Alignment & Institutional Capacity of MENR, …...Alignment & Institutional Capacity of MENR, Unbundling Support for BOTAŞ and Visibility & Public Awareness TASK 3 Natural Gas Market

European Union / Instrument for Pre-Accession (IPA) Energy Sector Technical Assistance Project

Alignment & Institutional Capacity of MENR, Unbundling Support for

BOTAŞ and Visibility & Public Awareness

TASK 3

Natural Gas Market Legislative and Implementation Support Report

Updated Version

August 2017

This project is co-financed by

the European Union and the Republic of Turkey

2

This project is co-financed by the European Union and the Republic of Turkey

Team composition: Deloitte Danışmanlık A.Ş.

KEMA International B.V.

Copyright of this report belongs to the Ministry of Energy and Natural Resources. Therefore you should not, without

prior written consent, refer to or use this document for any other purpose, disclose or refer to them in any prospectus

or other document, or make them available or communicate them to any other party, other than the parties allowed

in advance. No other party is entitled to rely on this document for any purpose whatsoever and thus no liability to

any other party who is shown or gains access to this document is accepted. The content of this publication is the

sole responsibility of the consultant and can in no way be taken to reflect the views of European Union or MENR.

Consulting Services for: Acquis Alignment & Institutional Capacity of MENR, Unbundling Support for

BOTAŞ and Visibility & Public Awareness

TASK 3

Natural Gas Market Legislative and Implementation Support Report

Updated Version

August 2017

Consulting Services for: Acquis Alignment & Institutional Natural Gas Market Legislative and

Capacity of MENR, Unbundling Support for BOTAŞ an Implementation Support Report – Updated Version

Visibility & Public Awareness

Joint Venture of Deloitte and DNV GL – August 2017 3

Contents

1. EXECUTIVE SUMMARY .............................................................................................................. 11

2. INTRODUCTION............................................................................................................................... 14

3. UNBUNDLING MODELS .................................................................................................................... 16

3.1. Motivation for Unbundling....................................................................................................... 16

3.1.1. Pros and Cons of Unbundling .......................................................................................... 17

3.2. Unbundling Concepts ............................................................................................................. 20

3.2.1. Accounting unbundling..................................................................................................... 21

3.2.2. Organisational Unbundling ............................................................................................... 21

3.2.3. Information Unbundling .................................................................................................... 23

3.2.4. Legal Unbundling ............................................................................................................. 24

3.2.5. Ownership Unbundling ..................................................................................................... 24

3.3. Unbundling Models in the Context of EU Regulation............................................................... 24

3.3.1. Ownership of Unbundling - OU ........................................................................................ 25

3.3.2. Independent System Operator (ISO) ................................................................................ 28

3.3.3. Independent Transmission Operator (ITO) ....................................................................... 30

3.3.3.1. Autonomy ................................................................................................................. 30

3.3.3.2. Independence .......................................................................................................... 31

3.3.3.3. Network Development and Investment...................................................................... 32

3.3.4. Certification ..................................................................................................................... 33

3.4. Unbundling of LNG and Storage ............................................................................................ 34

3.4.1. Access to LNG and Storage ............................................................................................. 34

3.5. Roles and Functions of the Unbundled Companies ................................................................ 36

3.5.1. Internal Implementation ................................................................................................... 36

3.5.2. External Interface Management ....................................................................................... 40

3.6. Unbundling Alternatives From Tax and Legal Perspectives .................................................... 41

3.6.1. Legislative Background .................................................................................................... 41

3.6.2. Full split-off ...................................................................................................................... 42

3.6.3. Partial split-off .................................................................................................................. 44

3.6.4. Sales of assets ................................................................................................................ 45

3.6.5. Applicability of the Models under Turkish Law .................................................................. 47

3.6.5.1. Ownership Unbundling (OU) ..................................................................................... 47

3.6.5.2. Independent System Operator (ISO) ......................................................................... 49

3.6.5.3. Independent Transmission Operator (ITO) ................................................................ 49

3.6.5.4. Split-off in Relation to Competition Law..................................................................... 50

4. EU BEST PRACTICE ....................................................................................................................... 51

4.1. Prevailing Practice in the EU .................................................................................................. 51





4.2. Unbundling in the UK ............................................................................................................. 58

4.2.1. Background ..................................................................................................................... 58

4.2.2. Motivation and Rationale ................................................................................................. 63

4.2.3. Practical Implementation Steps in Unbundling of British Gas ............................................ 64

4.2.3.1. Amendments of legal/regulatory framework .............................................................. 64

4.2.3.2. Corporate Restructuring of British Gas and its successor companies ........................ 65

4.2.4. Lessons Learned ............................................................................................................. 68

4.3. Unbundling in France ............................................................................................................. 71

4.3.1. Background ..................................................................................................................... 71

4.3.2. Practical Implementation Steps in Unbundling of GRTgaz ................................................ 73

4.3.2.1. Amendments of Legal and Regulatory Framework .................................................... 73

4.3.2.2. Governance Reform of GRTgaz ............................................................................... 74

4.3.2.3. Corporate Restructuring of GRTgaz.......................................................................... 76

4.3.3. Lessons Learned ............................................................................................................. 81

4.4. Lessons from developments in the EU ................................................................................... 81

4.4.1. Lessons from the creation of the Internal Energy Market .................................................. 81

4.4.2. Insights from unbundling examples in the EU ................................................................... 84

5. UNBUNDLING MODEL SUGGESTIONS FOR BOTAŞ ............................................................................ 86

5.1. Current Status of Turkey ........................................................................................................ 86

5.1.1. Legal and Legislative Framework ..................................................................................... 86

5.1.2. Duties and Responsibilities of BOTAŞ ............................................................................. 88

5.1.2.1. Organisational Structure ........................................................................................... 88

5.1.2.2. Areas of Activity ....................................................................................................... 89

5.2. Unbundling in the Turkish gas sector...................................................................................... 91

5.2.1. TSO unbundling ............................................................................................................... 92

5.2.2. LNG and Underground..................................................................................................... 96

6. RECOMMENDATIONS FOR OPERATIONAL ASPECTS OF UNBUNDLING OF BOTAŞ ................................ 103

6.1. Products, Customers and Markets ....................................................................................... 103

6.1.1. Transmission Company Products, Customers and Market.............................................. 103

6.1.2. Supply Company Products, Customers and Markets ...................................................... 108

6.2. Management Structure and Organization ............................................................................. 110

6.2.1. TransCo Governance and Organization Structure .......................................................... 111

6.2.1.1. Governance Structure ............................................................................................ 112

6.2.1.2. Administration and Finance .................................................................................... 113

6.2.1.3. Network and Asset Management ............................................................................ 114

6.2.1.4. Strategy Development and Corporate Affairs .......................................................... 115

6.2.1.5. Natural Gas System Operations ............................................................................. 116





6.2.1.6. Storage ve LNG ..................................................................................................... 117

6.2.2. SupplyCo Governance and Organization Structure ........................................................ 117

6.2.2.1. Governance Structure ............................................................................................ 119

6.2.2.2. Administration and Finance .................................................................................... 120

6.2.2.3. Commercial Operations .......................................................................................... 121

6.2.2.4. Strategy Development and International Relations .................................................. 122

6.3. Business Processes ............................................................................................................. 123

6.3.1. Business Processes of the Transmission Company ....................................................... 123

6.3.1.1. System Operations ................................................................................................. 125

6.3.1.2. Network Operations ................................................................................................ 126

6.3.1.3. Network Maintenance ............................................................................................. 128

6.3.1.4. Strategy and Risk Management .............................................................................. 129

6.3.1.5. Human Resources Management ............................................................................ 130

6.3.1.6. Corporate Affairs .................................................................................................... 131

6.3.1.7. Legislation and Legal Management ........................................................................ 132

6.3.1.8. Procurement and Logistics ..................................................................................... 133

6.3.1.9. Accounting and Finance ......................................................................................... 134

6.3.1.10. Information Technologies Management .................................................................. 135

6.3.1.11. Facility Management .............................................................................................. 136

6.3.2. Business Processes of the Supply Company ................................................................. 137

6.3.2.1. Natural Gas Trade Management ............................................................................. 139

6.3.2.2. Risk Management .................................................................................................. 140

6.3.2.3. Back Office ............................................................................................................. 141

6.3.2.4. Strategy Management ............................................................................................ 142

6.3.2.5. Human Resources Management ............................................................................ 143

6.3.2.6. Corporate Affairs .................................................................................................... 144

6.3.2.7. Legislation and Legal Management ........................................................................ 145

6.3.2.8. Procurement and Logistics ..................................................................................... 146

6.3.2.9. Accounting and Finance ......................................................................................... 147

6.3.2.10. Information Technologies Management .................................................................. 147

6.3.2.11. Facility Management .............................................................................................. 148

6.4. Technological Infrastructure ................................................................................................. 149

6.4.1. Transmission Company’s Technological Infrastructure ................................................... 150

6.4.2. Supply Company’s Technological Infrastructure ............................................................. 153

7. ROADMAP FOR UNBUNDLING ......................................................................................................... 155

7.1. Action Steps ........................................................................................................................ 155

7.2. Suggested Amendments to the Natural Gas Market Law ...................................................... 161





ANNEX: THE LAWS, DECREES, REGULATIONS AND DIRECTIVES TO WHICH BOTAŞ IS SUBJECT ................ 166

ANNEX 2 – EU NATURAL GAS COMPANIES .......................................................................................... 168

ANNEX 3 – MEMO ON PRICING OF NATURAL GAS SUPPLY CONTRACTS AND CAPS FOR TRANSMISSION

OPERATOR .................................................................................................................................. 230

ANNEX 4 – MOTIVATION OF UNBUNDLING IN GAS SECTOR .................................................................... 235

List of Figures

Figure 1: Forms of unbundling ........................................................................................................... 21 Figure 2: Information unbundling – Implementation approaches ........................................................ 23 Figure 3: Three unbundling models ................................................................................................... 25 Figure 4: Insourcing and outsourcing in the ITO model ...................................................................... 31 Figure 5: Certification procedure ....................................................................................................... 34 Figure 6: Roles and Functions of the Unbundled Companies ............................................................. 36 Figure 7: Additional duties of NRA under different unbundling options ............................................... 40 Figure 8: Overview of the liberalization and unbundling processes in the UK ..................................... 59 Figure 9: Structure of British Gas in 1994 .......................................................................................... 62 Figure 10: Illustration of market contract structure prior to liberalization ............................................. 64 Figure 11: Illustration of market contract structure after transportation trading separation .................. 65 Figure 12: Ownership unbundling and further corporate restructuring in the UK ................................. 66 Figure 13: Unbundling models ........................................................................................................... 67 Figure 14: Developments in the ownership of storage facilities .......................................................... 67 Figure 15: The group structure of Engie with its main infrastructure business line .............................. 71 Figure 16: The governance structure of GRTgaz before and after the unbundling process ................. 74 Figure 17: Management chart of GRTgaz, blue boxes represent executive management board......... 76 Figure 18: History of BOTAŞ ............................................................................................................. 87 Figure 19: Regional and Operations Managements and Branch Offices of BOTAŞ ............................ 88 Figure 20: Organisational chart of BOTAŞ ......................................................................................... 89 Figure 21: Distribution of BOTAŞ’s natural gas imports by sources (2014) ......................................... 90 Figure 22: Functional separation alternatives .................................................................................... 92 Figure 23: Suggested unbundling model ........................................................................................... 94 Figure 24: Overview of the Independent Transmission Operator+ (ITO+) for BOTAŞ ....................... 102 Figure 25: Capacity products in EU ................................................................................................. 105 Figure 26: TransCo Organizational Transformation ......................................................................... 112 Figure 27: SupplyCo Organizational Transformation ........................................................................ 119 Figure 28: Processes of the Transmission Company ....................................................................... 124 Figure 29: Processes of the Supply Company ................................................................................. 138 Figure 30: Roadmap for the unbundling of BOTAŞ .......................................................................... 160





List of Tables

Table 1: Benefits and cost of unbundling (Pollitt) and of alternative unbundling options as compared to no or lighter forms of unbundling (Mulder and Shestalova). ............................................................... 20 Table 2: Tasks and obligations of the ISO and the transmission system owner .................................. 29 Table 3: Internal implementation in the unbundling models ................................................................ 37 Table 4: Restructuring from Legal Perspective .................................................................................. 42 Table 5: Summary Table for Tax Results ........................................................................................... 46 Table 6: Unbundling models applied in gas TSOs.............................................................................. 51 Table 7: Public and private shareholding in OUs and ITOs ................................................................ 52 Table 8: Summary of opinions of the EC in the process of certification for the OU model ................... 55 Table 9: Summary of opinions of the EC in process of certification for the ITO model ........................ 56 Table 10: Examples of combined operators in the EU........................................................................ 58 Table 11: UK gas importation infrastructure ....................................................................................... 69 Table 12: Governance structure and issues raised in the process of ITO certification ........................ 75 Table 13: Organization structure and issues raised in the process of ITO certification ........................ 78 Table 14: Contractual arrangements and issues raised in the process of ITO certification .................. 79 Table 15: OU and ITO model in Turkey ............................................................................................. 93 Table 16: Features of ITO+ model in Turkey...................................................................................... 95 Table 17: Unbundling of Marmara LNG ............................................................................................. 97 Table 18: Unbundling underground natural gas storage facility ........................................................ 100 Table 19: Actions for the unbundling of BOTAŞ ............................................................................... 155





Table of Versions

Version Version Date Comment Copy Submitted

Version 1 17-08-2016 First Version Soft Copy

Version 2 12-01-2017 Second Version Soft Copy

Version 3 17-04-2017 Third Version Soft Copy

Updated Version 03-08-2017 Updated Version Soft Copy





Abbreviations

BAT Best Available Technology

BOREN National Boron Research Institute

BOTAŞ Petroleum Pipeline Corporation

CS01 Consulting Services for Acquis Alignment & Institutional Capacity of MENR, Unbundling Support for BOTAŞ and Visibility & Public Awareness

DG CLIMA General Directorate of for Climate Action, European Commission

DG ENER General Directorate of Energy, European Commission

DG ENV General Directorate of Environment, European Commission

DG MOVE General Directorate of Transport, European Commission

DG TREN General Directorate of Energy and Transport, European Commission (replaced by DG ENER and DG MOVE)

EBB Electronic Bulletin Board

EC European Commission

E3M Energy-Economy-Environment Modelling Laboratory

EE Energy Efficiency

EPEC Equilibrium problem with equilibrium constraints

EMRA Energy Market Regulatory Authority

ETİ ETI Mine Works

ETS Emission Trading Scheme

EU European Union

EUROSTAT Directorate-General of the European Commission located in Luxembourg which provide statistical information to the institutions of the European Union

GAINS The Greenhouse Gas and Air Pollution Interactions and Synergies

GAMS General Algebraic Modelling System

GD General Directorate

GDP Gross Domestic Product

GDRE General Directorate of Renewable Energy

GDFR & EU General Directorate of Foreign Relations & EU

GDEA General Directorate of Energy Affairs

GEM-E3 General Equilibrium Model for Economy - Energy - Environment

GHG Greenhouse Gases

IPA The Instrument for Pre-Accession Assistance

IIASA International Institute for Applied Systems Analysis

JV Joint Venture

LCP Large Combustion Plants

MENR Ministry of Energy and Natural Resources

MİGEM General Directorate of Mining Works

MTA General Directorate of Mineral Research & Exploration

NGML The Natural Gas Market Law

NTUA National Technical University of Athens

PCD Preliminary Certification Decision

PİGM General Directorate of Petroleum Affairs

RE Renewable Energy

RES Renewable Energy Sources

ŞİD BOTAŞ Network Code

TAEK Turkish Atomic Energy Authority

TEDAŞ Turkish Electricity Distribution Company

TEİAŞ Turkish Electricity Transmission Company

TEMSAN Turkish Electro Mechanics Industry

TETAŞ Turkish Electricity Trading Company

TKİ Turkish Coal Enterprises

TPAO Turkish Petroleum Corporation

TRY Turkish Lira

TTK Turkish Hard Coal Enterprises





TSOs Transmission System Operators

TÜBİTAK The Scientific and Technological Research Council of Turkey

TÜSİAD Turkish Industrialists' and Businessmen's Association

UNFCCC Framework Convention on Climate Change

USD United States Dollar PPU Principles and Procedures on Use

KPI Key Performance Indicators

NRA National Regulatory Authorities

List of References

E3M-Lab PRIMES ENERGY SYSTEM MODEL

E3M-Lab PRIMES MODEL 2013-2014, Detailed model description

EURELECTRIC Power Choices - Pathways to Carbon-Neutral Electricity in Europe by 2050

European Commission

EU Energy, Transport and GHG Emissions Trends to 2050 - Reference Scenario 2013

European Commission

Final report of the Advisory Group on the Energy Roadmap 2050, Summary record of the PRIMES Peer review, Meeting Results of the public consultation on the Energy Roadmap 2050

www.iesys.com Intelligent Energy Systems

SEC(2011)1095 final

Commission staff working paper on certification of transmission system operators of networks for electricity and natural gas in the European Union. 21 September 2011.

SWD(2013)177 final

Commission staff working paper document – Ownership unbundling – The commission’s practice in assessing the presence of a conflict of interest including in case of financial investors. 8 May 2013.

Commission staff working paper – Interpretative note on Directive 2009/72/EC concerning common rules for the internal market in electricity and Directive 2009/73/EC concerning common rules for the internal market in natural gas – The unbundling regime. 22 January 2010.

Commission staff working paper – Interpretative note on Directive 2009/73/EC concerning common rules for the internal market in natural gas – Third-party access to storage facilities. 22 January 2010.





1. EXECUTIVE SUMMARY Under this report, a model proposal is presented for the unbundling of BOTAŞ and to accelerate the liberalisation of the Turkish natural gas market, and operational elements are elaborated to put this model into practice.

3 basic unbundling options are required as per the relevant EU acquis.

• Ownership Unbundling - OU

• Independent System Operator – ISO

• Independent Transmission Operator – ITO

Independent System Operator (ISO) model is rarely preferred by the EU, which makes one question how beneficial the relevant model is actually in relation to its suitability for the unbundling requirements and shows that its implementation is not easy, particularly in terms of the documentation process. Ownership Unbundling (OU) and Independent Transmission Operator (ITO) options are widely implemented in the EU. The unbundling models used in the EU and the implementation examples are addressed in detail in Chapters 3 and 4 of this report.

From the viewpoint of the EU Directive, unbundling on the basis of the Ownership Unbundling (OU) model is the most appropriate option. However, considering the current structure and the medium/long-term strategies of the Turkish gas sector as well as the issues relating to the security of supply, the subordination of entities operating in the same sector/industry in Turkey to different government agencies or Ministries is not a common practice. Thus, even though the Independent Transmission Operator (ITO) model stands out as it is appropriate and enables the grouping of different companies under one single Ministry, it has some important disadvantages as well. Above all, this option will allow the vertically integrated structure to continue, and the conditions targeted by unbundling will not be obtained in full. It is considered that if the supply company is a shareholder of the transmission company or if the transmission and supply companies are operated under a conglomerate, this would not sufficiently contribute to the improvement of competitive environment. Moreover, the Independent Transmission Operator (ITO) model brings with it many administrative burdens, and is subject to numerous restrictions in relation to issues such as service procurement and personnel transfer.

