1. Guidelines for New Gas Infrastructure Investment Regulation in the Energy Community (GGIIR) Basic Criteria Joint working group meeting 22-23.03 2006, Belgrade Disclaimer: Non binding document

2. 2 Legal Framework – Scope The existing European legislative framework (Directive 2003/55/EC, Regulation (EC) No 1775/2005 including annexed guidelines) has to be implemented by the signatory countries of the EC Treaty as part of the acquis communitaire scope aim: providing a reliable and stable regulatory framework on a legally binding basis infrastructure addressed: GGIIR shall be applicable to new infrastructure considered of regional strategic interest as such and in the sense of art 22 Directive 2003/55/EC geographic scope: as provided under Articles 26 and 27 of the ECSEE Treaty

3. 3 Regulatory Framework (1) National projects vs. Regional projects of strategic interest EC decides on the qualification as a strategic project at the request of the TPO Reliable and stable regulatory framework: Regulatory Committee/ECRB (single regulatory decision related to any strategic project of regional nature with no deviation possible for a sub-part of it) Regulatory Committee of the ECRB is set up per TPO and consists only of the regulatory authorities of the relevant countries and the EC Transmission Project Operator (TPO): a legal entity to act as the counter part vis a vis third parties to the project, legally responsible for the implementation of the guidelines and the eventual operation of the project Transmission Project Operator (TPO): a legal entity to act as the counter part vis a vis third parties to the project, legally responsible for the implementation of the guidelines and the eventual operation of the project

4. 4 Exemptions: The Five Tests of Article 22 1. 1. enhance competition in gas supply and enhance security of supply 2. 2. The level of risk attached to the investment is such that the investment would not take place unless an exemption is granted 3. 3. The infrastructure must be owned by a natural or legal person which is separate at lest in terms of its legal from the system operators in whose systems that interconnector will be built 4. 4. Charges are levied on users of that infrastructure 5. 5. The exemption is not to the detriment of competition or the effective functioning of the internal gas market, or the efficient functioning of the regulated system to which the infrastructure is connected Can be looked-at in the following way:

5. 5 Key Criteria for Derogation Guidelines Independence of the Project Company Open Seasons, TPAUse-it-or-Lose-it, Transparency requirements The Risk is Such Test Security of Supply Short-term Contracts Enhance Competition

6. 6 Independence of the Project Company Independence of project company is the major issue, since it will result in: Independence of project company is the major issue, since it will result in: Incentives to conduct meaningful open season Incentives to conduct meaningful open season No need for regulator to examine the proposed tariff for the open season No need for regulator to examine the proposed tariff for the open season No pipeline project should be majority owned or controlled by: No pipeline project should be majority owned or controlled by: Dominant suppliers in importing countries (commonly agreed) Dominant suppliers in importing countries (commonly agreed) Dominant producers in exporting countries (this needs more discussion, there are still pending issues to be discussed) Dominant producers in exporting countries (this needs more discussion, there are still pending issues to be discussed) Note: for LNG projects, could permit control by a producer who is dominant in country of origin, because LNG is internationally competitive (however there is the need for further elaboration on this concept…) Note: for LNG projects, could permit control by a producer who is dominant in country of origin, because LNG is internationally competitive (however there is the need for further elaboration on this concept…) The issue of independence is directly linked to unbundling The issue of independence is directly linked to unbundling

7. 7 Open Seasons Scope for Open Season: Scope for Open Season: To guarantee the participation of all interested stakeholders in any project and to size the project in line with market needs and to enhance security of supply To guarantee the participation of all interested stakeholders in any project and to size the project in line with market needs and to enhance security of supply The crucial issue is to safeguard that the open season process will be meaningful and transparent (therefore linked with the independence of the project company) and non-discriminatory The crucial issue is to safeguard that the open season process will be meaningful and transparent (therefore linked with the independence of the project company) and non-discriminatory Open season possible for equity of TPO and mandatory for defining project capacity Open season possible for equity of TPO and mandatory for defining project capacity Open season conducted before deciding on capacity Open season conducted before deciding on capacity If there is a lot of demand and commitment, expand the capacity under non- discriminatory conditions If there is a lot of demand and commitment, expand the capacity under non- discriminatory conditions Imposes no risk on project sponsors– they only build to match long-term commitments Imposes no risk on project sponsors– they only build to match long-term commitments Allows all interested, also potential competitors to join in Allows all interested, also potential competitors to join in Non discriminatory, same services granted under same tariffs to all parties committing Non discriminatory, same services granted under same tariffs to all parties committing

