2. Calculation and methodology of the storage charges in the Hungarian gas sector 24. 04. 2012

3. Contents Storage capacities in Hungary Price regulation –Framework, periods –Setting the basic price o Justified historical cost o Revaluated asset, profit Calculating the storage charges –The previous system –The current system www.eh.gov.hu 2

4. 3 Kardoskút Zsana Pusztaederics Hajdúszoboszó Withdrawal capacity:3,1 mm3/day Injection capacity:2,5 mm3/day Working gas capacity:340 mm3 Withdrawal capacity:51,2 mm3/day Injection capacity:27 mm3/day Working gas capacity:3 600mm3 Withdrawal capacity:20,8 mm3/day Injection capacity:10,3 mm3/day Working gas capacity:1 440 mm3 Withdrawal capacity:3,2 mm3/day Injection capacity:2,2 mm3/day Working gas capacity:280 mm3 Total storage capacity: Withdrawal capacity:79,3 mm3/day Injection capacity:42 mm3/ day Working gas capacity:5 660 mm3 Storage capacities in Hungary

5. Contents Storage capacities in Hungary Price regulation –Framework, periods –Setting the basic price, o Justified historical cost o Revaluated asset, profit Calculating the storage charges –The previous system –The current system www.eh.gov.hu 4

6. Framework 5 Gas Act Regulated prices Principle of price regulation Who sets the prices The regulated price shall include, the costs of the justified investments and the costs of the efficiently working licensees, as well as the profit necessary for long-term operation. -transmission, distribution and storage - natural gas trade between the wholesaler and the universal supplier, and - natural gas sold to the consumer entitled for universal supply (households) Prices and conditions of their application are set in a ministerial decree on the basis of the recommendations of the Office until 1st January 2012. From that time the Office sets the prices.

7. Price regulation periods Number of period Year of the basic price Price regulation period 1 1995January 1997 - (December 2001) June 2002 2 2000January 2004 – December 2005 3 2004January 2006 - December 2009 4 2008January 2010 - December 2013 www.eh.gov.hu 6

8. Contents Storage capacities in Hungary Price regulation –Framework, periods –Setting the basic price, o Justified historical cost o Revaluated asset, profit Calculating the storage charges –The previous system –The current system www.eh.gov.hu 7

9. Two phases of price regulation Setting the basic price Operating the price regulation system www.eh.gov.hu 8

10. 9 Functional costs 2008 Justified cost 2008 Inflated justified costs for 2010 2010

11. Main characters of price regulation Justified historical cost : –the tariffs are set to cover the cost of supply within Hungary, –depreciation = technically expected lifetime Rate of return: –the base is the revaluated assets value –the rate of return was calculated with the WACC method Profit sharing www.eh.gov.hu 10

12. Justified historical cost correction Summary justified cost of 2008 (except capital related costs) H www.eh.gov.hu 11 200820102009 Middle of 2008 level H 2010April = H 2008 * INF corr INF corr = (1 + INF 2009 – k 1 ) * (1 + INF 2010 – k 2 ) k = correction factor, 0,018 < k < 0,022 Year2008*2009*2010*2011*2012** Inflation %6,14,24,93,94,3 * Data from the Hungarian National Bank ** Data from the Central Static Office

13. Contents Storage capacities in Hungary Price regulation –Framework, periods –Setting the basic price, o Justified historical cost o Revaluated asset, profit Calculating the storage charges –The previous system –The current system www.eh.gov.hu 12

14. Booked value 2003 2004 2005 2006 2007 2008 Tangible brutto asset value property other tangible Summ intangible summ 1,18 … … … … 1,01 www.eh.gov.hu 13 Tangible brutto asset value property other tangible Summ intangible summ Tangible brutto asset value property other tangible Summ intangible summ Tangible brutto asset value property other tangible Summ intangible summ Revaluated asset value indexes

15. Ratio of the indexes Hungarian Central Statistical Office www.eh.gov.hu 14

16. www.eh.gov.hu 15

17. Asset related costs Cost of capital indexation Revaluated asset for the end of 2008 indexation from the end of 2008 till 1. April 2010. www.eh.gov.hu 16 Price indices of domestic sales calculated on investment goods April 2010 / December 2008 2010 2009 Additional asset related costs: some cost of closely future

18. Rate of return calculation December 2010. Competitiv market Universal supply Real risk-free rateRFRF 3,89 Company risk premium(R M -R F )*ß6,60 Debt premiumσ1,80 Cost of DebtR D =R F +σ5,69 Equity risk premiumR M -R F 6,60 Equity betaß1,00 Cost of Equity after texationR ET =(R M -R F )*ß+R F 10,493,00 Percentage of financing that is debt (Gearing) D/(D+E)0,400,4 DebtR D *D/(D+E)2,28 1-corporation tax1-t0,81 Cost of Equity before texationR E =R ET /(1-t)12,953,70 Percentage of financing that is equity E/(E+D)0,600,6 EquityR E *E/(E+D)7,772,22 pre-tax WACCRE*E/(E+D)+RD*D/(D+E)10,054,5

