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Force Majeure

Force Majeure. Existing FM situation: Up to 200GWh/d capacity shortfall due to the rejection of NG’s planning application for a PRI in Corse / Tirley area. Second Public Enquiry held July 2010 and awaiting Sec of State decision (DECC / C&LG joint decision). Mod 262 - rejected in Dec 2009

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Force Majeure

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  1. Force Majeure • Existing FM situation:Up to 200GWh/d capacity shortfall due to the rejection of NG’s planning application for a PRI in Corse / Tirley area. Second Public Enquiry held July 2010 and awaiting Sec of State decision (DECC / C&LG joint decision). • Mod 262 - rejected in Dec 2009 • Lack of risk to NG revenue seems inappropriate • Incentive on shippers to challenge FM • Whether FM terms in UNC are comparable with other normal commercial terms? (To be dealt with under RIIO-T1) • Way forward – material value (>£0.5m/month) of delay • Mod is sufficiently well developed to go to consultation • Request that the Mod report could be heard at Dec’ 10 Panel • 15 days consultation / Best endeavours by JO / Short notice Panel

  2. Modification 3 4 9 • Generic solution for treatment of NTS Entry Capacity affected by FM, not geared to specific situation • Key elements of Mod: • If implemented, NGG would have the obligation to enter into an FM Option capacity management agreement : • Pays the Shipper an option premium for constrained registered capacityOption premium paid to Registered User = rebate affected capacity based on WAP of each Registered User @ ASEP * Constrained capacity of User (pro-rated) • Exercise the option on a daily basis when nom’n > constraint at zero exercise price • NG bear 50% of the cost via the Buyback incentive • Shippers bear 50% of the cost via Capacity Neutrality and Commodity • Applies to QSEC / AMSEC capacity at the time the FM was declared (prevents “gaming”) • If a shipper is successful in challenging FM then the option would be unwound by NGG, keeping the industry whole and shippers not gaining under this mechanism. • NG have indicated that this could be implemented within 5 days of approval

  3. Worked example Schematic of option • Option rather than Forward contract to avoid sterilising capacity (and potentially restricting flows) unnecessarily. • Where the option is exercised, capacity holders may still need to trade capacity in order to maximise flows (example given) • The capacity is fully sold out between A and B • This would effectively be pro-rated and NG hold an option O that would be prorated with A and B. • In (1), overall flows are below the constrained level and flows are unrestricted (B requires additional capacity to flow more) • In (2) the aggregate nomination exceeds the FM level so NG exercise the option O, reducing A and B to the pro-rated amounts. A would continue to flow the gas it wanted to and would sell some capacity to B to maximise ASEP flows. • The Option premium to A and B goes through NG’s capacity buyback incentive mechanism, giving a 50:50 split between NG and Entry Users at all ASEPs. • The Option exercise price on a day is zero Baseline A O O Cap s.t.FM A A A A A B B B A2B B B B Capacity 1 2

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