8. 8 TPA TPA provisions shall apply according to the provisions of Directive 2003/55 as an overriding principle TPA provisions shall apply according to the provisions of Directive 2003/55 as an overriding principle Requests to TPA derogation shall be scrutinised most carefully with respect to the granting of the regional Article 22 exemption procedure including the share of total capacity (below 10%, 50% or more than 75%) Requests to TPA derogation shall be scrutinised most carefully with respect to the granting of the regional Article 22 exemption procedure including the share of total capacity (below 10%, 50% or more than 75%) The ECRB Committee with the EC shall consult on the necessity The ECRB Committee with the EC shall consult on the necessity The respective provisions of Regulation 1775/05 e.g. on transparency shall apply under all circumstances The respective provisions of Regulation 1775/05 e.g. on transparency shall apply under all circumstances

9. 9 Use-it-or-Lose-it and Transparency Both enhance competition: the provision of Regulation 1775/05 apply Both enhance competition: the provision of Regulation 1775/05 apply Use-it-or-Lose-it: Use-it-or-Lose-it: Regulation 1775/05 as defined in the explanatory notes apply except for the firm UIOLI principle in case an open season has been undertaken and the TPO has built at least the capacity requested by all interested and committing stakeholders and no party willing to commit has been rejected (undersized project) Regulation 1775/05 as defined in the explanatory notes apply except for the firm UIOLI principle in case an open season has been undertaken and the TPO has built at least the capacity requested by all interested and committing stakeholders and no party willing to commit has been rejected (undersized project) Only possible objection: want to undersize project, hoard capacity Only possible objection: want to undersize project, hoard capacity In this case investment would not facilitate competition

10. 10 Tariff methodology, tariffs Possible ways: 1. TPO and ECRB Committee agree ex-ante on a regulated tariff methodology, which then cannot be amended over the defined and agreed (TPO-ECRB Committee) investment period - if so, TPO will be automatically granted a derogation (under regional Article 22 procedure) from Article 25/4 of the directive 2003/55 2. TPO and ECRB Committee do not agree ex-ante on a regulated tariff methodology 1. EC will try to broker compromise within 1 month 2. If no compromise is found, EC will afterwards assess whether TPO is still eligible for regional procedure and try to ensure that all parties make best endeavours to increase competition and security of supply to the energy community 3. On particular occasions, TPO might still ask for regional Article 22 exemption procedure under negTPA assumptions, however under most stringent evaluation and obligations

11. 11 Short-term Contracts Offering short-term contracts in addition to long term contracts helps competition However, project sponsors do not want to bear the risk of short-term capacity sales, as the revenues can not be taken as granted Possible Solutions: Possible Solutions: Part of the capacity may be subject to ordinary and/or incentivized TPA regime, according to conditions as envisaged in Art. 22(3.b.iii) of Dir. 2003/55 Part of the capacity may be subject to ordinary and/or incentivized TPA regime, according to conditions as envisaged in Art. 22(3.b.iii) of Dir. 2003/55 Regulator may ask TSO to buy some capacity in open season, project sponsor therefore receives a long-term commitment (from the TSO) Regulator may ask TSO to buy some capacity in open season, project sponsor therefore receives a long-term commitment (from the TSO) TSO resells capacity to market on short-term basis. TSO resells capacity to market on short-term basis.

12. 12 General application of the Guidelines As a general rule the TPA rules shall fully apply to new infrastructure under the scope of the GGIIR Rules will be addressed to the Transmission Project Operator (TPO) On the part under TPA, Regulation 1775/05 shall apply On the part under TPA, Regulation 1775/05 shall apply

13. 13 1. Scope and Objectives Guidelines shall be applicable to new infrastructure as defined in Directive 2003/55 Guidelines apply to marketing of capacities and transport contracts concluded for the TPO area Standardized TPA services for all sections of the system (One Stop Shop) as a request for eligibility under the regional procedure (one stop shop for TPO and on stop shop for regulatory decisions) Secondary market implementation, UIOLI, interoperability and transparency rules will be applicable even in case of exemptions, according to EU practice Guidelines apply to the relevant TPO to act vis-à-vis market participants as far as services - such as e.g. operation and maintenance duties – are contractually transfered to other companies by the TSO, the TSO will on a contractual basis provide for that these companies will follow the present principles