Due to the abovementioned reasons, an unbundling model specific to the conditions of Turkey is proposed for BOTAŞ by drawing on the experiences of member states concerning unbundling. For the unbundling of BOTAŞ, a new model named “ITO+” is proposed, which combines the advantages of the Ownership Unbundling (OU) and the Independent Transmission Operator (ITO) models and is adapted to the conditions of Turkey. The practical difficulties of the Independent Transmission Operator model, namely, vertically integrated undertaking, administrative burdens, service restrictions and weak competitive environment, as well as the requirement of different ownership under the Ownership Unbundling model and the irreversibility of the model are eliminated by the ITO+ model, which combines the advantageous aspects of the two models. Thus, the primary step will be taken for establishment of a powerful and independent transmission operator which plays an important part in a good operating market.

In the proposed ITO+1 model, the transmission and supply companies to be established upon unbundling will be two different companies owned by the state. These companies will be the related companies of the MENR. Assets are owned by the Turkish Treasury and the MENR supervises and oversees the management to align it with the policies set bey the government. Thus, two different companies, which do not have a partnership, will be established for transmission and supply operations as in the ownership unbundling model, but they will be controlled by the same Ministry. In order to ensure that the transmission system operator is independent and does not adopt discriminatory practices, it is

1 According to the BOTAŞ's comments submitted on 9.11.2016, BOTAŞ suggests to incorporate an

energy conglomerate structure including two separate companies (BOTAŞ Transmission Company and

BOTAŞ Supply Company) which are fully owned by the conglomerate.





required to prepare a compliance report and assign a Compliance Manager just like in the ITO model. Furthermore, a Supervisory Board needs to be appointed as in the ITO model. Restrictions regarding service procurement and personnel transfer will apply to the ITO+ model as well. Along with the bundling of transmission and distribution companies to MENR, they will be included in the Public Economic Enterprise legislation, therefore, it is highly important to pay attention to the legislation and overcome the problems if there any.

In the light of taxation and legal conditions, it is recommended that the Transmission Company be established through partial split-off. The establishment of the transmission system operator in question through removal of the transmission assets from the current BOTAŞ and the retainment of contracts and liabilities relating to supply by the current BOTAŞ is believed to be most appropriate option. In the new structure, the Supply Company will continue its operations under the name BOTAŞ, which will ensure the recognition of the brand in the international markets and the continuity of its influence. Thus, BOTAŞ will legally continue its existence and protect its brand value, and no significant amendment will be required to be made in the current long-term contracts. Neverthless, BOTAŞ’s market share which will take a place in the market as a public company should be decreased and its dominance should not make pradatory practice.

Considering the specific conditions of the Turkish natural gas market and the relevant EU Directives, an option stands out, which involves the positioning of the existing underground storage facilities and the LNG terminal as a unit in the Transmission Company. In this situation the TransCo do not take the possession of neither the transmitted nor the stored gas, however, it may have exclusive rights. TransCo may be allowed some specific rights (included in the access / usage rules) of the LNG terminal for the purposes of system security. The underground storage facilities and the LNG terminal, which are integrated to the transmission operations, are expected to provide the following benefits:

• Coordination of the system’s stabilisation,

• Keeping the network pressure at the desired level,

• Elimination of regional network congestions that occur during times of high demand,

• The possibility for the transmission company to easily benefit from storage services to ensure the security of the system,

• Drawing on the synergies to the utmost degree through management of the natural gas infrastructure in an integrated manner,

• Reflecting widely the current experience in Turkey,

• Observation of similar practices in the EU member states and their approval by the National Regulatory Authorities.

Also, in the light of the Turkish energy and natural gas market, it is recommended that among the options of regulated third party access and negotiated third party access, the underground storage facilities and the LNG terminal provide the storage services to the interested parties without any discrimination and in accordance with the regulations to be prescribed by EMRA. Thus, it will be possible for the Transmission Company to benefit from the relevant facilities under the specified conditions in order to fulfil the tasks assigned to it, and additionally all supply companies operating in the market will be able to benefit from the storage service under equal conditions. Separate accounts need to be kept for underground storage and LNG operations. According to the unbundling model, the details of which are given in Chapter 5 of this report, the proposed structures of the Transmission and Supply companies are summarised in the figure below.

TransCo SupplyCo

LNG Terminal

Underground Natural

Gas Storage Facility





Within the framework of the current status of BOTAŞ and the relevant examples from the EU, a target operation model was designed for the unbundled companies. In this framework, both companies’:

• Products, Customers and Markets

• Management Structure and Organisation

• Business Processes

• Technological Infrastructure were elaborated and the suggestions are given in Chapter 6 of this report.

A roadmap was developed with the purpose of showing how the proposed unbundling model and the target operation model can be reached, and is addressed in Chapter 7 of this report along with the responsible parties.





2. Introduction This report, titled the Natural Gas Market Legislation and Implementation Support Report, has been prepared as defined in the contract signed between the Ministry of Energy and Natural Resources and the JV of Deloitte and DNV GL under Task 3 of the project “Consulting Services for: Acquis Alignment & Institutional Capacity of MENR, Unbundling Support of BOTAŞ and Visibility & Public Awareness”.

The objective of Task 3 is to provide a clear opinion on the liberalisation of the Turkish gas market to the Ministry and its stakeholders by conducting a detailed market analysis and making comparisons with the best practices in the EU. In line with this objective, first the Natural Gas Market Assessment Report (NGMAR) was submitted.

This report was prepared in an attempt to assess the Turkish Natural Gas Market, identify the bottlenecks of and obstacles to further liberalisation of the market, analyse the practices experienced in Europe, address the necessary conditions for the liberalisation process, explain in detail the transparent and non-discriminatory TPA framework, and evaluate the technical and financial components of the opening of a retail natural gas market.

In preparing the report, the Turkish Natural Gas Market was examined from a general point of view, the necessity of liberalisation of the market was discussed, the current bottlenecks of and obstacles to the Turkish Natural Gas market were sought to be understood, the EU experiences on the market liberalisation process were mentioned, and finally the conditions required for the liberalisation of the market were specified, taking into account the EU experiences. The approved final version of the Natural Gas Market Assessment Report was submitted on July 1, 2016.

The second report prepared under Task 3 is the Natural Gas Market Legislation and Implementation Support Report (NGMLR). The main objective of this report is to design in detail the model for the unbundling of BOTAŞ with a view to supporting the liberalisation of the market. A wide scope of market knowledge was used to provide a basis for the selection of the unbundling model in the NGMLR study. During the study, the current organisational structure of BOTAŞ was taken into account relying on publicly available resources, and additionally the international examples and best practices in relation to the proposed model were considered.

The consultants aimed to design the unbundling model proposed under the NGMLR in accordance with both the conditions of the Turkish natural gas market and the current structure of BOTAŞ and the practices in the European Union. The study was conducted in the 4 stages specified below:

• Unbundling Models and EU Practices: The EU regulations and unbundling models for the unbundling of BOTAŞ were examined in detail, and roles of transmission and supply operations as well as LNG and storage operations in the unbundling models were observed. Research was conducted on the roles and functions of the companies to be established upon unbundling and on how these companies and their operations will be affected in taxation and legal terms. In this context, certain EU practices (UK, France) were addressed in detail, and the lessons learnt from the EU unbundling examples were examined.

• Unbundling Model Suggestions for BOTAŞ: Upon exploration of unbundling model alternatives and EU examples, a current state analysis was conducted to ensure the proposed model is sustainable and viable in the Turkish natural gas market. By examining the current duties and responsibilities, organisational structure and processes of BOTAŞ using the publicly available resources, an unbundling model proposal was developed for the Turkish natural gas sector.

• Operational Suggestions for the Unbundling of BOTAŞ: In order to properly put into practice the proposed unbundling model, the products, customers and markets of the unbundled transmission and supply operations were identified in detail. The management structures, organisational charts, processes and necessary IT systems of the Transmission Company and the Supply Company to be established were defined.





• Roadmap: In line with the unbundling model proposal and target operation model for the unbundled companies, the action steps that would support the process of transition to the targeted state were identified. By defining the priority relationships for the said actions, the roadmap for the unbundling process was prepared.





3. Unbundling Models This chapter provides an overview of common options/models available for unbundling from the European perspective, i.e. taking the European legislation into account. In addition it also gives advantages and disadvantages of the different models.

3.1. Motivation for Unbundling The vertically integrated undertaking (VIU)2 is the traditional organisation model in the energy sector and can be found in many countries in the world. The VIU is characterised by a full integration of activities including production, import, storage, transmission, distribution networks and supply.

Gas industry reforms all over the world have introduced competition in production, import, storage and supply. Competition in transmission and distribution, however, is difficult as they are natural monopolies.3 In the reformed gas industry new players may enter the production and supply market and threaten the incumbent’s share. A company with vertically integrated activities has inherent incentives to hamper competition in the production and supply business segment, e.g. by impeding market access of new entrants or gaining advantages over competitors by cross-subsidising the potentially competitive business activities with profits from the monopoly activities. Therefore, regulators have been developing and implementing specific arrangements on monitoring and control of the relationships between activities in the vertically integrated companies to remove barriers for competition and secure non-discriminatory network access for third parties.

Therefore, unbundling of TSOs, or separation of gas network operation from commercial activities (production and supply), is one of the prerequisites of gas market liberalisation. The main objective of unbundling is to remove any conflict of interests between producers, importers, suppliers and storage operators, on one hand, and transmission system operators on the other hand. This means that unbundling should remove the incentive for vertically integrated undertakings (VIU) to discriminate against competitors in relation to (i) access to the network, (ii) access to commercially relevant information and (iii) investments in the network. There are various ways to discriminate against competing producers, importers and suppliers, for example by limiting transmission capacities, postponing investments in transmission which may cause congestions and fragment markets, providing access to information for affiliated companies, and complicating network access, including the (ab)use of the transportation pricing structure, and customer switching for competitors and new entrants.

In addition, unbundling of TSOs aims to remove cross-subsidies between monopolistic (network business) and competitive parts, to prevent charging of excessive network tariffs, to increase transparency and efficiency of tariffs and network access regulation, and to strengthen competition.

While the First Gas Directive (Directive 98/30/EC) required the unbundling of accounts, in the Second Gas Directive (Directive 2003/55/EC) legal and managerial unbundling of TSOs was introduced. However, the EU Sector Inquiry concluded that there is ongoing conflict of interest in vertically integrated companies, with suppliers still viewing their networks as strategic assets and a lack of independence of system operators. As a result, one of the most significant changes introduced by the Third Gas Directive (Directive 2009/73/EC) is the more stringent and tight transmission and distribution unbundling requirement.

2 See Gas Directive article 2(20) for a definition of VIU. 3 Natural monopolies arise if duplication of an infrastructure or service provision is uneconomic, i.e. the character of the technology and demand dictate that the service is provided at lower cost if the demand is met by a single firm rather than by two or more competing firms. The underlying source of this problem is subadditivity of costs. The main sources of the existence of subadditivity of costs in energy transmission are economies of scale. Economies of scale imply that average costs fall with increasing output. The most prevalent reason for economies of scale is fixed costs, costs that are incurred irrespective of the level of output. For example, in the case of the construction of large pipelines, their capacity can be increased without a commensurate increase in investment costs.





3.1.1. Pros and Cons of Unbundling

Various authors have investigated the theoretical and empirical effects of unbundling, e.g. in terms of

costs and benefits (in qualitative terms). Most of these studies primarily focus on the electricity market

and only a few have looked at the various models of unbundling (as opposed to costs and benefits of

unbundling in general compared to no unbundling). Direct evidence for the impact of unbundling on gas

(and electricity) networks is difficult to distinguish from the general evidence of energy market reforms.

Due to the simultaneous implementation of various reform steps (e.g. privatisation, introduction of

incentive regulation, reform of the wholesale market, introduction of retail competition), it is difficult to find empirical evidence for the effect of unbundling.4

Clearly the literature on unbundling in Europe dates back to the mid to late 2000’s when it was a relevant topic in energy market reforms and discussions and preparations around the EU energy packages. More recent studies by scholars are mostly related to new Member States, particularly in Central and East Europe (e.g. Lithuania, Ukraine), in preparations to implement the EU energy regulations. However, those more recent studies also tend to rely on references from the 2005-2010 period.

Two exemplary studies are by Michael Pollitt5 and by Michel Mulder and Victoria Shestalova6. The latter focuses on unbundling in electricity distribution, whereas the first is devoted to unbundling in gas and electricity transmission. Both studies however are themselves based on a vast number of academic literature and empirical studies and they discuss various levels (models) of unbundling. In this section we summarize their findings (see the table at the end) and list a set of arguments that have been used in the unbundling discussion.

Performance of the network - focus and synergy effects

First of all, de-linking the network from supply activities provides more independence to the network, with an improved focus on its own objectives. Management of both parts of the formerly integrated company will be subject to clearer incentives to improve business, without compromises to the needs of the integrated company.

The performance of the independent network will therefore improve as it responds more efficiently to regulatory incentives. In addition, cash flows generated are not diverted to other activities which improves financing. However, mergers between the network company and other high or low risk businesses will affect financing as well. The tendency of some network companies to form multi-utility (electricity, gas, telecom, water) network business is an example of a merger between low-risk businesses with improved economies of scope and financing.

Moreover, consolidation of networks into larger network companies results in positive economies of scale in network management, in particular in transmission (i.e. less so in distribution). It would induce cost savings due to more economic design of the network, better communication and cheaper operation.

An important counter argument often used against unbundling is the possibility to withhold or delay network investments. Since the independent network company has to share the gains of their investment

4 Regarding the timing of unbundling is worth citing Pöyry (in a report to the Finnish Ministry of Employment and the Economy, January 2015): “There is merit therefore that the TSO is unbundled as soon as reasonably practical on the path to liberalization of the market. Unbundling before the development of the FNC [Finnish Network Code], full market opening and the introduction of new processes and data exchange would help ensure its impartiality and suitability for its facilitator role towards delivering a properly functioning market. The TSO must be appropriately incentivized to operate its gas transmission system in accordance, wherever possible, with the commercial aspirations of shippers. It may also have a significant administrative function developing and operating IT systems and data communication to support proper market function. Experience in other countries would suggest that early and effective TSO unbundling accelerates the process of market development.” 5 The arguments for and against ownership unbundling of energy transmission networks, 2007 6 Costs and benefits of vertical separation of the energy distribution industry: the Dutch case. 2005





with other parties, e.g. network users being able to improve commercial activities, it may be tempted to hold up investments.7 However, tariff regulation should mitigate this problem, and as mentioned above, unbundled network companies would be able to better respond to regulation.

Also, there may be a loss of synergy benefits due to smaller size or loss of experience of operation of other segments. Unbundling leads to loss of operational economies of scope when common/centralised facilities can no longer be used (due to the introduction of Chinese walls in activities related to processing of customer information).

Competition

The main argument in favour of unbundling is improved competition in commercial parts of the supply chain. As already mentioned, unbundling prevents cross subsidies from the network to competitive activities and prevents distorting actions of the network company.

Mulder and Shestalova distinguish the following market distortions in relation to the VIU: direct cross subsidies by cash-flows between the network and commercial parts of the company; indirect cross subsidies by financing advantages; information advantages due to the close relationships between network and commercial activities; distortions created by firms’ actions. Unbundling alleviates these distortions thus reducing the scope for discrimination and improving competition.

Unbundling of TSOs would remove incentives to cross-subsidise between the network and competitive parts, prevents charging of excessive network tariffs, and increases transparency. In addition, unbundling removes the incentive for VIU to discriminate against competitors in relation to (i) access to the network, (ii) access to commercially relevant information and (iii) investments in the network. Distorting actions of the network company can be various, for example by limiting transmission capacities, postponing investments in transmission which may cause congestion and fragment markets, providing access to information for affiliated companies, and complicating network access, including the (ab)use of the transportation pricing structure, and customer switching for competitors and new entrants.

However, unbundling may also facilitate further production/wholesale mergers as sales of vertically unbundled assets provide financial resources for horizontal integration. Stand-alone (small) commercial companies are more prone to the risk of mergers and takeovers (also foreign takeovers). As a result, the number of competitors in the market reduces. Undesirable takeovers of strategic assets may be covered by competition policy.

EWI (2011)8 is one of the few who did empirical analysis in the gas sector, analysing the impact of

ownership unbundling on retail prices (as just one indicator of social welfare). This study revealed no

evidence for a natural gas price-decreasing effect of ownership unbundling. However, the breaking-up

of formerly vertically integrated TSOs with at least introducing more modest legal unbundling has

resulted in lower end-user prices.

Ease and effectiveness of regulation

Taking the regulatory perspective, unbundling is beneficial to the efficiency and effectiveness of regulation. A clear separation of tasks between the network company and other businesses creates more transparency and less incentive for e.g. cross subsidies. Therefore, informational and transactional constraints are relieved, contributing to more efficient regulation. Unbundling improves (cost) transparency in network and competitive businesses. The regulator gets better insight into the network company, including its contracts, enabling setting tariffs and incentives more appropriately.

Internal transactions between companies within the same group are difficult to control, leaving some freedom with respect to cost allocation and affecting network tariffs. Under stronger unbundling forms

7 A related argument is the substitution between investments in the network and investments in electricity generation, i.e. the trade-off between network reinforcements and building new production capacity. 8 Ownership Unbundling of Gas Transmission Networks – Empirical Evidence. EWI Working Paper, No 11/7





and increasing the adequacy of the regulator’s information, the network operator loses the possibility to (strategically) reallocate its internal costs.

Further, unbundling is likely to reduce government willingness and need to undertake further major reform for a period.

By contrast, unbundling can cause increase the requirement for regulatory oversight of transactions between unbundled stages of production/import/supply Or it can cause decrease government interference in the operation of the network companies if these are kept in state ownership.

Facilitation of privatization

If the VIU is in public hands, separating the network activities from commercial activities facilitates the sale of one of these activities separately. Public shareholders may in particular want to privatize the commercial (higher risk) part while keeping the essential network facilities. Public shareholders generally do not want to be involved in risky, entrepreneurial activities.

Also, unbundling may increase the total value of the companies due to transparency about future cash flows and financial structures that increase efficient operation of the commercial parts. For example, the pool of potential investors enlarge, e.g. institutional funds interested in low risk businesses that would otherwise not invest in the bundled, higher risk companies.

Transaction costs of unbundling

Unbundling gives rise to various one-off transactions costs: new computer/IT systems, restructuring offices and rearranging contracts. Especially contract renegotiation costs may be significant, e.g. gas supply contracts with implicit transport capacity arrangements need to be separated into a supply and a transport contract. Costs of new ICT systems and restructuring work processes, both within the company and between the unbundled companies and external parties are unavoidable. They are associated with required changes in technology to accommodate more market players (competition) and secure information flows. There is a relation between transaction costs and economies of scope: exploiting economies of scope, e.g. by sharing centralised functions, such as call centres, marketing or billing processes, reduces transaction costs of unbundling.

