Convergence of NonDiscriminatory Tariff and Congestion Management Systems Across Europe September 20

1
Convergence of Non-Discriminatory Tariff and
Congestion Management Systems Across
EuropeSeptember 20, 2002
Boaz Moselle (boazm_at_brattle.co.uk)
The Brattle Group
2
Introduction

• Purpose of study
• Describe gas transmission network, analyse
  potential cross-border congestion.
• Recommend tariff principles.
• Develop principles for capacity definition,
  allocation and congestion management.
• Provide recommendations concerning financing of
  new infrastructure within liberalised IGM.
• Received extensive input from GTE, CEER, German
  Federal Ministry of Economics and Technology,
  individual MS regulators and industry
  representatives.

3
Agenda

• Introduction
• Description of physical system
• Tariff principles
• Capacity definition
• Capacity allocation and congestion management
• Financing of new infrastructure

4
Physical System and Cross-Border Congestion

• Cross-border physical congestion currently rather
  limited.
• Caveats
• Cannot extrapolate to congestion within
  individual Member States.
• Cannot extrapolate forward.
• Some maximum flow rates published by GTE contain
  significant errors (pointed out to us by GTE
  members).
• Published maximum flow rates should therefore be
  subject to further careful verification.
• Published available capacity figures should be
  calculated according to agreed standard
  methodologies, and subject to careful
  verification.

5
Agenda

• Introduction
• Description of physical system
• Tariff principles
• Capacity definition
• Capacity allocation and congestion management
• Financing of new infrastructure

6
Tariff Definition and Capacity Definition

• We distinguish between tariff and capacity
  definitionscan be combined in different ways.

7
Tariff Type Entry-Exit (EET) vs
Distance-Based(DBT) Tariffs
8
Cost-Reflectivity DBT

• DBT can be cost-reflective for long,
  uni-directional pipes.
• Otherwise generally not cost-reflective, because
  of divergence between contractual and physical
  flows.
• Caveat/discussion if TSO practice is to reserve
  physical capacity along contract path, then DBT
  are cost-reflective. However, this is not an
  efficient way to operate the system.
• TSOs should take advantage of full capabilities
  of a meshed network, including synergies
  between flows, linepack, storage, interruptible
  transportation contracts, operational balancing
  agreements etc.
• Reservation of physical capacity along contract
  path is not a prerequisite for adequate security
  of supply (compare US practice in measuring peak
  firm capacity (FERC Form 567)).

9
Cost-Reflectivity EET

• In theory entry-exit charges can be set to
  reflect long-run marginal costs.
• Therefore a reasonable initial presumption for
  entry-exit on grounds of cost-reflectivity.
• Caveats
• Theoretical argument relies on assumptions that
  may not be realistic.
• May entail negative charges for some entry or
  some exit points (reflecting internal
  congestion)difficult to implement.
• In practice may therefore be difficult for
  entry-exit to reflect marginal costs fully.
• May not be possible to set entry-exit tariffs to
  reflect average costs.

10
Cost-Reflectivity EET (cont.)

• Presumption in favour of entry-exit should
  therefore be subject to a series of checks
• Define cost methodology.
• Calculate indicative entry-exit charges.
• Examine for problems.
• Consider modifications as necessary.

11
Recommendations on Tariffs

• Presumption in favour of entry-exit, based on
  advantages of cost-reflectivity and promotion of
  competition.
• However, presumption should be subject to checks
  described above.
• Each TSO should have right to argue in favour of
  alternative systems, by providing objective
  evidence that specific system features create
  problems for entry-exit tariffs.
• National authorities to give rigorous
  consideration to evidence, publish their
  analyses.
• Use of market-based rates should be subject to
  rigorous tests to confirm absence of market power
  (e.g., presence of two pipes is not enough).

12
Agenda

• Introduction
• Description of physical system
• Tariff principles
• Capacity definition
• Capacity allocation and congestion management
• Financing of new infrastructure

13
Alternative Definitions of Capacity

• Choice between alternative definitions entails a
  trade-off
• More flexible definition fosters competition,
  liquidity.
• Less flexible definition may allow TSO to sell
  more firm capacity, and protect against any
  possible threat to system stability.
• Right trade-off depends on network configuration
  and flows.
• Given our finding of little cross-border
  congestion, a preference for entry/exit capacity
  is therefore a reasonable starting point in most
  MS (subject to caveats re internal and future
  congestion).
• If entry-exit is not appropriate for a particular
  network, TSOs and national authorities should
  look for minimum reduction in flexibility needed
  to resolve problems.

14
Alternative Definitions of Capacity

• Point-to-point capacity definition is always
  unnecessarily restrictive, because alternative
  approaches exist that have all the advantages of
  point-to-point but allow greater flexibility to
  shippers.
• Examples
• Segmentation as practiced by Gastransport in
  the NL, and by US pipelines under FERC Order 637.
• System of primary and secondary receipt points
  and delivery points used in the US.

