Natural Gas Regulation in Brazil: a framework to Stimulate Competition in Sao Paulo state from 2011

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1 Natural Gas Regulation in Brazil: a framework to Stimulate Competition in Sao Paulo state from 2011 State University of Campinas (UNICAMP) -Brazil Paulo Henrique de M. Sant Ana Gilberto De Martino Jannuzzi Sergio Valdir Bajay

2 Overview The authors are not worried here about arguing for a more market oriented, or a heavier handed regulation, since both structures can produce distorted results. The objective of this paper is to propose a framework to stimulate competition for the retail trading in the state of São Paulo. This is based in the regulatory mark of 2011 in the state.

3 Overview Organization of the Brazilian natural gas industry Policy: federal government Policy: state government Natural gas exploration, production, processing, importation and storage Transportation (carrier) City gate Distribution & trading End-user ANP State regulatory agencies Shipper

4 Overview Regulatory regimes in the natural gas industry in Brazil after Law 9,478/97 Federal government regulation State government regulation Production Transportation, importation & storage Distribution Retail trading Winners of auctions organized by ANP sign concession contracts Interested companies require authorizations from ANP Each state law defines the regulatory regime: concession or authorization In the State of Sao Paulo, there are three concession areas for natural gas distribution and retail trading Exclusiveness for retail trading for industry and eletricity generation will end from 2011

5 The Natural Gas Industry in the State of São Paulo In 2004, the state of Sao Paulo was responsible for 31% of the Brazilian GDP, corresponding to U$ billion (IBGE, 2005) 1USD = 2,00 reais (current dollars) 350 Consumption in BCF of natural gas Post-Privatization Public Sector Commercial Residential Transportation Industrial* (*) Including electricity generation Source: BESP (2006)

6 Natural gas outlook for 2011 in Brazil 2,5 Consumption (bcf/day) 2 1,5 1 0, Historical Data Projection Demand Supply (projection) 2011 Electricity Generation 0,25 1,71 Other consumption 1,53 2,16 TOTAL 1,78 3,87 4,27 There will be likely a gas surplus of 0.4 bcf/day in 2011.

7 Upstream regulation and the Gas Law Transportation and Storage regime for pipelines Law 9.478/97 Bill N /06 Bill N. 334/07 Authorization or Concession Authorization (Defined by the Ministry of Concession Mines and Energy) Expansion Planning Company Determinative (Defined by the Ministry of Mines and Energy) Participative Exclusiveness Period and open access No exclusiveness period. Access is open but must be negotiated 10 years of exclusiveness before open access None for new gas pipelines (capacity auctions). 8 to 15 years for the existing ones Tariffs Negotiated after 31/12/2001 Regulated Regulated Cross-participation Accounting separation Accounting separation National Operator System Agência Nacional do Petróleo (ANP) Agência Nacional do Petróleo (ANP) Accounting and partial legal separation for Carriers to participate in activities of production, storage and trading Creation of a National Transport Operational System (ONGAS), subordinated by the electrical system operator (ONS)

8 Downstream regulation in the state of Sao Paulo First tariff revision ( ) Rate of return, including commitments of investments in expansion and replacements of the old and deteriorated distribution pipelines. Second tariff revision ( ) Hybrid modeling MM t = P t + K t P t = P t-1 [1 + (VP - X)]

9 Framework to stimulate competition in Sao Paulo State from 2011 Influence factors for competition development in the State of Sao Paulo POSITIVE INFLUENCE According to Petrobras Business Plan ( ) and the demand projection in section 2011, there will probably be a surplus of natural gas in Brazil. Petrobras doesn t have any participation in the gas distribution companies in the state of Sao Paulo. Industrial sector is the responsible for more than 80% of Sao Paulo State gas market, and this sector will be with most part of its market saturated by NEGATIVE INFLUENCE Petrobras and its subsidiaries dominate production, processing and transportation of natural gas. This situation will probably not change until The three Distribution companies in have long term contracts with shippers with take or pay commitments. Current regulation in the state of Sao Paulo stimulates mainly the increasing of sales.

10 Framework to stimulate competition in Sao Paulo State from 2011 For the third revision, this paper proposes the following measures to stimulate competition: Changing the Maximum Margin MM t that considers all sectors for a Maximum Margin for each sector. Allowing K t factor to be positive in the residential, commercial and cogeneration sectors only. Accounting unbundling of distribution and trading in downstream activities in 2009, and then a legal separation from For the distribution system, considering firm allocated capacity as fixed costs and physical gas movement as variable costs.

11 Framework to stimulate competition in Sao Paulo State from 2011 Open access to distribution pipeline through a capacity and/or gas transportation payment. Renegotiation incentives for demising take or pay and the switching of long-term to short-term contracts between shippers and LDC s. Stimulate the Creation of a market center. Standardization and harmonization of proceedings and rules. Supply and demand flexibilization policies, focusing the security of supply.

12 Conclusion The gas law for the upstream market and the downstream framework proposed in this paper would be the initial condition to stimulate competition in Sao Paulo State. If both were implemented, it would probably help to: 1) create a wholesale and a retail gas market; 2) stimulate risk management tools, i.e. derivative hedges; 3) promote a shift from long-term to short-term contracts between LDC s and shippers;

13 Conclusion 4) create a spot and future markets; 5) promote a move towards spot and futures gas price indexation in mid- and long-term supply contracts. Competition would probably bring end-user prices down, as it happened in USA and the United Kingdom. However, government and regulators should have a special attention for the security of supply (i.e. planning activities and contingence plans). This could help to avoid shortage problems, like happened in these countries.