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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 1/8 2/8 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. 3/8 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. 4/8 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. 5/8 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. 6/8 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 7/8 8/8