Coming to common proposal on filling in the Steps 5 and 4 Erik Rakhou Kristien van de Laar

Coming to commonproposal on filling in the Steps 5 and 4 Erik RakhouKristien van de Laar GRI NW Investment I1- Virtual Test/Business Simulation “It’s about dialogue, not 100% exact figures”

Content of presentation • Step 5: (how to allow for) risk distribution dialogue • Step 4: choosing (initial key) regulatory elements for the test • Intermezzo: more insight on our GRI NW frameworks is underway by May • By Kristien van de Laar • Debate and common refinement

Differences in the cases: My presentation focuses (to simplify) on Base Case. Innovative is presented later today. 3 Keys to success: • Simplicity (executable in given resources) • Balance between realism and sufficient distance to reality in order to have open dialogue in “reasonable comfort” on risk distribution. • Numbers can be realistic but not necessarily exact. • You need possibly 2 situations to judge and present results in qualitative manner, based on comparison. Base Case: 2-3 parameters differ from today: ‘market test’, ‘Risk dialogue’. Innovative Case: All parameters are allowed to vary Current projects This 1 case in VT (but 2 routes) ? Only via laboratory experiment, to learn... Reality Greenfield thinking

Process of the case: we shall zoom at step 5 now first…. The process is about iteration, especially between steps 4,5 and 6. 6. Design test process 1. Route 2. Initial size 3. Capex 4. Reg frame Work (revenue) 5. Risk distribution 7. Conclude February May September November

Outcome of the simulation is at least: (1) being able to have risk (distribution) dialogue (incl. range & ranking in critical and non-critical reg. parameters in frameworks to come to certain project risk profile; ability to determine level of needed risk mitigation and advise on required regulatory treatment (ie deny, shift or accept risks between tso/shippers/consumers)) AND……. Some notes X% (range) cost at risk Project risk profile Type of ‘help’ need? High risk 75% mitigation needed None, unless society need proven (eg Inv. only with Gov. Support) Med risk 25% mitigation needed Low reg. Intervention Needed (eg x % extra for 10 years) Low risk No mitigation needed Award “tools”: No (TSO, shippers can manage without Reg intervention)

1. Assumptions to come to 3 columns form valuable output of VT, so all can assess when low/med cases happen 2. Idea market test ‘tested’ (X% hurdle; known in advance) 3. Low and Med risk projects are likely to be invested (= this gives the requested clarity) Outcome of the simulation is at least: (1) being able to have risk (distribution) dialogue AND (2) market test idea ‘tested‘ as such and (3) clarity on when projects likely get invested……. Some notes X% (range) cost at risk Project risk profile Type of ‘help’ need? High risk 75% mitigation needed None, unless society need proven (eg Inv. only with Gov. Support) Med risk 25% mitigation needed Low reg. Intervention Needed (eg x % extra for 10 years) Low risk No mitigation needed Award “tools”: No (TSO, shippers can manage without Reg intervention)

Proposed approach to risk distribution dialogue in test: Road to discovery of possible reg. gaps in regional risk (assesment and) distribution (1). • TSOs and Shippers provide information (to • Regulators) leading to project risk profile X • (steps 1 – 3; 6) • Regulators assess project risk profile based • on the above information and dialogue, • determine what risk profile it is: high/mid/low. • Each types of risk profile has its own level (range) • of “award of mitigation” tools, • depending on project risk profile (=final analysis) • and risk appetite in region for that investment • Outcome: • Practical regional advise on approach to mitigation • Out of scope VT (proposal): • Specific details of mitigation vary per country: • eg X% extra ROI in A; 20 years depr. In B ....

