Guidelines for Guidelines for New New Gas Infrastructure Investment Regulation in Gas Infrastructure Investment Regulation in

the Energy Community (GGIIR)the Energy Community (GGIIR)

Basic CriteriaBasic Criteria

Joint working group meeting Joint working group meeting

22-23.03 2006, Belgrade22-23.03 2006, Belgrade

Disclaimer: Non binding documentDisclaimer: Non binding document

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Legal Framework – ScopeLegal Framework – Scope

The existing European legislative framework (Directive 2003/55/EC, Regulation (EC) No 1775/2005 including annexed guidelines) has to be implemented by the signatory countries of the EC Treaty as part of the acquis communitaire

scope

aim: providing a reliable and stable regulatory framework on a legally binding basis

infrastructure addressed: GGIIR shall be applicable to new infrastructure considered of regional strategic interest as such and in the sense of art 22 Directive 2003/55/EC

geographic scope: as provided under Articles 26 and 27 of the ECSEE Treaty

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Regulatory Framework (1)Regulatory Framework (1)

National projects vs. Regional projects of strategic interestEC decides on the qualification as a strategic project at the

request of the TPO

Reliable and stable regulatory framework:Regulatory Committee/ECRB (single regulatory decision

related to any strategic project of regional nature with no deviation possible for a sub-part of it)

Regulatory Committee of the ECRB is set up per TPO and consists only of the regulatory authorities of the relevant countries and the EC

Transmission Project Operator (TPO): a Transmission Project Operator (TPO): a “legal entity”“legal entity” to act to act as the counter part vis a vis third parties to the project, legally as the counter part vis a vis third parties to the project, legally responsible for the implementation of the guidelines and the responsible for the implementation of the guidelines and the eventual operation of the projecteventual operation of the project

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Exemptions: Exemptions: The “Five Tests” of Article 22The “Five Tests” of Article 22

1. “enhance competition in gas supply and enhance security of supply”

2. “The level of risk attached to the investment is such that the investment would not take place unless an exemption is granted”

3. “The infrastructure must be owned by a natural or legal person which is separate at lest in terms of its legal from the system operators in whose systems that interconnector will be built”

4. “Charges are levied on users of that infrastructure”

5. “The exemption is not to the detriment of competition or the effective functioning of the internal gas market, or the efficient functioning of the regulated system to which the infrastructure is connected”

Can be “looked-at” in the following way:

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Key Criteria for Derogation GuidelinesKey Criteria for Derogation Guidelines

Independence of the Project CompanyIndependence of the Project Company

Open Seasons, Open Seasons,

TPATPA

Use-it-or-Lose-it,Use-it-or-Lose-it,

Transparency requirementsTransparency requirements

The “Risk is Such” TestThe “Risk is Such” Test

Security of SupplySecurity of Supply

Short-term ContractsShort-term Contracts

En

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Independence of the Project CompanyIndependence of the Project Company

Independence of project company is Independence of project company is the major issuethe major issue, since it will , since it will result in:result in:

Incentives to conduct meaningful open seasonIncentives to conduct meaningful open season No need for regulator to examine the proposed tariff for the open seasonNo need for regulator to examine the proposed tariff for the open season

No pipeline project should be majority owned or controlled by:No pipeline project should be majority owned or controlled by: Dominant suppliers in importing countries (commonly agreed)Dominant suppliers in importing countries (commonly agreed) Dominant producers in exporting countries (this needs more discussion, Dominant producers in exporting countries (this needs more discussion,

there are still pending issues to be discussed)there are still pending issues to be discussed)

Note: for Note: for LNG projectsLNG projects, could permit control by a producer who is , could permit control by a producer who is “dominant” in country of origin, because LNG is internationally “dominant” in country of origin, because LNG is internationally competitive (however there is the need for further elaboration on competitive (however there is the need for further elaboration on this concept…)this concept…)

The issue of The issue of independence independence is directly linked to is directly linked to unbundlingunbundling

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Open SeasonsOpen SeasonsScope for Open Season:Scope for Open Season:

To guarantee the participation of all interested stakeholders in any project To guarantee the participation of all interested stakeholders in any project and to size the project in line with market needs and to enhance security of and to size the project in line with market needs and to enhance security of supplysupply

The The crucial issuecrucial issue is to safeguard that the open season process will be is to safeguard that the open season process will be meaningful and transparent (therefore linked with the independence of the meaningful and transparent (therefore linked with the independence of the project company) and non-discriminatoryproject company) and non-discriminatory

Open season possible for equity of TPO and mandatory for defining project Open season possible for equity of TPO and mandatory for defining project capacitycapacity

