Operating Margins UNC Sub Group

Tuesday 2nd December 2008

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Principles of Section K Re-write Already Agreed

Summary of Changes

1. Introduce flexibility to meet new Licence obligations

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

Note: Legal text has been amended to “Operating Margins Year’

(b) Operating Margins Facilities will need to include Supply Side Facilities and Demand Side Facilities

(c) Operating Margins Gas Delivery Arrangements will need to be extended so that OM Services can be provided by NTS-connected supply and

demand sources

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Principles of Section K Re-write Already Agreed

Summary of Changes continued.

(d) Clarify role of ‘Relevant System Managers’

(e) Procurement Flexibility: 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.

2. Add clarity to existing arrangements – make K easier to read

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Further Potential Section K Changes Identified to be considered today

1. Sale of gas associated with Operating Margins Capacity Arrangements

Where National Grid NTS has entered into an Operating Margins Capacity Arrangement they can be terminated (as already in code), or Operating Margins Capacity sold or transferred (as proposed and agreed in an earlier workshop).

2. Buy gas associated with Operating Margins Capacity Arrangements

Where National Grid has switched to an Operating Margins Capacity Arrangement.

Changes Proposed:Provides National Grid NTS with clearer guidelines regarding the disposal of any excess gas and purchase of gas to be held in storage. Changes reflected in Section 3.

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Further Potential Section K Changes Identified to be considered today

3. Closing Margins Adjustment Charge (CMAC)

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 storage (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 Proposed:It is proposed that the cost & revenues associated with pre-Storage Year transfers & or sale are also included in the CMACChanges reflected in Sections 3 & 4 of Section K

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Further Potential Section K Changes Identified to be considered today

4. Utilisation of Operating Margins

The utilisation of Operating Margins is currently restricted to the “Gas Day” on which damage to or failure of any part of the NTS (other than Programmed Maintenance) occurs.

Note: This change is not required to facilitate Operating Margins

Contestability and would not alter the level of bookings required for Operating

Margins.

Changes Proposed:Operating Margins can be used in these circumstances for up to 24 hours following the event. Change reflected within Section 2.

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Further Potential Section K Changes Identified to be considered today

Example:

Current:

06:00Gas Flow Day 1

05:00 Pipeline Incident

06:00Gas Flow Day 2

06:00Gas Flow Day 3

OM Utilisation

06:00Gas Flow Day 1

05:00 Pipeline Incident

06:00Gas Flow Day 2

06:00Gas Flow Day 3

OM Utilisation up to 24 hours

05:00

Proposed:

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Summary of Potential Additional Changes

1. Sale of gas associated with Operating Margins Capacity Arrangements

2. Buy gas associated with Operating Margins Capacity Arrangements

3. Costs & revenues associated with pre-Storage Year transfers and or sale of

gas are included in the Closing Margins Adjustment Charge

4. Utilisation of Operating Margins for damage to or failure of any part of the

NTS can be used for up to 24 hours following the event

Does the group believe it to be beneficial to take these changes forward as

part of this Review?

Proposed Consent to Modify

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Consent to Modify – Revision to TPD Section K4.2 – Margins WACOG – paragraph 4.2.6

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

UNC: K 4.2.6

Consent to Modify

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 Gas Transfer

(d) OM transportation charges

(e) OM balancing charges

(f) Injection charges

(g) User agent fees

(h) Withdrawal charges associated with Carry Across Gas

"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(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."

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Prevailing 2008 Summary of Code Text – post MP0311

(d) the amount payable by National Grid NTS (Margins) by way of Transportation Charges

(f) The amount paid or payable by National Grid NTS (Margins) by way of injection charges

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

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

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.

(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

Code Comparison

4.2.6 cross referenced the following provisions:

1996 Summary of Code Text – pre MP0311

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Proposed Consent to Modify Section K4.2.4 a

Consent to Modify Section K4.2.4 a

“4.2.4. (a) the quantity of relevant Carry-over Margins Gas multiplied

by the Operating Margins WACOG and the amount of relevant Carry-

Across Gas (in respect of which the relevant Storage Facility is the

deficit facility) multiplied by the Operating Margins WACOG in

respect of the surplus Storage Facility, in each case as at the last Day

of such Storage Year.”

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Proposed Second Consent to Modify

Summary of proposed Section K CTM changes:

1. 2.2.4 refers to paragraph 4 should be 3

2. 3.3.1(a) refers to paragraph 3.1.2 should be 3.1.4

3. 3.3.2(f)(i) & 3.3.2 (f)(ii) refers to paragraph 3.3.7 should be 3.3.6

4. 4.4.2(a) delete “(i)” and “; and (ii)”

Walk Through the Draft Legal Text

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Section K Draft Legal Text

Legal Text Key:

In general, when reading the legal text use the following key:

Insertion Moved to

Deletion Style Change

Moved deletion Format change

Moved from

Current Section K used to develop the draft legal text for contestability. To allow direct comparison.

Consent to modify changes have not been included at this stage, this is again to facilitate a direct comparison between current and proposed texts.

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Next Steps

CTM1 – Sent to Ofgem

CTM2 – Under development/will sent to Ofgem shortly

Next Version of draft legal text to include CTM related changes

04 December: Report to Transmission Workstream

12 December: OM sub group meeting

18 December: UNC Modification Panel