Gas Regional Initiative - Region South-South East 1st Implementation Group Meeting An Action Plan for the South-South East Europe Natural Gas Market Vienna, July 13th, 2006

2 European Commission assessment of the European Gas Market - Is this true in SSE? Gas market is not transparent, confidentiality a problem Concentration level high, not changed after liberalisation Incumbents control domestic production, import supplies, trade Gas infrastructure mostly owned or controlled by incumbents and not adequately unbundled Long term transit and storage capacity reservation to existing contracts leads to: little room to new entrants, even on a short term basis inefficient infrastructure development and utilization Lack of effective cross border competition Prices mostly linked to oil market, not to demand and supply Regulatory co-ordination not adequate and is hindered by asymmetries in regulators’ powers

3 GRI: Preparation of the Action Plan Fact finding study: Common information background to be achieved In depth information exchange among regulators Limited data collection from TSOs and other sources, to be undertaken by each regulator, if necessary (July-August) Written Consultation Hearings Outcome: an Action Plan to solve the problems over 3-4 years

4 Preliminary assessment of the SSE market (2005) Total market size Bcm/y

5 Preliminary assessment of the SSE market Main market features: Limited self sufficiency (14%) Largest transit system in Europe (East-West) High dependence on the largest supplier (Russia, 46%) High market concentration (79% on average controlled by dominant companies) Mature markets except Greece, Poland but some potential in power generation Good interconnection but with exceptions and bottlenecks: Poland not well connected with Czech and Slovak Republics Greece isolated Italy-Austria-Slovenia connections congested and inadequate

6 Preliminary assessment of the SSE market

7 Preliminary assessment of the SSE market Main market features: Uneven unbundling (from legal “without assets” to full ownership and control) Highly differentiated regulation Tariff methodologies Contract duration Capacity allocation mechanisms, congestion management Balancing rules Lack of upstream gas Poor liquidity at existing hubs (Baumgarten, Italian PSV and border points)

8 Preliminary assessment of the SSE market – Regulation

9 The SSE market in detail – An example: balancing

10 Priority I: Monitoring of Regulatory Implementation Update on implementation of Directive 2003/55: Infringement procedures pending? Is implementation satisfactory? How are TSOs unbundled? Implementation of Regulation 2005/1775 Tariffs Convergence of tariff structures and balancing charges Capacity allocation and congestion management mechanisms Interruptible service Transparency requirements Balancing rules Regulatory powers, sanctioning regime

11 Priority I: Monitoring of Regulatory Implementation Implementation of Regulation 2005/1775 – Guidelines (already compliant/developments/no change) Short term capacity Network codes or standard contracts Nomination and capacity transfer procedures Service information available Inter-TSO coordination Maintenance information Technical information for shippers

12 Priority I: Monitoring of Regulatory Implementation Scope of regulatory powers Detailed unbundling rules TPA tariffs Capacity allocation criteria Balancing regimes Sanctions

13 Priority II: Survey and analysis of the regional market and its problems  Current development of hubs and other trading activities in the region  Main data on trade in existing and developing hubs  Wholesale market participants and their supply share  Share of short term contracts  Development of the main physical and commercial gas flows  Update by country  Current and expected infrastructure development and its regulatory framework  Main planned expansion of capacity, particularly interconnectors, LNG terminals, bottleneck removal  TPA exemptions and its regulation

14 Priority II: Survey and analysis of the regional market and its problems  Practical case studies of gas transportation through the region for specific profiles (routes) by a fictive shipper: check list  Is the selected profile viable?  Used by how many shippers (market shares)?  Capacity transparency (data published vs. traffic light)  Capacity availability (long term, short term, interruptible…)  Capacity allocation methods (FCFS, auctions, open season, …)  Capacity release / Use it or lose it (is it available and used?)  Tariff structure: entry exit, postage stamp, distance, …?  Tariff level (to be provided and assessed for selected routings)  Rate of returns (negotiated vs. regulated level)  Secondary capacity trading (how and how much?)  Access conflicts jurisdiction (Regulator, Competition Auth., Ministry)

15 Priority II: Survey and analysis of the regional market and its problems  Practical case studies of gas transportation through the region for specific profiles (routes) by a fictive shipper check list (cont.):  Backhaul (is it available and used?)  Upstream gas (is it available?)  Capacity or tariff: cross border problems (e.g non matching zones, contract duration, capacity allocation criteria, balancing, interoperability issues)  Balancing difficulties  Storage access (is it available?)  Regulated end user prices (do they affect the market?)  Overall assessment and critical issues, also by considering issues mentioned under Regulation 1775 and related Guidelines

16 Priority III: Transparency requirements  Access to Storage Services  Separately available  Access by foreign parties (used/available/not available)  Regulation/competition  Public service obligations  Service features (strategic, load management, market oriented…)  Hub Services available  Title transfer  Matching nomination  Parking/loaning

17 Priority IV: Interoperability issues  Gas quality issues  Infrastructure interconnection agreements  Operational balancing How relevant are these in the region?

18 Proposals (1) Primary legislation  unbundling provisions entailing full independence of TSOs in capacity allocation, transparency  incentives on TSOs to provide a level playing field and to develop economically efficient network reinforcements  regulators fully endorsed with the role indicated by the 2 nd Directive and Regulation, including substantial independence and adequate monitoring and enforcement powers  sanctioned by adequate formal agreements including a regional Memorandum of Understanding  MoU may include provisions about minimum unbundling, reciprocity and gas release (enhanced regional co-operation)

19 Proposals (2) Capacity  common guidelines for capacity reservation (one stop shop principle)  at least for some part of international routes  provisions for interruptible services  capacity release in case of commercial congestion

20 Proposals (3) Tariffs  regional transportation tariff based on the entry-exit methodology  with a regional inter-TSO compensation scheme  based on the setting of a regulated allowed revenue for each TSO  could be extended to third countries, notably Switzerland and the Balkan Republics

21 Proposals (4) New infrastructure  common Guidelines for the treatment of new gas infrastructure  conditions to award exemptions from TPA rights after Article 22 of the Gas Directive, based on regional market assessment  joint regulatory decision for the whole infrastructure  common capacity definition and reservation procedure  open season  based on work already undertaken for the Energy Community

22 Proposals (5) Balancing  common guidelines for balancing including the setting of:  balancing time units  tolerances and charges  provisions for ex-post trading

23 Proposals (6) Transparency  Guidelines of good practice on transparency and information management at EU level  as already undertaken by ERGEG for the electricity sector

24 End of presentation