Open season conducted Open season conducted beforebefore deciding on capacity deciding on capacity If there is a lot of demand and commitment, expand the capacity under non-If there is a lot of demand and commitment, expand the capacity under non-

discriminatory conditionsdiscriminatory conditions Imposes no risk on project sponsors– they only build to match long-term Imposes no risk on project sponsors– they only build to match long-term

commitmentscommitments Allows all interested, also potential competitors to join inAllows all interested, also potential competitors to join in Non discriminatory, same services granted under same tariffs to all parties Non discriminatory, same services granted under same tariffs to all parties

committingcommitting

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TPATPA

TPA provisions shall apply according to the provisions of Directive TPA provisions shall apply according to the provisions of Directive 2003/55 as an overriding principle2003/55 as an overriding principle

Requests to TPA derogation shall be scrutinised most carefully with Requests to TPA derogation shall be scrutinised most carefully with respect to the granting of the regional Article 22 exemption respect to the granting of the regional Article 22 exemption procedure including the share of total capacity (below 10%, 50% or procedure including the share of total capacity (below 10%, 50% or more than 75%)more than 75%)

The ECRB Committee with the EC shall consult on the necessityThe ECRB Committee with the EC shall consult on the necessity

The respective provisions of Regulation 1775/05 e.g. on The respective provisions of Regulation 1775/05 e.g. on transparency shall apply under all circumstancestransparency shall apply under all circumstances

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Use-it-or-Lose-it and TransparencyUse-it-or-Lose-it and Transparency

Both enhance competition: the provision of Regulation 1775/05 Both enhance competition: the provision of Regulation 1775/05 applyapply

Use-it-or-Lose-it:Use-it-or-Lose-it: Regulation 1775/05 as defined in the explanatory notes apply except for the Regulation 1775/05 as defined in the explanatory notes apply except for the

firm UIOLI principle in case an open season has been undertaken and the firm UIOLI principle in case an open season has been undertaken and the TPO has built at least the capacity requested by all interested and committing TPO has built at least the capacity requested by all interested and committing stakeholders and no party willing to commit has been rejected (undersized stakeholders and no party willing to commit has been rejected (undersized project)project)

Only possible objection: want to “undersize” project, hoard Only possible objection: want to “undersize” project, hoard capacitycapacity

In this case investment would not “facilitate competition”In this case investment would not “facilitate competition”

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Tariff methodology, tariffsTariff methodology, tariffsPossible ways:Possible ways:

1.1. TPO and ECRB Committee agree ex-ante on a regulated tariff TPO and ECRB Committee agree ex-ante on a regulated tariff methodology, which then cannot be amended over the defined and methodology, which then cannot be amended over the defined and agreed (TPO-ECRB Committee) investment period - if so, TPO agreed (TPO-ECRB Committee) investment period - if so, TPO will be automatically granted a derogation (under regional Article will be automatically granted a derogation (under regional Article 22 procedure) from Article 25/4 of the directive 2003/5522 procedure) from Article 25/4 of the directive 2003/55

2.2. TPO and ECRB Committee do not agree ex-ante on a regulated TPO and ECRB Committee do not agree ex-ante on a regulated tariff methodologytariff methodology1.1. EC will try to broker compromise within 1 monthEC will try to broker compromise within 1 month

2.2. If no compromise is found, EC will afterwards assess whether TPO is still If no compromise is found, EC will afterwards assess whether TPO is still eligible for regional procedure and try to ensure that all parties make best eligible for regional procedure and try to ensure that all parties make best endeavours to increase competition and security of supply to the energy endeavours to increase competition and security of supply to the energy communitycommunity

3.3. On particular occasions, TPO might still ask for regional Article 22 On particular occasions, TPO might still ask for regional Article 22 exemption procedure under negTPA assumptions, however under most exemption procedure under negTPA assumptions, however under most stringent evaluation and obligationsstringent evaluation and obligations

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Short-term ContractsShort-term ContractsOffering short-term contracts in addition to long term contracts helps Offering short-term contracts in addition to long term contracts helps

competitioncompetition

However, project sponsors do not want to bear the risk of short-term However, project sponsors do not want to bear the risk of short-term capacity sales, as the revenues can not be taken as grantedcapacity sales, as the revenues can not be taken as granted

Possible SolutionPossible Solutionss:: Part of the capacity may be subject to ordinary and/or incentivized TPA Part of the capacity may be subject to ordinary and/or incentivized TPA

regime, according to conditions as envisaged in Art. 22(3.b.iii) of Dir. regime, according to conditions as envisaged in Art. 22(3.b.iii) of Dir. 2003/55 2003/55

Regulator Regulator may amay ask TSO to buy some capacity in open season, project sk TSO to buy some capacity in open season, project sponsor therefore receives a long-term commitment (from the TSO)sponsor therefore receives a long-term commitment (from the TSO)

TSO resells capacity to market on short-term basis.TSO resells capacity to market on short-term basis.

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General application of the GuidelinesGeneral application of the Guidelines

As a general rule the TPA rules shall fully apply to new infrastructure under the scope of the GGIIR

Rules will be addressed to the „Transmission Project Operator“ (TPO)

On the part under TPA, Regulation 1775/05 shall On the part under TPA, Regulation 1775/05 shall applyapply