1. Second Asia Gas Buyers’ Summit Mumbai, 2-3 February 2004
Regulating the gas market: the EU experience
Katrien Prins
Electricity and Gas Unit
DG Energy and Transport
European Commission

2. Structure The EU Internal Gas Market The state of play
The new Directive
The Madrid Forum
Gas Regulation

3. The EU Internal Gas Market
European Union is based on free movement of goods, services, capital and people
In nearly all sectors, an internal market was achieved by 1992
The energy sector lagged behind
1998 Adoption of the first Gas Directive – transposition in national legislation – mid 2000
2003 Adoption of second Gas Directive – transposition in national legislation – mid 2004

5. EU25 - Demand and Supply Growth of demand: 67% Growth of imports: 175%
Picture shows:
- considerable growth of demand providing win-win situations for incumbent and new market entrants including new suppliers
- due to rising demand and declining domestic production, there will be tremendously rising import requirements stressing the increasingly growing role of external suppliers
Growth of demand: 67% Growth of imports: 175%

6. Key provisions of the current Gas Directive
Abolition of exclusive rights - non-discrimination;
Non-discriminatory right to build new gas facilities;
Unbundling of accounts of integrated companies;
Third Party Access to the system, which includes storage;
TPA can be negotiated or regulated
Gradual market opening – 30% of demand; eligible customers
Exceptions.
refusal of access (capacity; PSO; TOP)
“emergent” markets and other areas

7. System of Access
RegTPA
NegTPA
Hybrid
Derogation
Benchmarking

8. Unbundling measures in Member States
Benchmarking

9. Regulation in the EU

10. The second Gas Directive
MARKET OPENING
July 2004 : all non-household consumers can freely choose their gas supplier
July 2007 : all consumers are free to choose

11. The second Gas Directive
UNBUNDLING
Legal unbundling of Transmission system operators by July 2004
Legal unbundling of Distribution system operators at the latest by July 2007
Functional unbundling
Accounting unbundling

12. The second Gas Directive Third Party Access
Third party access to transmission and distribution system on the basis of
published tariffs
applicable to all eligible customers
applied objectively and without discrimination between system users
ex ante approval of tariffs or methodology underlying their calculation
published prior to their entry into force

13. The second Gas Directive Third Party Access to Storage
Access to storage facilities and linepack necessary for providing efficient access to the system for the supply of customers
in accordance with objective, transparent and non-discriminatory criteria
negotiated TPA:
publication of Main Commercial Conditions for the use of storage facilities, linepack and other ancillary services
regulated TPA:
on the basis of published tariffs and/or other terms and obligations for use of storage and linepack

14. Regulating network access
Access to the network on the basis of regulated terms and conditions – storage can be NTPA
Regulation by regulatory authorities to be designated by Member States
Ex-ante regulation of at least the methodologies with regard to network access conditions, including tariffs and balancing services
At least ex-post regulation with regard to other important aspects
Regulator to decide on complaints in reasonable timeframe (2 months+2)

15. Regulating network access
Regulator to monitor and - if necessary to ensure non-discrimination - to require TSO/DSO to modify:
rules on congestion management, including allocation of interconnector capacities
unbundling of accounts to exclude cross-subsidies

16. Regulating network access – exemption for new infrastructure
Derogation from non-discriminatory TPA for major new gas infrastructure
Interconnectors between Member States, LNG and storage facilities
Exemptions depends on a series of preconditions
Restrictive approach
Decision by regulatory authority and Commission review
The provision aims to safeguard investments in very high-risk projects, which would not take place without such an exemption

17. Regulatory authorities
Minimum competencies of regulatory authorities in all Member States
Responsible for ensuring non-discrimination, effective competition and the efficient functioning of the market
Core duties relating to network access and balancing
Number of other requirements/options

18. Regulatory authorities
All Member States to appoint regulator
Preferred model is independent regulator – limited Ministry involvement
Local regulators are possible
Multi-MS regulators : regional regulator also an option
Regulators must have sufficient resources and rights to information: technical and financial

