1. 2006 APEX Conference Seoul, October 31, 2006 SESSION 4: Experiences in how to deal with market stress situations. José Javier González Market Operations Director OMEL

2. INDICE 1.Recent trend of the primary energy sources and electricity prices in Europe. 2.International exchanges through the Spanish Market. 3.Market prices and regulated tariffs. VACIO 4.Regional Markets and European single electricity market. (6) 5.Coming back to markets prices trust. VACIO ANEX

3. 1.RECENT TREND OF THE PRIMARY ENERGY SOURCES AND ELECTRICITY PRICES

4. HIGH PRICES IN THE PRIMARY ENERGY MARKETS èThe higher prices of primary energy sources such us, oil, gas and coal is the result of: l High demand due to the economic growth of the Asian Economies. l The instability of some oil producing countries. l Existing constraints oil reserve extraction. èThe CO 2 emission markets produced prices around 25 Euros/Tn until April 2006 when prices jump to 15 Euros/Tn levels. èDuring 2005 prices on the electricity markets have been much higher than in 2004 and have started to reflect the higher prices of primary energy sources as well as the price increase of CO2 emission rights. èDuring 2006 electricity prices varied between very high levels during the first quarter to more moderated values until now.

5. CRUDE OIL PRICES Source: B.P. report

9. CO2 EMISSIONS MARKET PRICES. NORD POOL

10. CO2 EMISSIONS MARKET PRICES. POWERNEXT

16. 2.INTERNATIONAL EXCHANGES THROUGH THE SPANISH MARKET

24. MAIN FACTORS INFLUENCING INTERNATIONAL TRADE: SPANISH – FRENCH INTERCONNECTION èInternational exchanges respond to the price differences between the markets. l Imports in valley hours.Congestion l Exports in plain and pick hours.Congestion l Imports and exports in the rest of the hoursNo congestion èThe high prices in Spanish were not a consequence of lack of electrical interconnection capacity, but were due to a generalized price increase in all Europe.

25. 3.MARKET PRICES AND REGULATED TARIFFS.

26. MARKET PRICES AND REGULATED TARIFFS (I) èRegulated tariffs in Spain. l All consumers can choose between a contract with a supplier in the free market or to continue with the contract with the traditional utility (distributor) at a regulated tariff. l A consumer can not come back to the regulated tariff in one year period. èThe energy cost included in the regulated tariffs is 33,6 Euros MW/h. l This price was compatible with market prices during 2004. l This price is not compatible with market prices during 2005 and 2006.

27. MARKET PRICES AND REGULATED TARIFFS (II) èThe Government thought that the market prices increases during 2005 and the beginning of 2006 were due to market power abuse. l A provisional sort of cup on market prices was established. The value will be revised prior to the end of 2006 based on market prices l The investigation on market power abuse has not a clear conclusion. èEvidences resulting from the actions taken in the period March- October 2006 l Electricity prices trend in Spain continue to be as similar as before to central Europe prices trend. l Electricity prices level in Spain in the band of central Europe prices. l The energy negotiated in the market is lower; It has been transferred to bilateral and ancillary services where the cup mechanism is not applied.

28. 4.REGIONAL MARKETS AND EUROPEAN SINGLE ELECTRICITY MARKET.

29. NEW EUROPEAN REGULATION èThe Directive 2003/54/EC modifying Directive 96/92/EC on common rules for the internal market in electricity. èThe Regulation 1228/2003 governing conditions for access to the network for cross-border exchanges in electricity. èThe Decision 1229/2003/EC modifying 1254/96/EC that establishes a set of guidelines relating to trans-European energy sector networks.

30. NEW EUROPEAN REGULATION èThe Decision 1229/2003/EC modifying 1254/96/EC that establishes a set of guidelines relating to trans-European energy sector networks. “The aim of the proposal is to foster the interconnection, interoperability and development of trans-European energy networks in order to achieve a 10% interconnection capacity between Member States. The Barcelona European Council (March 2002) highlighted this objective as a priority for the achievement of electricity interconnection at the latest by 2005 in order to foster the effective and quick operation of the internal energy market”.

31. NEW EUROPEAN REGULATION (I) èThe Directive 2003/54/EC modifying Directive 96/92/EC on common rules for the internal market in electricity. l Acceleration of the market deregulation calendar: s 1 July 2004, all non-household customers may choose a supplier. s 1 July 2007, all customers may choose a supplier. l Independence of transport and distribution management activities l Public service obligations. l Demand management.

32. REPORT ON PROGRES IN CREATING INTERNAL GAS AND ELECTRICITY MARKET (COMMUNICATIONS FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT) èThe most important persisting shortcoming is the lack of integration between national markets l Key indicators in this respect are the absence of price convergence across the E.U. and the low level of cross-border trade. l This is generally due to: s The existence of barriers to entry. s Inadequate use of existing infrastructure. s Insufficient interconnection between member states. èMoreover, many national markets present a high degree of concentration of the industry, impeding the development of effective competition. èSufficient cross-border competition has not yet developed to provide a fully effective constraining influence on the economic power of companies in each national market.

33. Source: European Commission. Report on progress in creating the internal gas and electricity market

34. 5.COMING BACK TO MARKETS PRICES TRUST.

35. MARKET PRICES AND REGULATED TARIFFS (III) èThe objectives announced by the governments are: l To establish a new tariff mechanism systems compatible with the market prices in the short run. l To establish a last resort tariff for small clients according to the European Union Directives. èTo increase the Energy supplied outside regulated tariffs l At least 50% at the end of 2007. èThere is a debate about the justification for free assignment to the electricity producers of CO2 emission rights.