Place your chosen image here. The four corners must just cover the arrow tips. For covers, the three pictures should be the same size and in a straight line.

Action NTS0507: Potential impact of EU Framework Guidelines on GB Charging

NTS Charging Methodology Forum (NTSCMF) 23rd June 2014

2

Agenda

Overall aims

Overview and key assumptions

Analysis:

Scenarios

Potential impact of EU Framework Guidelines on GB Charging – December 2013 Scenarios (for reference)

Potential impact of EU Framework Guidelines on GB Charging – New Scenarios Analysis

Summary

3

Overall Aim (1)

Give potential impacts the Draft EU Tariff Code on the GB NTS Charging Arrangements

Help industry understand potential impacts of the EU Draft Tariff Code on GB NTS charging that may help inform any responses to the code consultation

To support Ofgem’s Gas Transmission Charging Review (GTCR) and the technical modelling workshops scheduled over the Summer

4

Overall Aim (2)

Considered two approaches

Minimal approach – just on Interconnection Points (CAM Points)

Impact on all of domestic entry and exit points (CAM and non-CAM Points)

Analysis provides indicative impacts – does not provide any forecasts

The options presented here are indicative and are not how we propose or suggest the Framework Guidelines be implemented

5

Overview:Summary of data used in Analysis

Analysis used formula year 2012/13 to look at what the potential impacts would have been if we applied the EU Tariff Code at:

Interconnection Points only (CAM Points);

All Entry and Exit points of GB (CAM and non-CAM Points)

Assumed no changes in bookings / behaviour / flows

Uses a number of assumptions due to uncertainties or areas that need consideration

Looks at the revenues that would be need recovered under the scenarios and how they might be recovered

6

Overview: Key Assumptions (1)

What we mean by implementing the EU Draft Tariff Code:

Where used, the commodity charge as per the EU Draft Tariff Code is to recover the cost to flow gas

We have used costs for shrinkage as a proxy for fuel costs

Cost Allocation Methodology for the charging regime for the calculation of charges using the LRMC methodology (“Virtual point variant A” in EU Draft Tariff Code) remains

Any targeted charges (linking to “Dedicated Services”) or specific charging arrangements (e.g. current arrangements for storage) assumed to remain in place

7

Overview:Key Assumptions (2)

Charges set to aim to recover the target allowed revenue for the year including a mechanism to recover any shortfall

When considering how revenue shortfalls could to be recovered in the different scenarios this could be:

Through a mix of capacity and commodity; and

Potentially recovered in either a uniform method across all GB points or via a dual methodology for CAM and non-CAM points

Place your chosen image here. The four corners must just cover the arrow tips. For covers, the three pictures should be the same size and in a straight line.

Analysis

9

Analysis:Reminder of Current Methodology

TO allowed revenue recovered from capacity charges and commodity chargesEffective 50:50 split between Entry and Exit charges

DN Pensions Deficit & NTS Metering

Entry Capacity

(All)

Entry Commodity

(All)

Exit Commodity

(All)

Exit Flat Capacity

(All)

TO Charges

TO Allowed Revenue

SO Charges

St Fergus Compression + Shorthaul +Legacy Incremental Entry/Exit* +

Neutrality

Entry Commodity

(All)

Exit Commodity

(All)

SO Allowed Revenue

10

Analysis:Scenarios to be covered

Description of Scenario PreparedAssumptions based on FG or EU Draft Tariff Code

Potential Revenue Recovery method for shortfall*

Revenue Recovery of shortfall* from CAM / Non CAM Points

1New Commodity Charge at All Points with no other commodity at CAM points

Dec-13EU Tariff Framework Guidelines

CommodityCapacity

Non CAM

2

New Commodity Charge at All PointsAdjustment to Exit Capacity charges

Dec-13EU Tariff Framework Guidelines

CommodityCapacity

Non CAM

3New Commodity at all pointsAdjusted Capacity for Entry and Exit

Jun-14 Draft EU Tariff Code Capacity All Points

4

New Commodity at all pointsAdjusted Capacity for Entry and ExitCapacity charges grouped into CAM and Non CAM points

Jun-14 Draft EU Tariff Code Capacity All Points

5New Commodity at all pointsAdjusted Capacity for Entry and Exit

Jun-14 Draft EU Tariff CodeCapacityCommodity

Potential Mix

*Shortfall in Revenue is the amount not recovered using current methodology

Place your chosen image here. The four corners must just cover the arrow tips. For covers, the three pictures should be the same size and in a straight line.