19. Regulatory authorities
Ex-ante approval of:
overall network tariff methodology
balancing methodology
Ex-post intervention possible for:
individual network tariffs
individual balancing charges
mechanisms to deal with interconnectors and national congestion
time taken for connections and repairs
publication of appropriate information
the effective unbundling of accounts
the access conditions to storage, linepack and to other ancillary services

20. Creating an internal market
15 liberalised market do not constitute and internal market
Lack of rules concerning cross-border trade of gas
Addressed in Regulatory Forum of Madrid, assembling Regulators (CEER), Member States, Commission, gas industry (GTE and Eurogas), consumers, traders

21. Madrid Regulatory Forum Tarification, transparency, congestion
Tariff methodology : need for tarification regimes to converge, to avoid tariff pancaking and ensure cost reflectivity;
Strong support for an “entry-exit” tariff structure (would best facilitate the development of competition)
Importance of ensuring non-discrimination with regard to access to information on system use including available capacities of the system
ensure publication of available capacities
Principles adopted as overall guidelines with regard to capacity allocation and congestion management

22. Madrid Regulatory Forum Guidelines for good practice
Overall objective:
to ensure TPA to the networks which would meet the requirements of a well functioning competitive market for natural gas in line with the principles of non-discrimination and transparency
Guidelines aim at
clarifying the roles and responsibilities of the main parties in gas transportation
ensuring the principle of non-discrimination
facilitating cross-border trade and customer choice through competition in the internal market
avoiding distortions in trade

23. Madrid Regulatory Forum Guidelines for good practice
Offer unbundled TPA services for access to the different parts of the system including all necessary ancillary facilities operated by TSOs including storage when technically necessary for efficient TPA;
Offer the same range of services on the same conditions according to the principle of non-discrimination to any eligible third party within the EU as to marketing affiliates;
Publish the main conditions for all services;
Publish available capacities on a regular and user-friendly basis;
Co-operate with other TSO’s on interoperability

24. Madrid Regulatory Forum Guidelines for good practice
Offer both firm and short-term services (flexible in time) and interruptible in certain circumstances;
Design services to facilitate trading and liquidity in the European market;
Standardise request and response procedures according to best practice, co-ordinate maintenance to minimise disruption;
Implement non-discriminatory and transparent capacity allocation mechanisms and congestion management procedures subject to review by relevant authorities;
Ensure sufficient functionally independence of SOs from supply business to avoid conflicts of interest.

25. Madrid Regulatory Forum Guidelines for good practice
Tariff structure and derivation
TSOs should publish reasonably and sufficiently detailed information on tariff derivation and tariff structure;
As far as differences would hamper cross-border trade, TSOs should pursue convergence of charging principles and tariff structures.
Secondary capacity trading:
Allow TPA capacity rights to be freely tradable in a secondary market;
Endeavour to discourage capacity hoarding and facilitate reutilisation of un-used capacity.

26. Tarification models Progress made on tariffs: EU15 - 3
2001 Benchmarking
5 DR, 4 postalised, 3 e/e
2002 Benchmarking
4 DR, 4 postalised, 4 e/e
2003 Information
1 DR, 4 postalised, 7 e/e
By 2004
0-1 DR, 3 postalised, 8-9 e/e

27. Guidelines  Regulation
The Madrid Forum and the Guidelines of Good Practice have one major drawback: they are voluntary
Compliance is mixed
Commission decided to propose in December 2003 a Gas Regulation to change these voluntary arrangements in legally binding instruments

28. Directive on security of gas supply
Why?
The new market environment necessitates having security of supply arrangements compatible with the requirements and needs of a competitive market
What?
Member States are required to define security of supply policies clarifying the general roles and responsibilities of different market players in terms of security of supply
Minimum requirements in the form of output standards
Crisis mechanism (extraordinary supply situation)