rg0252 unc credit proposals overview of unc modification proposals to be raised by gas transporters...

RG0252 UNC Credit Proposals

Overview of UNC Modification Proposals to be raised by Gas Transporters reflecting

recommendations of Review Group 0252 “Review of Network Operator Credit Arrangements”

Transmission Workstream : 3rd June 2010

1 | Energy Networks Association

Background to RG0252 “Review of NetworkOperator Credit Arrangements”

• Raised by WWU in April 2009 to review current credit arrangements and processes within UNC TPD Sections V3 and V4, to determine if they were still appropriate, coherent and relevant

• 11 meetings in 2009/10• Active Transporter / Shipper / Ofgem participation• Some elements already shared with Transmission Workstream in

2009• Largely non contentious• Individual proposals (as opposed to one large proposal) to allow

Users to more easily identify issues affecting them • Evolution not revolution


Timeline......

• Presentations to Distribution and Transmission Workstreams (May/June 2010)

• Proposals to June 2010 UNC Modification Panel• To consultation (with suggested legal text) with extended period of 7/8

weeks (due to volume of proposals)• Opportunity for discussion at Workstreams during Consultation period

– June & July Distribution & Transmission Workstreams

• Implementation October 2010 – December 2010


Key Recommendations from RG0252

• Raise series of UNC Modification Proposals1. Amend & remove UNC TPD Section V3 text inconsistencies, errors

and bi–lateral insurance clause (Proposal 0298)2. Alignment of portfolio sanctions across UNC TPD Sections V & S

(Proposal 0299)3. Introduction of Fitch as an allowable Credit Rating Agency for the

purposes of Code Credit Arrangements (Proposal 0300) 4. Removal of the use of Specially Commissioned Ratings for the

purposes of obtaining an Unsecured Code Credit Limit (Proposal 0301)

5. Definition of Regulatory Asset Value (RAV) when calculating Maximum Unsecured Credit (Proposal 0302)

6. Obligation for Users to maintain a Code Credit Limit and at a reasonable level (Proposal 0303)


Key recommendations cont..

7. Introduction of a rating table for independent credit rating agencies for use with Independent Assessments (Proposal 0304)

8. Unsecured Credit Limit allocated through Payment history (Proposal 0305)

9. Administration of Shipper Credit Security Contact Details (Proposal 0306)

10. Alignment of Defaulting User Threshold with Insolvency Act (1986) Threshold (Proposal 0307)

11. Appropriate use of the terms Surety and Security in UNC TPD Section V (Proposal 0308)

12. Timeframes for establishing and extending Guarantees and Letters of Credit (Proposal 0309)

13. Removal of DNO Users from UNC TPD V3.3.4 (Proposal 0310)13a. Removal of DNOs as Users from UNC TPD V3 & V4 (Proposal 0311)


0298 - RG0252 Proposal 1: Amend & remove UNC text inconsistencies, errors and bilateral insurance clause

• Bi-lateral term removed from UNC, as not a facility any Transporter can offer

• Appropriate interpretation of Ofgem’s best practice guidelines (BPG) in respect of increased security requirements from Users due to unforeseen events (e.g. supplier of last resort) - Material change not linked to a 20% increase in Transportation charges as current UNC dictates

• Removal of 80% of 80% rule.


0299 - RG0252 Proposal 2: Alignment of portfolio sanctions across UNC TPD Section V & S

Current UNC• UNC Section S 3.5.3 ...if a payment of £10,000 overdue…portfolio

sanctions may be applied (within one business day)• UNC Section V3.3.2…if User receives a 100% VAR notice …portfolio

sanctions may be applied (after 5 business days)

Proposed UNC• in both instances, the Transporter may impose portfolio sanctions

within one business day (currently five in respect of VAR), should the User breach either of these two UNC clauses.


0300 - RG0252 Proposal 3: Introduction of Fitch as an allowable Credit Rating Agency for the purposes of Code Credit Arrangements



0301 - Proposal 4: Removal of the use of Specially Commissioned Ratings for the purposes of obtaining an unsecured Code Credit Limit

• Regulatory Asset Value (RAV) definition used in determining Users credit limit

• Currently ‘one moment in time’, however Transporters and Users better served by using most up to date RAV position

• New proposal to utilise updated RAV as published periodically by Ofgem

– the “Regulatory Asset Value” is the value of the relevant Transporter’s regulated assets as prescribed by the Authority, which will be published by the Transporter for use in determining a Users Code Credit Limit.


0302 - RG0252 Proposal 5: Definition of Regulatory Asset Value (RAV) when calculating Maximum Unsecured Credit

• Closing a loophole which potentially places User community at increased risk of bad debt

• Currently (post User acceptance criteria being satisfied), Shippers can withdraw or reduce credit security arrangements to an unreasonable level

• Modification Proposal will require any User being issued 100% VAR notices in 2 consecutive months to securitise to the value of highest of the 2 VAR notices

• Until security in situ, portfolio sanctions may be put in place • Implementation no earlier than December 2010


0303 - RG0252 proposal 6: Obligation for Users to maintain a Code Credit Limit and at a reasonable level

0304 - RG0252 Proposal 7: Introduction of a rating table for independent credit rating agencies for use with Independent Assessments


• A User can be allocated an Unsecured Credit Limit based upon the period of time that the User has paid all their invoices by the payment due date (on time)

• Accessible after the User has paid 1 months invoices

• Maximum of 2% of 2% of the relevant gas transporters Regulatory Asset Value (RAV) after 5 years