In contrast to the above, unbundling may also reduce transaction costs by facilitating the creation of more efficient price signals.

Cost of capital and investments / security of supply

The overall cost of capital may decline due to unbundling if the network business can get access to cheaper capital (due to regulated, low risk cash-flow) and if there is increased ease of integration on wholesale and retail (e.g. multi-utilities or consolidation at the production/wholesale level). In an efficient capital market separation will lead to efficient cost of capital for each business and therefore provide incentives to make investments.

However, if the size of firm falls, or if regulatory risk is increased due to increased and inefficient regulatory oversight of investment decisions, unbundling may increase cost of capital and reduce investment. This has been a concern in electricity generation in particular, where the generating company loses the possibility to use the network as a collateral resulting in reduced investments in generation capacity. Electricity producing and supply companies have counteracted this by entering into mergers and acquisitions (also internationally).

Another, related concern, is the effect that unbundling may have on long term contracts and security of supply. Competition in the production and supply business induces a reduced role for long term contracts, which increases risks and tempers investments in production and supply capacity. The creation of a liquid market for gas trading can provide a tool to manage and hence mitigate these risks.

Moreover, unbundling may create information problems between shippers and transporters in the absence of investment in better information systems, again resulting in security of supply issues. On the





other hand, the network company’s focus on security of supply may improve and incentivize improved information systems.

The table summarizes the pros and cons of unbundling in terms of expected net benefits (+) and costs (-) from the macro-economic perspective, i.e. representing an increase (+) or decrease (-) in total welfare. When the overall effect is likely to be insignificant (0), unclear (?) or not available (N.A.), e.g. depending on the exact circumstances, this is also indicated in the table.

Table 1: Benefits and cost of unbundling (Pollitt9) and of alternative unbundling options as compared to no or lighter forms of unbundling (Mulder and Shestalova10).

3.2. Unbundling Concepts With respect to the unbundling of vertical integrated energy companies, five different forms are differentiated, as given in the Figure 1:

9Arguments for and against ownership unbundling of power TransCos, 2007 10 Costs and benefits of vertical unbundling power distribution industry: Netherland example 2005





3.2.1. Accounting unbundling Accounting unbundling refers to the establishment of separate book-keeping systems for major functions along the energy value chain of energy companies. This implies establishing individual profit and loss accounts and balance sheets. In cases where legal unbundling has not been implemented yet, accounting unbundling refers to a virtual separation of book-keeping.

Accounting unbundling is designed to strengthen the transparency of cost origin, resource allocation and resource usage. Furthermore, it is prerequisite for establishing cost-reflective network tariffs as resources used for network operations have to be clearly and transparently assigned to the distribution/transmission networks accounts.

In order to separate the company’s accounts, its resources (e.g. employees) need to be allocated to the various accounts. Even in the case of virtual separation of the accounts, those separated accounts shall be prepared according to the guidelines for particular national legal forms of organisation (commercial law).

In practical terms, unbundled network operators also need to publish all major transactions with related companies (belonging to the same parent company), including (1) purchases and their value, (2) kind of sales and their value and (3) financing costs (e.g. dividend payments to related company). 11

Besides reasons of transparency, this shall also ensure that costs of purchase and the values of sales are market-based. In order to ensure that all the required information is given by the unbundled company, an external authority (e.g. the NRA), obtains real-time access to all internal accounting data.

With respect to the cost of shared-services (e.g. IT central functions) and other overhead cost items, transparent and causal-driven / cost-reflective cost allocation schemes have to be elaborated by the parent company including a clear definition of cost basis and cost drivers for the respective services.

3.2.2. Organisational Unbundling Organisation unbundling (also known as functional or managerial unbundling) refers to the establishment of separated organisational structures and functions (of vertically integrated energy companies). Furthermore, organisational unbundling is also linked to the explicit separation of human resources (e.g. management staff in the network area should not have any role in the integrated corporate group/company). Both are necessary preconditions for implementing independently acting transmission departments.

Organisational Unbundling comprises six major components:

• Separation of organisational structures

• Independent management of the unbundled companies

• Independence from the parent company

• Human resource management

11 Gas Directive, article 31(6) and ERGEG Guidelines of Good Practice on Regulatory Account Unbundling, E05-CUB-11-02, 2007.

Organization

Unbundling

Accounting

Unbundling

Information

Unbundling

Legal

Unbundling

Ownership

Unbundling

Unbundling

Figure 1: Forms of unbundling





• External communication

• Monitoring

Separation of organisational structures

First of all, separate organisation structures have to be established. This includes the precise allocation of human resources, as well as all relevant physical resources. Furthermore, processes have to be elaborated that describe how tasks have to be fulfilled in practical terms within the organisation and where interfaces to other organisations exist.

Independent management of unbundled companies

The management of unbundled companies shall act independently and pursue the company’s interests. Therefore, they should not have any role in the integrated/parent company. Besides this, concrete incentives for the management should be to act independently (e.g. bonus payments shall be linked only to performance of the unbundled company).

As a further consequence, the parent companies shall not actively influence decision making processes within the unbundled company. This applies to all management levels of the unbundled companies – in particular to the top and middle management levels.

In order to guarantee effective and independent management, sufficient qualified management resources will be made available. In addition, the management should hold no shares in the vertically integrated company itself or unbundled companies which are active in competitive areas.

Independence from parent company

With respect to the particular needs of network operators, it needs to be clarified that the network company must have sufficient personal, technical, financial and material resources to operate the network. Furthermore, it has to have the full decision-making power concerning assets for operation, maintenance or expansion of the network.

Therefore, the parent company should not give the network any instructions concerning operation and concerning individual decisions on structural measures, so long as these are included in the framework of the approved financial plan. Nevertheless, the parent company may handle or at least coordinate the management of regulatory affairs. Furthermore, the parent companies are entitled to monitor the management of the unbundled companies to secure their financial interest. The parent company may approve major investment plans/budgets, while having no influence on individual measures.

Human resource management

In order to guarantee an independently working company, with respect to the employee level and to avoid conflict of interests, it is a prerequisite that employees who are working for the company are not allowed to work for the parent company itself or another company which belongs to the parent company. However, a few exceptions might be allowed for certain shared-services (e.g. overall IT-Services).

Furthermore, salary and performance bonuses shall only depend on the individual performance of the employee and the financial performance of the unbundled company, but must not be linked to the performance of the parent company.

With respect to guaranteeing the confidentiality of commercially sensitive information, the transfer of employees between the unbundled companies and the parent companies should be restricted. For example, a certain time period might be defined before employees can switch to the parent company or another unbundled company (cooling-off periods). Certain switching procedures dealing with data confidentially may be specified in addition.

As the activities and the behaviour of the employees are essential for the implementation of effective unbundling, employees shall be trained regarding their duties with respect to unbundling requirements and their practical implementation.





External communication

In order to create a clear external awareness about the unbundled company, care should be taken with its communication, activities and branding in order to prevent confusion. In particular, unbundled companies which are active in competitive markets must not benefit from the credibility of the network operator. Therefore, different brands may have to be used. Besides this, companies might be forced to implement clear external communication guidelines.

Monitoring

In order to ensure a high level of compliance of the company’s activities with unbundling requirements, a compliance program shall be elaborated by the company, which will clarify how unbundling requirements have been implemented into the organisation and its procedures/processes. Where needed, explicit ring-fencing rules have to be specified.

In addition, a single person/employee/role shall monitor the implementation of the program and observe the overall compliance of the company’s activities with unbundling rules. Furthermore, companies might be obliged to prepare annual reports on their unbundling activities and the progress achieved so far.

3.2.3. Information Unbundling Information unbundling refers to two component (1) separation of IT systems and of personnel with direct access to information (access rights, 'Chinese Walls') and (2) separation of data between unbundled companies.

In particular, economically sensitive information from third parties should be kept confidential and not provided to other business units of the vertically integrated company (data protection). Furthermore, where economically advantageous information is to be disclosed, it should be made publically available to all other stakeholders free of discrimination and in a timely adequate manner.

Three approaches to the implementation of information unbundling can be distinguished:

Figure 2: Information unbundling – Implementation approaches

In the Two Contracted-Model the IT-System of the (former) vertically integrated energy company remains integrated, i.e. the IT-System can be owned and operated by either part within the company. But either for each role of the integrated company (no further unbundling), or for each unbundled company, separate contracts will be created for each customer. This also implies the establishment of separate accounting areas. To ensure non-discriminatory network access, the access to sensitive

Supplier IT-

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Supply

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Treatment Discrimination





information may be restricted for employees of the supplier. In practice, however, severe practical problems can occur when seeking to restrict user rights.

In order to increase transparency and to lower discrimination issues, clients for each (unbundled) company are established in the Two User Model. Again, either part of the company can own and operate the IT-system. Due to the need to create separate databases, customer data needs to be doubled and subsequently maintained twice (i.e. once for each client) in parallel within the system. This leads to significantly higher costs, but on the other hand it supports the consideration of other and new market participants (e.g. supplier) effectively.

In order to achieve a maximum degree of non-discrimination, separate IT-systems for each unbundled organization have to be established within the scope of Two Systemed Model. Only this option allows identical (market) processes between the TSO and all suppliers, including the supplier of the former vertical integrated energy company.

3.2.4. Legal Unbundling Legal unbundling refers to the establishment of separate legal entities for the major functions along the energy value chain of energy companies. Nevertheless, those legal entities may still belong to one company holding shares of various legal entities. The major target of legal unbundling is to increase the independence of activities as the network and competitive business areas of the energy industry (generation, trade, and retail supply) are organised into independent companies.

The establishment of separate legal entities requires management teams and capacities for each entity. Furthermore it also requires the separation of assets and property rights from the vertically integrated utility. Therefore, an asset register has to be created, which includes all of the assets of the vertically integrated utility and can serve as basis of the asset allocation. Nevertheless, the entities may continue using assets of other entities or the former vertically integrated utility based upon contractual agreements.

Beside the allocation of assets also employees have to be allocated clearly to the separate legal entities.

3.2.5. Ownership Unbundling Companies who are active in competitive gas markets (production, import, trade, sales) should not hold a majority interest in network operators. Also network operators should not hold an interest in companies who are active in competitive gas markets.

In order to implement effective and consistent ownership unbundling rules, network entities (TSO) should not hold shares in other companies or subsidiaries in the energy industry that are active in competitive business areas. Furthermore, the establishment of companies providing services mainly to regulated entities (electricity/gas) might be restricted for transparency reasons.

On the other hand, companies being active in competitive business areas may either only hold minority shares of network operators or are not allowed to hold shares at all.

If all companies remain state-owned, it is feasible to implement ownership unbundling by allocating responsibility of the companies to different ministries.

3.3. Unbundling Models in the Context of EU Regulation

The focus of this section is the unbundling of vertically integrated undertakings to ensure that the Transmission System Operator (TSO) is truly independent from any gas production or gas supply activities. Chapter III (Articles 9 to 16) and Chapter IV (Articles 17 to 23) of the Third Directive deal with the unbundling of transmission system operations. In the Directive, there are three models for unbundling, which will be further explained in subsequent sections:





• The ownership unbundling option (OU) (Article 9);

• The independent system operator option (ISO) (Article 14);

• The independent transmission operator option (ITO) (Articles 17-19).

In principle, Member States are free to choose one of the models. However, any TSO newly founded after 3 September 2009 has to comply with the OU model and, therefore, there is no other unbundling model option. Moreover, any ISO or ITO could be transformed into OU, but the reverse is not possible.

Each option have been specified with so many strict unbundling requirements and necessities, prohibiting an active management of the transmission activities by the vertically integrated undertaking, that the transmission entity is actually not much different from a financial investment for the VIU.

Irrespective of which unbundling model is chosen, under Article 10 of the Directive, an undertaking that is to be approved and designated as a TSO must be certified by the regulatory authority. The certification procedure is further discussed in Section 3.3.4., which takes part under the Unbundling Models in the Context of EU Regulation.

Note that, independent from ownership or legal structure, natural gas companies shall unbundle their accounts and submit to audit and publish their annual accounts as any other company. Unbundling of accounts as expressed in Article 30 ensures that MSs or any competent body has rights to access accounts of natural gas undertakings, while at the same time it should preserve the confidentiality of commercially sensitive information.

Figure 3: Three unbundling models

There are only very few exceptions to the unbundling rule, which almost exclusively apply to MSs that are relatively isolated and have exceptionally small gas markets, or – on a temporary basis – in the case of major new gas infrastructure (e.g. interconnectors, LNG and storage facilities)

3.3.1. Ownership of Unbundling - OU In the ownership unbundling model, transmission ownership and transmission system operation are conducted by one entity. This entity must be independent in ownership from any gas production, import or supply business activities. This requires that no person holds a dual management role, shareholdings or voting rights in both supply and transmission entities (directly or indirectly exercising control or being a member of a supervisory or administrative board or bodies of both supply and transmission). If both

Production Import

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Network

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network part of group

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the TSO and further supply entities are state-owned, it is furthermore required that the control over both entities is to be exercised by two separate public bodies .

The rules on ownership unbundling require that the same person cannot 'control' production or supply activities and at the same time 'control' or exercise 'any right' over a TSO or a transmission system. Furthermore, the same person cannot 'control' a TSO or a transmission system and at the same time 'control' or exercise 'any right' over production or supply activities.

Here, 'control' means exercise rights, contracts or any other means which confer the possibility of exercising decisive influence on an undertaking.12 The exercise of 'any right' includes in particular 1) the exercise of voting rights, 2) the power to appoint members of the supervisory board, the administrative board or bodies legally representing the undertaking13, or 3) the holding of a majority share. However, it does not exclude the holding of purely passive financial rights related to a minority shareholding, i.e. the right to receive dividends, without any voting rights or appointment rights attached to them.

In order to avoid undue influence arising from vertical relations between gas and electricity markets, ownership unbundling provisions apply across the gas and electricity markets, prohibiting influence over both an electricity generator or supplier and a gas TSO, or a gas producer or supplier and an electricity TSO.

Moreover, there are two additional requirements:

• the same person is not entitled to appoint members of the supervisory board, the administrative board or bodies legally representing the undertaking of a TSO or a transmission system, and directly or indirectly to exercise control or any right over generation, production and/or supply activities.

• conflicts of interest for board members should be avoided by prohibiting the same person from being a member of the supervisory board, administrative board or bodies legally representing the undertaking, of both a TSO and a generator, producer or supplier

After some years of experience, the Commission published their staff working document SWD (2013) 177 to explain their considerations in certification based on ownership unbundling in specific cases. In particular the position of financial investors with multiple interests in the energy sector is addressed. Strict application of the OU rules would imply that an investor controlling transmission assets will not be able to have any interest in production or supply assets and vice versa. SWD (2013) 177 provides a more relaxed view under the following conditions:

• First, when the geographic location of the transmission asset and the production/supply asset are so far apart that there is no realistic possibility of discrimination. That is, there must be no interface between the transmission system and the production/supply asset. For example, when certifying National Grid, the Commission did not find it necessary to raise an objection on the basis that the TSO parent company, National Grid plc had generation interests in the U.S. and Australia;

• Secondly, when the transmission asset and generation and production asset are of different energy types that is if one is gas and the other is electricity. For example, in the certification of the Spanish TSO, Red Electrica de Espana, the Commission found there was no

12 See article 2(36) Gas Directive for the definition of ‘control’. Decisive influence can arise from 1) ownership or the right to use (part of) the assets of a company, or 2) rights or contracts that lead to decisive influence on the composition, voting or decisions of the organs of a company. 13 Corporate governance and management of a company is organized according to national laws and practices, with varying terminology. The textbox provides some examples. In general, the (administrative or management) board is responsible for the day-to-day management of the company (with roles such as CEO, COO and CFO). By contrast, and as a key part of the checks and balances designed to ensure boards operate well, the supervisory board controls the management board.





possibility of discrimination where the same investor controlling a gas transmission asset also controlled certain small coal-fired generation;

• Thirdly, when the size and market share of the production/supply activities was very small. For example, the Commission approved the certification of the Walney 1 OFTO14 even though its parent Barclays and Mitsubishi had interests in a number of small, electricity generation plants, which has restricted market power, in UK, Italy, France and Bulgaria.

• Finally, there are a number of other assorted factors which the Commission may take into account on a case-by-case basis, these include: (1) if the energy production is only a by-product of other activities; (2) if the energy generated is sold at regulated prices; (3) if the production or generation activity has no effect on market prices; or (4) if there is financial regulation requiring ring-fencing in any case.

However, this list is indicative and not exhaustive, and none of these elements is necessarily decisive on its own. An overall assessment on a case-by-case basis is always required. In any case, the burden of proof as to the absence of a conflict of interest or an incentive to exploit it lies with the TSO to be certified and its shareholders, and includes an obligation to submit all the relevant information.

14 Offshore Transmission Operator.





3.3.2. Independent System Operator (ISO) Under the ISO model, transmission ownership remains part of a vertically integrated undertaking (VIU), while the operation of the transmission system is done by an independent transmission system operator. The ISO is an entity which is independent in ownership from the VIU (in the same way as under the ownership unbundling option). The Directive furthermore demands that the ISO has the required financial, technical, physical and human resources at its disposal to conduct its tasks (as described in the Directive), which excludes the possibility that – apart from purely administrative or IT functions – any tasks of the transmission system operator are provided via joint services. The transmission system

Corporate governance – Management body:

Companies are managed by a body organised according to national laws and practice. For example, in the UK companies are managed by a single, one-tier board of directors (the "board"). The company's articles of association often provide for a minimum and maximum number of directors. The UK Corporate Governance Code distinguishes two categories of director:

executive directors performing executive functions concerned with the day to day running and operation of the company, and

non-executive directors performing more of a supervisory, constructively challenging and strategic role.

The Corporate Governance Code provides that boards should contain an appropriate combination of executive and non-executive directors (including independent non-executive directors) so that no one individual or group can dominate board decisions. In particular, at least half the board (excluding the chairman) should be comprised of independent non-executive directors, one of whom should be designated as a “senior independent director” having certain prescribed skills. The Corporate Governance Code stresses that the board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively. Generally, companies are headed by a non-executive chairman who is responsible for leadership of the board and ensuring the board's effectiveness, together with a chief executive who is responsible for day-to-day business operations. Boards are required to establish the following committees:

a nomination committee, to lead the process for board appointments

a remuneration committee, responsible for setting remuneration for executive directors and the chairman and recommending and monitoring remuneration for senior management

an audit committee, with wide responsibilities including monitoring the integrity of the company's financial statements, reviewing internal financial controls and broader internal controls and risk management systems (unless this is expressly addressed by a separate risk committee), as well as the company's relationship with its auditors.