Action NTS0507: Potential impact of EU Framework Guidelines on GB Charging – December 2013 Scenarios (for reference)

12

Scenario 1 (Dec 2013 analysis)Overview: Apply EU FGs at CAM Points only

TO Revenues / charges

Allowed revenues unchanged

Same charging methodology for capacity as now

No changes to Capacity charges / revenues

EU FG Commodity charge (shrinkage) for all

Commodity charges recover shortfall

Apply to domestic only (Non-CAM Points) as exclude IPs (CAM Points) under EU FGs

Therefore use a smaller charging base to recover commodity

Targeted charges / pass through items remain as is

13

Entry Capacity

(All)

Scenario 1 – Implementing EU FGs at IPs(CAM Points) only

DN Pensions Deficit & NTS Metering

TO Charges

Exit Commodity

(Non-CAM only)

Exit Flat Capacity

(All)

Entry Commodity(Non-CAM

only)

SO Charges

St Fergus Compression + Shorthaul + Legacy Incremental Entry/Exit* +

Neutrality

Entry Commodity (Non-CAM)

Exit Commodity (Non-CAM)

Commodity (All)

14

Scenario 1: TO Analysis(Entry and Exit Commodity) - 2012/13

TO Entry Commodity Revenue

£-

£50

£100

£150

£200

£250

Domestic Current Domestic FG InterconnectorCurrent

Interconnector FG

Millio

ns 16% Increase

TO Exit Commodity Revenue

£0£5

£10£15£20£25£30£35£40£45£50

Domestic Current Domestic FG InterconnectorCurrent

Interconnector FG

Millio

ns 5% Increase

15

Scenario 1: SO Commodity Analysis – Entry and Exit 2012/13

Collected SO Commodity Revenue

£-

£50

£100

£150

£200

£250

£300

£350

£400

Current FG

Mill

ion

s

Domestic

Interconnector

10% Increase

70% Decrease

16

Scenario 2 (Dec 2013 analysis) Assumptions: Apply EU FGs across all GB

Total allowed revenues unchanged (combined TO+SO)

SO Commodity charge only recovers shrinkage

Apply to all points with any under recovery on what we have as remaining SO Commodity would move onto TO Capacity charges

Same charging methodology for capacity as now

Capacity charges (Entry and Exit) would need to be adjusted on top of those calculated using the Transportation Model to collect allowed revenue (TO+SO)

There are a number of options that could be applied to achieve this

Targeted charges / pass through items remain as is

17

Scenario 2 – Implementing EU FGsCharges (FG) – Step 1

DN Pensions Deficit & NTS Metering

Entry Capacity

(All)

Entry Commodity

(All)

Exit Commodity

(All)

Exit Flat Capacity

(All)

Entry SO Shortfall (All)

Exit SO Shortfall (All)

Charges (FG) – Step 2

DN Pensions Deficit & NTS Metering

Entry Capacity

(All)

Exit Flat Capacity

(All)

Entry Shortfall (All)

Exit Shortfall (All)

Recalculation of Exit Capacity Charges

18

Scenario 2 – Potential Impacton Entry and Exit Revenues – 2012/13

Analysis of Entry Collected Revenue

£-

£100

£200

£300

£400

£500

£600

Current Adjusted

Mil

lio

ns

SO Entry Shortfall

TO Entry Shortfall

TO Entry Commodity

Entry Capacity

Revenue contribution from Domestic & Interconnector points, and Revenue Shortfall for formula year 2012/13

£400m

£281m

£-

£50

£100

£150

£200

£250

£300

£350

£400

£450

Original Revenue Adjusted Revenue

£m

illio

n

Exit Revenue Shortfall

Interconnector Exit Cap Rev

Domestic Exit Cap Rev

Exit Target Rev

Place your chosen image here. The four corners must just cover the arrow tips. For covers, the three pictures should be the same size and in a straight line.

Action NTS0507: Potential impact of EU Draft Tariff Code (DTC) on GB Charging – New Scenarios

20

Overview – New Scenarios

The following scenarios follow on from the analysis done in December 2013

Analysis used formula year 2012/13 to look at what the potential impacts would have been if we applied the EU Draft Tariff Code

Assumed no changes in bookings / behaviour / flows

Uses a number of assumptions due to uncertainties or areas that need consideration

All key assumptions within the December 2013 analysis are applicable to this analysis

21

Scenario 3 – Apply EU DTC at all points with TO and SO split

Total allowed revenues unchanged (combined TO+SO)

SO Commodity charge only recovers shrinkage

Apply to all points with any under recovery on what we have as remaining SO Commodity would move onto TO charges

Capacity Floating and Floating Regime (split by TO and SO)

Targeted charges / pass through items remain as is

22

Scenario 3 – Apply EU DTC at all points with TO and SO split

SO Charges

St Fergus Compression + Shorthaul + Legacy Incremental Entry/Exit* +

Neutrality

Entry Commodity (All)

Exit Commodity (All)

Entry Capacity

(All)

DN Pensions Deficit & NTS Metering

Exit TO and SO Shortfall

Exit Flat Capacity

(All)

Entry TO and SO Shortfall

TO Charges

23

Revenue against charging options - Exit

£-

£100,000,000

£200,000,000

£300,000,000

£400,000,000

£500,000,000

£600,000,000

Current Tariff FG

Alternative ChargingMethodology

Commodity (Shrinkage)

