Second Asia Gas Buyers’ Summit Mumbai, 2-3 February 2004

1. Second Asia Gas Buyers’ SummitMumbai, 2-3 February 2004 Regulating the gas market: the EU experience Katrien Prins Electricity and Gas Unit DG Energy and Transport European Commission

2. Structure • The EU Internal Gas Market • The state of play • The new Directive • The Madrid Forum • Gas Regulation

3. The EU Internal Gas Market • European Union is based on free movement of goods, services, capital and people • In nearly all sectors, an internal market was achieved by 1992 • The energy sector lagged behind • 1998 Adoption of the first Gas Directive – transposition in national legislation – mid 2000 • 2003 Adoption of second Gas Directive – transposition in national legislation – mid 2004

5. EU25 - Demand and Supply Growth of demand: 67% Growth of imports: 175%

6. Key provisions of the current Gas Directive • Abolition of exclusive rights - non-discrimination; • Non-discriminatory right to build new gas facilities; • Unbundling of accounts of integrated companies; • Third Party Access to the system, which includes storage; • TPA can be negotiated or regulated • Gradual market opening – 30% of demand; eligible customers • Exceptions. • refusal of access (capacity; PSO; TOP) • “emergent” markets and other areas

7. System of Access RegTPA NegTPA Hybrid Derogation Benchmarking

8. Unbundling measures in Member States Benchmarking

9. Regulation in the EU

10. The second Gas Directive MARKET OPENING • July 2004 : all non-household consumers can freely choose their gas supplier • July 2007 : all consumers are free to choose

11. The second Gas Directive UNBUNDLING • Legal unbundling of Transmission system operators by July 2004 • Legal unbundling of Distribution system operators at the latest by July 2007 • Functional unbundling • Accounting unbundling

12. The second Gas Directive Third Party Access • Third party access to transmission and distribution system on the basis of • published tariffs • applicable to all eligible customers • applied objectively and without discrimination between system users • ex ante approval of tariffs or methodology underlying their calculation • published prior to their entry into force

13. The second Gas Directive Third Party Access to Storage • Access to storage facilities and linepack necessary for providing efficient access to the system for the supply of customers • in accordance with objective, transparent and non-discriminatory criteria • negotiated TPA: • publication of Main Commercial Conditions for the use of storage facilities, linepack and other ancillary services • regulated TPA: • on the basis of published tariffs and/or other terms and obligations for use of storage and linepack

14. Regulating network access • Access to the network on the basis of regulated terms and conditions – storage can be NTPA • Regulation by regulatory authorities to be designated by Member States • Ex-ante regulation of at least the methodologies with regard to network access conditions, including tariffs and balancing services • At least ex-post regulation with regard to other important aspects • Regulator to decide on complaints in reasonable timeframe (2 months+2)

15. Regulating network access • Regulator to monitor and - if necessary to ensure non-discrimination - to require TSO/DSO to modify: • rules on congestion management, including allocation of interconnector capacities • unbundling of accounts to exclude cross-subsidies

16. Regulating network access – exemption for new infrastructure • Derogation from non-discriminatory TPA for major new gas infrastructure • Interconnectors between Member States, LNG and storage facilities • Exemptions depends on a series of preconditions • Restrictive approach • Decision by regulatory authority and Commission review • The provision aims to safeguard investments in very high-risk projects, which would not take place without such an exemption

17. Regulatory authorities • Minimum competencies of regulatory authorities in all Member States • Responsible for ensuring non-discrimination, effective competition and the efficient functioning of the market • Core duties relating to network access and balancing • Number of other requirements/options

18. Regulatory authorities • All Member States to appoint regulator • Preferred model is independent regulator – limited Ministry involvement • Local regulators are possible • Multi-MS regulators : regional regulator also an option • Regulators must have sufficient resources and rights to information: technical and financial

19. Regulatory authorities • Ex-ante approval of: • overall network tariff methodology • balancing methodology • Ex-post intervention possible for: • individual network tariffs • individual balancing charges • mechanisms to deal with interconnectors and national congestion • time taken for connections and repairs • publication of appropriate information • the effective unbundling of accounts • the access conditions to storage, linepack and to other ancillary services

20. Creating an internal market • 15 liberalised market do not constitute and internal market • Lack of rules concerning cross-border trade of gas • Addressed in Regulatory Forum of Madrid, assembling Regulators (CEER), Member States, Commission, gas industry (GTE and Eurogas), consumers, traders

21. Madrid Regulatory ForumTarification, transparency, congestion • Tariff methodology :need for tarification regimes to converge, to avoid tariff pancaking and ensure cost reflectivity; • Strong support for an “entry-exit” tariff structure (would best facilitate the development of competition) • Importance of ensuring non-discrimination with regard to access to information on system use including available capacities of the system • ensure publication of available capacities • Principles adopted as overall guidelines with regard to capacity allocation and congestion management

22. Madrid Regulatory ForumGuidelines for good practice • Overall objective: • to ensure TPA to the networks which would meet the requirements of a well functioning competitive market for natural gas in line with the principles of non-discrimination and transparency • Guidelines aim at • clarifying the roles and responsibilities of the main parties in gas transportation • ensuring the principle of non-discrimination • facilitating cross-border trade and customer choice through competition in the internal market • avoiding distortions in trade

23. Madrid Regulatory ForumGuidelines for good practice • Offer unbundled TPA services for access to the different parts of the system including all necessary ancillary facilities operated by TSOs including storage when technically necessary for efficient TPA; • Offer the same range of services on the same conditions according to the principle of non-discrimination to any eligible third party within the EU as to marketing affiliates; • Publish the main conditions for all services; • Publish available capacities on a regular and user-friendly basis; • Co-operate with other TSO’s on interoperability

24. Madrid Regulatory ForumGuidelines for good practice • Offer both firm and short-term services (flexible in time) and interruptible in certain circumstances; • Design services to facilitate trading and liquidity in the European market; • Standardise request and response procedures according to best practice, co-ordinate maintenance to minimise disruption; • Implement non-discriminatory and transparent capacity allocation mechanisms and congestion management procedures subject to review by relevant authorities; • Ensure sufficient functionally independence of SOs from supply business to avoid conflicts of interest.

25. Madrid Regulatory ForumGuidelines for good practice • Tariff structure and derivation • TSOs should publish reasonably and sufficiently detailed information on tariff derivation and tariff structure; • As far as differences would hamper cross-border trade, TSOs should pursue convergence of charging principles and tariff structures. • Secondary capacity trading: • Allow TPA capacity rights to be freely tradable in a secondary market; • Endeavour to discourage capacity hoarding and facilitate reutilisation of un-used capacity.

26. Tarification models Progress made on tariffs: EU15 - 3 • 2001 Benchmarking • 5 DR, 4 postalised, 3 e/e • 2002 Benchmarking • 4 DR, 4 postalised, 4 e/e • 2003 Information • 1 DR, 4 postalised, 7 e/e • By 2004 • 0-1 DR, 3 postalised, 8-9 e/e

27. The Madrid Forum and the Guidelines of Good Practice have one major drawback: they are voluntary Compliance is mixed Commission decided to propose in December 2003 a Gas Regulation to change these voluntary arrangements in legally bindinginstruments Guidelines  Regulation

28. Directive on security of gas supply • Why? • The new market environment necessitates having security of supply arrangements compatible with the requirements and needs of a competitive market • What? • Member States are required to define security of supply policies clarifying the general roles and responsibilities of different market players in terms of security of supply • Minimum requirements in the form of output standards • Crisis mechanism (extraordinary supply situation)