Benoît Esnault Commission de Régulation de l’Energie (CRE) - ERGEG

1. Energy Infrastructure PackageERGEG preliminary views on cost allocationfor investments in gas infrastructures Benoît Esnault Commission de Régulation de l’Energie (CRE) - ERGEG 19th Madrid Forum, 21-22 March 2011

2. EIP diagnosis and objectives • Commission’s diagnosis • Potential lack of investment in infrastructure to implement the European energy strategy; • The "market" may not always finance the investments: investment gap estimated at 10B€; • Cross-border investment decisions made at national level. • Introduction of new concepts where investment should be promoted • Positive externalities; • Regional benefit or benefit for a « third country ».

3. Regulators’ approach to investment • Market based mechanisms to remain the reference principle: filling the gap between market value (shippers’ willingness to pay) and cost is the dominant issue; • Developing infrastructure to the benefit of competition and market integration: priority to market based mechanisms when appropriate; • Different situations • Market design (e.g. merger of balancing zones): market based procedures are generally not appropriate, except if there is some additional transmission capacity created at remaining IPs; • Interconnectors: possibility of TPA exemption (after a market test); • Interconnections: market based mechanisms (open seasons). • Regulators promote a rational approach to infrastructure development • Priority to a sound use of existing infrastructure: precondition to avoid inefficient network expansion is effective capacity management; • Assess the need for new infrastructure (market test); • Investment agreed regarding its market value, but also security of supply, competition development, etc.

4. Identification of priority projects, the role of the TYNDP • Market integration • Identify where the European system lacks of capacity to guarantee a sufficient level of cross-border interconnection open to TPA; • According to EWI-Study and ENTSOG’s TYNDP, the EU gas grid- in technical terms - is well developed but some (physical and potential) bottlenecks identified. • Security of supply • TEN-E projects, the EEPR and the reverse flow projects to be included in the TYNDP; • Need to simulate system’s reaction over longer periods based on different demand scenarios. • Depending on the TYNDP results cost allocation is driven by • Open Season procedures and tariffs; and/or • Cost allocation rules according SOS regulation.

5. Existing tools: Open Seasons • Background principles • Value based methodology focused on shippers’ willingness to pay; • Investment decision based on an economic test. • Key issue: elaboration of the economic test which should include all the different benefits expected from the project • When the collective value is higher than the market value: investment may be rejected while potentially desirable; • In successful open seasons, the economical conditions of long-term commitments are consistent with the shippers’ willingness to pay. • Additional value of the infrastructure may be due to • Security of supply; • Positive externalities; • Benefit for competition and market integration.  Challenge: addressing these dimensions when there is a potential gap between market and collective values of the project.

6. Existing tools: Tariffs • Tariffs are the basic tool for cost/revenue allocation, they are adopted in most cases; • Cost reflective entry/exit tariffs allow to cover the costs in a balanced way for cross-border infrastructures; • Limits and risks • Tariffs higher than the market value of the transmission service proposed, for instance when costs are high; • Underuse of the infrastructure during the asset’s life, after the end of long-term contracts for instance or when assets are used as reserve for SoS.  Challenges: filling the potential gap between costs and market value and allocating the risk of stranded assets consistently with the individual benefits expected from the interconnection.

7. Focus on cost allocation (1) • Specific cross-border mechanism only justified when • Shippers’ willingness to pay is below the collective value of a cross-border investment AND asymmetry of benefits between adjacent countries; • Regional benefits of a national investment. • Need for a sound diagnosis • Evaluation of externalities and respective national benefits to assess the collective value of the project; • Identification of risks. • Cross-border cost allocation options • Socialisation through national tariffs when balanced benefits; • Cross-border subsidy or financial support from the benefitting country when asymmetry of benefits; • EU subsidy if regional or community benefit.  Find a proper balance between “user-pays”, “beneficiary-pays” and “taxpayer-pays” principles in order to fill the gap between cost based tariffs and the market value of the services.

8. Focus on cost allocation (2) • Risk based approach • Rationale: when tariffs and market value are aligned at the time when the infrastructure is commissioned; • Estimation of risks during asset’s life; • Main risk: underuse of the infrastructure leading to a lack of revenue (stranded assets). • In case of assymmetric national benefits risk coverage should be agreed before the investment • Improving the cross-border coordination of open season procedures is often the first way of facilitating investment • Identifying all the necessary investments to develop transmission capacity; • Coordination increases the value of the projects; • Reduce the risks associated to delays from one of the investors. • Ensure effective unbundling to prevent potential obstruction by incumbents.

9. Conclusions • Market based approach should remain the reference • Prevents from over-investments which could result in high sunk costs; • They should internalise externalities before the open seasons are organised; • The result of open seasons should be followed, even when the investment is rejected  regular OS are an option. • Tariffs are sufficient to cover costs in most cases but • Part of the costs often need to be socialised in open seasons; • Distorsions due to the gap between market and collective values should be covered; • The long-term risks of underuse of a newly built infrastructure (stranded assets risk) may need to be addressed. • EU/tax payer support and cost/risk allocation should be assessed before the decision to invest is made, based on a sound methodology.

10. Thank you for your attention! www.energy-regulators.eu