EBCC MEETING

27th April 2012

AGENDA

1.0 Introduction2.0 Minutes and Actions3.0 Operational Update4.0 Modification Proposals5.0 Significant Code Review Update7.0 Presentation of Winter Operations 2011/20128.0 Proposed Review of Energy Balancing Credit Rules9.0 Update Deposit Deed10.0 Risk Register11.0 AOB

- Lehmans - EU Update - Team Update

12.0 Date of Next Meeting

Operational Update

March 2012

Modification Update

Market Operator Mod

Winter Operations Presentation

2011/2012

What went well

• Emergency EBCC convened in October/November 2011 for River Ter in accordance with Section X 1.2.3.

• No Failures reported.

• Pro-active engagement with at risk parties and EBCC members.

• Review the Credit Framework

• Early engagement with Users in relation to MOD 640 Adjustments.

• Introduction of AMS Banking and the change of banking arrangements.

• Introduction of Non Registrable Deposit Deed

Lessons Learnt

• Be more aware of external factors when progressing change.

– SCR has delayed progression of Modification 233v

– Implementation of Non Registrable Deposit Deed

• Give clearly definitive instructions to external stakeholders.

FI Aggregate Limit Review

April 2012

• Background

• Case for Change

• Action Taken

• Rating Amendment

• Impact

Contents

• Outlook

• Deposit Deeds

• Recommendations/Ways Forward

• Conclusions

• Appendices

Background

• In order to provide security for the purposes of Energy Balancing Activities a Financial Institute was required to hold a rating of A1/A+ or above.

• In 2011 the global economic climate deteriorate with the downgrading of a number of sovereign economies.

• As a result of that downgrading many Financial Institutions were also subject to a downwards rating change.

Background

Rating Comparison Table Prior to November 2011:Ratings Comparison

AggregateLimit

(Maximum exposure acceptable for an individual

Financial Institution)

Rating Action Moody’s S&P

Aaa, Aaa1, Aaa2, Aaa3, Aa1, Aa2, Aa3

AAA, AAA- AA+, AA, AA-

£62,000,000Rating is acceptable provided that the maximum Aggregate Limit is not exceeded. 

A1, A+ £25,605,000Rating is acceptable provided that the maximum Aggregate Limit is not exceeded. 

A2, A3, A, A-, Zero

Rating is not acceptable. In the event of a downgrade below A1 Moody’s or equivalent, The User(s) will be notified to provide alternative Security within 30 days. Failing to put in place Security 30 days after notice, the User(s) Secured Credit Limit will be set to zero and the Cash Call process will drive any indebtedness. 

Baa, Baa1, Baa2, Baa3

BBB+BBB, BBB-, BB+

Zero

Rating is not acceptable. In the event of a downgrade to below A3 Moody’s or equivalent rating, The User(s) Secured Credit Limit will be set to zero with immediate effect and the User(s) affected will be notified to provide alternative Security . The Cash Call process will drive any indebtedness. 

Ratings below A1 and A+ have a zero aggregate limit and are unsuitable for Security.

Case for Change

• 28.5% of FIs providing security were downgraded over 6 months.

• 26 Users affected in total.

• May 2011 - Credit Agricole is downgraded below A1/A+.• September 2011 - Bank of America and Intesa Sanpaolo are

downgraded below A1/A+. • October 2011 - National Westminster and Royal Bank of

Scotland are downgraded below A1/A+. • November 2011- Barclays Bank is downgraded to A+.

69%

23%

8%

Affected x 1

Affected x 2

Affected x 3

% of impact frequency on affected Users

Action Taken

• Energy Balancing Credit Rules amended in November 2011.

• The rating boundary for the purposes of guaranteeing Security was lowered.

• A £25,605,000 aggregate limit became applicable to FIs with a rating of A2/A and A3/A-.

• 30 day time limit for Users to find alternative security was extended to 90 days to act as a moratorium.

Rating Amendment

Ratings ComparisonAggregate

Limit(Maximum exposure acceptable

for an individual Financial Institution)

Rating Action Moody’s S&P

Aaa, Aaa1, Aaa2, Aaa3, Aa1, Aa2, Aa3

AAA, AAA- AA+, AA, AA-

£62,000,000Rating is acceptable provided that the maximum Aggregate Limit is not exceeded. 

