Third Workstream meeting re Baseline Re-consultation and Substitution

12 September 2007

Recap of previous two workstream meetings (1)

Outlined the basis for Ofgem’s TPCR baselines National Grid provided network analysis following

Ofgem’s prescribed methodology Based on 2008 network, average of three TBE

scenarios (Auctions +, Transit UK and Global LNG) using supply substitution Using least favourable node as supply balance

TPCR baselines were set based on: ‘Baseflow’ under each scenario as starting point, then

split remaining ‘unallocated’ entry capacity on 10YS forecast flows for 2008

Recap of previous two workstream meetings (2)

Resulted in aggregate baselines of 8814 GWh/d Discussed alternative methods for splitting the

unallocated capacity within Ofgem’s spreadsheet National Grid asked for input from workstream

members, in particular on: Views on ‘re-cutting of the cake’ (i.e. aggregate the

same, i.e. 8814 GWh/d) Vs setting higher baselines (aggregate greater)

Summary of responses

Where do we go from here?

No real consensus view from the industry No particular comments on a methodology to

apply Consider the two alternative approaches:

‘re-cutting of the cake’ (i.e. aggregate the same, i.e. 8814 GWh/d)

Vs setting higher baselines (aggregate greater)

Re-cutting the cake – how do you allocate the 8814 GWh/d? (1)

Start with current level of capacity obligations (take maximum booked for April 2008 onwards from August 2007 report on website) (8210 GWh/d)

Take off the Incremental Obligated (IO) which has been sold in Sept 2006 QSEC auction (1310 GWh/d)

This leads to 6900 GWh/d having been allocated If previously sold out at an ASEP, add back 20% previously

reserved for S-T (based on old TPCR baseline) This affects Cheshire, Easington, Hornsea and Isle of Grain (359

GWh/d)

This leads to 7259 GWh/d which would be allocated

… this then leaves 1554 GWh/d of entry capacity unallocated

How do you allocate the 1554 GWh/d?

Believe need to take account of physical capability New baselines should be constrained to not exceed

previous obligations Needs to be broadly commensurate with the buy-back

target Therefore, based on the above, need to preserve the zonal

limits Applied above logic and used four different ways of splitting

the 1554 GWh/d On existing obligated level; 2005 TYS; 2006 TYS; Max flow seen over 2 winters, 2005/6 and 2006/7.

Possible sets of baselines (1)

Obligated Allocation

Split on Old obligated

levels

Split on Av 2005 TYS

Split on 2006 TYS

Split on Max flow over Winters

2005/6 and 2006/7

ASEP GWh/d GWh/d GWh/d GWh/d GWh/dAvonmouth 0 147 154 188 121Bacton 1,119 1,671 1,655 1,600 1,663Barrow 309 374 349 342 352Barton Stacey 120 209 200 166 235Burton Point 55 87 67 70 110Cheshire 214 337 334 275 214Dynevor Arms 6 8 8 8 8Easington (incl. Rough) 1,062 1,062 1,062 1,062 1,062Garton 420 420 420 420 420Glenmavis 0 9 16 16 8

Hatfield Moor (onshore) 0 0 0 0 0Hatfield Moor (storage) 15 15 15 15 15Hole House Farm 104 119 142 167 153Hornsea 175 175 175 175 175Isle of Grain 453 522 538 593 530Partington 0 124 123 154 189St Fergus 1,437 1,590 1,631 1,644 1,627Teesside 328 397 373 368 381Theddlethorpe 489 595 595 595 595Wytch Farm 3 6 7 7 5Milford Haven 950 950 950 950 950Fleetwood 0 0 0 0 0Total 7,259 8,814 8,814 8,814 8,814

Obligated Allocation based on sold + 20% old TPCR baseline where sold out

Re-cutting the cake – how do you allocate the 8814 GWh/d? (2)

Start with the current level of capacity obligations (take maximum booked for April 2008 onwards from August 2007 report on website less Incremental Obligated) (6900 GWh/d)

Add back 20% previously reserved for S-T (based on old TPCR baseline) at all ASEPs (but cap resultant figure at the old TPCR baseline)

