1. Principles of gas transmission grid tariff setting in Belgium
Principles of gas transmission grid tariff setting in Belgium
Commission for Electricity and Gas Regulation (CREG)
Department of Pricing and Accounts
Tom MAES, Senior Adviser
4th February 2014
ECRB Gas Working Group, Vienna
TMA, Voorstelling Koninklijke Besluiten Aardgas

2. Agenda Basic principles of grid tariffs Treatment of new investments
Agenda
Basic principles of grid tariffs
Treatment of new investments
Remuneration parameters used in grid tariffs
Comments on remuneration parameters
Framework Guidelines Tariff Structures
Cost allocation to entry and exit points
TMA, Voorstelling Koninklijke Besluiten Aardgas

3. Basic principles of grid tariffs (1)
Basic principles of grid tariffs (1)
Equal third party access conditions
Single tariff structure
No cross subsidization
Between customer groups
Between activities
Basic Principles
No discrimination
Public sector pays same tariff as private sector
Transparent
Tariff covers real and reasonable costs + fair profit margin
TMA, Voorstelling Koninklijke Besluiten Aardgas

4. Basic principles of grid tariffs (2)
Costs
Real value of
operational costs
depreciation costs
financial costs
allowance for tax
Allocated to service or customer group
directly
via cost drivers
Profit margin
Return on RAB
Regulated Asset Base
economic replacement value of fixed assets +/- working capital
Rate of return
adjusted for optimal financial structure of 1/3 equity and 2/3 debt

5. Treatment of new investments
Approval of investment plan
Depreciation
Basis = investment cost
Rates corresponding to technical lifetimes (e.g. 50 years for cables and pipelines)
Remuneration
Return based on Capital Asset Price Model
Return on equity = risk-free rate + βe x risk premium
Cost of debt is entirely covered (embedded financial cost)

6. Remuneration parameters
Rf : risk free rate (YTM: yield to maturity of the government bond used as risk free asset)
t : tax rate
Cost of debt is entirely covered (embedded financial cost)
βe : equity beta
EMRP: equity market risk premium
βa : asset beta derived from initial βe with the Miller formula βe = βa (1 + Debt/Equity) or βa = βe (1-g)
Cost of equity : Rf + βe EMRP
βat : asset beta derived from initial βe with the Modigliani-Miller formula βe = βat [1+(1-t) Debt/Equity]
g : gearing Debt/(Debt+Equity)
i: projected inflation rate

7. Comments on remuneration parametersRf
10-year Belgium government bond's YTM averaged over 4 years (Transmission)
EMRP
Based on the reference stock market in Belgium
For other countries see Global Investment Returns Yearbook βe
Electricity transmission: based on the daily stock price of Elia SA
Gas operations: βe conventionally equals to 0,65 (transmission)
Beta per sector (e.g. 0,62 electricity distribution and 0,52 gas distribution) can be found on g
67% considered as optimal in an embedded financial cost model
Variation of the WACC formula according to the actual operator's financial leverage
Additional "illiquidity" premium (x 1.2) to the calculated return on equity for non publicly listed electricity and gas DSO

8. Framework Guidelines Gas Transmission Tariff Structures
Ch. 1-2: General provisions, publication requirements
Ch. 3: Cost allocation and determination of the reference price
Ch. 4-8: Revenue recovery, reserve price, virtual interconnection points, bundled capacity products, payable price
Avoid
risk of discrimination between categories of network
users
Enable CAM:
reserve price, revenue recovery and payable price
Transparency:
methodology, costs, congestion,
tariff evolution
Sep
-Nov
2012
Jan
-Feb
2013
29.06.
2012
18.12.
2012
26.02.
2013
15.03.
2013
non-discrimination, effective competition and the efficient functioning of the market
cost-reflectivity, avoidance of cross-subsidies, promotion of efficient new investment, and greater transparency
Wide range of provisions tackling all aspects of gas transmission tariff structures

9. What the cost allocation chapter is (not)
Ensure that tariffs are set in a fair way, based on objective and transparent criteria
Description on how the tariff is determined under the respective cost allocation methodology
Description under which circumstances each cost allocation methodology can be used
Bottom up approach
4 cost allocation methodologies:
* Postage stamp
* Capacity weighted distance
* Distance to virtual point
* Matrix
3 secondary adjustments:
* Equalisation
* Rescaling
* Benchmarking
Not a full harmonisa-tion
( )
Acknowledge the need for flexibility and possible trade-offs in achieving competing objectives when setting transmission tariffs in Entry-Exit systems

10. Cost allocation: capacity weighted distance method (1)
TITLE OF THE PRESENTATION
Variant A of the « Capacity Weighted Distance » methodology  cost allocated to each entry (exit) point depends on the weighted average distance from this entry (exit) point to each exit (entry) point
Entry 1
Cost allocated to Exit X =
Dist 1
Entry 2
Exit X
Dist 2
Dist 3
Dist 4
Entry 3
Entry 4
Underlying assumption of this methodology  gas exiting at a specific exit point can come physically from any entry point

11. Cost allocation: capacity weighted distance method (2)
TITLE OF THE PRESENTATION
Assumption of variant B: at peak flow situations (most constraining for network investment), not all combinations are possible  E.g. gas at a specific exit point will not physically come from some of the entry points
Entry 1
Cost allocated to Exit X =
Dist 1
Entry 2
Exit X
Dist 2
Dist 3
Dist 4
Entry 3
Some of the Entry-Exit combinations
are excluded in the calculation of the cost allocations
Entry 4

12. Thank you for your attention!
Thank you for your attention!
Commission for Electricity and Gas Regulation (CREG)
Department of Pricing and Accounts
Tom MAES, Senior Adviser
4th February 2014
ECRB Gas Working Group, Vienna
TMA, Voorstelling Koninklijke Besluiten Aardgas