A1,A2, A3,

A+A, A-,

£25,605,000Rating is acceptable provided that the maximum Aggregate Limit is not exceeded. 

Baa, Baa1, Baa2, Baa3

BBB+BBB, BBB-, BB+

Zero

Rating is not acceptable. In the event of a downgrade to below A3 Moody’s or equivalent rating, The User(s) Secured Credit Limit will be set to zero with immediate effect and the User(s) affected will be notified to provide alternative Security . The Cash Call process will drive any indebtedness. 

Ba1, Ba2, Ba3 or below

BB+, BB, BB- or below

Zero

Rating is not acceptable. In the event of a downgrade to below A3 Moody’s or equivalent rating, The User(s) Secured Credit Limit will be set to zero with immediate effect and the User(s) affected will be notified to provide alternative Security . The Cash Call process will drive any indebtedness.

Rating Comparison Table Post November 2011:

£25,605,000 aggregate limit now includes ratings A2, A3 and A, A-

Impact

• Further 8.6%of FIs suffered downgrades from December 2011 without impact to the 3 Users with security in place totalling £7.7 Million.

• Currently 26% of FIs are rated below the previous A1/A+ boundary.

>AA+/Aa1

>AA-/Aa3

>A+/A1

>A-/A3

>AA+/Aa1

>AA-/Aa3

>A+/A1

>A-/A3

FI Ratings April 2011

FI Ratings April 2012

5%

43%52%

26% 26%

48%

Outlook

87% Possible Downgrade

13% Not on Watch

39% Negative

61% Stable

Moody’s Outlook

S & P’s Outlook

87%

13%

39%61%

Outlook

0

50000000

100000000

150000000

200000000

250000000

>A

a1

/AA

+

Aa

2/A

A

Aa

3/A

A-

A1

/A+

A2

/A

A3

/A-

Apr-11

Apr-12

Aggregate secured credit by rating band

70,0

00

0 45,7

92,0

00

26,0

70,0

00

214,

417,

000

158,

244,

000

32,4

89,0

50

92,8

49,0

00

0 47,6

13,0

00

00

Outlook

• Sovereign creditworthiness is expected to continue deteriorating during 2012.

• A number of FIs providing security have interests in high risk areas and will be reviewed by Moody’s for potential downgrade.

Risk AreaNo. of FIs

Significantly Exposed

Aggregate Credit Secured by LOC

% of Total Credit Secured by LOC*

Greece 4 £108,065,000 33.8%

Italy 2 £72,562,000 22.7%

Spain 1 £10,562,000 3.3%

Ireland 1 £19,528,000 6.1%

* Total security held as LOC is £319,376,000

Deposit Deeds

• Growing use of deposit deeds.

• Success in terms of offering customers an alternate method of security to a LOC.

• Removes administration and associated costs involved in obtaining a LOC every year.

• Assists rationalisation of accounts.

• Users may not be able or wish to hold large amounts of cash.

Recommendations/Ways Forward

• Alert customers when FIs are subject to a possible downgrade.

• Amend Energy Balancing Credit Rules to include specific conditions on a sliding 90 day time limit for providing alternative security.

• Consider further possibilities for Deposit Deeds.

• Increase awareness of FIs able to provide security within the new boundary change.

• Make customers more aware of alternative security measures.

Conclusions

• 28.5% of FIs exceeded their aggregate limit from April 2011 to November 2011 due to downgrades.

• Further downgrades are expected during 2012.

• Although the economic atmosphere is generally negative the support of central banks makes failures less likely.

• Change to rating requirements has maintained a stable risk position and assisted increasing overall spread of risk.

• Increasing the aggregate limit is not necessary.

• A proactive approach with Users should be explored.