14. 14 2. Definitions Definitions contained in Article 2 of Directive 2003/55/EC and the Regulation 1775/2005 shall apply Additional definitions

15. 15 3. Internal Organisation Unbundling requirements of Directive 2003/55/EC shall fully apply Legal unbundling Management and organisational unbundling Compliance programme content requirements Cross border unbundling

16. 16 4. Right to Obtain Information – Inspect Records Regulators shall be granted the right to inspect all relevant business records as required in Directive 55/2003 Regulators shall disclose information on all matters related following acquis communautaire legislation

17. 17 5. Safety, Technical Integrity, Reliability... TPO guarantees Minimum Standards on Maintainance and operation sufficient long-term investment planning co-operation with operators of other connected systems developing the transmission system to meet the required adequate technical transmission capacity demand, when parties commit maintaining physical system balance provision of information needed for efficient TPA System Resources TPO shall be equipped for carrying out its functions or ensures the safe operation via contractual means – he is liable

18. 18 6. Non-discriminatory standardised TPA Services TPA and Ancillary Services according to Regulation 1775/05 and Directive 2003/55 Offer the same range of services on the same conditions according to the principle of non-discrimination Offer services on the same contractual basis to all network users – preferably using standard contracts or a common network code Develop TPA services and access rules allowing non-discriminatory use of the infrastructure Design transmission contracts to facilitate trading and re-utilisation of transmission capacity to ensure efficient system use Design one balancing regime for the infrastructure Design one credibility check (shipper approval) procedure Design one set of business rules (communication, nomination,..) Design one entry/exit regime (including tariff methodology) with sufficient entry/exit points to ensure increased competition and security of supply in all territories the infrastructure passes through

19. 19 7. Interoperability Co-operate with other TSOs and other system operators, on all relevant interoperability issues to develop Interconnection Agreements (IAs) and inter-TSO operational balancing Agreements (OBAs) Actively pursue harmonisation or convergence to facilitate interoperability Actively support the activities of EASEE-Gas Co-operate with other TSOs in co-ordinating the disruption management

20. 20 8. Capacity Offer and Nomination Procedure Range of services (long term/short term, firm/interruptible, down to a specified period, once infrastructure is in operation) according to regulation 1775/05 Open season in order to evaluate capacity demand Fees for Interruptible Capacity Nomination Procedures Charge for Information according to regulation 1775/05 and attached guidelines

21. 21 9. Capacity Allocation – Congestion Management Dir 2003/55 and regulation 1775/05 provisions apply except for firm UIOLI as long as no congestion (guaranteed through open season) Allocation requirements Considering results of open season enhance competition and entry of new market players Trading of unused capacity and freeing up of unused capacity (once infrastructure operational) 2ndary market activities efficiently possible Interruptible UIOLI, etc.. Revenues from congestion management systems should create incentives to reduce congestion

22. 22 10. Transparency Requirements Main conditions of all services, including tariffs and imbalance charges and maps of their network indicating all relevant points Definition of relevant points Information on system and services Information on capacity offers Information on maintainance Information on tariffs Possible exemptions Charge for information

23. 23 11. Calculation of Available Capacities According to Directive 2003/55 and regulation 1775/05

24. 24 12. Calculation of Cost and Tariff Derivation Single tariff methodology shall be established based on transparent, objective and non-discriminatory manner Tarification system in line with Directive and regulation Principles for TPO tarification Minimum guaranteed number of entry and exit points Overall Methodology for Calculation

25. 25 13. Balancing and Imbalance Charges Balancing rules Offer same rules (including the same charges for flexibility services provided by the TSO) to own commercial operations of vertically integrated companies as to third parties Tolerance levels Balancing Charges Imbalance Charges Ensure compatibility of balancing regimes in order to facilitate gas trade across borders of connected systems Pooling and Trading should be posisble once infrastructure operational Market participants shall be provided with sufficient, well-timed and reliable information

26. 26 14. Secondary Market Tradable rights Contractual basis Services such as bulletin board to facilitate secondary capacity trading might be an option