Caja o Cuadro General de Protecci´ on, CGP

The 1995 Gas Act requires BG Transco, as the sole national Public Gas Transporter licensee, to establish a Network Code, setting out standard terms and conditions that apply to any shipper wishing to use BG’s transportation network and storage

Power

facilities. As such, the Code constitutes the contractual regime for management of the commercial and operational aspects of gas transportation in Britain. It was drawn up by Transco in consultation with the industry and put into operation in 1996. The Code was deemed necessary in view of the transition to a fully competitive market. Previously, all gas transported through BG’s network for third parties was covered by the original open-access contracts — now referred to as

“legacy” contracts — introduced in 1989. These contracts specified both the beach delivery point and specific customer offtake points.

Key aspects of the Code include the following:

■ Daily balancing: All shippers are required to balance their deliveries and offtakes on a daily basis around a notional National Balancing Point (NBP). This requirement replaces the former monthly balancing regime. Transco is responsible for correcting any shipper imbalances by buying or selling gas via a flexibility mechanism (see below). Any net costs incurred in rebalancing the system are passed on to the offending companies, the level of penalties being determined by the degree of transgression.

■ Top-Up Manager: An organisation within Transco, known as the Top-Up Manager, is responsible for ensuring that enough gas is injected into and held in storage during the summer to meet expected peak winter demand taking account of projected beach supplies. Storage is booked by shippers, but their bookings may be deemed insufficient to meet seasonal demand needs. The Top-Up Manager may buy gas and inject it into unbooked empty storage according to the Manager’s estimate of the difference between the amount of storage that has been booked by shippers and the amount that the Manager believes will be required. The Manager may make this gas available on peak days, either though the flexibility mechanism or by direct sale to a shipper with booked storage space but insufficient gas, in both cases at a predetermined very high price. Any costs or profits made by the Top-Up Manager are recovered from or reimbursed to shippers in an equitable manner.

■ Reserving entry and exit capacity: Shippers are required to book capacity for a period of 12 months at each of the entry points on the Transco system where they intend to deliver gas. They are also required to reserve exit capacity at specific exit zones (of which there are 37) for their daily-metered firm sites — the largest industrial and power station customers. Transco automatically allocates non-daily-metered exit capacity. Shippers are thus able to match deliveries and offtakes in a flexible manner, without having to allocate deliveries to specific entry points to offtakes at specific exit points under individual contracts corresponding to each customer, as was previously the case³⁷.

■ Secondary-capacity trading: Under the Network Code,shippers are also able to trade capacity among each other. Transco maintains a computer-based market

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37. Umbrella and Gas Transfer Contracts used to provide shippers with a degree of flexibility in matching deliveries and offtakes under the old regime.

on which shippers can post bids for and offers of capacity. Alternatively, shippers are free to trade capacity directly without using the Transco market, but transfers of entitlement to capacity are required to be registered with Transco.

The shipper who initially booked capacity remains liable for payment of the capacity charges to Transco. There are no price controls. To date, secondary-capacity trading has been modest, amounting to 8% of total system throughput in the winter of 1997/8³⁸.

■ On-system gas trading: In cases where a shipper has spare entry capacity, he may sell gas “on system” to another shipper who is short of gas or gas-entry capacity at the NBP. The sale may take place either before or during the gas flow day. Having agreed on a trade at a mutually acceptable market price, the two parties each create a gas nomination which specifies the other party instead of an entry of exit point: so long as the nominations match,Transco approves the trade, but takes no part in the financial transaction.

■ Attribution of demand to non-daily-metered sites: Although the Network Code requires shippers to balance their deliveries and offtakes on a daily basis, the system does not provide shippers with daily metering information from the majority of sites. Only the largest industrial and commercial sites are metered daily³⁹; residential customers’ meters are normally read only once or twice a year. To deal with this problem,Transco uses an algorithm — a very complex mathematical formula — to estimate demand at each small NDM site, according to the size of the site, load profile, location and local weather conditions.

These calculations are performed before each gas-flow day. Demand is apportioned to each shipper and shippers are informed of their individual total NDM demand for the next gas-flow day. Shippers are then required to nominate how much gas they will need to transport or store by 15.00 on the day before the gas-flow day. Transco schedules its daily operations accordingly.

■ Booking storage capacity: BG Storage makes storage capacity available to shippers through a tender in the spring for the year beginning 1 May. To date, storage has been offered at fixed prices although Ofgas favours an auction⁴⁰. No capacity may be booked after 30 November. Depending on the total amount of storage booked by shippers and expectations of the Top-Up Manager’s needs, the Manager may auction off surplus capacity — at regulated rates. As with transportation capacity, shippers must contract for a full 12-month period from 1 May. Shippers may trade storage capacity, with or without gas in it, at unregulated rates at any time.

38. BG Transco, Winter Operations Review 1998 (1998).

39. All end-users consuming more than 75 000 therms/year will eventually be metered daily.

40. Traders NGC and Enron had proposed an auction of storage services for 1998/8. BG Storage is opposed to such a move and argued that its licence allows it to decide how to price storage services as long as it charges reasonable rates and does not exceed its revenue cap. Ofgas does not accept this argument but feared that a lengthy legal dispute over the extent of Ofgas’ powers in this area would not be helpful to the development of competition in storage. Ofgas subsequently launched a review of the structure of the storage market and the behaviour of the main participants.

■ Transco interruptions: In exceptional circumstances,Transco may interrupt delivery to sites in strategically important areas of the system, for example to relieve a capacity constraint. To prepare for such an eventuality, Transco makes arrangements with shippers, under which some of their largest customers’ sites are declared interruptible. No National Transmission System (NTS) exit or Local Distribution Zone (LDZ) capacity charges are levied on these sites. Transco must not discriminate between shippers in deciding on interruptions. In practice, only about 10% of all interruptions are imposed by Transco: all other interruptions are determined by shippers, for load balancing reasons.

Figure B-6 illustrates the physical gas flows in the Transco system and opportunities for capacity and gas trading under the Network Code regime.

Figure B-6

Physical Gas Flow Paths Through Transco Network

Source: Transco, Network Code - The Summary (1998)

Figure B-7 summarises the operational and commercial relationships between Transco and shippers and their respective responsibilities at specific times.

The Network Code was introduced in phases to allow time for market players to get used to the new regime. During the bedding-in period, known as the “soft landing”, which began in April 1996, shippers’ daily imbalance tolerances were set at high levels to minimise the penalties. Full implementation of the Code — the “hard landing” — took place in September 1996. For the most part, the code appears to be working well. Some shippers have, however, complained about the workings of the flexibility mechanism, which has led to pronounced within-day price fluctuations and severe financial penalties for those shippers who have not been able to maintain a close balance between deliveries and offtakes (see below).

NBP

Figure B-7

Network Code Responsibilities

Source: Transco, Network Code - The Summary (1998)