Incentive Regulation for business development GTE Conference, Copenhagen 24th September 2004 Paolo Caropreso, COO Business Development

2 Players and forces at work in the new unbundled/regulated framework Players and forces at work in the new unbundled/regulated framework TSOs Liberalisation Policy Makers Free Market Security of Supply Regulation Authority Antitrust Fair competition Market efficiency Financing Shareholders Financial Institutions Attractive return Min regulatory risk Competitiveness Producers Network Users Consumers Market dynamics Network access

3 The key Success Factor: Convergence of Interests between TSOs and Stakeholders Incentives on Volume transported Gas flows maximisatio n Incentives on Cost Reduction Management optimisation Incentives on Develop. CAPEX Network expansion plans Incentives on Quality BPR and ICT investments Productivity Growth Efficiency Quality Market opening Market development Tariff reduction Market liquidity Shareholders’ Value Policy Targets

4 Allowed Revenues Calculation Incentives Volumes 6 years incentives CAPEX Quality OPEX Claw-Back Allowed Revenues + 1st Year 2nd- 4th Year 1st Year Revenues + Inflation - Efficiency Targets RAB * WACC + Opex + DDA Following Periods Rules defined ex-ante The Italian case: convergence thanks to a Clear, Attractive and Stable Regulation Premium on incremental gas transported (commodity) Profitability Incentives on new Development Capex YQW Factors lower X-cap Efficiency Incentives

5 The key Success Factor: Convergence of Interests between TSOs and Stakeholders Incentives on Volume transported Gas flows maximisatio n Incentives on Cost Reduction Management optimisation Incentives on Develop. CAPEX Network expansion plans Incentives on Quality BPR and ICT investments Productivity Growth Efficiency Quality Market opening Market development Tariff reduction Market liquidity Shareholders’ Value Policy Targets

6 Fully satisfied Stakeholders’ wealth Capacity expansion Entry-Exit Tariff System Interruptible contracts Use-It-Or-Lose-It No network congestion Easy users’ access Flexible capacity mgmt No capacity hoarding

7 Higher Volumes Transported +3,6% +5,7% +2,7% 41,4 42,9 70,4 74,4 76,4

8 The key Success Factor: Convergence of Interests between TSOs and Stakeholders Incentives on Develop. CAPEX Network expansion plans Incentives on Volume transported Gas flows maximisatio n Incentives on Cost Reduction Management optimisation Incentives on Quality BPR and ICT investments Productivity Growth Efficiency Quality Market opening Market development Tariff reduction Market liquidity Shareholders’ Value Policy Targets

9 Projects for network development: in progress and under design Algeria Libya LNG Northern Europe Russia LNG Rovigo LNG Brindisi PIPELINE IN ENGINEERING PHASE PIPELINE IN OPERATION OR UNDER CONSTRUCTION STUDY FOR ADRIATIC STREAM

10 Capacity expansion at the Entry Points Evolution of transport capacity Transport capacity needed in Italy (million scm/d) Existing capacity Capacity under construction Needed capacity

11 The key Success Factor: Convergence of Interests between TSOs and Stakeholders Incentives on Cost Reduction Management optimisation Incentives on Develop. CAPEX Network expansion plans Incentives on Volume transported Gas flows maximisatio n Incentives on Quality BPR and ICT investments Productivity Growth Efficiency Quality Market opening Market development Tariff reduction Market liquidity Shareholders’ Value Policy Targets

12 Potential for additional efficiency Base :Year 2002 = 100% 100% 0% OPERATIONAL FIXED COSTS NETWORK OPERATIONS Maintenance decision model risk-based COMPRESSION STATIONS BRP Telediagnostic Systems SUPPLY & LOGISTICS New procurement & logistic contracts

13 Opex efficiency -14,5% cagr (*) (*) Net of Sicily Tax

14 The key Success Factor: Convergence of Interests between TSOs and Stakeholders Incentives on Quality BPR and ICT investments Incentives on Cost Reduction Management optimisation Incentives on Develop. CAPEX Network expansion plans Incentives on Volume transported Gas flows maximisatio n Productivity Growth Efficiency Quality Market opening Market development Tariff reduction Market liquidity Shareholders’ Value Policy Targets

15 On line services offered on the Snam rete Gas website Gas transportation services capacity booking nominations management scheduling M-Gas Measurement Gas Allocation System allocations on shared city gates gas flows Measure Services Profiling REMI technical infos Other data management SIT Center services Portal for Gas exchange Portal for Capacity Transportation exchange National Balancing Point Interactive Tool for tariff calculation Call Center

16 Market liquidity and transparency improved 30 network users nomination/g meters owned by the final customers telemetered CityGates 760 shared 250 DSOs 0 0,2 0,4 0,6 0, VOLUMES (Scm) * NBP Transaction Secondary Capacity Market transaction/year National Balancing Point transactions 23 shipper 300 Mm3 of gas Regulated Market Distribution Codes Metering Efficiency Balancing Regimes Evolution

17 The key Success Factor: Convergence of Interests between TSOs and Stakeholders Shareholders’ Value Incentives on Volume transported Gas flows maximisatio n Incentives on Cost Reduction Management optimisation Incentives on Develop. CAPEX Network expansion plans Incentives on Quality BPR and ICT investments Productivity Growth Efficiency Quality Market opening Market development Tariff reduction Market liquidity Policy Targets

18 Regulated Revenues evolution during the 1st Regulatory Period New development investments From initial RAB Regulated revenues (1) Capacity Commodity €m Gas year ,651 1, Gas year ,782 1, ,6511, (*) (*) Net of RA adjustment due to storage tariff (*) VAR

19 Regulated Revenues vs. Tariffs evolution during the 1st Regulatory Period Thermal year Thermal year Allowed Revenues Tariffs +8 % %

Incentive Regulation for business development GTE Conference, Copenaghen 24th September 2004 Paolo Caropreso, COO Business Development