Proposed approach to risk distribution dialogue in test: Road to discovery of possible reg. gaps in regional risk (assesment and) distribution (2) TSOs seek comfort in revenues • TSOs and Shippers provide information (to • Regulators) leading to project risk profile X • (steps 1 – 3; 6) • Regulators assess project risk profile based • on the above information and dialogue, • determine what risk profile it is: high/mid/low. Shippers wish for clarity on required level of risk mitigation by them in order to invest • Each types of risk profile has its own level (range) • of “award of mitigation” tools, • depending on project risk profile (=final analysis) • and risk appetite in region for that investment • Outcome: • Practical regional advise on approach to mitigation • Out of scope VT (proposal): • Specific details of mitigation vary per country: • eg X% extra ROI in A; 20 years depr. In B .... Regulators seek to HELP (!) and enhance Understanding of risk on behalf of consumers

We propose to build up complexity slowly...and only in so far as pragmatic progress allows... Key elements are built in steps, starting with “high-level”/”low detail” today. In May and September no large change in parameters (1-2 max), just better numbers. High level of detail Conclusions workshop Low level of detail May February September

Process of the case: now we shall zoom at step 4 …. The process is about iteration, especially between steps 4,5 and 6. 6. Design test process 1. Route 2. Initial size 3. Capex 4. Reg frame Work (revenue) 5. Risk distribution 7. Conclude February May September November

Initial criteria for choosing posible regulatory framework elements for VT • They are proposed based on 5 criteria: • Largest sensitivity • Enabling basic “NPV”-analysis • Useful to our research on risk (distribution) dialogue • Desire for simplicity • Suitability for all regional “route” proposals (generic and factual) • Next possible refinement moments: • Medium depth: May • Final depth: September

The “nominees” are: • Return on investment/WACC/ROI....(eg 5 to 10 %) • Depreciation period pipes.../Economic lifetime project (15 to 55 Years) • Assumed/realised “Sales” on future pipe (incl. mix of various contract durations: 1 to 15 years) • Tariff methodology (what can you charge for new pipe) • Period of regulatory commitment (eg budget period in Germany, price control period in NL) • Obligations/incentives prior to investment decision (high/med/low pressure to build) • (Procedure for assessing efficiency of) estimated CAPEX of proposed investment (incentive to keep cost low) • The “fire/flood” category (herein goes all other potential risk of not discussed parameters; see eg VT document) Initial proposal possible regulatory framework elements for VT

How about all other parameters in Proposed VT-documentation? • Other parameters and thoughts as outlined in chapters 4,5 and 6 of documentation can and should be brought up for discussion as well. But we can not select all parameters ! • We must mention (again) on crucial simplifications of chapter 6 like physical congestion assumed proven, market structure, (certain) level of regulatory commitment, shipper behaviour choices. • Q: Which parameter/simplification would you bring in (and take 1 out)?

How do we intend to work on more depth for May? Preview of some work on “Manual” Questions to be answered for the Manual: 1) Regulatory model 2) Type of investment 3) Investment Planning 4) Determining whether an investment proposal is efficient, required and sufficient 5) Allocation of risks (cross border only) 6) Allocation of costs (tariff based only) 7) Bearing the costs and risks 8) Determining allowed return

How do we intend to work on more depth for May? Preview of some work on “Manual” • Example on some findings in Manual on current regulatory framework in the region (e.g. based on proposed key elements; see prev. slide) • Question 8.3:Could you give an example of how the risk is distributed between parties? • BE: In Belgium the shippers are master of the risk • GE: In Germany there is not a fixed percentage of risk allocation between network users and network operator but a changing risk allocation over the years. In order to set incentives to invest the whole risk is allocated to the network users. As soon as the costs become controllable costs there is a risk shifting between network users and network operators.

How do we intend to work on more depth for May? Preview of some work on “Manual” • Where do we stand: - A patchwork of answers - Much diversity between the answered questions, but also (some) similarities • General determination of the regulatory framework is what we want to achieve • How do we get there? - Can we derive best practice? - The aggregation level of the questions: is it applicable into the test case? - How to proceed? The Manual is expected to be finalised for May 2009 based on key elements chosen in this workshop

Thank you.More questions please….So tomorrow and tonight we can have even better discussion….

Coming to common proposal on filling in the Steps 5 and 4 Erik Rakhou Kristien van de Laar