RESPONSE TO ACER'S CONSULTATION ON TARIFFS

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Gregory Richardson
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1 RESPONSE TO ACER'S CONSULTATION ON TARIFFS Question 1: What other issues should be dealt with in this Framework Guideline? What is the evidence for including these issues? Please provide justification. Eurogas does not see other issues, for the time being, to be tackled in this Framework Guidelines. As discussions will progress, other topics may be identified. However, the different options presented in the ACER document indicate several variables available for tariff setting. Therefore Eurogas would suggest that users have to be informed of changes in variables at an agreed period in advance of the gas year. Such guidance may be suitable for addressing in the Framework Guideline. Question 2: What are the most important problems that relate to tariff structures? Do the problems identified by you relate to the lack of harmonised approaches? The most important problems that relate to tariff structures are: - To meet the challenge to delivering long term investment (because the gas industry is a long term and capital intensive industry) - To avoid cross-subsidies between network users (between cross-border flow and national end-customers consumption, or between network users booking capacity products of different lengths.) - To be cost reflective - To set tariffs (cost allocation to connection points) which will support the gas flow between markets (i.e. avoiding pancaking) - To avoid unnecessarily complex tariff structures. These issues are not necessarily all related to a lack of harmonisation of detailed tariff structures. Question 3: Based on the Gas Regulation, are there further principles to be added? As expressed many times during the drafting of the network code on capacity allocation mechanisms, shippers would like a mechanism that gives the TSO a signal for building incremental capacity. It has not been done in the CAM NC and is out of the scope of the FG on tariffs (in Even though incentives, remuneration determination and potential mechanisms for releasing incremental capacity are outside the scope of the FG on harmonised tariff structure, it is clear that tariff setting and efficient investments should be compatible ). Eurogas stresses again that such a mechanism is needed to promote / develop long term investments. Question 4: How would you interpret the above principles and objectives? Which objective would you consider to be the most important for achieving an EU internal market for gas? How would you rank the rest of the objectives? Please provide justification. As expressed in our response to question 2, Eurogas most important objectives are: Promote new and efficient investments Achieve efficient gas trade and competition especially tarification that supports crossborder flows 12NO244 Page 1 of 6

2 Avoid cross-subsidies and undue discrimination between network users Establish cost-reflective tariffs and ensure recovery of allowed revenues These topics will be affected by the CAM NC and especially the generalization of auctions at all the Interconnection Points and by the discussion about the reserve price of these auctions in this FG on tariffs Transparency in line with the Third Package is essential for underpinning the good functioning of the market. Depending on the level of harmonization eventually decided on in the Code, an appropriate level of transparency related to tariff methodology and application may have to be developed; Question 5: What are your views on the proposed scope and application regarding: -Entry and exit points Eurogas requires further explanations and analysis on the reasons the extension to LNG terminals and storage is under consideration, and agrees it is important first to understand potential advantages and disadvantages. Both terminals and storage raise complex issues that require to be taken into account. The starting points in approaching the question should be non-discrimination, cost-reflectivity, and a pragmatic approach. Consideration of LNG terminals should also take into account wider supply related issues, that their inclusion may have an adverse impact on the costs of Europe s terminals, thus weakening of European gas markets the attractiveness Therefore this question requires further analysis before there is the possibility of a final position. Clarifications on which provisions ACER would extend to other entry-exit points would prove very helpful for Eurogas in analyzing this issue further. -Determination of the annual reference price Eurogas agrees with ACER that the annual regulated tariff should be used as a reference to determine reserve prices in auction for firm, interruptible and backhaul capacity for the various short and long-term products. This will help to avoid unnecessary complexity. -Mechanisms to deal with over- and under-recovery of allowed revenues and the definition of the clearing price? Please justify your answer. Eurogas requires further evidence and clarification on which different mechanisms ACER has in mind and their different impacts. Comments below are preliminary. A commodity charge should be avoided as a mechanism to deal with over- and under-recovery since there it would involve a great risk of cross subsidies. For sake of clarification, Eurogas is not objecting to all current systems of having a commodity charge as a tarification tool (like for example in Italy, where the tariff is the sum of capacity charges and a commodity charge which is used to recover the operational costs of the TSO ). This tool does not seem adequate to deal with over- and under- recovery as in Britain. Additional fee by unit of capacity seems the more neutral measure if it means that the reserve price changes each year to take into account over or under recovery. Nevertheless it would be helpful if in its impact assessment, ACER could provide further evidence and clarification on how different mechanisms could work, and their different impacts. Eurogas would be opposed to any change of past tariffs. Any over- and under-recovery should be taken into account in the next tariff (i.e. no retroactivity or no adjustment to the past invoices). 12NO244 Page 2 of 6