19. www.eh.gov.hu 18 Price for January 2010 Price for July 2010 Price for July 2011

20. Correction with inflation From 04. 12. 2010. there is a new method for correcting the cost base with the inflation The main point is that there is yearly 5% limit – If the calculated inflating factor is above that, then the part above the 5% is used to correct the cost base –If the inflation factor is below 5% there is no correction

21. Contents Storage capacities in Hungary Price regulation –Framework, periods –Setting the basic price, o Justified historical cost o Revaluated asset, profit Calculating the storage charges –The previous system –The current system www.eh.gov.hu 20

22. Storage price systems in Hungary (The previous system) The first pricing system was based on the ratio of working gas and withdrawal peak capacity This system used 2 capacity fees (working gas and withdrawal) and 2 commodity fees (injection and withdrawal) The costs were allocated between fix and variable part and fix cost were allocated between the 2 capacity fees

23. Relation between cost base and tariff in the case of storage www.eh.gov.hu 22 Cost baseTariff Commodity charge Payable after volumes actually taken over; Subject to the booked capacity Variable cost elements Fixed cost elements Pressure compensation, capital cost of compressors; Depreciation; Operating costs; Overhead; Return on asset; Withdrawal capacity charge Working gas capacity charge

24. Previously used calculation formula TM = 5,70 * cm 0,48 HUF/m 3 TCS = 267,25 * cm 0,48 HUF/m 3 /day/year BT = [(bk/m) / (1/150)/3 + 2/3] * 1,06 Withdrawal volume fee = 0,158 HUF/m 3 In the formula: TM: Working gas capacity fee (HUF/m 3 ), TCS: Withdrawal capacity fee (HUF/m 3 /day/year), BT: Injection volume fee (HUF/m 3 ). cm = 100 * cs/m cm: the contracted withdrawal/working gas rate projected on100 Mm3 cs: the contracted withdrawal capacity (m 3 /day) m: the contracted working gas capacity (m 3 ) bk: the contracted injection capacity(m 3 /day)

25. Contents Storage capacities in Hungary Price regulation –Framework, periods –Setting the basic price, o Justified historical cost o Revaluated asset, profit Calculating the storage charges –The previous system –The current system www.eh.gov.hu 24

26. Storage price systems in Hungary (The current system) From October 2010 there is a new calculation system in Hungary In this system there is 1 capacity fee and 2 commodity fees (injection and withdrawal) The formula for the capacity fee is calculated with 3 different capacity quantities (working gas, injection and withdrawal) Costs are splitted between fix and variable parts Splitting between the capacity fees is not relevant any more The capacity fee calculation is base on the ratio of injection and withdrawal and working gas capacity

27. The introduction of the injection capacity fee Reasons: The companies begin to use storage for optimising there cost structure in the injection period Because of the above injection capacity became valuable The injection fee did not rise the cost base it was just restructured It is an instrumental part of the new formula

28. Relation between cost base and tariff in the case of storage www.eh.gov.hu 27 Cost baseTariff Commodity charge Payable after volumes actually taken over; Subject to the booked capacity Variable cost elements Fixed cost elements Pressure compensation, capital cost of compressors; Depreciation; Operating costs; Overhead; Return on asset; Capacity charge

29. The new formula for the capacity charge Where P = specific fee HUF/MJ M = contracted working gas capacity MJ B = contracted injection capacity MJ/day K = contracted withdrawal capacity MJ/day The contracted capacity must be above 0 in case of all 3 capacity components. Commodity charges: Injection fee: 31,43 HUF/GJ Withdrawal fee: 5,12 HUF/GJ

30. Comparing the two formulas in numbers Contracted working gas capacity Contracted injection capacity Contracted withdrawal capacity Injections days Withdrawal days Current formula Previous formula Capacity cost (current formula) Capacity cost (previous formula) Difference m3m3/day day HUF/m3 HUF 100 000 000750 0001 422 22213370 12,4712,511 247 201 1111 251 310 023-4 108 912 100 000 000750 0006 666 66713315 40,1359,724 013 468 0095 972 124 433-1 958 656 424 100 000 000750 0003 333 33313330 22,5527,302 255 247 5232 729 865 856-474 618 333 100 000 000750 0002 222 22213345 16,6918,341 669 174 0281 833 751 278-164 577 251 100 000 000250 0001 666 66740060 13,7613,971 376 137 2801 397 289 330-21 152 050

31. www.eh.gov.hu30 THANK YOU FOR YOUR ATTENTION! NAME: Ákos Heiter, Edit Farkas E-mail: heitera@eh.gov.hu; farkase@eh.gov.hu Tel: 36-1-459-7827 36-1-459-7880 Fax: 36-1-459-7880 www.eh.gov.huheitera@eh.gov.hufarkase@eh.gov.hu