• Sliding timescale for providing alternative security necessary

Appendix 1

Financial InstitutePrevailing

RateMoody’s Outlook Aggregate Limit

Secured Credit Value (CL)

No. of Customers

Head Room

Banco Bilboa Vizcaya Argentina

A Possible Downgrade £25,605,000 £600,000 1 97.66%

Bank of Tokyo-Mitsubishi UFJ Ltd

A+ Not on Watch £25,605,000 £902,000 2 96.48%

Barclays Bank plc A+ Possible Downgrade £25,605,000 £10,562,000 7 58.75%

BNP Paribas Aa3 Possible Downgrade £62,000,000 £62,000,000 12 0%

Citibank N.A A Possible Downgrade £25,605,000 £1,030,000 1 95.98%

Credit Agricole Corp & Investment

A Possible Downgrade £25,605,000 £13,800,000 11 46.10%

DBS Bank Ltd AA- Possible Downgrade £62,000,000 £500,000 1 99.19%

Deutsche Bank AG A+ Possible Downgrade £25,605,000 £25,165,000 10 1.72%

DNB Bank ASA A+ Possible Downgrade £25,605,000 £2,100,000 2 91.80%

HSBC Bank plc AA- Possible Downgrade £62,000,000 £60,502,000 22 2.42%

ING Bank N.V A+ Possible Downgrade £25,605,000 £11,550,000 8 54.89%

Appendix 1 Cont.

Financial InstitutePrevailing

RateMoody’s Outlook Aggregate Limit

Secured Credit Value (CL)

No. of Customers

Head Room

JPMorgan Chase Bank NA A+ Possible Downgrade £25,605,000 £8,680,000 2 66.10%

Lloyds TSB Bank plc A Possible Downgrade £25,605,000 £19,528,000 11 23.73%

Mizuho Corporate Bank Ltd A1 Possible Downgrade £25,605,000 £250,000 1 99.02%

National Westminster Bank plc

A2 Not on Watch £25,605,000 £155,000 1 99.39%

Nordea Bank Finland plc AA- Not on Watch £62,000,000 £4,752,000 3 92.34%

Rabobank Nederland AA Possible Downgrade £62,000,000 £26,070,000 3 57.95%

Santander UK plc A1 Possible Downgrade £25,605,000 £7,256,000 3 71.66%

Skandinaviska Enskilda Banken AB

A1 Possible Downgrade £25,605,000 £9,000,000 2 64.85%

Societe Generale A Possible Downgrade £25,605,000 £7,100,000 2 72.27%

Standard Chartered Bank A1 Possible Downgrade £25,605,000 £6,064,000 2 76.32£

Sumitomo Mitsui Banking Corporation

A1 Possible Downgrade £25,605,000 £11,320,000 3 55.79%

Svenska Handdelsbanken AB

Aa3 Possible Downgrade £62,000,000 £30,500,000 2 50.81%

Appendix 2

Currently a majority of customers rely on a LOC from a FI, although there has been a rise in Deposit Deed registration.

Appendix 3

Energy Balancing Credit Rules

Proposed Review

Background

• The EBCR have been subject to ongoing amendment, however the document has not been reviewed in its entirety for a year.

• The appearance and performance of the EBCR is not at full potential.

• Users are not making use of the EBCR as intended.

• Complaints received from potential New Users/Users that calculations are not explained with sufficient clarity.

• Formatting is irregular.

• Dense text and paragraphs is off-putting to readers.

• Difficult to search document/ locate areas of interest.

• Key information is not up to date.

• Notices overly detailed/unclear.

Summary of Findings

Case for Change

• Text heavy pages are not User friendly.

• Individual requirements are not listed in a manner that makes them easy to identify.

• Information is repeated unnecessarily.

Case for Change Cont.

Information has not been updated

Formatting/grammatical errors.

Case for Change Cont.

• Explanations of calculations are not clear, particularly to New Users.

• No references provided to enable Users to find the information necessary to perform their own calculations.

Case for Change Cont.

• Notices are very lengthy.

• Level/type of information included can be misunderstood.

Conclusion

• EBCR document requires streamlining.

• Should be updated in line with Xoserve’s current branding.

• Text requires review for amendment/simplification.

• Notices should be reviewed for clarification.

• Request User Feedback.

