‘Consent to Modify’

re: incorrect cross referencing in current Section K

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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 reconfigure 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 stresses/shocks:

Supply Loss

Unexpected pipeline and/or plant failure

Demand Forecast Error

Facilitate orderly rundown (partial or full)

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Current OM Service Provision

Service Characteristics

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)

Current OM Service Providers:

Short Range Storage

Medium Range Storage

Long Range Storage

LNG Importation Terminals with Storage

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Section K: Current Principles and Changes Required

Determination of Operating Margins Requirements

National Grid determines its Operating Margins Requirements for each Storage Year using a combination of network simulation analysis and statistical techniques

The Operating Margins Statement published each year covers: The assumptions used in the determination of the OM Requirement

The aggregate quantity of gas required for Operating Margins

The amounts of deliverability and space in each storage location

The Operating Margins Profile

Changes required:To facilitate procurement from non-storage providers, certain references to ‘Storage Year’ will need to be amended to ‘Operating Margins Requirement Period’

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Section K: Current Principles and Changes Required

National Grid Gas currently has the ability to enter into and terminate the

following arrangements to meet the OM Requirements:

Operating Margins Capacity Arrangements Whereby National Grid Gas holds Operating Margins Capacity and gas at Operating

Margins Facilities which can be called upon when there is an OM event

Operating Margins Gas Delivery Arrangements Whereby a third party holds the OM gas at Operating Margins Facilities which National

Grid can call upon when there is an OM event

Operating Margins Facilities are currently defined as Storage Facilities and

LNG Importation Facilities

Changes required:Operating Margins Facilities will need to include Supply Side Facilities and Demand Side Facilities

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Section K: Current Principles and Changes Required

Operating Margins Capacity Arrangements: Managing gas held in storage

Within or before the Storage Year make arrangements for the re-profiling, procurement (Margins Gas Procurement Arrangements) and sale of gas:

Sell gas in store via a Storage Gas Transfer

Use a Storage Gas Transfer between OM Facilities

Withdraw gas and sell at tender

Buy and sell gas-in-store with other Relevant System Managers

Withdraw from OM Facilities in ‘surplus’ and inject into OM Facilities in ‘deficit’ (Carry-Across Gas)

Buy gas from Users and others in store or by making Acquiring Trade Nominations

Where the gas is bought out of store, the gas must be injected into the Operating Margins Space in line with the Operating Margins Facility Terms

Balancing the cost of such arrangements with the need to secure the availability of gas

Changes required:Rationalise and simplify current arrangementsClarify the role of ‘Relevant System Managers’

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Section K: Current Principles and Changes Required

Procurement: Operating Margins Gas Delivery Arrangements:

Within or before the Storage Year make arrangements for the delivery of gas

Balancing the cost of such arrangements with the need to secure the availability and the delivery of the gas

Mechanism: Tender process leading to a contract with Users or others for the delivery of gas

Changes required:None – current arrangements for Operating Margins gas Delivery Arrangements are flexible enough to deal with new service provider types

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Section K: Current Principles and Changes Required

Procurement Flexibility:

National Grid Gas is currently able to terminate Operating Margins Capacity Arrangements during a Storage Year and enter into Operating Margins Gas Delivery Arrangements as required

Also, National Grid Gas is currently able to terminate Operating Margins Gas Delivery Arrangements during a Storage Year and enter into Operating Margins Capacity Arrangements as required

Changes required:National Grid Gas requires flexibility in the way it manages its OM holdings, whether that be by switching between different capacity arrangements, different delivery arrangements or between capacity and delivery arrangements. Following a switch from capacity arrangements, National Grid Gas may wish to terminate those capacity arrangements (hence relinquishing capacity) or sell on the capacity to a third party.

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Section K: Current Principles and Changes Required

Calculation of Costs associated with Operating Margins Capacity Arrangements:

Operating Margins WACOG Weighted average cost of gas-in-storage

Carry Over Gas Cost

Gas Procurement

Storage Gas Transfers

Transportation Charges

Balancing Charges

Injection Charges

User Agents Fees

Carry Across Gas & Withdrawal Cost

Net Margins WACOG As above but removes costs associated with transportation and injection of gas

Changes required:None – current arrangements remain appropriate, however drafting could be simplified

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Section K: Current Principles and Changes Required

Calculation of Costs associated with Operating Margins Gas Delivery

Arrangements:

Net Margins WACOG Weighted average cost of gas delivered to National Grid NTS for Operating Margins

Purposes

Principles set out in the Operating Margins Statement

Changes required:None – current arrangements remain appropriate

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Section K: Current Principles and Changes Required

Treatment of costs and revenues associated with the Utilisation of Operating

Margins

National Grid recovers from Shippers either the energy costs (for capacity arrangements) or the delivery fee (for gas delivery arrangements) when OM is utilised by inclusion of Daily Margins Recovery Amount into Balancing Neutrality Charges

Changes required:None – current arrangements remain appropriate

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Section K: Current Principles and Changes Required

Closing Margins Adjustment Charge:

Applies only to gas sold that had previously been held in storage under Operating Margins Capacity Arrangements

Closing Margins Adjustment Charge is the sum of weighted average cost of gas in store (which includes the original cost of gas & putting it into store) and any cost of sale minus the revenues received on the sale of the gas

Recovered /paid by Users in proportion to their UDQIs and UDQOs

Changes required:None – current arrangements remain appropriate

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Next Steps

Detailed Business Rules and Legal Drafting

Current Section K could be described as ‘convoluted’ and is a victim of a number of incremental changes

Changes as a result of contestability work are essentially minor, however desire is to rationalise, simplify and clarify where possible

Consequently, plan is to re-write Section K

Aim to provide business rules and/or legal drafting in time for next meeting

Aim of next meeting

To run through business rules in detail, in preparation for formally raising UNC modification