Stakeholder workshop on tariff aspects of the draft CAM network code Brussels – 19 July 2011 Introduction

Stakeholder workshop on tariff aspects of the draft CAM network code 2 CAM and tariffs are closely related… …reserve prices, bundling, over/under recovery. CAM network code needs to be implemented upon entry into force… ….regulated tariff arrangements on national level will need adjustment to new regime. Essentials need to be codified at an EU level at this stage through the CAM network code, to enable a workable CAM regime.

Stakeholder workshop on tariff aspects of the draft CAM network code 3 Aims of this workshop: Foster common understanding of issues at hand Get support for quality network code rules For the avoidance of doubt: Neither the draft network code nor this workshop including the practical exercises intends to encroach upon NRA and TSO prerogatives in determining specific tariffs. It is however important to point to the policy decisions that have to be taken in tariff calculation Tariff arrangements need to suit the proposed CAM measures to enable the functioning of the regime, therefore essentials have to be set on EU level.

Stakeholder workshop on tariff aspects of the draft CAM network code 4

Tariff provisions in the draft CAM network code Johannes Heidelberger Brussels – 19 July 2011 Stakeholder workshop on tariff aspects of the draft CAM network code

Tariff provisions in the draft CAM network code 7. Tariffs 1) If not further or otherwise specified in the network code on tariffs, the following shall apply for the determination of specific tariffs for the application of this Network Code. 2) The Regulated Tariff shall be used as the Reserve Price in all auctions for all Standard Capacity Products for firm and interruptible capacity. 1.2 Definitions (s) Regulated Tariff means either the tariff as calculated using the methodology set and/or approved by the national regulatory authority, or the tariff set and/or approved by the national regulatory authority, or both. 6

Tariff provisions in the draft CAM network code 7. Tariffs 3) The regulated prices as Reserve Prices for firm Standard Capacity Products shall be set such that bookings of a profiled set of products to meet the actual flow requirements throughout the year yield revenues which are, as far as reasonably possible, equivalent to the revenues from non-profiled longer capacity bookings to meet annual peak flow requirements. In order to achieve such equivalence, Standard Capacity Products shall be offered at regulated prices as Reserve Prices, which are derived per Interconnection Point and per direction by applying multipliers higher than one to a tariff determined from an annual accounting basis. 7

Tariff provisions in the draft CAM network code 7. Tariffs 4) Auction revenues from Bundled Capacity need to be split between the transmission system operators placing capacity elements in a Bundled Capacity. The Reserve Price of the Bundled Capacity shall be the sum of Reserve Prices of the capacity elements in the bundle. All revenues from sales of Bundled Capacity shall be attributed to the contributing transmission system operators in relation to each capacity transaction. 5) Any revenue from an auction of Bundled Capacity shall be split between the transmission system operators placing capacity elements in the bundle according to a pro-rata rule, based on the proportions of the Reserve Prices of the capacity elements placed in the bundle at the time of the auction. By way of derogation, transmission system operators placing capacity in a Bundled Capacity can agree on a different split of the revenue from an auction of bundled products. 8

Tariff provisions in the draft CAM network code 7. Tariffs 6) Auction revenues exceeding the allowed revenue (or under a price cap, auction revenues arising from capacity prices above the regulated tariff) shall be used for different aims, subject to approval by the national regulatory authority. 7) In the event of revenue under-recovery (or under a price cap, capacity prices falling short of later regulated prices after the auction), national regulatory authorities shall allow transmission system operators to collect the revenue shortfall in a timely manner by adjusting tariffs accordingly. 9

Regulated reserve prices throughout Standard Capacity Products Adriaan de Bakker Brussels – 19 July 2011 stakeholder workshop on tariff aspects of the draft CAM network code

Regulated reserve prices throughout Standard Capacity Products To enable the offer of Standard Capacity Products (SCP) as proposed in the draft CAM NC, TSOs need assurance on revenue recovery Reserve price design needs to be based on booking forecast: Profiling of capacity, e.g. seasonal quarters Substitution of products – long vs. short term 11

Regulated reserve prices throughout Standard Capacity Products Revenue of long term booking approximately equal to revenue of profiled booking along actual flows 12 Principle in draft CAM network code : Aim: Equity for all system users and avoidance of cross- subsidisation Not foreseen in draft CAM NC

Achieving equity between long and short product users Reserve prices enabling profiling of quarters should therefore be: (annual accounting tariff/4) x (appropriate multiplier) Users who book longer term shall be put on equal footing with those who can book close to time of flow – no undue cross-subsidisation: Reserve prices for short term SCP (monthly and shorter) to reflect further profiling opportunity closer to flow 13

14 … substitutability between long and short term capacity is observed and this may create material distortions and inefficiencies in regime functioning Source: National Grid Sep 2009 Migration from long term booking. Not even zero firm day ahead reserve price! (but discount; and zero within day / interruptible) Low short term prices may lead to non-optimal charging

Regulated reserve prices throughout Standard Capacity Products - Conclusion Finally: KEMA (2009) identified high tariffs for short term capacity as market barrier Regulation 715 calls for tariffs not arbitrarily higher or lower than the standard annual tariff (Art. 14 (2)) 15 With the principle of revenue equivalence of profiled vs. longer term bookings, a reasoned, non-arbitrary approach is introduced.

