Launching Gas Market on POLPX Leszek Prachniak Director, Quotations Department leszek.prachniak@tge.pl

then tariff abolishment Particular role of the Commodity Exchange in the gas market in a tariff-based environment Article 49 of the Energy Law: The President of ERO may discharge the energy undertaking from the obligation to submit tariffs for approval if it is confirmed that the energy undertaking is operating in a competitive environment, and may revoke the discharge granted if determined that the conditions which substantiated such a discharge have ceased. Competition first then tariff abolishment According to Article 32 of the current Energy Law, exchange-based gas trading is released from licensing obligation, and consequently, from application of a Tariff approved by the President of ERO.

Key role of the Commodity Exchange in the gas market in a no-tariff environment Setting the reference price of gas and electricity for the local wholesale market, determined in a fully competitive environment; The price provides a benchmark for other transactions in the gas and electricity market !!!

New TNC – four selected definitions A point in the group E high-methane natural gas transmission system of unspecified physical location where the trade in gaseous fuel takes place. Virtual point A contract for gas transmission service executed between the TSO and the System User, including the ITC. Transmission Ability Allocation (PZ) – a part of the transmission contract that specifies the transmission ability the Shipper is eligible to at the specified entry point or exit point (it may be a virtual point). Transmission contract/transmission ability allocation (PZ) A [...] person, or an organizational unit [...], which uses the transmission or balancing services under a transmission contract executed with the TSO and the transmission ability allocation (PZ) Shipper The Shipper’s declaration passed to the TSO regarding the quantity of gaseous fuel that will be delivered/off-taken by the Shipper at the entry/exit points during a certain time period. For exchange transactions, nominations are made by POLPX on Shippers' behalf Nomination

Virtual point – any offtake/delivery point The notion of Virtual Point assumes that the transmission/distribution network is treated as a single source of gas where the number and configuration of exit/entry points may be designed as required and the gas offtakes (deliveries) from (to) any two points are indistinguishable. Physical model of Virtual Point

Minimum requirements for exchange market New Transmission Network Code becomes effective Agreement between POLPX and Gaz System becomes effective Formal Conditions Public trading obligation Gas release programme PGNiG’s role as a voluntary key supplier Independent importers Secondary market – sale of surplus volumes, making up shortfalls, balancing Gas supply to the newly created market

Who can trade gas at POLPX Any Shipper which has received Transmission Ability Allocation, met the requirements under TNS and entered into a suitable agreement with a Brokerage house affiliated with POLPX. Until the Energy Law and/or the Act on Commodity Exchanges are changed/amended, exchange transactions on the gas market are only allowed through brokerage houses. This concerns everyone, PGNiG included !!!

General Information Under the TNS, the following definitions of delivery periods apply on the gas market: Gas Day corresponds to the day of delivery and is a period from 06.00 hours of the current day until 06.00 hours of the following day. Gas month corresponds to the month of delivery and is a period from 06:00 hours on the first day of the current month until 06:00 on the first day of the following month. Winter season is a period from 06:00 hours on the first day of the 4th quarter of the current year until 6:00 hours on the first day of the 2nd quarter of the following year (4th and 1st quarter), Summer season is a period from 06:00 hours on the first day of the 2nd quarter until 06:00 hours of the 4th quarter (2nd and 3rd quarter). Gas year is a period from 06:00 hours on 1 October of the current year until 06:00 on 1 October of the following year.

Proposed gas markets Spot Market Day Ahead Market(DAM) – contracts with next day delivery of same amount of gas over 24 hours Commodity Futures Market (CFM) Monthly, quarterly and yearly Base (24h) forward contracts.

Gas Market – Trading Schedule DAM 08:00 12:30 14:00 Continuous trading Registration with TSO CFM 08:00 14:00 Continuous trading

Day Ahead Gas Market-DAM Trading involves the delivery of equal amounts of gas in all hours of the delivery date. It is a Base type instrument. 1 contract corresponds to the delivery of 1 MWh of gas in all hours of the Delivery Date Trading is carried out for the duration one day preceding the Delivery Date. Quotations are provided every day in accordance with the session schedule defined under Detailed Trading and Clearing Rules for the Day Ahead Gas Market. DAM trading employs the continuous trading system. Information on concluded transaction (nominations) is submitted to GAZ SYSTEM in the form of work schedules.