3 Question 6: Regarding the issue of compensation payments between TSOs within cross-national entry-exit zones, do you consider that: ii. The rules establishing compensation payments should be harmonised at EU level. iii. Guidelines of good practice on the issue would suffice. Please provide guidelines suggestions. iv. Other option: Eurogas has to develop a position on this issue and will follow with interest the views of TSOs and NRAs. Question 7: Do you agree that reserve prices shall be based on reference prices as described above? As a first thought, reserve prices should perhaps be based on option 2 Actual costs incurred (i.e. based on CAPEX and OPEX). Nevertheless, before concluding on this topic, Eurogas members unfamiliar with LRMC-based approaches would like to have a better understanding of how option 1 (Long Run Marginal Cost) works. A general principle to keep in mind in the definition of reference price should be efficiency. Question 8: Which option would you find appropriate to determine the reference price? Please justify your answer. Option 2 seems suitable because it should secure TSO s investments (i.e. cost will be recovered) and therefore reassure network users that they are only paying for what they use. Question 9: Regarding the cost concepts, do you consider that: iii. Guidelines of good practice would suffice, along the following line: iv. Other option: ii. The rules should be harmonised within the cost concept of option 2 and along the following lines : - TSO s revenues due to cross-border flow should be proportionate to the grid cost needed to allow this flow (i.e. the responsible party pays principle) avoiding then cross-subsidies. Economy of scale should be shared between cross-border and domestic consumption. - There should not be cross subsidies between shippers booking underground storage (for their end-customers) and the others, which argues for seasonal reserve prices (see 16). Question 10: Could two different cost concepts be applied on the two sides of an interconnection point without hindering cross-border trade? Please justify your answer. Before concluding on this topic, Eurogas needs to have a better understanding of how option 1 (Long Run Marginal Cost) works. 12NO244 Page 3 of 6

4 Question 11: Regarding the issue of cost allocation, do you consider that: ii. Methodologies for allocating a TSO s costs between cross-border and domestic usage should be harmonised across Europe. iii. Methodologies for allocating a TSO s costs between cross-border and domestic usage should be established on a more local basis, in combination with guidelines of good practice. iv. Are there any other ways of allocating the TSO s costs in a harmonised or local way which should be considered, focusing on the allocation of costs between crossborder and domestic usage? v. If cost allocation methodologies are to be set on a local basis, do you agree with the criteria set out above for assessing the methodologies? ii. Methodologies for allocating a TSO s costs between cross-border and domestic usage should be harmonised across Europe. Nevertheless, Eurogas needs more time to understand all the cost allocation methodologies given as examples. It is, therefore, very difficult to give a view on that theoretical issue, at this stage. Question 12: Do you consider potential cross-subsidies as a concern in relation to the coexistence of different cost allocation methodologies? Please provide justification. It may, indeed, hinder cost-reflectivity if for example one NRA were to choose an Individual cost-based approach and the adjacent NRA an Equalisation approach; some routes would in effect subsidise others. Question 13: Regarding the issue of reserve prices for short term products, do you consider that: iii. Guidelines of good practice would suffice, along the following line : iv. Other option: ii. Among Eurogas members, there are strong reservations about Options 2 and 3. The first main thoughts of Eurogas are that the rules should be harmonised, along the following lines: - Either on option 1 pricing short-term proportionally to the yearly reference price - Or on option 4 pricing with multipliers higher than one for short-term products - Seasonal factors may have to be taken into consideration in both solutions (but see 16) Eurogas will analyze this issue further. Question 14: What are your views on the proposed policy options? Would you suggest other options? Please provide your reasons. Eurogas is not suggesting other options. Question 15: What are in your view the advantages/disadvantages of each of the options? Arguments in favour of Option 1 or 4 are that they will incentivize long term booking. Perceived disadvantages of using the GB model with discount for short term booking are 12NO244 Page 4 of 6