Exercise 1: revenue equality between users Quarter 1Quarter 2Quarter 3Quarter 4Total Year Annual booking annual accounting based reserve price 1.00 Profiled booking forecast Q capacity sales forecast90%40% 90%65% M capacity sales forecast5% D capacity sales forecast5% Total capacity sales forecast100%50% 100%75% Possible non-seasonal reserve prices Q reserve price 1.30 M reserve price 1.40 D reserve price 1.70 Capacity revenue forecast Possible seasonal reserve prices Q reserve price M reserve price D reserve price Capacity revenue forecast 1.00 To do: fill red box with seasonal reserve pricing, such that total revenue is 1.00 Figures are only to illustrate reserve price principles and do not constitute concrete TSO positions. NB: Regulated reserve prices may be subject to changes over the years – with changes in tariffs for products already auctioned (cf. German model with auction premium above regulated price). Distinction of annual monthly and rolling monthly is conceivable. Within-day needs to fit in revenue equality principle as well.

Issues with over and under recovery Eddie Blackburn Brussels – 19 July 2011 Stakeholder workshop on tariff aspects of the draft CAM network code

Issues with over and under recovery Under recovery; contributing factors are: – Aggregate level of capacity sold being less than forecast – Greater than expected profiling of capacity to meet flow requirements – Target (allowed) revenue increasing following the auction Over recovery; contributing factors are: – Aggregate level of capacity sold being greater than forecast – Less than expected profiling of capacity to meet flow requirements – Target (allowed) revenue reducing following the auction – Capacity sold at prices in excess of the reserve price The method of managing under/over recovery might depend on the contributing factors 18

Issues with over and under recovery Examples of current, quite different ways of dealing with over and under recovery Commodity charge (GB) – Under recovery is charged to all users flowing gas (including flat users) floating regulated price under an auction premium (DE) – System wide smearing of over recovery to all capacity tariffs – Regulated reserve price of products, already auctioned, may change over time, as the TSO cost basis changes. Regulatory account – Under/over recovery is passed through to the next year 19

Issues with over and under recovery General options for dealing with over and under recovery: Retrospective v current year v future year Capacity v commodity Locational v entry/exit side only v system wide 20

Issues with over and under recovery Potential effects of different over and under recovery mechanisms and issues involved (1): Users who bid high at a location get money back: – perverse incentive to excessively outbid competitors Tariff adjustments to or from other users: – may create cross-subsidies Dedicated commodity charge may hamper trade: – acts as a tax on allocated gas quantities 21

Issues with over and under recovery Potential effects of different over and under recovery mechanisms and issues involved (2): Tariff volatility may become substantial, depending on e.g. number of points in system Ex-post over or under recovery mechanisms may involve cash and interest rate issues: – How are network users or TSOs treated in terms of the time value of money? 22

Issues with over and under recovery Conclusion Ex post over and under recovery correction will always have the potential to create cross- subsidisation and distortions, between users – at different locations, or – of different products, or – at different times. 23 It is therefore vital to ex-ante design tariffs such that ex-post correction need is minimised

Entry-Exit zone Allowed revenue: 400 Domestic Exits Revenue: 100 Revenue Entry: 100 Actual auction revenue: 200 Revenue Entry: 50 Revenue Exit: 50 Revenue Entry: 50 Revenue Exit: 50 Auction revenue exceeding allowed revenue: 100 To do: Where, when, and with what charge (capacity/commodity) to be returned to system users? Exercise 2 (1): over recovery

Entry-Exit zone Allowed revenue: 400 Domestic Exits Revenue: 100 Revenue Entry: 100 Actual auction revenue: 40 Revenue Entry: 50 Revenue Exit: 50 Revenue Entry: 50 Revenue Exit: 50 Revenue falling short of allowed revenue: 60 To do: Where, when, and with what charge (capacity/commodity) to be recovered from system users? Exercise 2 (2): under recovery

Wrap up Brussels – 19 July 2011 Stakeholder workshop on tariff aspects of the draft CAM network code

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