DAM Trading Schedule Time Trading Phase By 6:00 pm 2 days prior to the Delivery Date Updating of collateral Entry of up-to-date collateral. From 8;00 am 1 day prior to the Delivery Date until 12:30 pm 1 day prior to the Delivery Date Continuous trading Posting of orders; orders may be withdrawn and modified; orders are checked for collateral By1:00 pm 1 day prior to the Delivery Date Updating of Work Schedules by Exchange Members By 2:00 pm 1 day prior to the Delivery Date Registration of transactions (nominations) with the TSO By 5:00 pm 1 day prior to the Delivery Date Publication of quotations on the publicly accessible website.

CFM-Gas Trading involves the delivery of equal amounts of gas in all hours of the delivery period under the instrument specification. Trading is carried out on business days from 8:00 am to 2:00 pm. CFM trading employs the continuous trading system. The instrument is traded within a period determined in the quotation and execution calendar. The trading period ends two days prior to the execution period (e.g. trading for an instrument with 2013 delivery shall end on 30 December 2012).

CFM-Gas – quoted instruments The futures market involves trading in forward contracts using the following instruments: Monthly Instrument – the delivery period corresponds to the gas month and runs from 06:00 hours on the first day of the current month until 06:00 on the first day of the following month Quarterly Instrument – period from 06:00 hours on the first day of the current month until 06:00 on the first day of the following month, Yearly Instrument– period from 6:00 hours on 1 January of the current year until 6:00 hours on 1 January of the following year. The delivery period does not correspond to the gas year.

CFM-Gas – Number of Series Futures Instruments are quoted in series. Number of series simultaneously quoted for particular instruments: Monthly Instrument – 3 series; Quarterly Instrument – 3 series; Yearly Instrument – 2 series (e.g. contracts for 2013 and 2014 delivery will be quoted in 2012);

No. of Instrument Series Y_13 Y_14 Q1_13 Q2_13 Q3_13 M1 M2 M3 November December January

CFM-Gas – Division of Instruments The division of instruments takes place on the date preceding the start of the execution period. Yearly, seasonal and quarterly instruments are divided as follows: A yearly instrument is divided into four quarterly instruments A quarterly instrument is divided into 3 monthly instruments;

GAS_Y_13 (10) Q1 Q2 Q3 Q4 Yearly contract division Q2_13 Q1_13 Q3_13 M1 M3 M2 (10) Q2_13 Q1_13 Q3_13 Q1 Q2 Q3 M1 M2 (2) M3 (3) (3) (-4) (- 4) Quotations for remaining forward contracts (2) M1 (13) M2 (15) M3 Q2 (10) Q3 (6) Q4 (10) Aggregation of contracts M1 = + = 13 M2 = + + = 15 M3 = + = 13 Q3 = + = 6 10 3 10 3 2 10 3 10 - 4 2012 2013

CFM – Monthly Instrument Specification Futures instrument name GAS_BASE_M-mm-yy, where: GAS_BASE_M – type of futures instrument, mm – number of the month in the year in which the execution date of a futures contract falls, yy – two last digits of the year in which .the execution of a futures contract falls Base instrument Gas at a price set on the Day Ahead Market for gas, expressed as PLN/MW and rounded up to the nearest PLN 0.01. Futures instrument lot size 1MW multiplied by the number of hours depending on the number of days in the year, as defined under the "Futures Quotation and Execution Calendar": 672-745 MWh. Futures instrument price Expressed as PLN/MWh, rounded up to the nearest PLN 0.01 Futures contract value Lot size of the futures instrument multiplied by its price. Execution time One calendar month (from 28 to 31 days) from 06:00 hours on the first day of the month until 06:00 hours on the first day of the month following the month of contract execution Execution period As per "Futures Quotation and Execution Calendar". Quotation period Delivery unit 1MWh for each hour of the contract execution time Expiry date Last day of trading. Last session day, sa per "Futures Quotation and Execution Calendar" First day of new series trading First session day, sa per "Futures Quotation and Execution Calendar". Quotation unit 1 futures instrument. Futures contract clearing method Physical delivery of equal amounts of gas in all hours of the execution period.