TO Exit Commodity

SO Exit Commodity

TO Exit Capacity

Revenue against charging options - Entry

£-

£100,000,000

£200,000,000

£300,000,000

£400,000,000

£500,000,000

£600,000,000

Current Tariff FG

Alternative Charging Methodlogy

Commodity (Shrinkage)

TO Entry Commodity

SO Entry Commodity

TO Entry Capacity

Scenario 3 – Apply EU DTC at all points with TO and SO split

£190m

£50m

£50m

£340m

24

Scenario 4 - Apply EU DTC at all points with CAM and Non-CAM split

Revenue Amount - Values based on model and what is allocated to IPs (CAM Points) and non IPs (Non CAM Points)

New Capacity Rates at both IP’s (CAM Points) and Non IPs (Non-CAM Points)

Total Revenue split by CAM and Non-CAM points

Commodity charge only recovers shrinkage

Revenue not collected would need to be collected from Capacity

Floating Regime (CAM and Non-CAM split)

Targeted charges / pass through items remain as is

25

Scenario 4 - Apply EU DTC at all points with CAM and Non-CAM split

CAM Commodity

Non-CAM Commodity

CAM Capacity

(All)

DN Pensions Deficit & NTS Metering

Non-CAM Shortfall

Non-CAM Capacity

(All)

CAM Shortfall

St Fergus Compression + Shorthaul + Legacy Incremental Entry/Exit* +

Neutrality

26

Exit revenue split by CAM and Non-CAM

£-

£50,000,000

£100,000,000

£150,000,000

£200,000,000

£250,000,000

£300,000,000

£350,000,000

£400,000,000

£450,000,000

CAM Non-CAM

Exit Shrinkage

Exit Alternative ChargingMethodology

Exit Capacity Revenue

Entry Revenue split by CAM and Non-CAM

£0

£50,000,000

£100,000,000

£150,000,000

£200,000,000

£250,000,000

£300,000,000

£350,000,000

£400,000,000

£450,000,000

CAM Non-CAM

Entry Shrinkage

Entry Alternative ChargingMethodology

Entry Capacity Revenue

Scenario 4 - Apply EU DTC at all points with CAM and Non-CAM split

£195m

£44m

£6m

£30m

£44m

£145m

£6m£17m

27

Scenario 5 – Apply EU DTC at all points (mix of Capacity/Commodity)

Fixed regime is today for IP’s (CAM Points) and Non-IP’s (Non-CAM Points)

Remove Shrinkage Revenue from the SO Commodity Revenue

The shortfall in SO Commodity Revenue needs to be collected by an alternative Commodity Charge

The TO Commodity Revenue needs to be collected by an alternative Commodity Charge

28

Scenario 5 – Apply EU DTC at all points (mix of Capacity/Commodity)

SO Charges

St Fergus Compression + Shorthaul + Legacy Incremental Entry/Exit* +

Neutrality

SO Entry

Alternative Commodity

SO Exit Alternative Commodity

Commodity (All)

Entry Capacity

(All)

DN Pensions Deficit & NTS Metering

TO Exit Alternative Commodity

Exit Flat Capacity

(All)

TO Entry Alternative Commodity

TO Charges

29

Revenue against charging options - Exit

£-

£100,000,000

£200,000,000

£300,000,000

£400,000,000

£500,000,000

£600,000,000

Current Tariff FG

Alternative Charging MethodologyExit (TO)Alternative Charging MethodologyExit (SO)Commodity (Shrinkage)

TO Exit Commodity

SO Exit Commodity

TO Exit Capacity

Revenue against charging options - Entry

£-

£100,000,000

£200,000,000

£300,000,000

£400,000,000

£500,000,000

£600,000,000

Current Tariff FG

Alternative Charging MethodologyEntry (TO)

Alternative Charging MethodologyEntry (SO)

Commodity (Shrinkage)

TO Entry Commodity

SO Entry Commodity

TO Entry Capacity

Scenario 5 – Apply EU DTC at all points (mix of Capacity/Commodity)

£220m

£120m

£45m

£145m

30

Summary (1)

Where considering floating charges, capacity charges could be subject to an additional adjustment to aim to recover target allowed revenues for the year (e.g. on top of any existing adjustments)

Could include revenue uplift (like Exit), inflation adjustments or other

Options include taking revenue shortfall recovering based upon:

Adjusting using baselines or obligated levels

Adjusting using forecast bookings

Issues to consider would be:

Application of any uplift considering (amongst other items):

The methodology to be applied in the Transportation Model

The application of discounts for short term capacity

How to apportion any uplift or adjustment

31

Summary (2)

EU Draft Tariff Code gives some flexibility in the adoption of fixed or floating tariffs

Becomes a GB discussion about optimal balance between charges and points to recover revenue

Ofgem’s GTCR and modelling workshops will be looking at this in some detail and there will be assumptions within this work on the EU Draft Tariff Code

32

Questions

Any Questions?