15
Alternative Definitions of Capacity

• Regulatory authorities should be closely involved
  in these decisions
• TSO to provide objective evidence that its
  proposed definition involves a reasonable
  trade-off between capacity availability.
• Definitions should be analysed using gas flow
  models that TSOs should share with regulators.
• Regulators should develop modelling
  capabilities.
• Commission and CEER should share experiences
  concerning analyses of trade-offs between
  alternative capacity definition systems.

16
Agenda

• Introduction
• Description of physical system
• Tariff principles
• Capacity definition
• Capacity allocation and congestion management
• Financing of new infrastructure

17
Capacity Allocation and Congestion Management

• Appropriate rules depend on extent of congestion
• No congestion.
• Contractual congestion.
• Physical congestion.
• With no congestion, first-come, first-served is
  appropriate.

18
Capacity Allocation and Congestion Management

• With contractual congestion, we recommend
  two-stage approach
• Ex ante release of capacity that the incumbent
  has booked in excess of its customer volume.
• Implement a rule for automatic resale of
  capacity when a customer switchesnew supplier
  has automatic right to purchase from the old
  supplier the capacity it previously used to
  supply the customer.
• To implement ex ante release, regulatory
  authority will need information regarding
  suppliers existing contracts.
• An alternative to the one-off ex ante release
  would be repeated ex post releases.
• In theory could be as effective.
• However, requires ongoing intervention, may risk
  greater delays.

19
Capacity Allocation and Congestion Management

• In the case of physical congestion, need to
• Incentivise efficient expansion.
• In meantime, ensure capacity goes to those that
  value it most.
• For efficient expansion
• Authorities should have power to require
  expansion if economically justified.
• Develop long-term capacity auctions as important
  market signals.
• For efficient allocation of scarce capacity we
  recommend capacity release through auctions
• Require existing shippers with dominant positions
  to release some percentage of their booked
  capacity.
• Reallocate via auction as a non-discriminatory
  and efficient way to ensure capacity goes to
  those that value it most.

20
Capacity Allocation and Congestion Management

• We recognise that these proposals interfere with
  existing contracts
• Must therefore be justified by reference to
  competition law principles.
• Underlying presumption is existence of dominant
  position(s)a historical legacy that now
  threatens to restrict competition.
• European competition law provides limits to the
  scope of contractual freedom, to prevent
  anti-competitive behaviour.

21
Capacity Allocation and Congestion Management

• Additional measures to mitigate congestion
  include
• Imbalance tolerances that vary with temperature
  (as proposed in NL).
• Frequent updating of capacity availability, sale
  of short-term spare capacity as it becomes
  available.
• Interruptible capacity.
• Finally, where gas release programmes are
  implemented they should be accompanied by
  capacity release.

22
Forecasting Congestion

• Important roles for regulators and TSOs.
• Information publication important to establish a
  level playing field.
• Recommend publication of
• Continuous updates of available capacity.
• Historical and forecast annual demand and peaks
  at major points.
• Investment plans over an extended time horizon.
• Regulators/TSOs should develop computer models of
  networks that shippers can acquire (cf Transcost
  in UK)
• Auctions and secondary markets involving
  long-term capacity rights an important ingredient
  for forecasting congestion.
• We recommend against any price caps in auctions
  or secondary markets.

23
Agenda

• Introduction
• Description of physical system
• Tariff principles
• Capacity definition
• Capacity allocation and congestion management
• Financing of new infrastructure

24
Financing New Infrastructure

• In negotiated access regimes, this is left to the
  market.
• In regulated access traditional method is
  coordinated planning develop infrastructure
  based on outcome of planning studies, guarantee
  cost-recovery via regulated tariffs.
• This approach should continue to form the basis
  of many/most investments.
• Such planning should look to market signals as
  complements to modelling work. Regulators should
  foster creation of such signals, e.g., auctions
  and secondary trading of long-term capacity,
  open season processes.
• Regulators should use standard financial models
  (e.g., CAPM) to set allowed rate of return.
• Avoid tendency to under-estimate the cost of
  capital for regulated utilities.

25
Financing New Infrastructure

• For some new projects (e.g., LNG terminals,
  sub-sea interconnectors) regulators should
  consider using competitive bidding processes to
  set rates.
• Example Potential builders of an LNG terminal
  propose tariffs, project awarded to company that
  bids the lowest tariff.
• Regulators should not automatically refuse
  authorisation to projects deemed unnecessary by
  planning process. They should be allowed subject
  to conditions to protect public interest
• Builder bears volume risk.
• Project not responding to distorted incentives
  from tariff system (inefficient bypass).
• Will not compromise operational or commercial
  viability of existing infrastructure.
• Will not entail abuse of market power.

26
Financing New Infrastructure

• We identify a checklist of specific market power
  problems, and potential remedies.
• Some project sponsors request exclusive or
  near-exclusive access to the project. Regulators
  should determine whether the request
• Would adversely affect competition.
• Responds to a too-low regulated tariff.