CFM - Quarterly Instrument Specification Futures instrument name GAS_BASE_Q-q-yy where: GAS_BASE_Q – name of futures instrument, q – number of the quarter in the year in which the execution date of a futures contract falls, yy – two last digits of the year in which .the execution of a futures contract falls Base instrument Gas at a price set on the Day Ahead Market for gas, expressed as PLN/MW and rounded up to the nearest PLN 0.01. Futures instrument lot size 1MW multiplied by the number of hours depending on the number of days in the year, as defined under the "Futures Quotation and Execution Calendar": 2159-2209 MWh. Futures instrument price Expressed as PLN/MWh, rounded up to the nearest PLN 0.01 Futures contract value Lot size of the futures instrument multiplied by its price. Execution time One calendar quarter, (from 90 to 92 days) from 06:00 hours on the first day of the quarter until 06:00 hours on the first day of the quarter following the quarter of contract execution Execution period As per "Futures Quotation and Execution Calendar". Quotation period As per "Futures Quotation and Execution Calendar". Delivery unit 1MWh for each hour of the contract execution time Expiry date Last day of trading. Last session day, sa per "Futures Quotation and Execution Calendar" Division date As per "Futures Quotation and Execution Calendar". Following the session on the lat day of trading. The instrument is divided into three monthly contracts. First day of new series trading First session day, sa per "Futures Quotation and Execution Calendar". Quotation unit 1 futures instrument. Futures contract clearing method Physical delivery of equal amounts of gas in all hours of the execution period.

CFM – Yearly Instrument Specification Futures instrument name GAS_BASE_Y- yy gdzie : GAS_BASE_Y – nazwa podstawowa instrumentu terminowego, yy – dwie ostatnie cyfry roku, w którym wypada termin wykonania kontraktu terminowego. Base instrument Gas at a price set on the Day Ahead Market for gas, expressed as PLN/MW and rounded up to the nearest PLN 0.01. Futures instrument lot size 1MW multiplied by the number of hours depending on the number of days in the year, as defined under the "Futures Quotation and Execution Calendar": 8760-8784 MWh. Futures instrument price Expressed as PLN/MWh, rounded up to the nearest PLN 0.01 Futures contract value Lot size of the futures instrument multiplied by its price. Execution time Jeden rok kalendarzowy (od 365 do 366 dni) w godzinach od 06:00 1 stycznia roku dostawy do 06:00 1 stycznia roku następnego po roku dostawy.One calendar year (from 365 to 366) from 06:00 hours on 1 January of the delivery year until 06:00 hours on 1 January of the year following the delivery year. Execution period As per "Futures Quotation and Execution Calendar". Quotation period As per "Futures Quotation and Execution Calendar". Delivery unit 1MWh for each hour of the contract execution time Expiry date Last day of trading. Last session day, sa per "Futures Quotation and Execution Calendar" Division date As per "Futures Quotation and Execution Calendar". Following the session on the lat day of trading. The instrument is divided into four quarterly contracts of the delivery year. In addition, the 1st Quarter is divided into 3 monthly contracts. First day of new series trading First session day, sa per "Futures Quotation and Execution Calendar". Quotation unit 1 futures instrument. Futures contract clearing method Physical delivery of equal amounts of gas in all hours of the execution period.

Rules for Notifying Transactions to Gaz System (TSO) POLPX submits information on transactions made (nominations) to the TSO by 2:00 pm Nominations include the volume of transactions with next day delivery made through POLPX, i.e. the balance of transactions made on DAM and CFM. Nominations include volumes given separately for each hour of delivery The TSO accepts for execution all transactions made through the exchange and notified by POLPX The volume of transactions notified by POLPX under a nomination is executed in its entirety. Nominations are not corrected.

