Modification Proposal 0246: Quarterly NTS Entry Capacity User Commitment

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Modification Proposal 0246 Quarterly NTS Entry
Capacity User Commitment
Chris Shanley
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Modification Proposal 0246 Entry Capacity User
Commitment The Concept

• Long Term Entry Capacity Car
• Value - 1.3bn Value - 40,000
• Security - ? Deposit - 1000

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Timeline

• RG221 was established in September 2008
• Main questions
• Is the balance of investment risk right between
  existing and new shippers and National Grid NTS?
• How do you mitigate the risk of default.
• Modification Proposal 0246 to the UNC Panel in
  March 2009.
• Aim is to put new arrangements in place prior to
  the next Long Term Entry Capacity Auction (QSEC)
• Ofgem Impact Assessment is highly likely.

default payment for allocated capacity is
not received at the time expected
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Issues discussed by Review Group

• Currently no security required at time of long
  term capacity auction.
• Security called for 12 months prior to the
  start date of the entry capacity
  potentially long after system investment made.
• User currently able to defer capacity commitments
  12 months prior to use and keep deferring without
  penalty.
• Incremental Capacity auction allocations lead
  to fixed additional allowed revenue to
  National Grid.
• If a User defaults Allowed revenue shortfall
  is recovered through wider Transportation charges

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Proposal General terms agreed

• Provision of security
• To cover auction allocations inc. past auctions
  
• Amount of security sufficient to deter
  speculative auction bidding
• Aspiration for annual cost of security to be
  proportionate to the risk to the Shipper
  Community of a User Default
• Security tools
• Only Letter of Credit (LoC) or deposit allowed.
• Default rules
• Y2 to Y16 Entry Capacity at all ASEPs is
  withdrawn from User and User incurs cancellation
  fee equivalent to security provided by that User

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Allocated Capacity Value (ACV) Options
considered
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Entry Capacity Risk Assessment

• ACV Years Y2 to Y16 0.1
• Modification 0246 proposes that the ACV derived
  will be further reduced depending on the Users
  credit rating risk (between 30 and 100 of the
  ACV)
• User Security Value (USV) ACV UCR VAT
• During legal drafting for Mod 0246 concerns have
  been raised by our Legal representatives
• Charging a different cancellation fee when
  cancelling the same quantity of capacity, could
  be considered as unduly discriminatory
• We propose to remove UCR
• User Security Value (USV) ACV VAT

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Barrier to Entry vs Community Risk

• Proposal seeks to strike a balance
• LoC costs to cover aggregate USV estimated at
  around 4m per annum
• Risk of a project or major User failure has been
  estimated at 20m per year this figure is
  based on current levels of capacity holdings and
  not historic defaults
• Views are sought on whether an appropriate
  balance has been met, i.e. should the 10 ACV
  figure be amended or not?

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Security Tools and Operating Costs

• For the purposes of long term entry capacity,
  only the following types of security shall apply
• Deposit Deed
• Letter of Credit

Note Users with poor credit ratings may choose
to use a deposit deed as a cheaper option
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Security Required Across Users
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When should security be put in place? Options
Considered
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Options - Pros and Cons

• No consensus reached
• Option One 14 days before auction proposed
  within Mod 0246
• Option Three - Post auction favoured by some
  Review Group Members

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QSEC Bid Window Amendment

• Issues identified with removing a Users bids
  prior to allocation (option 1) - potential effect
  on other bidders at multi user ASEPs
• Current QSEC Bid window
• Opens at 0800 and closes at 1700. Bid Windows
  must be held between 1st Sept - 30th Sept.
• Open for 10 consecutive Business Days (stability
  can be met from day 2 and auction closes early).
• The bid window closes 1700 and auction
  information is sent to Users by 2000 on each day
• Now proposing that we check the security after
  each bid window and remove any bids where the USV
  gt security provided.
• This will require us to amend the QSEC auction
  to have a day between each bid window and reduce
  the number of windows to 8.

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Example of a Users Security Value - 2008 QSEC
ACV Years Y2 to Y16 0.1
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Example of a Users Security Value - 2009 QSEC
ACV Years Y2 to Y16 0.1
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Default Rules

• Long term entry capacity events of default
  will be
• Security lt USV
• The security tool (LOC/Bank Deed) is about to
  expire (less than 28 days).
• The User is Terminated (UNC Section V4) for other
  reasons under UNC.

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Default Rules - process

• User will be notified and given 10 business days
  to rectify (except where Termination is for other
  reasons under UNC).
• If not rectified
• Invoice will be raised for the Secured amount
  (cancellation fee)
• NG will call on the USV pending payment of the
  above invoice.
• The User loses the right to acquire entry
  capacity
• NG will re-call the Users QSEC capacity at all
  entry points across all years (Y2 Y16).
• NG offer Capacity to trading party (UNC B5.4)
• NG will resell the capacity in subsequent
  auctions