• Payment of >£250 is paid late = Credit Limit reset to £0

• Limited use of payment history as a UNC credit tool • Good payment history under the UNC is not always a useful means of

gauging if an applicant is fully credit worthy• Independent assessment credit tool contains a wider payment history

assessment• Some small Users considered that its removal could impact on

competition - difficult to obtain a full independent assessment until they have been trading for a period of time


0305 - RG0252 Proposal 8: Unsecured Credit Limit allocated through Payment History

0305 - RG0252 Proposal 8: Unsecured Credit Limit allocated through Payment History

• Payment History should be retained as a credit tool but be restricted to new entrants

• Only available upto the 2nd anniversary of the User acceding to the UNC

• All other credit tools available in Section V, such as independent assessment, Deposit Deed, etc. would continue to be available to the User

• Amend UNC to allow for administration errors inline with CUSC• For a payment that is received upto and incl. 2 days after the payment due

date• Interest would be charged on the late payment • The amount of unsecured credit would not increase that month• However, should a further late payment be received within a rolling 12 calendar

month period then the unsecured credit amount would be reset to zero

• Should a payment be received more than 2 days late the User’s Unsecured Credit allowance reverts to zero straight away and interest is charged on the late payment


0306 - RG0252 Proposal 9: Administration of Shipper Credit Security Contact Details

Current• Each Transporter and Shipper maintain their own register of Shipper

Credit Security contact details for credit purposes• No requirement to maintain details post User acceptance criteria

Proposed UNC• It would be beneficial to recommend that all parties provide and

maintain their contact details with a central co-ordinating agent such as xoserve

xoserve• Will utilise existing processes within xoserve (currently operate User

Emergency contacts process)


0307 - RG 0252 Proposal 10: Alignment of Defaulting User Threshold with Insolvency Act (1986) Threshold

Current• Under existing UNC Transporters are entitled to Terminate a User where

the aggregate amount unpaid by the Invoice Due Date is £10k or more • User owing up to £50k across all Transporters, but if all less than £10k

per Transporter, no termination option available, potentially exposing the User community.

Proposed UNC• To link the limit with the current Insolvency Act (currently £750)• This will provide a “trigger” where suitable action can be taken• Benefits• Reduce risk to DNs and ultimately the end-user. • This would close a loophole whereby a shipper can pay the minimum

amount to keep the debt just below the £10K threshold• Able to implement sanctions or termination earlier


0308 - RG 0252 Proposal 11: Appropriate use of the terms Surety and Security in UNC TPD Section V

Instrument of Credit Form Form

Letter of credit Surety

Guarantee Surety

Prepayment agreement Security

Deposit deed Security


0309 - RG0252 Proposal 12: Timeframes for establishing and extending Guarantees and Letters of Credit

• A Guarantee can reasonably be deemed valid for the purposes of a Code Credit Limit up until the date of its expiry, but is a risk for future debt if not replaced or extended prior to its expiry. A LOC should be deemed valid for the purposes of a Code Credit Limit until 30 days prior to its expiry to allow time to make any claim. Note- this is formalising existing custom and practice

LOC value £1M end dated 31/10/10

Guarantee value £1M end dated 31/10/10

VALUE FOR CODE CREDIT LIMIT @ 30/09/10 £1M £1m

VALUE FOR CODE CREDIT LIMIT @ 01/10/10 NIL NIL

VALUE FOR RECOVERING INVOICED UNPAID AMOUNTS @ 31/10/10

£1M but too late to claim on

LOC

£1M

VALUE FOR RECOVERING INVOICED UNPAID AMOUNTS @01/11/10

NIL £1M relating to pre 31/10


0310 - RG0252 Proposal 13: Removal of DNO Users from UNC TDP V3.3.4

• The effect of V 3.3.4. is to require Users (inc DNO Users) to provide, with effect from 1 October 2010, credit cover equivalent to the cost of 12 months’ Exit (Flat) Capacity charges in addition to usual VAR calc

• In the case of DNO Users this is unnecessary and represents an increase in costs for which there is no clear offsetting benefit

• V 3.3.4 also introduces differential treatment between NG Distribution and the iDNO’s in respect of credit arrangements with NG NTS

• Proposal 13 seeks to remove DNO Users from V 3.3.4 which would have the effect of removing both the additional cost and the differential treatment between NG Distribution and the iDNOs


0311 - RG0252 Proposal 13a : Removal of DNOsas Users from UNC TPD V3 and V4

Proposal 13 SGN

Proposal 13a WWU

Removal of 12 month securitisation requirement for NTS Exit Capacity charges YES YES

Removal of circa 51 days securitisation requirement for all applicable charge types (2 of @Oct 2012) NO YES

Removal of requirement for IDNs to securitise against DN Pension charges NO YES

Removal of unworkable DN Termination facility in UNC V4 NO YES

Removes unintended consequences of Mods 116, 127, 195AV and any future DNO charges PARTIALLY YES

Removes differential treatment of DNs by NTS in V3 and V4 PARTIALLY YES

Removes potential increased security cost pass through to Shippers due to UNC requirements above. PARTIALLY YES


Summary

• Proposals raised on the basis of Review Group 0252 recommendations

• Consistent with intent of BPG as a ‘living document’

• Close loopholes

• Greater clarity

• Consistency

• Removal of redundant/incorrect terms

• Appropriate credit/security terms for all


rg0252 unc credit proposals overview of unc modification proposals to be raised by gas transporters...

Documents

letters of credit proposal

rg0252 proposal

credit ratings

unc tpd section v proposal

unc clauses

threshold proposal

unc tpd v3 v4 proposal

large proposal