Information Exchange Model – Gas Market TNS Information on transactions made through POLPX

POLPX Commodity Exchange Market Trading Rules for POLPX Commodity Exchange Market Małgorzata Słomko Legal Advisor Malgorzata.slomko@tge.pl

Gas trading organisation will be modelled after electricity trading. Former Rules - included the essential matters regarding the gas market and gas trading: gas definition, gas markets (Spot and CFM), trading parties (Exchange Members), transaction making and clearing principles (common regulations for all exchange commodities). 1/3

New Rules - approved by the decision of the Polish Financial Supervision Authority of 4 September 2012, effective as of 27 September 2012, were only supplemented to include the missing regulations regarding gas transactions made through the Exchange: appointment of GAZ SYSTEM S.A. as the transmission system operator (similarly to PSE Operator S.A. for electricity) indication and reference to the Transmission Network Code TNCg in respect of the physical execution of transactions made through the Exchange (similarly to TNCe for electricity) Shipper who will use gas transmission services under a Transmission contract/transmission ability allocation (PZ), concluded with GAZ SYSTEM S.A. and including at least entry point (170001) and exit point (100001), which is a prerequisite for executing transactions made through the Exchange Nomination and Shipper Code, necessary for notifying GAZ-SYSTEM S.A. by POLPX about transactions made through the Exchange to be executed (similarly to "scheduling" for electricity) principles for notifying GAZ-SYSTEM S.A. about gas transactions made through the Exchange to be physically executed (similarly to electricity) gas transaction fees (similarly to electricity) and conversion of gas units from cubic meters (m³) to megawatt hours (MWh).

Polish Power Exchange GPSA – Gas Purchase and Sale Agreements concluded at the Gas Exchange (trade transactions at POLPX)   Legal Basis: POLPX Rules for Commodity Exchange Market Trading and Act on Commodity Exchanges Entities: Exchange Members acting on their own behalf as Shippers, or on behalf of Shippers (A brokerage house can act ,as an Exchange Member, in its own name and on its own behalf as a Shipper, or it can act in its own name but on behalf of a Shipper ) We trade at a "virtual point" with no specific location; The product offered at the virtual point will be gas fuel – Group E high-methane gas (GZ50); A sale agreement concluded at the Gas Exchange is valid and effective between the parties and to be executed by the TSO Gaz-System S.A. POLPX requires each Exchange Member to have a transmission agreement with TSO Gaz System + PZ, at least for the virtual point of the Gas Exchange: entry (170001) and exit (100001). POLPX will not be liable for the physical gas delivery (or electricity delivery); Any gas delivery, including liability for such delivery, will be made under a transmission agreement between TSO Gaz System and Shipper. 2/4

Gas Transmission under GPSA by TSO, DSO, SSO Nomination TSO GAZ–SYSTEM SA Gas Transmission under GPSA by TSO, DSO, SSO (gas delivery under transactions made through POLPX) Legal Basis: Transmission Agreement + PZ, including at least entry point (170001) and exit point (100001 ) and TNCg Entities: Shipper TSO Gaz System assigned two coupled codes to POLPX as a Gas Exchange: Gas Exchange Entry Code 170001 and Gas Exchange Exit Code 100001 and defined the requirements for a Shipper to be able to make transactions at the Gas Exchange: Transmission Agreement + PZ for Entry Point (170001) and Exit Point (100001). No nomination submitted by POLPX is subject to approval by TSO Gaz System under the TNCg; Any nomination received from POLPX is deemed approved by TSO Gaz System under the TNCg. Any gas delivery, including liability for such delivery, will be made under a transmission agreement between TSO Gaz System and Shipper. 3/4

We are ready (gas sale) (gas trading) (gas delivery) POLPX Trading Rules (gas trading) POLPX – Gaz System Agreement (gas delivery) POLPX– PGNIG Agreement (gas sale) 4/4

Thank you for your attention.