Energy Balancing Credit Energy Balancing Credit ProposalsProposals

Transmission Work Stream Transmission Work Stream 6th November 2008 6th November 2008

Mark Cockayne Mark Cockayne

Unprecedented Economic Factors

The aim of this presentation is to provide background in respect of recent events managed by the Energy Balancing Credit Committee and its subsequent review of the Energy Balancing Community’s potential risk of financial exposure which is inherent in the existing regime and put forward for discussion three modification proposals to address the issues identified.

Recent Events

During September a number of financial institutions ratings were down graded

15th September Lehman Brothers Holdings Inc announced its intention to file for a Chapter 11 Bankruptcy Petition in the US

Lehman’s Brothers Commodity Services Inc, Default, Lessons Learnt

Accrual methodology in section X is too restrictive

Drafting inconsistencies between section X and V

Financial neutrality, current methodology for smearing of revenue and recovery of debt creates inequity

Accrual methodology

Current methodology for the calculation of a Users Outstanding Relevant Balancing Indebtedness and Anticipated balancing Indebtedness too restrictive

Has the potential to either expose the community to avoidable financial loss due to the lag time before actual information available, or

Conversely has the potential to trigger consideration of Termination where the true financial exposure if fully secured

Accrual methodology Proposal

A two staged response amend the code to allow us to utilise more accurate data than that calculated by the accrual where it is available within the system. Drafting flexible to include the ability to process manual adjustments to Relevant Balancing Indebtedness.

Accommodated in a manual process initially without the need to amend systems it would address both possible extremes but would have to be processed as an adjustment to exposure, so backup data would also need to be provided to allow the user to appeal any resulting cash call. This situation does not fully mitigate the risk as it would have to be triggered by an event e.g. the issue of a cash call or change in financial standing of the company. Has the added advantage of facilitating adjustments being processed in a gas emergency scenario.

Longer term a change to Gemini IMS should be raised to use actual data that is closed out within the system that relates to the relevant period for the users Anticipated Balancing Indebtedness which would then replace those elements and would reflect the exposure of the User more accurately.

Drafting inconsistencies between section X and V

Defaults driven by section X cash collection, exposure monitoring and further security request processes specify that the Termination Notice becomes effective the day following the date of the Notice.

All of the above link to V 4.3.3 which allows issue of a Notice effective at any time following the User Default

Where a User is a Trader at the NBP only, this inhibits the potential to avoid one days exposure as trades become effective at 6am on the gas day.

Smearing of revenue and debt has potential to be inequitable

Where a User does not to pay smearing of debt has potential to expose individual users to inequitable financial loss or gain.

Original smear takes place at time of invoice and assumes that the defaulting user pays, this has the effect of creating a positive smear to the beneficiaries of CNU which is set off against the finance adjustment recovered via neutrality for the cash flow deficit that the Neutrality Bank Account incurs from the payment due date of the invoice.

Subsequent recovery of the defaulting user’s debt takes place after the debt has been over due > 2months, recovery is again via CNU and as a consequence the original beneficiaries of the smear may incur a greater or lesser value to be recovered. This could present a barrier to entry as Users who enter the market during the lapse period who have a portfolio will pick up a charge.

15-Sep-08

16-Sep-08

155 Days

154 Days

16-Feb-0931-Oct-08

Sep – 08 EBI Issue Date

Sep – 08 EBI Payment Due Date

1

12-Nov-08

97 Days

03-Feb-08

Dec–08 EBI Issue Date

Dec – 08 EBI Payment Due Date

2

Lehman Brothers Commodity Services Inc. Debt Recovery Timeline

LEH invoice smeared as credit to the community through the CNU charge within the Energy Balancing invoice. Each users share of the credit will be based on their September 2008 throughput (UDQI + UDQO) figure as a percentage of the overall system throughout figure.

LEH outstanding debt smeared as a debt to the community through the CNU charge within the Energy Balancing Invoice. Each users share of the debit will be based on their December 2008 throughput (UDQI + UDQO) figure as a percentage of the overall system throughput figure.

1

2

Neutrality Bank Account

Invoice Due Date M + 2 after the Invoice Due Date

Negative value equal to the value of the debit in respect of charges that feed neutrality that have been issued to the failing User

Bank account becomes neutral when monies recovered via neutrality. Note that all funding costs incurred by the bank account during the interim are recovered via neutrality in the form of a finance adjustment

-10 +10

Smearing of revenue and debt Proposal

Proposed modification addresses the issue with regard to recovery of debt > than 2months old for EB charges covering both EBI and Reconciliation ensuring that it is recovered via ADS and not CNU so that monies are recovered based upon the original smear removing any potential inequity created by portfolio movement having the added benefit of protecting new entrants to the market.