1. Gas Regional Initiative W orkstream regulatory co-ordination, subfocus investment Workshops Bonn, 8 February 2007 Draft 2

2. Operator paper Overview of regulatory coordination issued by TSOs and interconnectors (1) Risk: – Operators want to take sound investment decisions. – The higher the risks, the higher the expected return of investors. – Some risks have to be sufficiently covered before investment is taking place. Reward: – The regulatory regime determines the reward of the TSOs. – In regimes with revenue regulation, the ‘reward’ of the TSO is determined through the addition of investments in the regulated asset base (RAB) and the allowed return on this investment. – In systems with market based tariffs and tariff regulation, the TSO bears the market risk (volume risk). – A change in the regulatory regime can increase the risk or decrease the rewards for TSOs.

3. Regulatory co-ordination – Timing of decisions and procedures – Regulatory requirements regarding capacity allocation mechanisms – Regulatory requirements regarding congestion management mechanisms – Regulatory requirements regarding additional capacities on top of committed capacities – European or regional perspective (e.g. when regulators evaluate efficiency of investments) – Coordination of regulatory models in to avoid market distortions – Avoidance of dual regulation or conflicting regulation (e.g. for cross border pipelines) Operator paper Overview of regulatory coordination issued by TSOs and interconnectors (2)

4. Operator paper Overview of regulatory coordination issued by TSOs and interconnectors (3) Examples: – In the country where company W operates it is uncertain which market player is responsible for building the infrastructure needed for replacing the declining gas production in the North Sea. – The regulator determined that Company X should offer to the market a certain amount of capacity at an entry point. The company could either choose to build this capacity or be exposed to the costs of buying back the capacity. Company X chose to make the investment. In setting conditions for the following regulatory period the regulator in hindsight deemed this investment inefficient and proposed not to include it in the RAB. The cost of the investment was over €100m. Assuming the investment is not allowed in the RAB it is uncertain whether the company will be able to recover these costs.

5. Operator paper Overview of regulatory coordination issued by TSOs and interconnectors (4) Examples: – The regulatory regime in which company Y operates has a regulatory depreciation period for installations of 50 years. There is a large uncertainty for company Y whether the economic life of a specific installation will also be 50 years, i.e. whether the installation will generate income. If this happens and the investment is stranded, the regulator can refuse to cover the costs, e.g. because this would cause an increase in tariffs. – Company Z requires a specific return on its investments. For an LNG terminal to go on stream, a pipeline had to be reinforced by company Z. As to not delay the LNG project, the investment decision by company Z for the reinforcement had to be made before the regulator had decided the rate of return that company Z could earn on the pipeline. The regulator decided (after the investment decision was made) that only part of the pipeline could earn the necessary return on investment, and that additional conditions had to be met by company Z.

6. Issues for discussion Improving the investment climate for investments with regulated tariffs (1) Fundamentals – There should be a balance between risks and rewards that TSOs/investors take. The regulatory risk which TSOs/investors are exposed to (e.g. changes in the allowed rate of return or the tariffs) should be recognised and taken into account. Where do you feel does the balance between risks and rewards lie? – Most TSOs regard long-term binding commitments as an indispensable risk management tool. Who do you think should invest in capacity for short term use, and how should the investor be rewarded? How much capacity for short term use is needed? – The revenues of TSOs from tariffs have to be sufficiently high to cover the investment. The tariffication system should limit cross-subsidation between cross-border transport and transport to domestic customers and between short and long distances. – A clear, fair process and a clear definition of roles is necessary.

7. Issues for discussion Improving the investment climate for investments with regulated tariffs (2) Process – The process of coming to an investment decision should be clear. – The roles and responsibilities of all parties involved should be clear. – There should be a clear process for changes that affect the investment climate, including a possibility for appeal against regulatory decisions. Roles – The TSO/investor should take the final investment decision. – The regulator should guard that the process is fair and non-discriminatory, and that the interest of all stakeholders is duely taken into account. – The TSO should cooperate with neighbouring network operators, producers, regulators etc to co-ordinate a.o. aspects such as timing and amount of capacity offered. – Regulators should take into account benefits for all European consumers (not only those of the country in which they are based).

8. Issues for discussion Improving the investment climate for investments with regulated tariffs (3) Providing information – The TSO should regularly provide stakeholders information about the need for investment and its investment plans, e.g. through a 10 year statement. – The regulator should provide stakeholders with timely information about future changes that affect the investment climate. – Shippers/users should provide the TSO with information regarding their expected capacity needs (before entering into binding commitments).

9. Discussion Do you agree to those points? What is missing? How do we progress towards systems that take into account these issues?