In Germany, companies usually have a dual board system consisting of a management board and a supervisory board. The company is managed by the management board, responsible for the day-to-day operation of the company. The management board is controlled by the supervisory board. The members of the management board manage the company collectively and they are jointly responsible. Usually, specific functions are allocated to the individual members of the management board (CEO, CFO, COO, etc.). Nevertheless, the entire management board remains generally responsible and liable for any acts and omissions of its individual members. The delegation of functions to committees is not common for the management board but rather the supervisory board (personnel committee, audit committee, etc.). The supervisory board consists of at least three members.





owner function on the other hand is required to be provided by an entity independent with regards to legal form, organisation and decision making.15

Note again that if the transmission system does not belong to a VIU on the date of entry into force of the Gas Directive, the ISO model cannot be applied and the rules on ownership unbundling must be followed.

Table 2 provides an overview of the division of tasks and obligations between the ISO and the network owner.

Table 2: Tasks and obligations of the ISO and the transmission system owner

• ISO • Network Owner

• All obligations applicable to TSOs • Granting TPA • Collection of access charges • Congestion charges • Inter-TSO compensation

• Provide cooperation to the ISO, including relevant information on the network

• Operating, maintaining and developing the transmission system

• Covering liability related to the network, but excluding tasks of the ISO

• Investment planning and obtaining necessary authorisations

• Obligation to finance investments decided by ISO and approved by NRA

An ISO should be considered as a TSO and has to comply with all the obligations applicable to TSOs under the Gas Directives and the Gas Regulations (Article 14(4) Gas Directive). It means that each ISO is responsible for granting and managing third-party access, including the collection of access charges, congestion charges, and payments under the inter-TSO compensation mechanism in compliance with the Regulations. The ISO is also responsible for operating, maintaining and developing the transmission system. Therefore, the ISO has full responsibility for ensuring the long-term ability of the system to meet reasonable demand through investment planning, including obtaining the necessary authorisations for the construction and commissioning of new infrastructure.

According to Article 14(5) of the Gas Directive the owner of the network has the obligation to provide all the relevant cooperation to the ISO for the fulfilment of its tasks. This concerns in particular the provision of all relevant information concerning the network. The network owner must also provide for the coverage of liability relating to the network assets, however, this excludes the liability relating to the tasks of the ISO. In practice, it means that the network owner must cover liability for e.g. the condition of the network, but not for the management of the network.

In addition, the network owner in principle has the obligation to finance the investments decided by the ISO. This however only concerns the investments that have been approved by the regulatory authority. If the network owner does not want to finance the investments itself, it has to give its agreement to the financing of the investments by any interested party, including the ISO. This may mean that the network owner will not become the owner of the new parts of the network that it has not financed.

15 This includes also the prohibition of the procurement of joint services from the vertically integrated undertaking (and vice versa) and of management personal holding a dual role in a generation and/or supply entity and in the transmission system owner entity. Furthermore, measures to ensure the independence of the transmission system owner shall be established within a compliance programme and documented within an annual report, which is to be submitted to the NRA.





The network owner also has to provide financial guarantees to facilitate the financing of the network expansions unless it has agreed to financing by another party.

If an ISO has been appointed, the Directive requires legal and functional unbundling of the transmission system owner. Article 15(1) refers explicitly to the obligation of legal unbundling. Article 15(2) provides for rules on functional unbundling, aiming to ensure the independence of the transmission system owner from other activities of the vertically integrated company, in terms of organisation and decision-making power, and requiring the establishment of a compliance programme. These rules on legal and functional unbundling are similar to the rules concerning unbundling of DSOs and should be interpreted accordingly.

There are also specific rules on unbundling of accounts (Article 31 Gas Directives), which apply to gas undertakings in general.

The burden on the NRA increases when the ISO model is chosen. The Gas Directive provides for several additional specific duties for NRAs, mainly related to the ISO certification procedure and to the relationship and coordination between the ISO and the transmission system owner. For example, the NRA shall monitor the relations and communications between the ISO and the transmission system owner. This includes the approval of any contracts between the ISO and system owner. In general, the NRA must ensure compliance of the ISO with its obligations, in particular through constant monitoring of the activities of the ISO and of the transmission system owner. In the event of a violation, the regulatory authority is empowered to issue penalties for non-compliance.

3.3.3. Independent Transmission Operator (ITO) In the ITO model, transmission ownership and transmission system operation remain part of a vertically integrated undertaking, but it is strongly ring-fenced within it. This includes that the ITO is organised in a separate legal entity with a different corporate identity (branding, premises), has the required financial, technical, physical and human resources at its disposal to conduct its tasks (as described in the Directive) and that its IT systems or equipment (and the access to it) are not shared with the VIU. Furthermore, the ITO shall have effective independent decision making rights on operation, maintenance and development of its transmission assets and the power to independently raise money (borrowing / capital increase). In relation to the functional independence the ITO option also includes several strong requirements for the personnel of the ITO and in particular its management.16 Measures to ensure the independence of the ITO shall be established within a compliance programme, followed-up by a compliance officer and documented within an annual report, which is to be submitted to the NRA.

3.3.3.1. Autonomy

Although the TSO may remain part of a VIU in the ITO model, numerous detailed rules are provided in order to ensure effective unbundling. In general, the Directives require the ITO to be autonomous, which means that:

• Assets (the network and all other assets required for gas transmission) must be owned by the ITO.

• Personnel must be employed by the ITO, including for management and network operation.

• For corporate services, including legal services, accountancy and IT services, the ITO must employ a sufficient number of qualified staff members to handle day-to-day core activities. Only then, the ITO may, in specific circumstances and by way of exception, conclude contracts with third-party service providers for legal, IT, or accountancy services. The same

16 Besides the requirement that no management personal is allowed to hold a dual role in a generation and/or supply entity and in the ITO entity, this relates among others to cooling-off periods (i.e. waiting periods) for management personnel (and persons directly reporting to the management) that hold job positions with the vertically integrated undertaking prior and after to management position at ITO.





applies to specific services relating to, for example, the development and repair of the network.

This autonomy requirement for the ITO does not relate to activities that do not directly concern the gas transmission activity, such as office cleaning services or office security services.

A special regime concerns the leasing of personnel and contracting of services between any part of the VIU and the ITO, see also Figure 4, the insourcing and outsourcing use in the independent transmission operator model which is below. Leasing of personnel and contracting of services to the ITO by other parts of the VIU are categorically prohibited. The other way around, provision of services by the ITO to other parts of the VIU is permitted only in specific circumstances (if there is no discrimination of other system users, if there is no restriction of competition in generation or supply and if the NRA has approved it). However, the ITO is not allowed to share IT systems or equipment, physical premises and security access systems with any other part of the VIU (nor is the ITO allowed to use the same consultants or external contractors for IT systems or equipment, security access systems or auditing).

Figure 4: Insourcing and outsourcing in the ITO model

The ITO is however allowed to set up joint ventures, including with one or more TSOs, power exchanges, and other relevant actors, to pursue the objectives of furthering the creation of regional markets or of facilitating the liberalisation process.

The Gas Directive provides for a general rule that appropriate financial resources for future investment projects, including for the replacement of existing assets must be made available to the ITO by other parts of the VIU in due time, following an appropriate request. This duration is open to the comments with not having a statement clearly in the Natural Gas Directive, however, the implecation is realizing investments in line with the ITO’s plans. These resources have to be approved by the Supervisory Body and the ITO must inform the NRA of these financial resources.

In its corporate identity, communication, branding and premises, the ITO should not create confusion in respect of the separate identity of other parts of the VIU (to avoid any confusion for consumers between the TSO and the supply company).

The Directives require the ITO to be organised in the legal form of a limited liability company.

3.3.3.2. Independence

The ITO must have effective decision-making rights, independent from any other part of the VIU, with respect to assets necessary to operate, maintain and develop the transmission system. The VIU is not allowed to determine, directly or indirectly, the competitive behaviour of the ITO in relation to the day-

IT-system and

consultants

IT-system and

consultants

Personnel and

services not

allowed

VIU

Import

Supply

LNG

ITO

Assets and

operations

Personnel and

services not

allowed

Personnel and

services at market

rate€





to-day activities and management of the network, and in relation to activities of the ITO for the preparation of the ten-year network development plan.

This means for example that the ITO must have the power to raise money on the capital market, that supply subsidiaries of the VIU cannot have shareholding in the ITO – and vice versa that the ITO cannot have shareholding in subsidiaries of the VIU with supply functions. Moreover, all commercial and financial relations between the ITO and the VIU must comply with market conditions and any contracts between the two should be approved by the NRA.

In order to guarantee that the ITO is independent in practice and does not pursue discriminatory conducts, the ITO must establish a compliance programme and appoint a compliance officer. The compliance officer is to be appointed by the Supervisory Body of the ITO, subject to the approval by the NRA, which may refuse the approval of the compliance officer only for reasons of lack of independence or professional capacity.

In addition, the ITO’s employees and management should be independent. A key requirement for the ITO model is the establishment of a Supervisory Body (SB). The SB is in charge of the appointment and renewal, working conditions and termination of the ITO management. These decisions must be notified to the NRA. Furthermore, the Directives contain specific rules to avoid any conflict of interest regarding management and staff of the ITO:

• For a period of three years before appointment, and for a period of at least four years after termination of their term, management of the ITO cannot have any professional position, responsibility, interest or business relationship with (parts of) the VIU or with its controlling shareholders. This also applies to people directly reporting to management and involved in operation, maintenance or development of the network.

• Management and staff cannot have any professional position, responsibility, interest or business relationship with the VIU.

• Management and staff of the ITO cannot financially benefit from the VIU. This also means that remuneration of management and staff cannot depend on activities or results of the VIU.

As indicated, the SB is a key requirement of the ITO, primarily in the decisions concerning management. In addition, the SB is also in charge of decisions that have an impact on the value of the assets within the ITO, including financial plans, the level of indebtedness and dividends to shareholders. The SB shall not interfere with day-to-day activities of the ITO.

At least half of the members of the SB minus one, have to comply with the same rules that apply to management and staff (see above). Moreover, the identity and the conditions governing the terms, the duration and the termination of office of SB members must be notified to the NRA.

3.3.3.3. Network Development and Investment

The ITO is obliged to submit a ten-year network development plan to the NRA on an annual basis. The ten-year network development plan includes the main transmission infrastructure that needs to be built or upgraded over the next ten years, together with a time frame. It also contains all the investments already decided and identifies the new investments required in the next three years. The NRA is obliged to publically consult system users on the ten-year development plan and publish the results of the consultation. The NRA must also check that the development plan is consistent with the (non-binding) EU-wide ten-year network development plan.

If the ITO does not execute an investment indicated in the ten-year development plan, the Member State must ensure that the NRA is required to take at least one of the following measures:

• Require the ITO to execute the investment.

• Organise a public tender to any investors for the investment.

• Oblige the ITO to accept a capital increase to finance the investment.





As in the ISO model, also in the ITO model there are specific duties for the NRA. These relate to the monitoring of the relations and communications between the ITO and the VIU, including the approval of any contracts between the ITO and VIU. The NRA can also issue penalties for discriminatory behaviour and act as dispute settlement authority between the ITO and VIU. Moreover, the NRA may request justification from the VIU as to any proposed investments

3.3.4. Certification A TSO can only be approved and designated as a TSO following the certification procedure in Article 10 of the Gas Directive and the provisions of Article 3 of the Gas Regulation. These rules apply to all TSOs for their initial certification, and subsequently at any time when a reassessment of a TSO’s compliance with the unbundling rules is required. The certification procedure is applicable to all unbundling models. However, for certification under the ISO and ITO models some additional requirements (the requirements including the comparison with the Ownership Unbundling model such as the independence necessities in areas such as management, employees, systems, Steering Committee) are applicable. As such, claiming to have implemented a certain model does not guarantee certification.

Figure 5 provides an overview of the certification procedure, which can take up to 10 months in total. The procedure starts with the TSO’s notification to the NRA combined with the submission of all relevant data and information covering each requirement for the selected model of unbundling. The NRA has to monitor compliance of the TSO with the unbundling rules continuously and can open a new certification procedure if changes in rights and influence over the TSO are expected.

If certification is requested by a potential TSO which is controlled by a person from a third country (not an EU member state), the procedure of Article 10 is replaced by the procedure of Article 11 of the Gas Directive (the ‘third country’ or ‘reciprocity’ clause). As an additional requirement in the certification of the TSO controlled by a third country, the security of supply situation of the member state and the EU as a whole should be assessed by the NRA, while taking into account international agreements between the EU and/or the relevant member state with the third country concerned.17

Commission staff working paper SEC(2011) 1095 provides practical guidance on how the Commission will treat and assess notifications by NRAs and explain the information which is required by the Commission in the process.

17 The is also known as the ‘anti-Gazprom’ clause, or an attempt by the European Commission to prevent too much control of Gazprom (or other majors such as Sonatrach) over European TSOs.





Figure 5: Certification procedure

Examples of EC’s considerations in gas TSO certification decisions are provided in chapter 4.1.

3.4. Unbundling of LNG and Storage Article 12 of the Gas Directive establishes that Member States shall designate, or shall require natural gas undertakings to designate, one or more storage and LNG operators. Storage and LNG operators shall keep separate accounts for their activities, with a view to avoiding discrimination, cross subsidies and distortion of competition (Article 31).

In addition, Article 15 establishes that a storage system operator (LNG operators are not mentioned here) which is part of a VIU shall be independent at least in terms of their legal form, organisation and decision making from other activities not relating to storage. However, this independency requirement applies only to storage facilities that are technically and/or economically necessary for providing efficient access to the system for the supply of customers. The minimum criteria to ensure independence of the storage operator are the same as for the owner of the transmission system under the ISO model, see also chapter 3.3.2 above.

Also relevant for LNG and storage is Article 29 which implies that operation of a combined transmission, LNG, storage and distribution system operator is allowed, under certain independency requirements similar to OU, ISO or ITO models. Indeed in several member states two or more activities are combined in one operator, see section 4.1

3.4.1. Access to LNG and Storage The Third Party Access (TPA) rules of Article 32 in the Gas Directive are also applicable to LNG facilities18. Regulated TPA (rTPA) is the default access regime for LNG in Europe. Thus member states

18 According to the Gas Directive, an ‘LNG facility’ means a terminal which is used for the liquefaction of natural gas or the importation, offloading, and re-gasification of LNG, and includes ancillary services

Notification to NRA

Submitted by TSO

Preliminary Certification Decision PCD

Adopted by NRA in 4 months and notification of PCD to EC

EC’s opinion on PCD

Adopted by EC’s in 2 months or in 4 months when ACER is involved

Final certification decision

Adopted by NRA in 2 months approval and designation of TSO (by MS)

Notification of designation to EC

Publication in Official Journal of EU





shall ensure the implementation of a TPA system to LNG based on published tariffs, applicable to all eligible customers, including supply undertakings, and applied objectively and without discrimination between system users. Member states shall ensure that those tariffs or the methodology underlying their calculation are approved and published prior to their entry into force by the NRA.

Access to gas storage facilities19 can be subject to a different regime, as explained in Article 33 of the Directive. For the organisation of access to storage facilities and linepack when technically and/or economically necessary for providing efficient access to the system for the supply of customers, member states may opt for negotiated TPA (nTPA) and/or rTPA. Member states or NRAs shall define and publish criteria according to which the access regime applicable to storage facilities and linepack may be determined. They shall make public which storage facilities, or which part of those facilities, is offered under the different procedures of nTPA and rTPA. These storage access provisions do not apply to ancillary services and temporary storage related to LNG facilities that are necessary for the regasification process and subsequent delivery to the system.

In case of nTPA, member states or the NRA shall take the necessary measures for natural gas undertakings and eligible customers to be able to negotiate access to storage facilities, linepack and ancillary services in good faith. Contracts for access to storage shall be negotiated with the relevant storage system operator or natural gas undertakings. Storage system operators and natural gas undertakings shall publish their main commercial conditions for the use of storage on an annual basis. When developing the conditions for use of storage, system users should be consulted.

In case of rTPA, member states or the NRA shall take the necessary measures for natural gas undertakings and eligible customers to have a right to access to storage, linepack and ancillary services on the basis of published tariffs and/or other terms and obligations for use of that storage. The NRA or member state shall consult system users when developing those tariffs. The right of access for eligible customers may be given by enabling them to enter into supply contracts with competing natural gas undertakings other than the owner and/or operator of the system.

Note that the Gas Directive (Article 2(9)) allows that certain storages may be reserved exclusively and entirely (i.e. not in part) for TSOs to fulfil system stability purposes. It means that entire facilities are either reserved for TSOs or are labelled as ‘storage facility’ under the Directive. The use of storage facilities for balancing purposes does not fall under the exclusive use by a TSO: TSOs shall procure the energy they use for the carrying out of their functions according to transparent, non-discriminatory and market based procedures (Article 13(5)) and balancing rules shall be market-based (Article 21(1)).

Article 36 of the Gas Directive regulates the exemption procedure for new infrastructure, including new LNG and storage facilities. Major new infrastructure may upon request be exempted for a defined period of time from the third party access provisions under the following five conditions:

• The investment must enhance competition in gas supply and enhance security of supply;

• The level of risk attached to the investment must be such that the investment would not take place unless an exemption was granted;

• The infrastructure must be owned by a natural or legal person which is separate at least in terms of its legal form from the system operators in whose systems that infrastructure will be built;

• Charges must be levied on users of that infrastructure; and

and temporary storage necessary for the re-gasification process and subsequent delivery to the transmission system, but does not include any part of LNG terminals used for storage. 19 ‘Storage facility’ means a facility used for the stocking of natural gas and owned and/or operated by a natural gas undertaking, including the part of LNG facilities used for storage but excluding the portion used for production operations, and excluding facilities reserved exclusively for transmission system operators in carrying out their functions.





• The exemption must not be detrimental to competition or the effective functioning of the internal market in natural gas, or the efficient functioning of the regulated system to which the infrastructure is connected.

Exemptions are granted by the NRA on a case-by-case basis. And the NRA shall notify the European Commission together with all the relevant information with respect to the decision.

3.5. Roles and Functions of the Unbundled Companies Basically, the three main functions of a TSO, irrespective of being an OU, ISO or ITO, are (Rious et al 2008) as shown in the following diagram:

Figure 6: Roles and Functions of the Unbundled Companies The tasks (roles and functions) of the unbundled TSO are described in article 13 of the Gas Directive. The commercial supply company is however free to choose its role to a large extent. In addition, to the main tasks as described in the diagram, the TSO shall

• Build sufficient cross-border capacity (Art. 13,2)

• Adopt objective, transparent and non-discriminatory balancing rules (Art. 13,3)

• Comply with minimum standards for maintenance and development of the grid according to national provisions (Art. 13,4)

• Procedure the energy they use for their functions according to market based procedures (Art. 13,5).

3.5.1. Internal Implementation Internal implementation relates to the consequences of the different functional roles namely management, financial & commercial, and organisational implications of each unbundling option. Furthermore the transfer of assets, staff and systems must also be considered for each option. Depending on the unbundling model chosen, changes and amendments to the roles and tasks of the TSO will differ as shown in the following table

The short term management of gas flows

The planning, maintenance and

development of the gas grid to ensure

long-term management of gas flow.

