Brussels NETWORK USERS WORKSHOP Brussels – 15 Nov TRANSMISSION TARIFFS Bernard Brelle, Vice-President, Gas Transmission Europe

Brussels A GENDA Main objectives of a tariff system Tariff levels Tariff structures Pancaking Transit and new investments G AS T RANSMISSION T ARIFFS

Brussels M AIN OBJECTIVES OF A T ARIFF S YSTEM Non-discriminating between users Transparent Does not create obstacles to development of the gas market Gives the operators incentives to invest timely and efficiently, and reasonable returns on past and future investments Does not allow operators to abuse of their dominant position Gives the market relevant signals (including locational signals) Makes possible competition between operators G AS T RANSMISSION T ARIFFS

Brussels T ARIFF L EVEL Two basic options : –« Market value » principle (may be justified in case of actual or potential pipe-to-pipe competition) –« Cost plus » principle Basis for « cost plus » approach : –economic value of existing assets (replacement cost or re- evaluated historical cost minus depreciation) –return based on a WACC approach In any case : must give the operators incentives to invest timely and efficiently G AS T RANSMISSION T ARIFFS

Brussels T ARIFF S TRUCTURES (1) Two basic models : –distance and contractual path related tariff (used e.g. in Netherland, Belgium, France, Germany) –entry-exit system (used e.g. in GB, Italy, Spain) Both systems have advantages and disadvantages : how to choose ? G AS T RANSMISSION T ARIFFS

Brussels T ARIFF S TRUCTURES (2) A distance-related tariff : –reflects long-run capacity costs and market value of transmission –may take into account backhauls –is consistent with transits –facilitates competition in transmission –ensures tariff continuity at the boundaries of the systems –disincentivizes inefficient by-pass lines –facilitates tariff comparison –is compatible with the development of a competitive gas market (cf. the US) –is applicable on the European territory G AS T RANSMISSION T ARIFFS

Brussels T ARIFF S TRUCTURES (3) An entry-exit tariff : –may facilitate the development of gas trading (one central hub) –may reflect long-run capacity costs within a limited area –may take into account backhauls –may reduce (compared to a 100% distance related tariff) locational differences within the area covered –facilitates capacity trading (auctions, secondary market, …) –increases flexibility for shippers –creates discontinuities at the boundaries of each system G AS T RANSMISSION T ARIFFS

Brussels W HAT A BOUT P ANCAKING ? As far as a shipper is using more than one system, it has to pay for the use of each system – unless leading to cross-subsidies between system users The use of a given system can be derived from the entry and exit capacities and flows, which are contractually and physically monitored and controlled Each tariff system has to take into account backhauls if any A shipper can choose not to reserve capacity on a given route or system (swap) So is it still an issue ? G AS T RANSMISSION T ARIFFS

Brussels T RANSIT AND N EW I NFRASTRUCTURES In principle, as long as the service and the conditions are the same, no difference should be made between transits and internal transmission (unless cross-subsidies) In practice : – large volumes and large investments – specific features regarding in particular pipe-to-pipe competition, definition of service, risk-sharing between TSO and users, … Specific terms and conditions may have to be negociated between TOs and users (including long term contracts) Same for large new investments such as interconnectors, LNG plants, … G AS T RANSMISSION T ARIFFS