5 because that it will undermine long term booking and therefore investment. Furthermore, it has increased National Grid under-recovery which has led to a variable and increasing commodity charge. This last measure penalizes long term booking because it subsidizes short term booking. Indeed, short term shippers buy cheaper capacity which leads to charges on all the network users with a commodity charge! Question 16: Should seasonal factors be applied? This is a complex issue, and is closely related to the designs of current national systems, and to what extent a harmonized approach will penetrate these. Nevertheless, Eurogas needs a further analysis on the degree of elasticity of capacity demand to have a final view on the use of seasonality factors, and if they would lead to cross-subsidies. The analysis should also reflect on what solution would best suit the European market. Question 17: Regarding the issue of reserve prices for interruptible and non-physical backhaul capacity, do you consider that: iii. Guidelines of good practice would suffice, along the following line: iv. Other option: - Interruptible capacity should be priced at a discount in relation to the corresponding firm capacity service (option 1) Reserve prices for interruptible and non-physical backhaul capacity should not undermine the firm secondary capacity market and, at the same time, the attractiveness for TSO to offer interruptible capacity. That is why option 2 zero reserve price could be problematic in its effects. Question 18: Would you suggest other options? No. Question 19: What are your views on the proposed policy options? Would you prefer one option over the other? To what extent can this preferred option be uniformly applied? Please explain. Option 1 Regulated tariff plus fixed auction premium should be implemented within the European Union. Option 2 and 3 automatically inflated prices would not be suitable because inflation is already commonly taken into account during TSO and NRA negotiation on the TSO s revenues (e.g. in the return rate of the CAPEX and the evolution of the OPEX). Option 4, clearing price, could have been a solution but this would entail higher over- or under-recovery and, therefore, it appears to be more problematic in its effects. Question 20: Do you consider that different approaches could be applied for one bundled capacity product? No, option 1 should apply at each IP and at each part/side of a IP. 12NO244 Page 5 of 6

6 Question 21: Regarding the issue of recovery of allowed revenues, do you consider that: i. No harmonisation in required. ii. The rules establishing this relation should be harmonised at EU level. Please provide harmonisation suggestions. iii. Guidelines of good practice on the issue would suffice. Please provide guideline suggestions. iv. Other option: ii. The rules establishing this relation should be harmonised at EU level based on option 1 Recovery of allowed revenues through a regulatory account. This account will be a factor in the calculation of the next tariff, then consistent with our response to question 19. Question 22: Should there be a cap on the percentage of revenues to be recovered through a commodity charge? If so, then please provide proposals for how this could work in practice. Eurogas refers to its answer to Question 5 on mechanisms to deal with over- and under recovery of allowed revenues. When ACER mentions commodity charge, it should clarify which type. A commodity charge should not be put in place to deal with over- or under recovery. Of course, this does not mean that a commodity charge could not be part of existing tarification for example to recover TSOs OPEX. But a socialization of the tariff burden should be avoided as far as possible; capacity- and commodity- based tariff components can still coexist, but not to deal with under recovery leading to a socialization of the tariff burden. We also invite any further suggestion you may have concerning the Framework Guidelines on harmonised transmission tariff structures relating to issues which are either not considered in the scoping document or mentioned but not considered for further analysis. Please reason your answer. It is evident that the issue of harmonized tariffs raises very complex issues. The above remarks reflect a first consideration by Eurogas, but until further high-quality analysis is available on some key aspects, few definite opinions are offered. Eurogas, however, would urge that in approaching the complexities, the underlying question should always be what is good for the European market. Eurogas supports the objective of efficient use and access to the system and criteria of non-discrimination, cost-reflectivity, avoidance of market distortion, and also urges pragmatism. 12NO244 Page 6 of 6

Scope and policy options for Framework Guidelines on Harmonised transmission tariff structures. -Public Hearing -

Scope and policy options for Framework Guidelines on Harmonised transmission tariff structures. -Public Hearing - Contact Details (as instructed): Name Ana Pinto/Mikel Amundarain Company EDP Gás/Naturgás Energia Comercializadora Contact email Anateixeira.pinto@edp.pt/mikel.amundarain@naturgasenergia.com Phone +351