Achieving a sound investment climate – the role of regulators

1. Achieving a sound investment climate – the role of regulators Boaz Moselle Joint-Chair, CEER Gas Working Group Managing Director – Corporate Strategy Ofgem

2. Background • Infrastructure investment generally happens through: • Regulation (e.g. for onshore transmission networks); or • Competitive markets (e.g. for power stations). • Changing industry environment • Moving towards the new world • Increasing reliance on the market • Inevitable changes to the way investment is secured

3. Regulation and Investment • Appropriate level of infrastructure is key for: • development of an internal energy market • Security of supply • It is also necessary but not sufficient for effective competition within the EU gas market • Also need transparent and non-discriminatory access • Promotion of investment and protection of regulated investment are core duties of the regulator • For example, Ofgem has a duty to ensure that licencees can finance their duties and statutory obligations.

4. Moving towards the ‘new world’ • In the past, the European gas industry developed largely on the basis of national or regional monopolies, with investment often co-ordinated through planning rather than market-based means • Much was achieved! • Now however Europe faces new challenges and has committed to a new approach • In the new world: “full liberalisation…is the dominant prerequisite for the efficient use of existing infrastructure and the development of new infrastructure. In these circumstances, a key focus should be on the ability of signals emerging from trade to highlight the need for new investment” (CEER , March 2003)

5. CEER infrastructure principles • CEER set out a number of principles for infrastructure investment: • Public authorities should encourage sufficient investment to implement the internal energy market, facilitate competition and safeguard security of supply • TSOs must manage networks in a way that ensures efficient use of infrastructure • Public Authorities should establish transparent, non-discriminatory and standardised options for development of infrastructure and minimise regulatory risk as far as possible

6. CEER infrastructure principles • Public Authorities should enforce a minimum procedure or publication of TSOs’ infrastructure plans • TSOs must be effectively unbundled to ensure no conflict of interest when making investment decisions and sufficient incentives for non-discriminatory 3rd party access • So…transparency (by all parties), market signals and minimisation of regulatory risk (i.e. ensuring stability) are key to efficient investment..

7. Possible approaches • Applying the CEER principles gives three broad approaches: • Regulated reinforcement with regulated tariffs • Non-regulated reinforcement with regulated tariffs • Non-regulated reinforcement with non regulated tariffs – “merchant line” approach

8. Example: bringing new gas to GB UKCS Forecast Decline

9. Proposed new projects

10. Consultation • Transparency (by all parties) is key to stable framework and efficient investment • ERGEG formally established by Decision of the European Commission. ERGEG consultation procedure approved. • Madrid Forum – key forum for consultation • Industry initiatives – e.g., UK offshore data release

11. Conclusions • Investment in infrastructure is key to the development of effective competition in EU energy market • Investment must be efficient and respond to needs of market participants • Transparency, reduction of regulatory risk and increasing use of market based signals are key to achieving this aim • Market opening and the promotion of competition should not and need not undermine a sound investment climate for the European gas industry

12. Promoting choice and value for all gas and electricity customers