Workshop on “Requirements of financial institutions on the financing of gas infrastructure projects, Brussels, Regulatory requirements for new gas infrastructure Michael Thomadakis RAE

2 Needs for Europe … Gas: Source: EC

3 Needs for Europe (cont)…  Reinforcement of existing pipelines  New pipelines, both at national and regional level  LNG facilities  Storage facilities  Strong dependence on imports  Strong need for diversification of supplies  Substantial investments

4 Legal Framework…  Gas Directive 2003/55/EC  TPA is the default regime  Exemptions from the default regime are permitted if specific criteria are met  Regulation 1775/03 (tariffs, capacity allocation and congestion management, transparency requirements, balancing) and the anticipated guidelines  Energy Community Treaty: important since it serves as a “bridge” to the Caspian region

5 Regulatory requirements…  Design regulation which will:  Enhance security of supply, without destroying competition  Bring gas from new supply sources, without creating “new closed routes”  Provide incentives to investors, without enhancing “market power”  Permit the entrance of new suppliers, even at a later stage  Permit the development of new markets and “gas hubs”, especially at the EU neighborhood  Provide guarantees to investors and IFIs for a “fair and equitable” return on investment

6 rTPA or Exemptions ? (1)…  rTPA is the default regime:  Regulated Tariffs, approved by the Regulators  Investors’ revenue is guaranteed through the tariffs but return on investment is limited to the regulated WACC  The “investment” or “market” risk is transferred to the rate-payers, i.e. the market participants (“socialized” through the tariffs).  Access to the networks must follow certain “guidelines” (for EU member states), i.e Regulation 1775/2005  rTPA is required but not always feasible, especially for transit  Transit routes may cross countries where the market size does not allow this risk to be taken (e.g. SEE)  Long term guarantees must be available

7 rTPA or Exemptions ? (2)… Exemptions can be granted should the following tests are examined (Art. 22): “enhance competition in gas supply and enhance security of supply” “The level of risk attached to the investment is such that the investment would not take place unless an exemption is granted” “The infrastructure must be owned by a natural or legal person which is separate at lest in terms of its legal from the system operators in whose systems that interconnector will be built” “Charges are levied on users of that infrastructure” “The exemption is not to the detriment of competition or the effective functioning of the internal gas market, or the efficient functioning of the regulated system to which the infrastructure is connected” Can be “looked-at” in the following way:

8 Key Concepts for Derogation 1. The “Risk is Such” Test 2. Open Seasons, Use-it-or-Lose-it 3. Independence of the Project Company 4. Short-term Contracts 5. Security of Supply 6. Impact on Interconnected System Enhance Competition

9 The “Risk is Such” Test Two Possible Interpretations: No. 1: Investors must prove they cannot tolerate regulated access No. 2: Regulator decides whether regulated access is desirable Maximum Return Set at Cost of Capital Investor will Accept, if Recovery Guaranteed Traditional Regulation (central planning approach): Ratepayers bear Utilisation risk But, “Risk is Such That” Regulator “wants out” of central planning Investors, not ratepayers should bear utilisation risk

10 Open season Open season conducted before deciding on eventual capacity Open season conducted before deciding on eventual capacity  If there is a lot of demand, expand the capacity (specific provisions must be there, when this is not technologically feasible).  Imposes no risk on project sponsors– they only build to match long- term commitments.  Allows competitors to join in. Use-it-or-Lose-it: Use-it-or-Lose-it:  If holders of long-term capacity don’t need it, should sell it. Only possible objection: want to “undersize” project, hoard capacity Only possible objection: want to “undersize” project, hoard capacity Investment would not “facilitate competition”

11 Short-term contracts Offering short-term contracts helps competition However, project sponsors do not want to bear the risk of short-term capacity sales  Pipelines from countries with dominant producers cannot rely on spot sales  No liquid “spot LNG” market yet Possible Solutions: Possible Solutions:  Part of the capacity may be subject to ordinary and/or incentivized TPA regime, according to conditions as envisaged in Art. 22(3.b.iii) of Dir. 2003/55  Regulator may ask TSO to buy some capacity in open season, project sponsor therefore receives a long-term commitment.  TSO resells capacity to market on short-term basis.  Ratepayers bear some utilisation risk, but they benefit from competitive effect.

12 What do we need ?…  Combine “traditional” tools with those of the “open market” approach:  Grant exemptions when necessary, but leave some part under rTPA (under regulatory decision but with full guarantees to investors)  Apply rTPA but with long term commitments on capacity and on the setting of the tariffs  Develop clear rules which go beyond the borders:  On collaboration between regulatory authorities (e.g. unified regulatory decisions on cross-border investments)  On the harmonization of the rights and obligations of the investors  On commitments from the governments

13 Way Forward ?  These issues have been already faced in some parts of Europe (and in some cases addressed)  There is a clear need for an important debate on these issues right now  Decisions must be taken for the long term  The EC, Regulators, TSOs and the Financing Institutions must work together, with the view to reach a consensus  Guidelines on the development of new gas infrastructure at a pan-European level must be elaborated  ERGEG will start the corresponding work very soon

14 Thank you for your attention Dr. Michael Thomadakis Vice President Greek Regulatory Authority for Energy 69 Panepistimiou Avenue