A regulatory framework for gas quality treatment

facilities: recap and update

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GB regulatory framework

DTI• Regulatory authority

for offshore

• Licensing for offshore exploration

• Liaise with HSE on G(S)MR

HSE• Safety regulatory

authority – all GB gas activities

• Sets G(S)MR limits

•Sets & monitors compliance with safety

case requirements

Ofgem• Regulatory authority for GB

gas market

• Sets and monitors compliance with regulatory

framework

Ofgem to work together with HSE and DTI on any options developed

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Ofgem - work so far

Ofgem Workshop in September 06• Gas Quality is a material issue

Ofgem led two workstreams (Sep-Dec 2006)• Scenario development workstream– considered the extent of issue• Economic Regulation workstream – considered possible regulatory

framework to support construction of a gas processing facility• Conclusions document published 30 January

Work in Europe• Gas interoperability• ERGEG Taskforce

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What is the extent of the issue?

Future Source and spec of gas – Highly Uncertain…

• More continental LNG terminals ~ avail of import for GB Mkt• Norwegian supplies delivered; high prices prompt UKCS dev

• Gas supplies diverted to Continent ~ increase GB demand • High gas prices lead to increase development of UKCS

• All import facilities and UKCS flow to full capacity ~realistic?

• High imports flows to UK lead to exports to continent • Depressed GB prices; limited dev of UKCS

• 2009/10 – earliest period to consider dev. scenarios• 2013/14 – uncertainty regarding supply/demand balance• Bacton most suitable terminal; upper wobbe focus

Parameters Set

Transit UK

Global LNG

Equilibrium

Design Limits

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Economic Regulation – What was considered

Unregulated approach

• NGG builds facility

• Investment potentially included in RAB subject to user commitment meeting 100% NPV

• Costs recovered through user charges

Pure regulated approach

User commit approach

Not favoured due to concerns over timeliness of investment.

Favoured but with scope to allow NGG to add capacity above the level of user commitment at its own risk (i.e. not automatically included in the RAB)

Not favoured as risk of asset stranding would be smeared across all gas customers.

• No regulation of facility

• Pure commercial incentives apply

• NGG builds facility

• Investment included in the RAB

• Costs smeared across all gas customers

NOW FURTHER DEVELOPING THIS REGULATORY MODEL

Economic regulation workstream considered three broad approaches

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Proposed regulatory approach – summaryThird party approaches NG to conduct feasibility

studyNGG refuses Possible licence route

of appeal to Auth

NG offers terms and conditions for feasibility study

Third party refuses

Third party accepts

NG invests in capacity if bids cover 100% of facility cost

NG undertakes study and asks third party whether to proceed to auction based on

the study

Third party accepts

Third party rejects Third party pays for study

NG offers service to market through auction

NG can invest in additional capacity

NG earns a regulated rate of return

NG can earn higher or lower return

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Next consultation document (May)

• Flesh out main issues in the allocation of risks among parties– e.g. competition impacts, balancing risks to consumers, etc.

• Present initial views on how risks might be allocated & the associated regulatory framework– Taking into account submissions to Workstream Conclusions

• Industry feedback key– Framework to rely on strong user signals

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Next consultation doc published

31 May

Draft Proposalspublished

late July/early Aug

Apr

Jun Jul Aug SepMay

LICENCE AMENDMENTS

NGG DEVELOPS UNC MOD PROPOSALS

NGG First Workshop

23 Apr Panel Recommendation

Sep

Ofgem decision

Oct

Feasibility study potentially being conducted

Oct

Final proposalsearly Oct

Responses due

early Sep

Responses due

early July

Workstream completes dev

July

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