(a) Operate maintain and develop transmission

facilities to meet service obligations

(b) Refrain from discriminating between system

users

(c+d) Provide any other TSO as well as system

users sufficient information

Ma

in F

un

ctio

ns

Ta

sks

Art

. 1

3,1

ISO ITOOU

• Other YSOs

(ENTSO-G)

• NRA

• Industry

Associations

• Customers

Cooperation

Other TSOs (ENTSO-G)

NRA

Industry Associations

Customers





Table 3: Internal implementation in the unbundling models

Acting TSO

OU ISO ITO

Management Complete independence Neither ISO nor TO management active in management of VIU

Independence:

Cooling on/off periods

Supervisory Body

Compliance officer

Financial & Commercial

Separate financing from capital market

Company financing Compliant with market conditions: Company financing or market loans

Functional & Organization

Complete separation ISO separate from TO and VIU

Legal and functional separation of TO from VIU

Legal independent subsidiary - organizational separation only

Assets Valuation generally based on a due diligence

Assets remain in ownership of VIU (TO)

Valuation based on book values

Personnel Staff has to be transferred completely and once and for all

Systems Full control over all systems necessary to operate the transmission system in a reliable way (e.g. EMS, Scada)

Management

Under full ownership unbundling, TSO staff and management must not be involved in, or belong to, parts of the business involved in gas production, gas trade or gas supply. This is to ensure full independence and to avoid conflict of interest between the different entities and stakeholders. They have complete independence and their sole role is to manage and serve the interests of the TSO.

Under the ISO option, the management of the ISO and the transmission owner may not participate in activities related to the management of the VIU. The management shall have independent effective decision-making rights, independent from the VIU, also with respect to assets necessary to operate, maintain or develop the network.

Under the ITO model, a key requirement is the setting-up of a Supervisory Body. Management of the ITO is appointed by supervisory body and certain requirements related to appointment include:

• Three year cooling on period – this means that management of the ITO cannot exercise any professional position or responsibility, interest or business relationship, directly or indirectly, with any part of the vertically integrated undertaking, or with its controlling shareholders, other than the ITO, for a period of three years before its appointment





• Four year cooling off period means that after termination of their term of office in the ITO, the management cannot have any professional position or responsibility, interest or business relationship with any part of the vertically integrated undertaking, or with its controlling shareholders, other than the ITO, for a period of not less than four years. The management is allowed to remain within the ITO after termination of their term of office in the ITO, but only in a non-managerial position

In addition to the decisions concerning the management of the ITO, the Supervisory Body is responsible for decisions that may have an impact on the value of the assets of the shareholders within the ITO. This includes the decisions regarding the approval of the annual and longer-term financial plans, and the amount of dividends distributed to shareholders. However, the Supervisory Body cannot interfere with the day-to-day operational activities of the ITO and the management of the network.

Article 20(3) of EU Gas Directive specifies the certain rules applicable to at least half of the members of the Supervisory Body, among others are related to having no interest or stakes in the VIU, also after termination of their term of office in the ITO, the members of the Supervisory Body cannot have any professional position or responsibility, interest or business relationship with any part of the VIU, or with its controlling shareholders, for a period of not less than four years.

Financial & Commercial

Financial and commercial aspects deal with in particular the autonomy to finance and make investment decisions. As investment requirements for the gas transmission networks are usually substantial especially for major grid extensions (security of supply and demand development), financing the necessary investments is an issue especially if under the ownership unbundling option. The TSO here have the option to seek financing from the capital market.

For the ISO option, the ISO here acting as a TSO has full responsibility for ensuring the long-term ability of the system to meet reasonable demand through investment planning. The Gas Directive states that when developing the transmission system, the ISO is responsible for planning, including obtaining the necessary authorizations and for the construction and commissioning of new infrastructure. As regards to the financing of these investments, the transmission network owner (TO is under the obligation to finance the investments decided by the ISO. This however only relates to the investments that have been approved by the regulatory authority. If the transmission network owner does not want to finance the investments itself, it has to give its agreement to the financing of the investments to other interested parties, including the ISO. This may mean that the network owner will not become the owner of the new parts of the network that it has not financed.

Under the ITO option, the ITO must have a strong say in investment planning and have the power and autonomy to raise money on capital market if it chooses to. However, Article 17(1)(d) EU Gas Directive provide for a general rule that appropriate financial resources for future investment projects and/or for the replacement of existing assets must be made available to the ITO by other parts of the vertically integrated undertaking in due time, following an appropriate request from the ITO. These resources have to be approved by the Supervisory Body and the ITO must also inform the regulatory authority of these financial resources.

Functional & Organisation

Full ownership unbundling implies that there is a complete clear cut separation of the TSO and other activities (production and supply). It will operate as an independent entity with its own resources, management, staff, assets etc. These requirements are stipulated in the EU Gas Directive.

Under the ISO option, the TSO is separate from the transmission owner and the VIU. There is a legal and functional separation from the TO and the VIU. This means that the management and staff may not participate in activities related to the management of the VIU. It can demonstrate that it has at its disposal the required financial, technical, physical and human resources to carry out its tasks.





The ITO is a legally independent (ring-fenced) subsidiary of the VIU, therefore organization separation is required. For example the ITO is not allowed to share IT systems or equipment, physical premises and security access systems with any other part of the vertically integrated undertaking. The ITO is also not permitted to use the same consultants or external contractors for IT systems or equipment, security access systems or auditing, in accordance with Article 17 (6) of the Gas Directive. This includes having separate control rooms e.g. dispatching operations will need to be split between the functions of the transporter and the incumbent supplier.

Transfer of assets, personnel and systems

The following relates to the transfer of assets, staff and systems required under the unbundling options.

Assets

Full ownership unbundling also requires the transfer of assets to the new company operating as the TSO. The task is to first value the assets, this is commonly done via due diligence. This could result in the market value of the assets not being equal to the book value. Different approaches can be adopted for asset valuation. Depending on the asset valuation methodology used, this could have consequences for the asset base which under the regulatory regime impacts the allowed revenue of a TSO.

Under the ISO model, the assets remain under the ownership of the VIU. So there is no requirement to transfer the TSO assets under this option.

As regards assets of the ITO, Article 17(1)(a) of the Gas Directive states that these must be owned by the ITO. These assets are not only the network assets, but also any other assets necessary for gas activity and will be based on book values.

Personnel

For all three options, staff have to be transferred completely and once and for all. There are no differences between the three options.

Systems

This implies, regardless of the unbundling model, that full control over all systems necessary to operate the transmission system (e.g. EMS, Scada) are in place and implemented in a reliable way.

Outsourcing of activities in affiliated, unregulated entities and limits of service level agreements

In some instances outsourcing of activities may be considered. The reason for outsourcing services may be because this proves to be cost effective and more efficient, however some restrictions apply. For example the provision of services by the VIU to TSO (insourcing of activities from affiliated entities) is not permitted in any of the three models. This is to ensure the separation and avoidance of conflict of interest between the two entities.

The provision of services by the TSO to VIU (outsourcing to affiliated entities) is only permitted if:

• The services are rendered at market rates

• Approved by the regulator

Outsourcing to other TSOs (TSO, ISO or ITO) is allowed. For example, joint ventures between TSOs (TSO, ISO or ITO) and/or market operators are permitted

Additional duties of the NRA

The following shows the additional duties that regulatory authorities have to abide by under the different unbundling options. Articles 40 and 41 of the Gas Directive set out the general objectives and duties and powers of the regulatory authority respectively. Depending on the unbundling model chosen the tasks of the regulator may differ. These mainly fall into the categories of monitoring and compliance tasks and involvement in the settlement of disputes within the different relationship (e.g. ISO and TO, ITO and VIU).





ISO (and TO) ITO (and VIU)

Monitoring compliance

Monitoring relations and communications

Dispute settlement

Approving investment planning and network development

Ensure that network tariffs collected by ISO include remuneration for TO

Inspections

Monitoring use of congestion charges

Issue penalties for discrimination

Monitor communications

Dispute settlement

Monitor commercial and financial relations

Approve commercial and financial agreements

Inspections

Assign tasks of the ITO to an independent system operator in case of breaching obligations

Figure 7: Additional duties of NRA under different unbundling options

3.5.2. External Interface Management Regulation (EC) No 715/2009 is the second part of the Third Energy Package on natural gas, Art. 4 of the Regulation established (ENTSOG) where all transmission system operators shall cooperate at Community level. There TSOs can cooperate in order to facilitate cross border trade, promote the completion and functioning of their internal markets and further the development of a pan-European transmission system.

Network code(s)

One of ENTSOG’s task is the establishment of network codes. The joint European network codes aim to harmonise cross border procedures and so lead to better integration of neighbouring markets and cross border trading/shipping of gas. They define the requirements and obligations for connection and access to the transmission system and administer the information flow between system operators and grid users. The Network Codes are regulated by ACER (European Agency for the Cooperation of Energy Regulators).

A number of network codes have been established:

NC Capacity Allocation Mechanisms (Reg 984/2013)

The Network Code on Capacity Allocation Mechanisms in Gas Transmission Systems requires gas grid operators to use harmonised auctions when selling access to pipelines. These auctions sell the same product at the same time and according to the same rules across the EU. This network code applied from 1 November 2015.

NC Balancing (Reg 312/2014)

The Network Code on Gas Balancing of Transmission Networks sets out gas balancing rules including the responsibilities of transmission system operators and users. This network code will applied from 1 October 2015.

NC Interoperability and data exchange (Reg 703/2015)

The network code on interoperability and data exchange rules aligns the complex technical procedures used by network operators within the EU, and possibly with network operators in the Energy Community and other countries neighbouring the EU. This network code will apply from 1 May 2016.

NC transmission tariff setting

A fourth network code for the transmission tariff setting is currently under development. The draft is currently iterated between ENTSOG and ACER. In addition, it is expected that ACER will soon publish framework guidelines for rules for trading, thus starting the development of a fifth network code.





System planning and operation

Gas Regulation (EC) 715/2009 requires ENTSOG to develop a Ten Year Network Development Plan (TYNDP) on a biennial basis. The first TYNDP was published in 2010 and the most recent one in 2015. Additionally there also are national development plans for example the Netzentwicklungsplan (NEP) in Germany. In these network development plans the necessary network extensions in the transmission system are identified. The goal is to reduce congestion and further the development of the pan-European gas market. The projects are financed by equity, market debt and public co-financing (through the EU TEN project).

The system operation of TSO is based on the roles and responsibilities as laid out in the EU and national Network Codes. The system operators shall treat all system users equal and shall cooperate and exchange information with other system operators freely and in a collegial manner.

3.6. Unbundling Alternatives From Tax and Legal Perspectives

3.6.1. Legislative Background The Natural Gas Market Law No. 4646, which entered into force in April 18, 2001 (the “Law”), regulates the framework for the liberalization of the gas sector by breaking up the monopoly of the government owned pipeline operator BOTAŞ on imports, distribution, storage and the sale of natural gas. The Law requires that BOTAŞ’s gas import share should fall below 20% of total consumption via contract and volume transfers to private companies by 2009. This hasn’t been accomplished as of today. In this regard, the Law does not allow private companies to import pipeline gas from supplier countries that already have a supply agreement with BOTAŞ, unless the contracts are transferred by BOTAŞ. In addition, the Law requires that the wholesale, transmission and storage business of BOTAŞ shall be legally unbundled and an autonomous transmission system operator would own and operate the transmissions network.

There is a new Draft Law on Amendment of the Natural Gas Market Law (the “Draft Law”). Accordingly, the Draft Law adopted the unbundling model of BOTAŞ through legal unbundling20 and creation of three separate enterprises out of BOTAŞ. One of the enterprises is designated to carry out transmission activities, another one is designated operate LNG terminals and conduct gas storage activities, and the last one is designated for the other activities other than mentioned thereof.

Unbundling for the conduct of gas production, import and supply and gas transmission operations of BOTAŞ under separate legal entities can be realized in accordance with the provisions of the Turkish Commercial Code numbered 6102 (“TCC”) relating to partial split-off, full split-off and sale of assets procedures. Furthermore, Turkish Corporate Income Tax Law defines merger, split-off and exchange of shares in the 19th Article of the Law and provides relevant tax results of the transactions in the 20th Article of the same Law. Within the scope of Article 19, possible unbundling alternatives are;

a) Full split-off: All assets of the company are divided into parts and transferred to the other

companies. The shareholders of the de-merged company shall obtain all shares and rights

of the transferee companies (newly established companies). The company which is de-

merged shall be dissolved and removed from the trade registry.

b) Partial split-off: One or more parts of a company’s assets shall be transferred to other companies.

c) Sale of Assets: A part of the assets of the company shall be transferred to a newly established or existing company by way of sale.

20 Please refer to Section 3.6.5.1 for detailed information.





Table 4: Restructuring from Legal Perspective

Full Split-off Partial Split-off Sale of Assets

• In the case of full split-off,

the divided company shall

dissolve without liquidation.

Two separate companies will

need to be established.

Accordingly, full split-off shall

require more workload and

shall be subject to loss of

time and effort in relation to

transactions which need to

be realized and notifications

which need to be made,

when compared to partial

split-off.

• Principle of joint liability is

accepted for debts of the de-

merged institution.

• Partial split-off of BOTAŞ’s

sole shareholder through

establishing new

company(s) and transfer of

part of its assets to

companies which will be

newly established shall be

more advantageous

compared to full split-off. For

instance it shall not be

necessary to make an

additional transaction in

relation to the activity

remaining in the divided

company (e.g., assignment

and transfer of agreements,

lawsuits, assets,

employees).


accepted for debts of the de-

merged institution.

• The most important

difference compared to split-

off is that all transfers that

are made to the new

company shall also be

subject to the other party’s

consent. Additionally, the

requirements which are

determined in the law shall

be fulfilled separately for

each legal transaction. If the

agreement is executed

through the notary public

before the sale, the

agreement must be

reconcluded and re-

notarized.


not an issue for debts of the

company which transfers its

assets/ the assignee (the

newly established

companies) company unless

it is not deemed as a

transfer of commercial

enterprise.

Partial split-off is considered as the most applicable model amongst the examined alternatives due to the advantages explained above. When examined from a legal perspective, as a basis, maintenance of existing legal entity, conveniences of concept of partial universal succession and compliance with the legislation render the alternative of partial division more advantageous. A number of issues need to be resolved before BOTAŞ can apply partial split, which are discussed below.

3.6.2. Full split-off

Definition in the Law

Article 19 of Corporate Tax Law defines full split-off as:

“Transfer of all assets including receivables and debts of a Turkish resident company to an existing or newly established two or more Turkish resident companies at their book values and giving shares of the transferee company to the transferor (dissolving) company’s shareholders. The transaction shall still be considered as a split-off even if up to 10% of the nominal value of the participation shares that would be given to the shareholders of the transferred company is paid to them in cash.”

In case of full split-off, all assets and liabilities are transferred to the transferee companies with the current balance sheet values and trade name of the transferor (dissolving) company is deleted from the Turkish Trade Registry.





Acquisition Date of the Shares

As per Turkish Income Tax Legislation, sales of the joint stock company’s shares is exempted from capital gain taxation in case the holding period of related shares is greater than 2 years. Therefore, in order to benefit the capital gain income tax exemption, the shares should be held at least for 2 years by the tax payers.

In case of merger and spin-off within the scope of the Articles 19 and 20 of Turkish Corporate Tax Law, the acquisition date of the shares entitled to the shareholders of the dissolving company should be considered as the acquisition date of the shares of spin-off entity.

Corporate Income Tax Exemption

If spin-off of the companies is realized in accordance with the provisions of Article 19 and 20 of Corporate Income Tax Law governing tax-free mergers, any income resulting from the merger is not subject to corporate income tax. Only profit of the dissolving company for the partial accounting period ending as of the date of merger is subject to corporate taxation.

Additionally;

• The spin-off date is the registration date of the company’s authorized body decision regarding the spin-off in the Trade Registry.

• Corporate tax return regarding the spin-off should be prepared mutually by the dissolving company and Transferee Company, it should be jointly signed and submitted to the tax office of dissolving company within 30 days starting from the registration date of the spin-off in the Trade Registry.

• In order to tax the profit for the period until the spin-off date, the corporate tax base as of the spin-off date should be declared via above mentioned corporate tax declaration. Any profit after the spin-off date is taxed within the transferee company.

• The transferee company who obtains the assets of the dissolving company should commit that transferee company itself will be jointly responsible for the accrued and to be accrued tax liabilities of the dissolving company for the period prior to the spin-off date and should commit to fulfil other obligations related to this period. This commitment should be attached to the corporate tax return which is jointly submitted to the tax office.

Tax Losses Utilization

As per Corporate Tax Legislation, tax losses may be carried forward for five years provided that the losses for each year are shown separately in the corporate income tax returns. Tax losses lower the corporate tax base so the tax payment of the company. Carry forward tax losses of the dissolved company can be utilized by the transferee company under certain conditions. As per the 9th Article of Corporate Income Tax Law, tax losses to be utilized should not exceed the equity capital of the dissolving company as of the acquisition date and should be identified in proportion to transferred assets by the transferee company. Additionally, below provisions should be satisfied:

• Annual corporate tax returns of the previous 5 years should be submitted on time;

• Activities of the dissolving company should be continued for at least 5 years starting from the fiscal period of spin-off.

In cases of violation of these conditions, taxes are deemed as lost on purpose and tax fine is assessed over the lost tax.

VAT Exemption

As per the Article 17/4-c of VAT Law, the transaction of merging or split-off is exempt from Value Added Tax provided that the transactions are realized in accordance with the conditions specified in the relevant provisions of Corporate Income Tax Law.





In addition deferred VAT of the dissolving company present as of the spin-off date shall be used by the transferee company without leading any duplicate deductions.

Stamp Tax Exemption

As per Stamp Tax Legislation, written contracts signed by both contract parties and over which a specific monetary amount is indicated are subject to stamp tax. As per the Article 1 of the Stamp Tax Law, the stamp tax is applicable when the conditions and provisions of the contract are benefitted in Turkey, or the contract is endorsed or presented to any State Institution.

Stamp taxes are mainly levied on a wide range of transaction documents. The maximum limit of stamp tax to be imposed per document is TL 1.797.117,30 (for the year 2016, updated annually). Stamp taxes relating to major business transactions are: contracts with a monetary amount at 0,948% of the contract amount, letters of guarantee at 0,948% of the amount, payrolls at 0,759% of the gross salary.

As per Table 2 attached to the Stamp Tax Law, the documents arranged for split-off purposes are exempt from Stamp Tax provided that the transactions are realized in accordance with the conditions specified in the relevant provisions of Corporate Income Tax Law.

Fixed Assets and Depreciation

The fixed assets of dissolving company are transferred to the transferee company with the net book values valid as of the spin-off date and transferee company shall continue to depreciate the fixed assets within the remaining depreciation periods and net book values.

Contribution Fee to Competition Board

It is mandatory to pay 0, 04% of the capital increase amount to the Competition Board for each capital increase registration of each company.

Fee Exemption

As per Article 123 of Fee Law, split-off transactions are exempted from possible fees; i.e. litigation fees, notary fees, title deed fees.

