Modification proposal 0073 ‘Revision to the Notice Period regarding the implementation of changes to Transportation charges’

Transmission Workstream, 2nd February 2006

Proposed Benefits of Modification

Proposal is to ‘increase the current notice period for changes to transportation charges from 2-months to 4-months’

Corona believes this mod will better facilitate competition between shippers, suppliers & DN operators - Licence, Relevant Objective A11.1 (d)

By allowing all suppliers to accurately factor into supply contracts the impacts of transportation charge changes

By reducing the need on suppliers to raise charges to cover risk of increases in transportation charges

However, Corona does recognise that this extension may also lead to increased under/over recovery and errors in charging levels

National Grid NTS’ position

National Grid NTS recognises the perceived benefits of greater notice periods for the purpose of agreeing end-user contracts

However, it is worth noting the following likely impacts if the proposal were implemented :

National Grid NTS’ position

Greater forecasting uncertainty There would be a greater margin for forecasting error at 4

month stage, relative to 2 month stage, brought about by : Less certainty of current level of “k” . The level of carry over of “k”

from previous financial year would not be known at time of setting charges for 1 Oct. This would mainly affect TO exit capacity charge

Less certainty of anticipated volumes (and hence predicted revenues). Outcome of NDM forecast data not known at time of setting charges for 1 Oct. Mainly affect TO exit capacity charge

Less certainty over predicted gas costs – this is the main cost driver for SO commodity charge, but also affects allowable revenue (for shrinkage)

Price VolatilityDue to increased forecasting errors, levels of “k” would be expected to increase, leading to larger subsequent corrections in charges (the ‘seesaw’ effect)

National Grid NTS’ position

..contd.

Frequency of Price ChangesAs a result of greater volatility, it is more likely we would need to change charges twice per year

Price CertaintyAt 4-month stage, the confidence in the appropriateness of the published final prices would not be significantly greater than that for the 150-day (5 month) indicative notice. For example, the SO commodity charges for April ’06 were set at +3% with a range of –5% to +11%.

Assessment against relevant objectives

On balance, we do not believe implementation would further the relevant objectives, but rather would have a detrimental effect on them : A11.1 (d) secure efficient competition between

all Users1. Earlier notice will result in less appropriate prices resulting in

increased under/over recovery and greater volatility

2. Implementation would give rise to increased price uncertainty

3. These outcomes would be to the detriment of supply competition

Assessment against relevant objectives

A11.1 (c) Efficient discharge of Licensee's licence obligations1. Cost Reflectivity (SSC A4) - setting charges earlier would lead

to the use of less accurate data thus reducing cost reflectivity :Using previous years NDM forecast data for 1 Oct pricesForecast of anticipated gas costs less accurate

2. Allowable Revenues (SSC C8B (1)) - Transportation owner activity revenue shall not exceed the maximum allowed revenue

Earlier charge setting would lead to greater uncertainty of National Grid NTS recovering revenue in line with its maximum allowable revenue

Potential for price instability would therefore increase