Download Minutes of meeting

1st Gas Tariffs FG Expert Group Meeting
2 April 2012, 10:30 to 16:30; [E-control premises – Rudolfsplatz 13a – 1010 Vienna]
FINAL DRAFT MINUTES for approval on 4th of May 2012
(Chatham house rules, no names basis in quotes)
Regulators,
European Commission
Tanja
Held
EC
Benoit
Esnault
CRE
Chair ACER TF
Tom
Maes
Belgium (CREG)
Chair ACER TF
Kerstin
Wernig
Austria (E-Control)
Chair ACER TF
Ognjen
Radovic
Austria (E-Control)
Thomas
Querrioux
ACER
Erik
Rakhou
ACER
Jan-Peter
Richard
Sasse
Germany (BNetzA)
Miller
United Kingdom (Ofgem)
AIMOLA
Edison
ANGER
GRTgaz
BARNES
Gazprom Marketing & Trading
DE WOLF
Fluxys
GHIOSSO
EDF
HAWKIN
National Grid
MEUZELAAR
VEMW, IFIEC
PEPTEA
E.ON Energie Romania
PETROV
PRESSE
KEMA
Experts
Alberta
Geoffroy
Alex
Laurent
Ivan
Debra
Dirk Jan
Agatha
Konstantin
Ralf
Jorge
RWE
ROMAGOSA
Gas Natural Fenosa
Observers/Academic
Expert(s)
Johannes
Heidelberger
ENTSO-G
Ann-Marie
Colbert
ENTSO-G
Sergio
Ascari
FSR; Academic expert
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1.1
Objectives/process.
ACER representative introduced participants and thanked E-control for welcoming the 1st Expert
Group in Vienna.
Chairs explained the general process and next steps. It was explained that minutes will be made to
reflect all made remarks on no names basis, and additions will be invited. The additions will be
annexed to these draft minutes, and minutes will be approved at the next Expert Group meeting (4
May 2012) and published on ACER website.
Chairs reminded that the goal of the session is – for Experts to advise ACER – in order to further
identify (and confirm) the problems and scope, which are to be addressed in FG1 on harmonized
transmission tariff structures, based on evidence before defining the (to be) adopted policy
options.
Chairs emphasized for FG Tariffs the objectives as cost-recovery, cost reflectivity and competition
as key, with focus on non-discrimination and transparency.
1.2
General views on FG Gas Tariffs-work
It was signaled that ACER shall be avoiding too complex options, and welcoming simplicity of
solutions as it leads to more transparency.
The following issues were discussed, and following advisory remarks towards ACER were, in
summary, recorded:

Revenue setting
The issue of allowed revenue should be outside the scope of the Tariff Framework
Guidelines. Even though the issue of under & over recovery is linked to the allowed
revenues it could be addressed in the FG; how this could coexist with price-cap regulation
regimes still needs to be explored. In any case, the differences in definitions of allowed
revenue can cause discrimination. One expert remarked that he believed that the
discrimination is linked with the cost allocation and not with the definition of the allowed
revenues.
Another expert remarked in addition that this kind of discrimination considered in this
context is between cross-border and domestic network usage. This particular discrimination
is not fostered by the definition of the allowed revenue of a TSO (e.g. high tariffs) but
potentially by its breakdown of such revenue amongst the entry and exit points of the grid.
Another expert added a comment that high (investment) costs for a mainly transit network
would have an effect – (also) as an argument for including allowed revenues as part of the
scope.
1
FG stands for Framework Guidelines.
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
Cost allocation
Cost allocation is viewed by several experts as the key issue, along two distinct paths:
Entry/Exit and Domestic/Cross border. As domestic and Cross-Border tariff-related
issues cannot be studied separately, a macro approach of the topic should be favored,
defining two categories of cost – “envelopes” (especially seeing ‘domestic’ costs as one
big envelope without going into details).
An efficient cost allocation methodology will be driven by appropriate cost-recovery &
cost efficiency signals.
The issue of cost allocation is related to the issue of cross-subsidies. In An Entry/Exit
system it is usually impossible to reach a full cost-reflective tariff system (whereby the
combined tariff of each entry and exit point reflects the cost of the investments made
along this route), but the objective shall be to reach broad cost reflectivity. However,
the legal framework clearly states that non-discrimination has to be ensured.

