Market parties’ wishes for regional framework and trade through the day- ahead market. Doug Wood GRI N/NW Ministerial Meeting 13 November 2008

2 Contents Background and general objectives What we asked for…and what we got! Where are we now? Legal bottlenecks Regional framework / conclusions Where from here

3 Background and objectives Two quotes from the Sector Inquiry: −“Suppliers need to have transparent and non-discriminatory access to the transportation network on terms matching customer needs (This can include, for example, short term capacity on the secondary market, reasonable liabilities, etc.).” −“Depending on market circumstances, long-term contracts can result in foreclosure. This is particularly the case where they lead to a good part of customers or an available input such as transport capacity being tied to a dominant player.” Access to capacity is essential! Pilot was to test a number of objectives: −TSOs / Network users to gain experience of the impact of smaller amounts of capacity being available then can extend −Trial of auctions as delivery and price setting mechanism −Trial of locations, to test for roll-out −Trial delivery periods −Identify and breakdown artificial contractual barriers −Support initiatives by liquidity providers such as E.On Choice Market Access to capacity is also essential for hub trading / risk management ! A goal without a plan is just a wish.

4 What we asked for… …and what we got Daily auctioning Jointly organised Secondary firm capacity Primary interruptible capacity Cross border or linked 3 interconnection points Simple solution / common platform Starting 1 April 2007 Daily product Continuous trading Secondary firm capacity tradable once in theory No interruptible / competing interruptible product (EUCABO) 1 interconnection point Two platforms – solutions on either side of border May 2008

5 Where are we now Dutch side Limited trades of GTS capacity on APX Non-watertight contracts for Dutch capacity trades, but some players prepared to accept the risks for the sake of the pilot APX up and running; agreement reached with trac-x German side Ongoing lack of definition on German capacity trading “ueberlassung” Capacity overrun charges remain with primary holder – though calculation unclear Product not possible to contract in acceptable fashion Choice market is still running, for small volumes with no impact on market Legal bottlenecks identified Basis swaps continuing General Some remaining operational issues being addressed (gate closure, fees, re-tradability) Danish side No legal bottlenecks Ellund addition Progress might have been all right once, but it has gone on too long. (Ogden Nash)

6 Legal bottlenecks IssuePriorityOutlook Dutch FCFSNot fatal Methodebesluit in discussion, but is this on the agenda? German FCFSNot fatalWill this be addressed? German prices Ex post solution proposed Pragmatic. Support the proposal. German platformNot helpful Clarify European law. Proposal to embed is not realistic. German tradability KoV restricts rights allowed by NZV Must be addressed What you see as a glass ceiling, I see as a protective barrier.

7 Secondary Capacity Trading KoV II Article 38 Secondary Trading 1. Subject to Sections 2 and 3 of this Article 38, the shipper shall be entitled to sublet or assign acquired capacities to a third party. Section 14 of the Gas Network Access Ordinance (GasNZV) shall remain unaffected. 2. The shipper shall be entitled to sublet capacity booked under an entry and/or exit contract without the network operator's consent. In such case, the shipper shall remain liable to the network operator for the performance of its obligations under the entry and/or exit contract including, without limitation, the obligation to pay fees. 3. The shipper shall be entitled to assign the entry and/or exit contract wholly to a third party subject to the network operator's consent. Such consent shall not be withheld except for reasonable cause. Without limitation of the generality of the foregoing, failure by the third party concerned to demonstrate its creditworthiness in accordance with Article 45 or to provide the security required shall constitute reasonable cause for the network operator to withhold such consent. Such assignment shall not be effective as against the network operator until expiry of 10 (ten) days after the granting of consent in accordance with the first sentence of this Section 3 or notification in accordance with the first sentence of Section 2 of Article The network operator shall provide a bulletin board and ensure that the capacity rights bookable with the network operator can be traded on a joint electronic trading platform. The first sentence of this Section 4 shall not apply to local distribution network operators (1st sentence of Section 8(1) of the Gas Network Access Ordinance (GasNZV)).