3.6.3. Partial split-off

Definition in the Law

Article 19 of Corporate Tax Law defines partial split-off as below:

“Transfer of - the properties belonging to a full Turkish resident company, or - the properties existing in the balance sheet of a foreign equity company having a permanent

establishment in Turkey, or - the participation shares that are held for at least two years, or - one or more manufacturing or service enterprises, at their book values, to an existing or a newly established full Turkish resident company, as the capital participation in kind.

However, when manufacturing or service enterprises are transferred, all the asset and liability items that are required for the integrity of such enterprises must have been fully transferred. In partial spin-off, the company shares that are obtained in exchange for the transferred assets can either be kept as the property of the transferring company, or given to its shareholders. In the transfer of the shares of the real property and the affiliate, if the transferee company’s shares are given to the shareholders of the transferred company, it shall also be mandatory to transfer the debts related to such transferred property and affiliate shares.” In case of partial split-off, the legal personality of the transferor company still continues.





Acquisition Date of the Shares

Ref: Full split-off, Section 3.6.2

Corporate Income Tax Exemption

If partial split-off of the companies is realized in accordance with the provisions of Article 19 and 20 of Corporate Income Tax Law, any income resulting from the split-off is not subject to corporate income tax. Only profit of the dissolving company for the partial accounting period ending as of the date of merger is subject to corporate taxation.

In partial split-offs, transferee companies are responsible for the transferor company’s tax debts accrued or to be accrued until the split-off date with the portion of the arms’ length value of the assets transferred.

Tax Losses Utilization

Tax losses belonging to the transferor company cannot be transferred to the transferee company so tax losses can only be utilized in the transferor company.

VAT Exemption, Stamp Tax Exemption, Fixed Assets and Depreciation, Contribution Fee to Competition Board, Fee Exemption issues are similar to full split-off explained in Section 3.6.2

3.6.4. Sales of assets In this alternative, the assets of a company are sold to another company via regular sales and purchase transaction.

One of the most crucial points in assets sales is that as per Turkish Transfer Pricing regulations, sales price should be determined based on the arms’ length principle and so should be in line with the market values.

Moreover, Transferee Company is not responsible for the tax debts accrued and to be accrued until the transfer date as in the case of full and partial split-offs.

Corporate Income Tax of Asset Sales

As a general principle any possible income generated through the sales of assets is subject to corporate income taxation; however, this taxation depends on the overall corporate tax base of the transferee company.

However, as per the Article 5 of Corporate Tax Law, 75% of the income generated through sales of the shares and properties which are held by the transferor company for at least 2 years period is exempted from corporate taxation. The exempted portion (75% of the total income) should be booked to a Special Fund account in the shareholders’ equity of the balance sheet and kept in this account for 5 years period. Additionally, in order to benefit from the exemption, the sale payment should be received within 2 years following the sale date. Corporate tax is deemed as tax loss for the unreceivable portion of the sales value within 2 years.

VAT of Assets’ Sales

In case there will be no specific regulation defined by Law, there is no VAT exemption for the sales of assets; so, sales transaction is subject to 18% VAT. Moreover, as per the 17/4-r Article of Turkish VAT Law, sales of the shares and properties which are held for at least 2 years period is exempted from VAT.

Depreciation

The assets sold are subject to depreciation by the transferee company over the sales values and over the beginning of depreciation period defined in the tax legislation.





Table 5: Summary Table for Tax Results

Full Split-Off Partial Split-Off Sales of the Assets

Corporate

Taxation

- Profit generated through the full split-off is exempted from corporate taxation.

- Profit generated through the partial split-off is exempted from corporate taxation.

- Sales of the assets are subject to corporate tax at 20% rate. - CIT exemption is only defined for the sales of properties and shares held for at least 2 years, 75% of the sales income is CIT exempted.

VAT - Merger and split-off transactions are VAT exempted.

- Merger and split-off transactions are VAT exempted.

- Sales of the assets are subject to 18% VAT, exemption is valid only for the sales of properties and shares held for at least 2 years.

Carry

Forward Tax

Losses

- Tax losses of the dissolving company may be utilized by the transferee companies in proportion of the transferred assets’ values. - Tax losses utilized by the transferee companies are limited to the shareholder’s equity amount of the dissolving company as of the split-off date.

- Tax losses of the transferor company cannot be utilized by the transferee companies. - There is no limitation for the tax utilization by the transferor company.

- It is not possible to utilize the tax losses of the seller company.

Transfer of

Receivables

and

Liabilities

- Receivables and liabilities are transferred without any tax burden.

- Receivables and liabilities are transferred without any tax burden.

- Transfer of the receivables and liabilities may result in additional tax burden.

Stamp Tax - The documents arranged for the split-off transaction are stamp tax exempted.

- The documents arranged for the split-off transaction are stamp tax exempted.

- New contracts or contracts which are transferred to the transferee company may result in stamp tax.

Fee - Transactions for split-off purposes are fee exempted.

- Transactions for split-off purposes are fee exempted.

- Fee may be charged for the transferred assets.

Capital

Decrease

- Capital decrease is not required.

- In case the shares are provided to the shareholders capital decrease may be required and additional tax results may arise based on the capital structure.

- Capital decrease is not required.

Depreciation

- Transferred assets are subject to depreciation over the remaining net book values which are calculated the remaining depreciation periods.

- Transferred assets are subject to depreciation over the remaining net book values which are calculated during the remaining depreciation periods.

- Transferred assets are subject to depreciation over the sales values which are calculated for the whole depreciation periods defined in the legislation. So it creates tax advantage for the transferee company.





3.6.5. Applicability of the Models under Turkish Law

3.6.5.1. Ownership Unbundling (OU)

Unbundling for the conduct of gas production and gas supply operations of BOTAŞ under separate legal entities shall be realized in accordance with the provisions of the TCC. The requirements of OU not only include unbundling of accounts, management, functional structure and/or legal entities, but also the shareholding structures shall be unbundled for BOTAŞ. In this way, activities in different fields will be fully controlled, operated and carried out by different legal entities, owned by different shareholders. This model provides for the highest level of unbundling with “operation of different activities under different legal entities with different shareholders”. As stated above, the shares of BOTAŞ are currently held by the Republic of Turkey Undersecretary of Treasury but the company is under the control of Ministry of Energy and Natural Resources. After the demerger of BOTAŞ, the new legal entities will also be state-owned, if not privatized in follow up. However it is required that the control over the new entities is exercised by separate public bodies (e.g. agencies, ministries other than Ministry of Energy and Natural Resources). Therefore, the public bodies should also be determined and required actions should be followed for OU model. Accordingly, after the restructuring of BOTAŞ, the TSO will not be entitled to directly, or indirectly, have any interest in companies which generate, produce or supply electricity or gas. In other words, the same entity (which is for the time being BOTAŞ) will not (i) control production and/or supply activities and cannot control or exercise any right over a transmission system operator or a transmission system simultaneously, (ii) will not control a transmission system operator or a transmission system and control or exercise any right over production and/or supply activities simultaneously. In addition the same entity will not be entitled to appoint members of the board of directors which is legally representing the undertaking of a transmission system operator or a transmission system, and directly or indirectly to exercise control or any right over, production and/or supply activities. To avoid of any conflict of interest the same person should be prohibited from being a member of the board of both entities.

In accordance with the provisions of TCC on partial split-off, the assets are transferred to other companies. Whilst shareholders of the de-merged company may be shareholders in the assignee company, the de-merged company itself may also be shareholder in the transferee companies.

In partial split-off, the shareholders of the assignee company (the demerging company) have a right to claim shares and rights in the transferee company (the newly established company) at a value that satisfies their existing shares and rights. Such claim is calculated by considering the value of assets of the companies that participate in the division, the distribution of voting rights and other important issues. Shareholders of the assignee company which have non-voting shares are given non-voting shares or shares which have voting rights in the same value. In consideration of privileged rights which are connected to the shares existing in the assignee company, equivalent rights or appropriate consideration is given in the transferee company. The transferee company must provide equal value rights to jouissance share owners of the assignee company or purchase their jouissance shares at their real value at the date of split-off agreement. In all companies which participate in the split-off company shares in the ratio of their existing shares, or in some or all companies which participate in the split-off in varied ratios according to their existing shares may be assigned to shareholders of the transferor company (TCC article 168 and with reference article 140).

In partial split-off, part of the assets (active-passive) may be transferred through separation. In accordance with Article 168 of the TCC, rights and debts related to the assets which are not subject to split-off remain in the transferor company. The principle of maintenance of shareholding and protection of rights is pursued. Company shareholders have request for rights in equivalent value. As stated in article 159, the shareholders of the de-merged company receive shares in Transferee Company. The net assets remaining in the de-merged company after the split-off shall be at a level to meet the debts. (Rationale of TCC 162)

In partial split-off, capital decrease can be realized to remove the legal and financial dangers of the capital loss which may be caused by the separation of parts of assets from the de-merged company pro rata or any inconveniences which may arise, namely to ensure compliance of the capital to the new





circumstances. According to Article 162, in case a capital decrease is made, rules regarding protection of creditors in capital decrease shall not be applied.

A set of issues have been identified so that partial split-off may be applied for BOTAŞ:

Transfer of Employment Contracts

The TCC protects the employees (a. 178) by providing that the employment contracts shall be transferred to transferee companies with all their rights and debts such as salaries, notice and severance payments, annual leaves, insurances, advance payment etc. However, employees have a right to object, in that case, the service agreement ceases at the end of the legal dismissal period. The Transferee Company and employee have the obligation to perform the agreement until the end date. Therefore, it shall be suitable to obtain consents from all employees in case of full split-off. Although it is not yet clear in the legislation under which circumstances the employees’ objection shall be accepted as fair or wrongful objection, there are different opinions.

Transfer of the Agreements

One of the most significant impact areas of the unbundling shall be on the existing agreements BOTAŞ has executed. The legal basis and the universal succession principle brought to split-off transactions with the TCC, is in the nature of being able to remove most of the workload such as renewal etc. which shall be applied to the agreements in the split-off transactions. In case of partial universal succession, rights and debts shall be transferred with a single transaction. It is not mandatory to fulfil the requirements of form to pass the ownership relating to such assets. Partial universal succession shall operate when the split-off is registered and announced.

In split-off transactions, transferee companies shall be successors of the assignee companies for any type of dispute which arose or may arise on third parties. Therefore, as long as they may be unbundled with respect to their subjects, it is considered that it shall be not necessary to renew the existing agreements of the companies, however notification relating to the split-off with registry and announcement letter of the Directorate of Trade Registry shall be necessary. Additionally, in the regulation brought by the reference Swiss Code regarding transfer of assets since the agreements are regarded as assignment of claims and transfer of assets in relation to split-off, there are opinions saying that consent of the other party must be obtained. As a result of our research, it is also understood that this issue is controversial. Therefore, in transactions which shall be realized, it may be suitable to establish a protective provision with the natural gas market legislation which shall end the discussions in relation to obtaining the other party’s consent, through a special provision regarding transfer of employees, other rights and agreements to the company created as a result of the split-off.

In addition to the foregoing evaluations, agreements which include provisions in relation to both supply and transmission activities, need to be evaluated separately. In case the subject of the agreement contains both activities, an additional protocol must be executed or a separate agreement must be executed for each company through termination of the existing agreement. In case the agreements are renewed, stamp duty may arise. In addition, special circumstances regarding agreements to which BOTAŞ is a party must be evaluated.

Transfer of Licenses and Permits

For all types of licenses, permits etc., which BOTAŞ has, the relevant institution or organization shall be applied to with the decision of registry regarding the split-off. In order to prevent any risks at this stage, the transfer of licenses and permits without any consent, permit and payment of any taxes, duties, charges etc. must be regulated with the natural gas market legislation.

Otherwise, new application to the relevant institution or organization may be necessary to re-obtain the existing licenses, permits etc. In this case, the supply company will need to fulfil all conditions which are legally necessary completely and fully to obtain such license or permit and re-pay the license fee.





Litigation

Assignee company shall acquire legal entity status at the date of registry of the split-off resolution; shall become BOTAŞ’ partial complete successor. According to a court decision in relation to partial universal succession with regard to becoming a party in a lawsuit; in case the transfer transaction is made during the lawsuit, the lawsuit shall proceed by showing the transferee as opponent.

Nevertheless, if BOTAŞ is the claimant, it may transfer the subject matter of the lawsuit to newly established company(s), pursuant to Code of Civil Procedure. In this case, the newly established company(s) shall become claimants in the lawsuit and the lawsuit shall proceed. If BOTAŞ is the defendant, it may again transfer the subject matter of the lawsuit to the newly established company(s), however in this case, the claimant shall have two rights of choices. The lawsuit may be proceeded with or the claimant may convert the lawsuit to an action for damages if it wishes.

In case the transfer transaction happens during BOTAŞ’s ongoing lawsuits in existing circumstances, proceeding with the lawsuit through showing Transferee Company as opponent must be regulated in the natural gas market legislation which will regulate the legal unbundling against all risks.

3.6.5.2. Independent System Operator (ISO)

As this model requires the vertically-integrated company still owns the transmission network, but the operation of the network is carried out by an independent system operator appointed by the relevant authority, BOTAŞ shall still own the transmission network but not carry out the independent system operations. The ISO shall be responsible for granting and managing third-party access, including the collection of access charges, congestion charges, and payments under the inter-transmission system operator compensation mechanism and shall be responsible for operating, maintaining and developing the transmission system. In case that an ISO has been appointed, the Gas Directive requires legal and functional unbundling of the transmission system owner which is applicable under Turkish law. ISO unbundling method can be applicable by restructuring of BOTAŞ with the split-off provisions of TCC. Legal entities of (i) production import supply, network owner and (ii) system operator shall be organized under different legal entities by following above-mentioned partial split-off procedure. In this way, BOTAŞ will be prohibited from giving instructions with respect to day to day operations of the subsidiary. Therefore to establish “independent” operator shareholders of the transmission company and the system operator should consist from different shareholders.

3.6.5.3. Independent Transmission Operator (ITO)

This model allows for the ownership of the transmission network to remain with the vertically-integrated company (BOTAŞ) but requires the company to comply with a number of rules aimed at ensuring the independence of its supply and generation businesses. In accordance with the Gas Directive, the ITO may, in specific circumstances and by way of exception, conclude contracts with third-party service providers for legal, IT, or accountancy services only if (i) assets are owned by the ITO, (ii) personnel are employed by the ITO, (ii) ITO employ a sufficient number of qualified staff members to handle day-to-day core activities for corporate services, including legal services, accountancy and IT services. Gas Directive requires that ITO shall be organized in the legal form of a limited liability company. Please note that although ITO unbundling method shows some similarities with legal unbundling model, which is applicable in Turkey with the current enforceable regulation; such method is not regulated by any specific law.

Additionally, under Turkish law, flexible board mechanisms have been brought by the TCC. Although “supervisory board” does not exist in provisions of the TCC, it is stated in the rationale of article 367 of the TCC that supervisory board-executive board may be set up alongside the board system. Even though this is technically correct, we believe that a supervisory board-executive board as foreseen by German/EU system may not be set up under the TCC system. Accordingly, supervisory board-executive board separation may be achieved through the Board of Directors. The Board of Directors may appoint executive officers and set up an executive board. In case the Board of Directors transfer all of its powers to the executive board, the Board of Directors become the supervisory board. However, such supervisory board shall not be in the same qualification as the supervisory board under the German system. With this option, in case there are any Board of Directors Members in the executive board,





such member shall also perform duties in the Board of Directors which is in the nature of supervisory board. The Board of Directors supervise, give instructions to and dismiss the executive board when necessary. Due to these reasons, we believe that it may be more efficient to restructure the supervisory board-executive board as regulated under the TCC.

3.6.5.4. Split-off in Relation to Competition Law

In Article 7 of the Law on Protection of Competition numbered 4054, it is stated that, “Merger by one or more undertakings, or acquisition of their assets or all or a part of their partnership shares, or of means which confer themselves the power to hold a managerial right, except circumstances of acquisition by way of inheritance, by any undertaking or person from another undertaking, to create a dominant position or strengthen their dominant position, which shall result in significant lessening of competition in any market for goods or services within the whole or a part of the country, is illegal and prohibited. Via communiqués to be issued, the Board shall declare the types of mergers and acquisitions which have to be notified to the Board and for which permission has to be obtained in order for them to become legally valid”. Pursuant to Article 5 of Communique Concerning the Mergers and Acquisitions Which Require Approval of the Competition Board numbered 2010/4, approval of Competition Authority must be obtained in partial split-off. Nevertheless, according to Article 6 of the said Communique, there is no need to obtain approval in “intra-group transactions which do not lead to change in control”.





4. EU Best Practice

4.1. Prevailing Practice in the EU Before going into the unbundling details of some specific countries that may serve as (good or bad) example for Turkey, in this section we first provide a more general overview of unbundling practices in the EU.

Table 6 provides an overview of the unbundling models currently applied in the EU member states for their main natural gas transmission networks. Other networks such as individual (transit) pipelines (e.g. TAG in Austria or ITG in Italy) and interconnectors (e.g. the BBL between the Netherlands and the UK) are disregarded in the table, although they have dedicated and certified TSOs. This information is based on documents that can be found at https://ec.europa.eu/energy/en/topics/markets-and-consumers/market-legislation.

Table 6: Unbundling models applied in gas TSOs21 Country % State owned OU ITO ISO

Austria 31.5 (OMV) Gas Connect Austria

Belgium 79.8 (Publigas) Fluxys

Bulgaria 100 Bulgartransgaz

Czech Republic

0 Net4gas*

Germany 0

Fluxys

Gasunie Transport

Bayernetz, GRTgaz, Jordgas, Nowega, Terranetz, Gascade, GTG Nord, Ontras, Thyssengas, OGE, (Open Grid Europe)

Denmark 100 Energinet.dk

Spain 5 (SEPI) Enagas

Reganosa

Enagas as ISO for ETN

Enagas as ISO for Saggas

France 33.3 (Engie) TIGF GTRgaz

Greece 34 Desfa

Hungary 24.7 FGSZ

Ireland 100 BGE (now Gas Networks Ireland)*

Italy 21 Snam Rete Gas

21 Gaz piyasaları çok küçük olan veya hiç gaz piyasası bulunmayan ya da yeni veya izole piyasalar olduğundan dolayı ayrışma düzenlemelerinden muaf olan (Madde 49) yedi üye devlet bu tabloda yer almamaktadır.

https://ec.europa.eu/energy/en/topics/markets-and-consumers/market-legislation

https://ec.europa.eu/energy/en/topics/markets-and-consumers/market-legislation





Lithuania 96.58 (UAB EPSO-G)

Amber Grid

Netherlands 100 Gasunie Transport

Poland 100 Gaz-System Gaz-System as ISO for Yamal

Portugal 11.1 REN

Romania 58.5 Transgaz

Sweden 0 Swedegas

Slovenia 39.6 Plinovodi

Slovakia 100? (at least 51) Eustream

UK 0 National Grid Gas

As explained in the text below, Net4gas and BGE are certified as ITO but after the transfer of shares to private parties the TSOs no longer belong to a VIU and therefore are OU in practice.