Investment incentive
Cost reflectivity and price stability are seen as the key drivers to trigger investment.
Price stability is seen as a tool to ensure possibility of an appropriate number of long
term contracts, which are key to ensure the required investments are made in the
current investment framework.

1.3
Other issues – mentioned as context when discussing Tariffs - include the differences in
fiscal conditions in various EU countries, and the impact of Regulation (EU) No 994/2010
on Security of Supply on Tariffs.
Harmonisation level in FG Tariffs and scope
Harmonisation level – full harmonization of all aspects not feasible or not necessary.
Tariff is a complex issue. The initial draft FG – due for consultation in summer 2012 - should be
driven by simplicity as a main rule of drafting in the view of experts.
Thus, full harmonization of all aspects is complex based on the face of discussions in the Expert
Group, and harmonisation should be limited to where it is of benefit to the overall objectives of the
Regulation.
Storage and LNG – to include (if evidence supports) or not, is a pending question2.
Based on the Regulation, any area of the network that has an impact on cross-border trade and
market integration can legitimately be included in the FG. As a general statement, all network
points are inter-related. Cost allocation at cross-border points will have an impact on domestic
points, including LNG and Storage related points.
However, the issue is complex, and involves many trade-offs. Decisions that would improve the
tariff issue could have negative consequences on other areas of the gas market. A practical
2
Mr. Ivan Ghiosso stated during approval of the minutes on 4th of May 2012 that he disagreed with chapter
1.3 of the minutes regarding Storage and LNG remarks; and it was agreed that his substantiated input would
be annexed to the minutes once available.
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approach should be favored: the FG should be limited to areas where it can trigger clear
improvement.
Consequently, the general approach is that the FG should focus on points where harmonization is
needed to enhance cross-border trade and market integration.

Storage
As long as access to storage isn’t discriminatory, they shouldn’t be concerned by the FG, all
the more if they can be considered as part of the domestic market. However, in practice,
discrimination is observed between domestic and cross-border users of the network, and it
was noted in addition that the fact that storage prices lack alignment could signal need to
address the Tariff structures affecting storages to some extent3. This latter view was was
only expressed by two experts without providing further examples or evidence at that
point.

LNG terminals
They can be considered as entry points to the transmission system similar to points e.g.
bringing gas production and could therefore be addressed as being part of entry-exit
systems. Attention should however be given to the fact that EU should remain attractive to
external suppliers, when designing any requirements affecting LNG.
1.4
Problem Identification, as input for Impact Assessment document.
Current problems related to Gas tariffs mentioned at the tour de table in the Expert
Group were:

transparency on how tariffs are set and how they may evolve/ instability of tariffs;

transition of tariffs from point to point and inclusion of transit contracts into entry exit
system creates some problems especially regarding price stability;

distortion of the trade/investment when short term tariffs are set lower than the long term;
leads to loss of investment signal and price instability;

distortion in case of several IPs at the same border/route which have different prices. The
lower tariff of one IP may lead to congestion even if there is capacity available on the
alternative route/IP;

short term capacity is then priced so high that nobody is using the available capacity;

deficits of underused grids.
3
One expert explained that storages have a specific role in the internal market and save investment on entry
points for TSO. That’s why capacities at interconnection with storages have to be considered with caution.
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1.5
Policy Options

