Investment workstream 20 January 2009 Cross-border gas transmission‏ Investment project (I1) Advisory Group Meeting Conclusions and minutes, draft Bonn Project is delivered in co-operation with I2

2 Investment workstream, GRI NW Contents 1. Conclusions AG (1- 2) 2. Minutes AG (3- 5) 3. Outlook on VT format to be rolled out (6) Annexes Presentations Mulder/Knowles; Laar; Henze; Barten/Barnes/Rakhou.

3 Investment workstream, GRI NW Conclusions of AG (1) Work on manual is advised to be continued as follows:  Provides good, but yet diverse view. Needs deeper research at certain elements.  Is and should be useful as VT input.  To be focused on parameters found relevant to VT (these parameters shall become definitive in VT “scoping” kick off workshop on 26/27 February).  Therefore at current stage work should be “frozen” till VT key parameters are known. Work on incentive study is advised to be continued as follows:  Mulder/Knowles presentation provides an excellent overview of idea behind incentives and of “toolbox” of incentives to be further studied.  Incentives are specific per country situation, therefore one should rather speak of a toolbox of possible incentives to stimulate investment behavior.  Further presentation is invited to serve as input for VT and to presented during kick off workshop on 26/27 February.  To the “overview of elements” to be studied as incentive (slide 13) an element should be added “is there obligation for TSO’ to invest (a) and (b) what happens if investment is not happening. Presentation of Mr. Henze on experiments is well received:  It is advised to investigate possibility of full co-operation with experimental expert Mr. Henze as in the VT process (subject to cost approvals). As first step Mr. Henze is invited to brainstorm on 2 nd of February on VT.  Experiment at university can serve as technical check on VT design and prevent strategic behavior in the actual VT with industry participants.

4 Investment workstream, GRI NW Conclusions of AG (2) Work on VT is advised to be continued, taking into account following:  Envisioned outcomes (questions), needed parameters and built up of the test must be precised in more detail in eg a strawman-paper.  Such strawman could be also informed by todays discussions. See following sheets for detailed remarks on what could be elements of such strawman.  In the week of 2 February and after the brainstorm of 2 February a telco with Advisory Group is to be scheduled to walk through details of strawman to allow for additional comments.  Overall timing is welcomed: In the next week send out invitation with draft agenda, by 16 February detailed material for workshop, Feb/May/Sept/Nov workshops.  The 26/27 February should become “the scoping” workshop. Afterwards the real test work starts. General comments VT  Such a VT should “test the main parameters of current regulatory systems in the region”; “allow for opportunity to test new ideas on incentives as well”; “result in 4-5 scenarios with key parameters of regulatory frameworks, based on fair reflection of the region”.  To come to detailed test set-up (1) a “decision tree” should be designed in detail (see further); (2) objectives for test players be agreed (what goals Regulators, TSOs and Shippers shall strive to during the test). Detailed comments, questions for VT to be used as “key parameters” for regulatory framework  See next slides 3 to 5 with detailed record of comments made during the meeting in Bonn on the parameters during/in the presentations - In

5 Investment workstream, GRI NW Minutes of AG (3) Detailed comments on what key parameters could be used in the test  Following assumptions and questions are suggested during AG as inputs for key parameters for “regulatory framework” scenarios of VT, as reflective for current industry questions:  As an approach to valid trigger to investment “physical congestion” between chosen “hubs” is assumed as starting point - So no connection of hubs just for merging and increasing liquidity of market zones  The possibility of second guessing of TSO investment decision by Regulator after the build of pipeline is assumed non-existent. Ie the possibility for Regulator to “re- evaluate the RAB”. - It seems that some GRI NW jurisdisctions (eg UK) have that possibility, but because of non-occurrence non-relevant.  Despite theoretical possibility of merchant approaches to investment (art 22, pipe- pipe), the case should focus on fully regulated approach to investment. That seems currently the approach having most questions to be researched.  One should consider in 1 of the regulatory scenarios for the test case the working of parameter as “obligation” to invest for TSO. At detailed level this obligation seems to differ per jurisdisction of the region. “Obligation” can eg mean investment under “1 in 20” or “1 in 50 year” failure of the system criterium. Obligation does not always exist. There seems to be difference in eg a trigger to start investment. Eg some countries have “binding” investment plans, some have indicative plans. Plans are for various outlook periods, up to 10 years. The “binding” definition is not clear. The investment plans seem often to focus on national systems. It seems that (practice of) “enforcement” of obligation to invest differs as well per jurisdisction. - In