The table also gives an overview of the net share of public ownership in the TSO. For example, the Austrian state holds 31.5% of shares in OMV, the mother company owning the TSO (ITO) Gas Connect Austria. In Belgium, the municipal holding company Publigas owns 77.7% of Fluxys shares. An additional 2.1% of shares is in the hands of the Federal Holding and Investment Company. Thus Fluxys is mainly owned by lower government (municipalities).

Public shareholdership in gas TSOs is (still) quite common in Europe, whereas the commercial parts of the former incumbent gas utilities have often been privatized. In general, governments expect that privatization will lead to more capital invested and reduce prices by higher productivity and utilization. The reasons for not privatizing the gas network are that the infrastructure is regarded as a natural monopoly and is of crucial importance for the economy. As illustrated in Table 7, ownership unbundled TSOs tend to be publicly owned, while ITOs often are largely in private hands.

Table 7: Public and private shareholding in OUs and ITOs OU ITO

Publicly owned majority Belgium Denmark Czech Republic Ireland Lithuania Netherlands Poland

Bulgaria Slovakia

Privately owned majority Spain Italy Portugal Sweden UK

Austria Germany France Greece Hungary Slovenia





OU examples

The ownership unbundling model forces owners to divest their controlling shares either in the supply business or in the transmission operator. Contrary to the ITO model, which is based on behavioural rules, the ownership unbundling model is meant to ensure a situation in which discrimination can be excluded on the basis of the ownership structure of the TSO. Even before it became part of the regulation in the Third Directive, some member states or companies have implemented ownership unbundling of gas transmission networks (e.g. UK, Denmark, Spain and the Netherlands). This often took place as part of a privatization process of state owned companies, where the commercial supply parts were sold to private companies.

But also, in some countries largely privately owned gas companies were fully ownership unbundled for various reasons. For example, in the Netherlands, the gas transmission network was labelled (by law) as vital infrastructure for the country that requires state ownership. As a result, the vertically integrated gas company Gasunie was forced to unbundle and the Dutch state bought out the private shareholders (Shell and ExxonMobil) in the network part for a total amount of €2.77 billion in 2005.

It is also worth noting that some TSOs that originally separated as ITO now apply the OU model. French TIGF (Transport et Infrastructures Gaz France) has been part of the Total group until 2013 when Total decided to divest the pipeline and storage business, and sold their shares (to Snam 45%, GIC 35% and ENI 20%). In Italy, Snam Rete Gas was forced to change from ITO to OU due to the Italian law imposing the OU regime to all regulated natural gas utilities. ENI lost its control over Snam by transferring 30% of Snam shares to Cassa. Note again, that the Gas Directive prohibits the transfer back from OU to either ITO or ISO.

ITO examples

Although the ITO model seems quite complex, it is also a popular model for unbundling among European TSOs. This model was originally not foreseen in the Gas Directive but is the result of a compromise requested by eight member states (Austria, Bulgaria, France, Germany, Greece, Luxembourg, Latvia and Slovakia) that allows the retention of existing structures where the TSO belongs to a VIU. However, strict ring-fencing rules should ensure the TSO’s independence. Not surprisingly, the ITO model is currently applied in the countries requesting the model in the first place, although certification of Latvijas Gaze has not taken place yet as it has an explicit derogation from the Gas Directive, exempting if from unbundling rules (article 49). E.ON and Gazprom own the majority of shares in Latvia’s gas TSO.

Noteworthy is the situation in Germany, where the majority of TSOs operate as an ITO. However, some TSOs with origins in other countries, i.e. Fluxys (Belgium) and Gasunie Transport (Netherlands), apply the OU model, which is the same as in their country of origin. It shows that within one country (and one NRA) different unbundling models can occur.

The choice for the ITO model in some of the other countries became obsolete in the meantime. In the Czech Republic a privatization process by the government resulted in a merger between Transgas and RWE to form RWE Transgas in 2001. This was followed by unbundling, resulting in the TSO RWE Transgas Net in 2006. The TSO was later renamed Net4Gas, which was certified as an ITO in 2012. Subsequently in 2014, RWE sold its stakes to Allianz and Borealis for ca. 1.6 billion euro. Consequently, the current situation does not warrant an ITO situation: there is no VIU related to Net4Gas (former RWE) anymore. A comparable development could recently been seen in Ireland, where Bord Gais Energy was sold to Centrica in 2014 and Gas Networks Ireland22 is now the licensed TSO and asset owner under the umbrella of state-owned multi-utility Ervia. A revision of the certified unbundling model is therefore expected.

Effectively, only eight member states apply the ITO model currently (excluding the Czech Republic and Ireland). In an assessment of the ITO model23 (both electricity and gas) the European Commission concluded in 2014 that in general the autonomy requirements (ITOs must be equipped with all financial,

22 Former Gaslink was abolished in August 2015 and its responsibilities rolled back into Gas Networks Ireland. 23 Report on the ITO model. SWD (2014) 314 final.





technical, physical and human resources) for the ITOs are applied and work in practice. However, regarding the independence of the ITO (with regards to decision-making rights, the power to raise money on the capital market and its corporate structure) the EC has frequently raised issues in its certification opinions. Nevertheless, the independence rules under the ITO model are now working in practice and significant monitoring of compliance occurs with regular communication between the NRAs and the ITOs. Other findings of the EC are:

• Independence of staff and management: It is generally ensured that the people working for the ITO no longer have an interest to favour the VIU over other network users. However, the cooling off/on period for management is often seen as too long (both by TSOs and NRAs)

• Supervisory Body: Rules have been implemented satisfactorily although some NRAs indicate that they have no possibility to act against the VIU. It was suggested that the independence requirements for members of the Supervisory Body should be made stricter

• Compliance Program and Officer: Are generally seen as an effective tool in helping to monitor ITO’s compliance with unbundling requirements

• Network development and powers to make investment decisions: There appears to be no difference between the levels of investment made by TSOs under the ITO or the OU model

ISO examples

Transgaz, the TSO in Romania, is the only national TSO applying the ISO model. However, the European Commission is of the opinion that “under the present circumstances there is insufficient ground for certification of Transgaz under the ISO-model”.24 The main reason why Transgaz is not accepted as ISO by the EC is that the ISO is to a large extent the same person as the system owner. The proposed ISO Transgaz owns 64% of the grid, which is not allowed under the ISO model. Additional objections by the EC against the ISO model in Romania relate to separation within the state (various ministries and departments), the interests of minority shareholders (they can exercise rights that are incompatible with EU requirements on appointment of board members and voting rights), the independence of Transgaz's board members, and the powers of the Department for Energy over Transgaz.

Clearly, the ISO model is not popular and seems difficult to get approval by NRAs and the EC. Effectively, only the Polish TSO Gaz-System acts as ISO for the transit pipeline Gaz-System Yamal, and in Spain Enagas is the ISO for two smaller systems ETN and Saggas. As such, the ISO model seems to fit better to smaller projects of networks or pipelines within the larger system. System operations expertise and resources of the ISO seem the drivers here.

The ISO concept is not new and has been applied in a number of wholesale markets in e.g. the USA but more often in electricity than in gas. One of the few gas ISOs can be found in Australia, where the Australian Energy Market Operator (AEMO) delivers an array of gas and electricity market, operational, development and planning functions. It manages the Victorian gas transmission network and the National Electricity Market (NEM). AEMO also facilitates electricity and gas full retail contestability, overseeing these retail markets in eastern and southern Australia. It is additionally responsible for national transmission planning for electricity and the establishment of a Short Term Trading Market (STTM) for gas. AEMO is a governmental organization, whereas the Australian gas pipelines are privately owned, e.g. by APA Group.

In practice, independent system operations without ownership of assets proves problematic. The network is leased to the ISO and the ISO does not have full control on all system and asset operation. The ISO model therefore requires new interface rules between system operation and transmission (ownership) activities. Pollitt concluded that, although ISOs seem to address the issue of non-discriminatory access, they do not solve the issue of investment adequacy. PJM in the USA serves as a (bad) example, showing high congestion costs which they were unable to manage properly. Managing

24 https://ec.europa.eu/energy/sites/ener/files/documents/2013_088_ro_en.pdf

https://ec.europa.eu/energy/sites/ener/files/documents/2013_088_ro_en.pdf





the interface between ISO and asset owner is a challenge, i.e. giving proper incentives to the owner for developing the grid. Moreover, efficient and flexible management of maintenance and congestion is compromised. Most EU member states that experimented with ISO came back on that decision and transferred to OU or ITO. Therefore, strict regulation and permanent monitoring is required, e.g. NRA approval of investment planning and ensuring that the ISO is involved in or able to make investment decisions.

Regardless of the model applied, in most cases the major obstacle in the TSO certification process, is the ownership structure between shareholders. According to CEER25, even the OU model gives rise to questions on ownership structure, while the model itself seems very strict and straightforward in this matter.

The opinions issued by the European Commission as a response to NRAs’ certification of TSOs in Europe may include approval, disagreement or further investigation of a specific action in respect to the unbundling process. From the majority of opinions we observe that that the EC interprets the Directives in a very strict manner. In specific cases the EC takes into account the primary objectives of the unbundling rules, makes assessments in a case by case manner, and evaluates whether these objectives are infringed or not. Thereby the EC sometimes comes to the opinion that a deviation from the strict wording of the Directives is justified. It is not always foreseeable when the European Commission will apply such an interpretation considering the primary objectives of the Directives. On some issues, e.g. the concrete scope of the ‘core activities’, the European Commission does not give detailed guidance as to the interpretation and leaves it to the NRAs to decide.26

Below we summarize the most imperative elements of EC’s opinions in the process of certification of European TSO. The summary is divided by two models: OU and ITO.

Table 8: Summary of opinions of the EC in the process of certification for the OU model OU topic Description Country examples

Significance

Some shareholders of OU TSOs hold direct or indirect participations in companies active in production (generation) and/or supply. The crucial point is whether the participation is significant enough to constitute a potential for discrimination against other network users.

Italy

Gas TSO SGI applied for certification under the OU model. SGI is a 100% subsidiary of Eiser, which has two companies active in generation of solar energy in Spain sold at regulated prices, the others are waste management companies, both of small size, one located in the United Kingdom and one situated in Italy, selling the electricity as a by-product at a regulated price.

The EC considered that, if the generation plants are of such a small size, not located where the SGI gas network is situated and especially when electricity is produced as a mere by-product or even sold at a regulated price, there was no potential for discrimination of other network users.

Gas storage and exchanges

Article 9(1)b(ii) and Article 9(3) of Directive 2009/73/EC prohibits the same person to operate or control

Denmark

EC stated that the ownership and operation of a gas storage facility falls outside the

25 CEER Memo on the transposition of unbundling requirements for Transmission, Distribution and Closed Distribution System Operators. C14-IBM-61-03. 30 July 2014. 26 The review based on Fiebinger Polak Leon Attorneys-at-Law - Thomas Starling, Tamara Karlovsky





both a transmission system and other parts of the values chain.

scope of relevant activities listed in Article 9(1) b (ii) and Article 9(3). Furthermore, the EC took the view that activities of gas exchanges cannot be qualified as supply27 Thus, they do not create an obstacle to certification of the TSO and the TSO was allowed to keep storage and exchange operations.

Public bodies Pursuant to Art 9 (6) of Directive 2009/73/EC “two separate public bodies ... shall be deemed not to be the same person ... “.

In its interpretative note on the unbundling regime, the EC considered that “two separate public bodies should be seen as two distinct persons ... provided that they are not under the common influence of another public entity in violation of the rules on ownership unbundling ...; the public bodies concerned must be truly separate”.

Latvia

The EC considered that “two separate Ministries ... can under certain circumstances constitute bodies with a sufficient degree of separation ...” The EC checked in detail whether or not the two Ministries had separate decision making powers.28

Austria

The EC had doubts that the two members of the provincial government had independent decision making powers in all aspects and in addition deemed it necessary to have also a strict separation between the officials administering the respective participation rights of the province.29

Table 9: Summary of opinions of the EC in process of certification for the ITO model ITO - topic Description Country examples

Independence of management and supervisory board

Legislation in some MSs provided that the independence requirements of the Directive only apply to members of the board appointed after 2012.

Germany

Germany law allows that members of the management, who acquired interests in other parts of the VIU, to keep those interests until 31 March 2016. The EC considered that financial interests should be sold immediately, or at least be put into the hands of an independent trustee.30

Corporate identity In order to underline the autonomy of the ITO, confusion of market players

Austria, Hungary

27 Certification of Energinet (gas). C (2012)88. 006-2011-DK. The operation and ownership of storage and exchanges it itself does not imply production or supply of gas. Therefore these activities can stay with the TSO, provided that the storage company complies with the rules on legal and functional unbundling and that the NRA is responsible for verifying whether this is the case. 28 Certification of AST. C (2012)9108. 044-2012-LV. The in-dept evaluation focused on the legal structure of the State administration and the regulations determining the competences of Ministries in Latvia. Furthermore, independent operation of the TSO is assured through the fact the state owned companies are managed and governed according to commercial law. 29 Certification of Vorarlberger Übertragungsnetze GmbH 30 Certification of Bayernetz





regarding its separate identity from the VIU shall be avoided. Therefore the ITO has to refrain from using marks, names, etc. resembling those of the VIU.

Regarding Austrian GCA and Hungarian FGSZ, the EC made clear that any reference to the label of the VIU is forbidden.31

IT and auditors The ITO is prohibited from using the same IT-system and IT service providers and auditors to reduce the risk that the VIU could gain confidential data from the ITO.

Germany

The EC disagreed with the German regulator BNetzA, who was of the opinion that the same external service provider or auditing company can be engaged, as long as it is ensured that specific employees are designated to advise exclusively the ITO.32

LNG and storage operators

Several European TSO have indeed combined their LNG and/or storage activities with transmission activities, see Table 10. For example, the LNG terminal Revithousa in Greece is owned by the TSO DESFA. DESFA provides third party access to the terminal at regulated conditions (tolling service). Third parties can be the former state import monopoly DEPA and other independent shippers. In addition, DESFA has some discretionary rights embedded in the access rules related to maintenance of system security.

The majority of these TSOs in the table are ownership unbundled, effectively resulting in ownership unbundling (from commercial supply activities) of LNG and storage operators as well. France’s Elengy is the only LNG operator for which the majority of the ownership remains in the hands of a company with supply interests (ITO). Combined TSO and Storage operators under the ITO model are more common, e.g. in Germany and Austria.

Note however that next to the combined LNG and storage operators (combined with the TSO) there are various other LNG and storage operators not related to any TSO, but e.g. part of commercial gas supply companies. For example, in the UK the Rough storage facility is owned and operated by supply company Centrica.

31 Certification of Gas Connect and FGSZ 32 Certification of Bayernetz





Table 10: Examples of combined operators in the EU Country Transmission

TransCo LNG Storage

Belgium Fluxys (OU) Zeebrugge Loenhout

Denmark Energinet.dk (OU) Lille Torup and Stenlille

Spain Enagas (OU) Enagas (several terminals)

Enagas (several facilities)

France GRTgaz (ITO) Elengy (several terminals)

Storengy (several facilities)

France TIGF (OU) Lussagnet and Izaute

Greece Desfa (ITO) Revithousa

Italy Snam (OU) GNL Italia1 Stogit (several facilities)

Netherlands Gasunie (OU) GATE2

Portugal REN (OU) Sines Carriço

UK National Grid (OU) Grain LNG LNG storage 1 Panigaglia

2 Gasunie owns 40% of GATE

4.2. Unbundling in the UK The UK has full ownership unbundling between the TSO (National Grid Gas) and the supply companies. However, ownership unbundling was not enforced by the UK Government or the competition authorities; it was undertaken voluntarily by the privatized VIU for commercial reasons. We have chosen this example for a number of reasons. First, the fact that ownership unbundling was undertaken voluntarily demonstrates positive reasons for doing so, rather than this simply being forced by regulatory authorities. Second, the EU target model is heavily based on the approach that was designed and implemented in the UK. Since unbundling and market liberalization are so closely linked, a focus on the UK may be helpful. Finally, the UK has encountered, and successfully managed, issues with security of supply since unbundling took place. The way in which this has been accomplished – with a strong reliance on the market – may be instructive in the Turkish context.

As indicated above, to understand the history of unbundling in the UK, it is important to also understand the approach that was taken to liberalize the market during the 1980s and 1990s. This section tells the stories of liberalization and unbundling in parallel.

4.2.1. Background

Context: the early history of the UK gas industry

The UK gas industry is 200 years old. Gas was originally manufactured from coal on a local basis and used for lighting, and then later for heating and cooking once electricity came along as a competing source of energy.

The industry was nationalized in 1948 by the creation of 12 geographically-based organizations, known as Area Boards, and these were then combined to form British Gas Corporation, which was still publically owned, in 1972.

Natural gas was discovered in the North Sea in the 1960s. Over a period of ten years, the whole UK system (including all appliances) was converted to use natural gas, and the old town networks were connected by the construction of a national transmission system.





Figure 8: Overview of the liberalization and unbundling processes in the UK

The privatization of British Gas

During the 1980s, the Conservative Thatcher government undertook a process of privatizations, seeking to raise money to support tax cuts and to introduce private sector disciplines into the previously state-owned monopolies.

A fierce battle took place within the Conservative government over whether British Gas should be privatized intact or broken up. If the company had been broken up at that point in time, it is most likely that this would have been a geographical split into a number of local gas companies, rather than a split between transportation and supply. The perceived benefit of a geographical split would have been to encourage greater efficiency through the regulatory process. Privatization was seen as sufficiently challenging, so there would not have been a great appetite for the additional complexity that would have come with a transportation/supply structure. Furthermore, the difficulty of developing competition whilst retaining a vertically integrated company – and hence the desirability of splitting transportation from supply - would not have been well understood in the mid-1980s.

British Gas’ chairman, Denis Rooke, was a formidable man who had spent his career developing the company into the integrated monolith that it then was. He was vehemently opposed to any break-up and had allies within the Government who helped him win the argument.

It is not clear how much genuine concern there was about security of supply at that time. North Sea gas was being exploited, reserves were still plentiful and the National Transmission System was well developed to transport these indigenous supplies to UK consumers. So while security of supply probably did appear in the list of reasons for not breaking up the company, higher up the list would have been arguments to do with efficiency, practicality and the retention of a powerful company that could compete successfully on a world stage.

So, British Gas was privatized in 1986 as an integrated monopoly, employing over 100,000 staff: it bought gas as a monopsony purchaser from the gas producers33 and sold it as a monopoly supplier to consumers; it owned and operated the transmission and distribution networks and the storage facilities; it sold and serviced gas appliances etc.

33 British Gas was a de facto monopsony purchaser at this time. Its statutory monopsony status had been removed in 1982, under the Oil and Gas Enterprise Act.





The approach prior to privatization of central planning, and of command and control operations, continued unchanged after British Gas was privatized. Indeed, the general belief within the company was that it would be business as usual, but now without government interference.

The Gas Act 1986

The Gas Act 1986 enabled the privatization, retaining the integrated structure. The development of competition, while envisaged in the Gas Act, was not seen as a key driver behind the privatization process.