This leads to 8400 GWh/d being allocated

… this then leaves 414 GWh/d of entry capacity unallocated:

Possible sets of baselines (2)

Sensitivity

Current Baseline

Proposed Starting point

Difference

ASEP GWh/d GWh/d GWh/dAvonmouth 179 30 -150Bacton 1,783 1,468 -316Barrow 309 452 142Barton Stacey 173 120 -53Burton Point 74 55 -19Cheshire 286 188 -97Dynevor Arms 8 16 8Easington 1,062 1,062 0Garton 420 420 0Glenmavis 29 20 -9Hatfield Moor (onshore) 0 1 0Hatfield Moor (storage) 15 26 11Hole House Farm 132 104 -28Hornsea 164 175 11Isle of Grain 410 453 43Partington 175 43 -132St. Fergus 1,671 1,677 6Teesside 361 480 119Theddlethorpe 611 658 47Wytch Farm 3 3 0Milford Haven 950 950 0Fleetwood 0 0 0Total 8,814 8,400 -414

Zonal analysis of possible baselines (2)

Zonal Totals Current Baseline

Possible Baseline

Difference

GWh/d GWh/d GWh/d GWh/dEast Coast 4,465 4,262 -203

Easington Area 1,661 1,683 22South East 2,193 1,921 -272

Theddlethorpe 611 658 47West UK 958 966 8Northern Triangle 2,370 2,628 259North West 666 390 -275South West 355 153 -202Total 8,814 8,400 -414

Re-cutting the cake – how do you allocate the 8814 GWh/d? (3)

Alternative starting position - could use historical flow over the last two winters (subject to the old TPCR baseline)

Then adjust for the current level of capacity obligations

This leads to 7802 GWh/d being allocated

… this then leaves 1012 GWh/d of entry capacity unallocated:

Alternative ‘re-cutting of cake’ – possible baselines (3)

Sensitivity

Current Baseline

Proposed Starting point

Difference

ASEP GWh/d GWh/d GWh/dAvonmouth 179 84 -95Bacton 1,783 1,308 -475Barrow 309 322 13Barton Stacey 173 120 -53Burton Point 74 55 -19Cheshire 286 146 -140Dynevor Arms 8 32 24Easington (incl. Rough) 1,062 1,062 0Garton 420 420 0Glenmavis 29 59 31Hatfield Moor (onshore) 0 0 0Hatfield Moor (storage) 15 20 5Hole House Farm 132 104 -28Hornsea 164 175 11Isle of Grain 410 420 10Partington 175 195 20St Fergus 1,671 1,437 -233Teesside 361 401 40Theddlethorpe 611 489 -122Wytch Farm 3 3 0Milford Haven 950 950 0Fleetwood 0 0 0Total 8,814 7,802 -1,012

Zonal analysis of possible baselines (3)

Zonal Totals Current Baseline

Possible Baseline

Unallocated

GWh/d GWh/d GWh/d GWh/dEast Coast 4,465 3,893 -572

Easington Area 1,661 1,677 16South East 2,193 1,728 -466

Theddlethorpe 611 489 -122West UK 958 982 24Northern Triangle 2,370 2,220 -150North West 666 499 -166South West 355 207 -148Total 8,814 7,802 -1,012

Alternative of higher baselines – Capex requirement

Can Use the TPCR agreed revenue drivers as proxy for capital expenditure

If baselines increased back to pre 2007 TPCR levelsAround £275m extra capex needed to provide the increased baselines

Alternative of higher baselines – Buyback modelling

Alternatively, can examine the incremental buyback risk. Preliminary results indicate that:

Just at Teesside, increasing the baseline back up to 70 mscm/d could lead to around £90m incremental buyback risk (mean level of £20m) per year (assuming that the incremental flow at Teesside is off-set by reduction of flow at Milford Haven)

Similar level of risk at Barrow of increasing baseline back to 66 mscm/d

Summary

Discussed how baselines were set Presented feedback received from industry Proposed alternative ways of ‘cutting the cake’ Demonstrated that going back to higher baselines

means either: significant capex needed or that buy-back risk is likely to be high

Will provide a summary report to Ofgem in the next two weeks

Ofgem to commence their consultation