6 Investment workstream, GRI NW Minutes of AG (4) Detailed comments on what key parameters could be used in the test  The risk of “stranded” (unused) pipeline is dealt differently on detail level per system. This risk can be directed to involved shippers, TSOs and (via socializing on whole system) consumers. This variable is key to address in several scenarios. The common approach is to (a degree) accept and spread that risk between the parties and, if occurs, to socialise it eg via (cross border) entry/exit fees within the transport system. The degree of acceptance is eg designed in UK by means of accepting investments only if 50% of NPV-test is met by shippers.  The risk can be distributed partly to shippers via so called open seasons by varying commitment of shippers to 3 variables “duration” (fixing time of contract duration), volume (fixing capacity level) and price (fixing or not tariff levels).  The risk can be partly attributed to TSO, eg via relating new investment to remuneration of the TSO (eg via extra ROI. Eg in France a ROI was raised for certain project +3% for 10 years). The “overpayment” of TSO can be prevented by including incentive to relate investment to overall remuneration of the TSO. This is eg achieved via general RPI-X system of transport fees or “re-evaluation of RAB”.  The risk can be partly attributed to consumers by allowing to raise tariffs not just for particular entry/exit, but at all points of the TSO system. Eg. This was allowed in NL for recent GTS investment in strengthening the cross-border gas system.  The effect of existence of formal obligation to co-ordinate between TSOs/Regulators during cross-border investments should be investigated. This seems – at detailed working level - to differ per jurisdiction in the region. However at practice the key question is, that such co- ordination only hinder investment if somehow there is difference in timings of formal approvals by Regulators. If then Regulators talk to each other to simultaneously (dis)approve investments, then any hindrance is remedied. - In

7 Investment workstream, GRI NW Minutes of AG (5) Detailed comments on what key parameters could be used in the test  It is warned that despite the fact that focus on parameters as ROI, WACC is needed, however mere focus on numbers show nothing. The numbers can only be compared based on full comparison of all investment risk “affecting” elements (eg as elements mentioned before).The existence of various ROIs (eg between 5 to 10) is therefore partly an outcome of project risk profile, but sometimes variabel to make investment happen. - It is mentioned by experts that in current financing market, it might be difficult to attract project finance. Certain temporary higher ROI might be needed as capital is now more difficult to attract.  One should investigate in regulatory scenario’s the following “incentives”: - Is there reward for co-ordination? - What type of (long term) clarity is possible on regulated tariffs? Are they eg maximised to eg 200% of current, are they fixed for duration of project finance (eg 15 years)…?  Is it possible to differentiate between short-term and long-term tariffs. - What level of commitment for recovery of costs by TSO is actually needed? Is it eg 50%? Is that commitment need eg growing as leadime of invesment being “away” increases? What should be minimum commitment overall? What part should come from shippers, from regulators, governments (from TSOs)? - Overall one should consider that incentives are a toolbox, not one size fits all (see slides of presentation Mulder/Knowles for other remarks/examples) - In

8 Investment workstream, GRI NW 6a. How shall test look like in detail? Summary based on insights from AG in Bonn, building on earlier work The arising, slightly adopted, detailed set-up of the test to be worked out in strawman seems to become as follows. VT outline, based on days comments (see slides 1 till 5):  Goals, striven for, next to ToR, could be more precised as: Content output: - Test key parameters of (regional) regulatory systems and resulting effects on investment behavior of TSOs/shippers - Test innovative suggestions to incentivize investment, where appropriate Process output: - Valuable learning by real experts in test environment on co-operation/co- ordination - Rework the results in advise report to policy makers - In qualitative but realistic terms - Accounting key assumptions and simplifications (and therefore not investigated parameters)  Agree on (Scope all elements of) “Decision tree” of the test in/by kick-off workshop February - See next slide  Define objectives of participants during the VT - See next slide - In

9 Investment workstream, GRI NW 6b. How shall test look like in detail? Summary based on insights from AG in Bonn, building on earlier work Scope of test Step 1: Define 4-5 scenarios of regulatory framework (see minutes AG)  Frameworks could be based on i.a. connecting hubs of NL, GE, FR, BE. by a virtual pipeline. For trigger it is simplified that “physical congestion” between hubs is proven. Elements from other regional frameworks could be tested as well in 1 of the scenarios.  Frameworks should reflect that there are various frameworks at different sides of the border (key to realism). Steps 2-4 are:  Define commitment process (“tender” letter by TSOs)  Define how shippers react (eg several iterations like in VT suggested, via ‘price schedule’) “crucial to organise realistic input and therefore possibly anonymity”  An execution step: eg at certain NPV-level investment is done (that is more outcome, then input) Agree on Objectives of the “participants during test”  Eg Regulators strive to maximize consumer welfare  Eg TSOs shall invest if X (50%) of NPV test is met  Eg Shippers want capacity at max. cost x, depending on their market view (use common “shipper roles” according to which shippers shall adopt a certain risk appetite) - In