8 Secondary Capacity Trading Suggested Changes Article 38 Secondary Trading 1. Subject to Sections 2 and 3 of this Article 38, the shipper shall be entitled to sublet or assign acquired capacities to a third party. Section 14 of the Gas Network Access Ordinance (GasNZV) shall remain unaffected. 2. The shipper shall be entitled to sublet capacity booked under an entry and/or exit contract without the network operator's consent. In such case, the shipper shall remain liable to the network operator for the performance of its obligations under the entry and/or exit contract including, without limitation, the obligation to pay fees. 3. The shipper shall be entitled to assign the entry and/or exit contract wholly to a third party subject to the network operator's consent. Such consent shall not be withheld except for reasonable cause. Without limitation of the generality of the foregoing, failure by the third party concerned to demonstrate its creditworthiness in accordance with Article 45 or to provide the security required shall constitute reasonable cause for the network operator to withhold such consent. Such assignment shall not be effective as against the network operator until expiry of 10 (ten) days after the granting of consent in accordance with the first sentence of this Section 3 or notification in accordance with the first sentence of Section 2 of Article The network operator shall provide a bulletin board and ensure that the capacity rights bookable with the network operator can be traded on a joint electronic trading platform. The first sentence of this Section 4 shall not apply to local distribution network operators (1st sentence of Section 8(1) of the Gas Network Access Ordinance (GasNZV)). (other than penalties for overrunning the transferred capacity which shall be paid by the shipper acquiring the capacity). Any capacity so transferred shall be included in the balancing group contract of the shipper acquiring the capacity for the duration of the transfer period within [ ] working days of notification of the transfer to the network operator by the shippers. If the entry and/or exit contract from which the capacity is transferred is terminated before the end of the transfer period then [the capacity shall remain in the balancing group contract of the acquiring shipper and the acquiring shipper shall become liable to the network operator for the performance of all obligations in respect of the transferred capacity including, without limitation, the obligation to pay fees.] transfer transfer any for all or part of the remaining term of such capacity all or part of the capacity in any

9 Secondary Capacity Trading KoV III Article 43 Secondary Trading 1. Subject to Sections 2 and 3 of this Article 38, the shipper shall be entitled to sublet or assign acquired capacities to a third party. Section 14 of the Gas Network Access Ordinance (GasNZV) shall remain unaffected. 2. The shipper shall be entitled to sublet capacity (with or without nomination rights) booked under an entry and/or exit contract without the network operator's consent. In such case, the shipper shall remain liable to the network operator for the performance of its obligations under the entry and/or exit contract including, without limitation, the obligation to pay fees. 3. The shipper shall be entitled to assign the entry and/or exit contract wholly to a third party subject to the network operator's consent. Such consent shall not be withheld except for reasons that would have prevented the conclusion of an entry and/or exit contract with the third party in the first place. Without limitation of the generality of the foregoing, failure by the third party concerned to demonstrate its creditworthiness in accordance with Article 50 or to provide the security required shall constitute reasonable cause for the network operator to withhold such consent. Such assignment shall not be effective as against the network operator until expiry of 10 (ten) days after the granting of consent in accordance with the first sentence of this Section 3 or notification in accordance with the first sentence of Section 2 of Article The network operator shall provide a bulletin board and ensure that the capacity rights bookable with the network operator can be traded on a joint electronic trading platform. The first sentence of this Section 4 shall not apply to local distribution network operators (1st sentence of Section 8(1) of the Gas Network Access Ordinance (GasNZV)).

10 Regional framework / conclusions Transparency Capacity availability Hub liquidity New capacity Capacity reallocation TSO incentives

11 Learnings for Capsquare? Platform should be optional OTC trades of gas with capacity should not be mandatorily separated Capacity trade registration is “ordinarily required” Introduction of a fee will encourage more basis swaps Imposition of a single platform contravenes European law. Priority should be to sort out other confusing issues (units, transport service conditions, fee clarity)

12 Where from here Review of platform success Extension sought while we look at other issues around gate closure, fees, onward tradability – where some progress has been made. Will this make the pilot successful? Will this lead to a solution which will help address the capacity problem? Will this help the regional convergence process? Convergence of capacity service at regional level Application of EASEE-Gas capacity trading CBP on uniform basis Clear terms in network access conditions

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