Deposit Deed

Update

Conclusion

• Security is a moving target

• Total number of Users 193

• Total Security in place £349,064,500

• Number of Deposit Deeds in place 55 ( £17,845,000)

• Number of Letter of Credits in place 112 (£322,162,000)

• Cash Deposits still in progress 26 (£9,057,500)

Risk Register

Update

Register Part 1

Risk Register as at 26/4/12 :

  Risk Likelihood - comments Likelihood

H1loss of Gemini system - sustained loss for

1 working day or more

Once in 10 years – to date Gemini over 2 years Gemini has had 1 short overnight outage. Also due to Oracle Software Upgrade, Gemini affected between 22nd and 25th October. Loss of Gemini on 14th and 15th May due to Server problems. 2

H2 Calculation for IMS is found to be incorrect.

Has happened in Dec 05 and also recently when during Oracle OS upgrade UAT it was found that accruals not included in a D-1 or D-2 recalculation – twice in last 6 to 7 years – once in 5 years. April 08 data was uploaded incorrectly. 3

H3APX Gas files containing system prices

and trades arrives late.

Pre Gemini IMS this used to stop PIMS jobs running – since introduction of Gemini IMS this has not happened – once in 5 years. Controls and monitors are now in place to ensure files are received. 3

Register Part 2

Risk Register as at 26/4/12 :

  Risk Likelihood - comments Likelihood

H8User’s unable to provide CVA data due to the CVA system / website being down

This happened once on 13/03/07 – Once in 5 years. Controls in place that would receive notification from CVA. 3

H9

In the absence of being unable to adjust the ABI calculation the industry could be unduly exposed to avoidable financial debt. Should NGD be aware of more up to date information.

Due to SCR Mod 233 this was put on hold to await outcome of SCR consultations. 3

H10

Due to the current European financial climate, there is a risk that the number of FI’s meeting the relevant criteria to provide security could reduce significantly.

Moodys are currently have a schedule to review all FI’s current rating in June 2012. 4

Lehman’s

Update

Update

• Court Order in the US to reduce and allow claim for the discounted amount of $15,874,398.73 held on 22nd March 2012. Time for appeal has elapsed.

• Xoserve are working with NG Legal and Skaddens to finalise a Termination Agreement – This is no longer required.

• Working in conjunction with National Grid’s Treasury department to sell the claim.

EU Third Energy Package

Update

• Collection of three European Regulations and two European Directives.

• Aims to create a harmonised market for gas and electricity within the European Union.

• Creates a new institutional framework:

• Agency for the Cooperation of Energy Regulators (ACER); • the European Transmission System Operators for Gas (ENTSOG); and• the European Transmission System Operators for Electricity (ENTSO-E).

Background

Developing European Network Codes

• Development of binding Network Codes across 12 areas is required:– Capacity Allocation Management– Energy Balancing– Tariffs– Interoperability Rules– Trading Rules– Third Party Access– Security and Reliability– Network Connection– Data exchange and Settlement– Operational Procedures in an Emergency– Energy Efficiency – Transparency Rules

Current Position

• Draft Network Code for Capacity Allocation Mechanisms was delivered on 06 March 2012 and submitted for review and comitology.

• Initial draft Network Code for Balancing submitted for consultation on 13 April 2012.

• Scoping documents for Tariffs FG development issued on 08 February 2012, ACER to produce FG based on responses by June 2012.

• Draft FG for Interoperability issued for consultation on 16 March 2012, consultation is due to close mid May 2012.

Potential Change

• CAM Network Code redefines the Gas Day.

• Requirement for capacity to be allocated as ‘Bundled Capacity’ at interconnection points.

• Nominations at interconnection points will be a single transaction to nominate for both sides of the connection.

• Draft Balancing Code redefines current UNC definitions.

• Invoicing methodologies and tariffs possibly amended.

• Overriding requirement that national contracts cannot pose undue burdens on New Users.

Potential Impact Areas

• Implications for Gemini and invoicing.

• Change in Gas Day affects all reliant time periods ie submission of data, scheduling files etc.

• External pressures to change existing Credit arrangements.

Way Forward

• Ongoing analysis to take place.

• EU monitoring to continue.

• Maintenance of a Watching Brief.

AOB

• AOB

• QUESTIONS?