Cost allocation methodology : transparency on tariffs design crucial and needed
Currently stakeholders seem to be unable to ‘calculate’ to full extent tariffs in all Member
States. In some regimes implementation of entry-exit systems is ongoing still. We
summarize the views of some experts by saying that stakeholders would be able to make
better economic decisions, should they have knowledge of the following in all EU-markets:
i. Tariff calculation and setting: understanding of the calculation methodology
principles;
ii. Tariff evolution: understanding of what would trigger a regulatory change;
iii. Tariff stability: understanding of the level of uncertainty and volatility on tariff.
Cost allocation methodology: level of harmonization needs to be further explored

Cost allocation is seen as a crucial but very complex issue. How far this can be
harmonized needs to be further explored. For full harmonization benefits were
only seen related to the merge of adjacent zones and tariff calculation for crossborder incremental capacity.
As all cost allocation methodologies eventually reflect the reality in the country applied, they can all be
considered equivalently aimed at recovering the costs in general. Simple methodologies are seen as
improving transparency. LRMC (Long run marginal cost approach) is viewed as too complex by many
experts45. In any case, a full harmonization of cost allocation practices doesn’t seem necessary, except
potentially in order to merge adjacent zones. To which level harmonization is needed needs to be further
explored. One expert added that adjacent zones in Germany have merged without harmonization of the
cost allocation methodologies.

Guidance on Pricing of Short term and long term products
NB: Please note that we summarize the debate on this contentious area, in the order of
tour de table, rather than in the order of options put in the scoping document.
Short-term signal/tariff should allow optimizing capacity sells on IP’s, while long-term
signals/tariff should appropriately trigger new investments.
One expert considered that the pricing of short term products versus long term ones should
take into account the level of congestion at an observed point.
One other expert suggested discount(s) if revenue is ensured.
4
Experts remarked that maybe it is too complex for EU-wide harmonisation, but not too complex for some
countries. One expert added that the LRMC can provide good signal on congested points whereas actual
costs allocation approach triggers the shipper to pay the current cost on non-congested points and to benefit
from tariff decrease with asset depreciation.
5
Two experts mentioned it could be interesting to still consider LRMC as an option.
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On the other hand, discounts for short term products will be detrimental to long term
products, which will increase in price to compensate short-term under-recoveries, and
investment signals, as stakeholders will be less willing to commit in the long run6.
The “option 4” from the consultation document was put forward by a number of experts
(and underlined by an observer), stating that this is the option

that will ensure the right investment signal is given from the market

that will not undermine the value of long term capacity
One expert considered that a simple approach would be to avoid multipliers and let the
market decide the value of the capacity.
However, on that issue again, approaches could differ when considering options.
Multipliers equivalent to 1, at least initially, seemed preferable by some experts, while
others had different views. No clear conclusion was reached.

Under & Over-recoveries. Under & Over-recoveries compensation mechanisms should as
a main rule ensure price stability.
i. Three key tools for addressing this issue were discussed:
1. Regulatory accounts;
2. Commodity charges (which convey instability7);
3. Capacity charges8
One expert remarked that the difference between these 3 tools is that the first tool
involves a definite lag in revenue attribution. It does not say which charges would be
affected and in fact it could be either commodity or capacity depending of the tariff
structure.
‘Regulatory account(s)’ were stated by most experts as generally preferred as they improve
stability. One expert explicitly disagreed. However, it should be considered that the
efficiency of ‘Regulatory account(s)’ depends on the design of the reference price. One
expert added that ‘Regulatory account(s)’ give stability with year or chosen time period but
do not necessarily mean more stability over the long term.
1.6
Next steps
Next meetings were scheduled for 4 May (Brussels) and 30 May (Paris). A fourth, final meeting would
probably take place in September (Ljubljana).
6
One expert remarked that the result will be a cross-subsidy between long term users and short-term users.
7
As a participant remarked in any case commodity charges should always only concern OPEX-costs
(variable costs).
The concept of ‚capacity charges‘ is that the (under-)recovery is spread across all those buying capacity
and that these are the ones using the network and who the (under-)recovery should be targetted on.
8
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