Key features of the legislation included:

• It gave British Gas a statutory monopoly over the domestic and small-medium industrial and commercial market, but not over the large industrial and commercial market (over 25,000 terms (c. 732,000 kWh) p.a.)

• A price control formula was put in place to control tariffs

• An economic regulator – a non-ministerial government agency called Ofgas - was created to regulate the onshore gas industry

• Ofgas was given a statutory objective of enabling effective competition, and it had powers to direct the terms of access to transportation services

The development of competition

Competition developed very slowly at first as new entrants struggled to gain access to the transportation network and to procure gas that they could market. Existing gas fields were already committed to British Gas under long-term contracts, and new supply companies struggled to compete with the dominant incumbent for new sources of gas. Between 1988 and 1993, three reviews were held by the competition authorities, each of which led to additional measures being put in place to speed up the process of competition.

The 1988 Monopolies & Mergers Commission (MMC) Inquiry

The first competition review came about because a large customer complained about British Gas’s monopolistic pricing practices, where in particular it would price contracts up to the cost of the customer’s alternative fuel.

The MMC (the main competition authority in the UK at the time) investigated and concluded that British Gas was operating in an anti-competitive manner. It made a number of significant recommendations, including:

• A requirement to introduce price transparency by publishing price schedules for the large industrial and commercial consumers

• Information separation between the transportation division and the gas purchasing and marketing departments

• Greater transparency of access charges for producers using the pipeline network

• A restriction on future gas purchases, limiting British Gas to 90% of new gas fields in an attempt to provide sources of gas for new competitors

So, although this review arose from a downstream issue, a number of the recommendations were focused on stimulating competition upstream. These were regulatory mechanisms at this stage; they didn’t go so far as to affect the organizational structure of the integrated monopoly.

The 1991 Office of Fair Trading (OFT) report

The second competition review came 3 years later, this time by the Office of Fair Trading, which was the authority that had been tasked with monitoring the success of the earlier reforms.





In the meantime, British Gas had formed a department to negotiate gas transportation agreements with the newly forming shippers, and the first such agreement was signed in 1990.

The OFT found that competition was not progressing quickly enough, with a fundamental problem being the lack of access to gas for new entrants, despite the 90/10 rule, which limited British Gas’s purchases of new fields. According to the OFT, insufficient supplies would be available to competitors until 1995 under the 90/10 rule.

Requirements from the OFT review, agreed by British Gas in a set of formal undertakings, included:

• A 40% market share target for British Gas (in the large industrial and commercial market sector)

• A gas release programme, equating to approximately 4.7 bcm over a 4 year period

• A separate transportation unit to be set up, to operate at arms-length from its competitive supply business, by October 1993. Ownership unbundling was still not seen as a pre-requisite to effective competition

• The development of a new system of transparent and non-discriminatory tariffs for the use of the pipelines and storage facilities, to apply equally to the supply business of British Gas as to any other user of the pipeline system

It is notable that British Gas agreed to the 40% market share target, possibly because there was always the threat of another MMC reference if they did not agree, with the potential for ownership unbundling to arise from a second MMC inquiry

The 1993 MMC Inquiry

Following the OFT report, competition developed quickly, stimulated by a number of factors:

• The greater access to gas production from the gas release program

• A rapidly growing market for gas fired power stations, in which the new entrants were able to compete

• The arrival of energy traders from the US, seeing opportunities in the UK market

• A heavily tilted playing field in favour of the new market entrants, the result of the earlier regulatory interventions

• The lowering of the threshold above which competition was permitted, from 25,000 therms per annum to 2,500 therms per annum (approximately 732,000 kWh per annum to 73,200 kWh per annum)34.

British Gas became so concerned with developments, and the creeping nature of the changes, that it needed clarity and it asked for another MMC inquiry. Ofgas also referred the company to the MMC as it was dissatisfied with progress on the separation of the transportation and storage business from the supply business that had been required by the OFT.

This time the MMC concluded that British Gas had failed “to conduct its businesses……in such a way as to secure an effective separation between them”. In other words, the joint ownership of the supply business on one hand and the transportation business on the other hand was impeding the development of competition and therefore acting against the public interest. To remedy this, they recommended that the company should be required to divest its trading business (i.e. the MMC did propose ownership unbundling). They also recommended that domestic competition should be introduced by the early 2000s.

34 In August 1992, Ministry of Foreign Affairs exercised its rights to lower competition threasholds stated in Competition and Services Law (1992).





(While security of supply was noted as a consideration in the MMC’s report, the measures required to ensure security of supply to underpin a fully liberalized market would have been the same with or without ownership unbundling).

However, these were recommendations for Government, and the Government disagreed with the priorities implicit within the MMC’s proposals. They said that ownership unbundling was not necessary, but that domestic competition should happen much more quickly and be completed by 1998.

The start of unbundling

Figure 9 below shows the organizational structure of British Gas after it separated its trading arm from its transportation and storage arm as required by the OFT.

This separation of the businesses happened 15 years prior to the Third Energy Package coming into force in 2009. It is, however, interesting to compare the arrangements that were put in place with the requirements of the EU in respect of the ITO model.

The separation of the British Gas businesses can best be described as physical, financial and informational separation. Many of the present EU requirements for an ITO would have been met, for example: TransCo was a separate legal entity with its own branding, and was relocated to the outskirts of Birmingham, around 100 miles north of the trading arm’s headquarters; TransCo had separate accounts; and Chinese walls were put in place to restrict the sharing of information across the Group.

However, a number of the requirements for an ITO would not have been met, particularly those associated with independence. For example, TransCo did not raise capital independently – this was still a group-level activity - and the restrictions that now apply in the ITO-model in relation to management positions (cooling off periods etc.) are more stringent than those that applied within British Gas following this separation.

Figure 9: Structure of British Gas in 1994

The Gas Act 1995

The Government introduced new legislation in the form of the Gas Act 1995 (which amended the Gas Act 1986) in order to facilitate further the gas market liberalization process.

TradingTransportation

and StorageE&P Global Gas

Supply Gas

Supply

Business

Gas

Service

Retail

TransCo

Notes

Public Gas Supply focused on the price-regulated market

Business Gas focused on the competitive market

E&P and Global Gas looked after the upstream and

international ventures respectively

Public Gas Supply





Key features of the Gas Act 1995 were:

• Provision for the separate licensing of gas suppliers, gas shippers and public gas transporters (including independent public gas transporters who could compete with TransCo in the new connections and extensions market). The licensing framework required transportation activities to be distinctly separate from those of supply

• The ability for the regulator to determine the timing of the introduction of domestic competition, subject to a backstop date of the end of 1998 for the whole market to be opened

• The strengthening of Ofgas’ duty in relation to competition: from “to enable persons to compete effectively…” to “to secure effective competition…”

• The widening of Ofgas’ role to ancillary services such as metering, meter reading and gas storage

Network Code and domestic competition

By the time British Gas separated into business units in 1994, the whole industry was fully focused on the development of the Network Code in preparation for the first phase of domestic competition.

The Network Code was developed very quickly, between 1993 and 1996. This was achieved through a multi-party development process, facilitated by TransCo but with an active regulator ensuring the programme kept on track and willing to make decisions where the industry participants could not agree. Critical to the success of the programme was that everyone had an interest in making this work, even British Gas Trading who were still losing market share very quickly and needed to get onto the same terms as its competitors.

The Network Code was a pre-requisite for domestic competition because the pre-existing gas transportation agreements were becoming administratively unworkable as competition grew. The dramatic reduction in the competitive threshold in 1992 had caused major problems, but this was nothing as compared with the administrative complexity of domestic competition. So the Network Code created the entry-exit system of capacity and the virtual gas trading hub (the National Balancing Point, known as the NBP) in order to simplify the contractual structure and provide great flexibility to gas shippers in meeting the needs of their customers. The Network Code covered the whole transportation system, right down through the distribution networks to the customers’ meter.

This was as much an IT project as it was a commercial project, with a huge system required to support domestic competition. As planned, the first phase of domestic competition was implemented in 1996, with full implementation for around 20 million customers by 1998.

4.2.2. Motivation and Rationale

Rationale for the OU Model

In 1997, British Gas decided to demerge its trading business, leading to ownership unbundling. The demerger created two companies: Centrica plc, which was the gas supply business; and BG plc, which comprised the monopoly gas transportation business, E&P and the international downstream business. Centrica inherited the giant Morecambe gas field, ensuring that it had sufficient assets to operate as a sustainable business.

British Gas’s decision to demerge was a commercial one; it was not required to do so by the Government, the regulator nor any other competition authority.

There were two main reasons. The first was the need for strong management focus. TransCo was getting used to life as a regulated monopoly gas transportation company, and to some extent was the shop window for BG International’s overseas activities. Centrica, the trading arm, had to focus on competition across all sectors of the UK gas supply market. Creating separate companies allowed the respective management teams to focus clearly on these very different businesses.





The second driver of the demerger was a sharp commercial problem. British Gas had too much gas; it had over-procured, failing to predict the speed at which competition would develop, and the price of gas had tumbled. It needed to renegotiate its legacy take-or-pay contracts, and it was helpful in these negotiations that Centrica was a separate company, without the profits of the other businesses to underpin it. Having demerged, Centrica successfully renegotiated take-or-pay contracts with many of its counter-parties, although this came at a significant cost. In the first three years following the demerger, Centrica’s accounts reveal exceptional charges associated with the renegotiations of almost £1.4 billion.

4.2.3. Practical Implementation Steps in Unbundling of British Gas

4.2.3.1. Amendments of legal/regulatory framework

Since the main regulatory reforms (i.e., the 1995 Gas Act, separate licensing arrangements, implementation of the Network Code and domestic competition) had already taken place, major changes to the legal and regulatory frameworks were not required at the time of ownership unbundling. This section therefore focuses on the changes to the contract structure that were required for the market liberalization process, and the developments in gas trading that arose as a result of liberalization

Contractual implication

Figure 10 provides a simple illustration of the contract structure within the gas market prior to liberalization. Gas was bought and sold through gas sale and purchase agreements. The agreements between British Gas and the producers were typically very long-term depletion contracts, covering the entirety of a gas field and with the price linked to that of oil. In addition to the commercial aspects, these contracts also covered the necessary technical parameters associated with the transfer of gas between the parties: gas quality, flow rates, pressure requirements etc.

Figure 10: Illustration of market contract structure prior to liberalization

With the separation of transportation and trading, a revised contract structure is required. This is illustrated in simplified form Figure 11. Gas sale and purchase agreements remain between those parties buying and selling gas. Now, however, connection agreements are required at the interfaces of connected systems (principally gas terminals-to-onshore gas transportation system and gas transportation system-to–large gas consumer). These are technical agreements, covering the same set of technical issues that were previously dealt with in the gas sale and purchase agreements. The Network Code governed the arrangements for use of the gas transportation system by the shippers.

Gas Usage

Storage facility operation

Transmission

system

operation

Distribution

system

operationGas Terminal

Operation

Production

Exploration

Gas UsersBritish GasProducers

Gas sale/purchase

agreement

Gas sale/purchase

agreement





Figure 11: Illustration of market contract structure after transportation trading separation

Market liberalization has transformed the way in which gas is traded in the UK. Approximately 50% of gas physically delivered in the UK is now traded at the NBP, with a typical churn rate (or re-trading ratio) of 15-20. To facilitate trading, exchanges are well-established and standard agreements are in place to govern over-the-counter trades. Force majeure provisions are extremely narrow, relating only to the ability to report the trade to the TSO (i.e. covering IT failures). This has the great advantage of guaranteeing physical delivery to the buyer, with the seller exposed to the balancing cost if they fail to deliver. Prices are transparent and widely reported. The benefits of trading at the NBP have attracted a wide range of market participants including commodity traders and financial institutions, in addition to traditional gas market participants.

Long-term bilateral contracts still have a place in the market, but these tend to be for delivery at the NBP (rather than a stipulated beach terminal), have shorter contract durations than they did prior to liberalization (typically 8-10 years) with prices indexed to the NBP price and limited force majeure provisions.

At the other end of the gas chain, large consumers now have greater flexibility in their gas procurement strategies, with the ability to purchase the commodity, transportation and metering services separately and to manage their risk more actively on the market. The larger and more self-sufficient consumers have the opportunity to buy gas at the hub and procure transportation services from the hub to their premises directly from the TSO (known as self-shipping). Interruptible supply contracts are less common than prior to liberalization, with many only giving the right to interrupt to the transporter to manage capacity constraints.

4.2.3.2. Corporate Restructuring of British Gas and its successor companies

The demerger of British Gas is illustrated in Figure 12. As the diagram illustrates, this was just the first of three major changes to the corporate structure that took place between 1997 and 2002.

Three years after the British Gas demerger, BG plc demerged TransCo to create the Lattice Group. As with the first demerger, the need for management focus on very different businesses was also a key





factor in this transaction, this time the key difference being regulation. The regulated TransCo had licence conditions that effectively bound the company into significant capital investments. As an integrated company, this constrained the capital available for investment (for higher returns) in BG’s unregulated businesses.

The logic for the merger of the Lattice Group with National Grid two years later was quite different. National Grid owned and operated the high voltage electricity transmission network in England & Wales. The merger brought complementary businesses together, creating synergies and enabling cost savings.

In 2005, National Grid sold half of its 8 gas distribution networks. It has recently announced its intention to sell a majority interest in the remaining half.

Figure 12: Ownership unbundling and further corporate restructuring in the UK

Further unbundling

Unbundling in the UK has not stopped with the ownership unbundling of the network company. The UK regulator has strongly pursued an agenda of ‘competition where possible’, and this has extended into the areas of gas storage, new connections, meters and meter reading.

Figure 13: Unbundling model, illustrates this model of utilities. In the centre is the natural monopoly – the pipes in the case of gas. Services from those assets, principally transportation capacity, are provided on a monopoly basis. Everything else can be made competitive: services to the assets (e.g. maintenance contracting); services upstream of the assets (exploration & production and storage); and, services downstream of the assets (supply, retail, new connections, metering and meter reading).





Figure 13: Unbundling models

Storage unbundling

Prior to separation of the integrated British Gas, it owned and operated seasonal (Rough), mid-range (Hornsea) and five LNG storage facilities. In the early days of third party access to the gas transportation system, storage services were bundled with transportation services, i.e. shippers were unable to procure storage services separately. From 1994, following the 1993 MMC report, British Gas began to offer separate third party access to these facilities.

Figure 14: Developments in the ownership of storage facilities

Figure 14: Developments in the ownership of storage facilities, illustrates the subsequent corporate activity associated with the storage facilities, with only LNG storage retained within the transportation company. The logic for this was that (in addition to providing peak shaving gas) these storage sites provided system resilience by being located at the extremities of the network and therefore able to bolster system pressures through the rapid withdrawal of gas from storage when required. However, they have gradually become redundant as new sources of gas have come onto the UK gas transportation system at different parts of the country, with the effect that these sites can no longer be considered to be at the network extremities. The value they can realize purely as peak shaving facilities





has been insufficient to justify their ongoing existence and so they have therefore gradually been decommissioned, with the last of these LNG storage facilities due to close in 2016.

In a liberalized market, storage provides a form of flexibility to shippers allowing them not only to balance their portfolios but also to realize additional value through trading and optimization, for example by exploiting the difference between spot and future prices in times of high price volatility. The 6 new storage facilities, which now compete in an open market with Rough and Hornsea, tend to have high deliverability capabilities in order to make use of such opportunities.

To the extent that the TSO requires storage services to support it with the safe operation of the network, it is able to purchase these services from the storage operators.

4.2.4. Lessons Learned There are a number of aspects of the UK experience which may be relevant when considering the situation in Turkey. This section summarises the issues that the UK has encountered in relation to security of supply and the lessons that can be drawn from these. It then identifies some broad learning points from the UK experience of market liberalization and unbundling.

Security of supply

As discussed earlier, security of supply may have been a consideration when British Gas was privatized intact in 1986, but it was probably not an over-riding factor at that point in time.

When the liberalization process really started a few years later, the UK was still self-sufficient in gas and security of supply was still therefore not high on the agenda. As a result, it received relatively little attention during Network Code negotiations. Key points associated with the framework were:

a) TransCo was required to have a Network Code that incentivised suppliers (i.e. via the daily balancing regime) to have sufficient gas available to meet defined security of supply standards for their domestic customers35. However, the licensing framework did not place specific requirements on shippers or suppliers, relying instead on the gas balancing provisions in the Network Code to create the appropriate incentives. (In practice, the balancing regime has not been designed to meet any particular level of supply security, since the incentive to balance is based on prices set by the market)

b) The Network Code contained provisions (known as ‘Top-up’) to ensure that the gas storage facilities were not depleted too early in the winter. This was replaced in 2004 by a less stringent approach (‘safety monitors’) which was designed to avoid a network emergency by retaining sufficient gas in storage to protect customers who could not be safely isolated from the network.

c) The Network Code was largely silent on the question of how upstream market participants, developing new sources of gas, could trigger the necessary developments to the onshore transmission system. Initially, this aspect of the regime relied primarily on a) a general licence condition on TransCo to develop its network to meet peak (1 in 20) levels of demand, and b) a requirement on shippers to provide TransCo with details of their long term plans.

The investment framework was subsequently strengthened through the creation of an auction system, which allowed shippers to book entry capacity many years ahead. However, even this did not fully cater for the scenario where a new gas source necessitated the construction of a major extension to the transmission network. This situation arose when two new LNG terminals were being developed in the mid-2000s, as the UK’s reserves started a rapid decline.

As a fully liberalized market, the UK has relied on private investment to deliver new gas importation projects. Table 11 lists the gas importation sources into the UK at present. It can clearly be seen how

35 The ‘domestic customer supply security standards’ relate to a ‘1 in 50’ winter and a ‘1 in 20’ peak day





much of this infrastructure came on-stream during the mid-late 2000s to help secure the supply-demand position.

Many commentators would say that the market responded just in time. An alternative perspective is that this didn’t quite happen in time since the supply-demand position was extremely tight in the 2005 and 2006 winters, with much of the new infrastructure still to be commissioned. Two very mild winters helped the UK gas industry through this position relatively uneventfully.

As Table 11 shows, the UK now has a highly diverse profile of gas supplies even though the UK’s own gas production continues to decline. Whereas once the UK was at the far end of the gas supply chain through Europe, now with its three major LNG reception terminals and liquid wholesale market, it can act as a bridge to Europe for gas in the global market-place.

Since liberalization, the Government has maintained the position that ‘the market will provide’. It has been conscious that Government intervention could deter market participants from investing, making it important to stick to the policy.

In summary, the following learning points emerge from the UK’s experience of security of supply:

• During the process of liberalization and unbundling, it is helpful to think through how the framework will support security of supply over both short and long timescales. The UK did this successfully in relation to short timescales, but had to make significant modifications to the framework later to cover longer timescales. In a position of import dependency, it would clearly be important from the outset to provide the necessary obligations and incentives within the regulatory framework to facilitate the required levels of supply security following liberalization and unbundling

• The simplicity and flexibility of the entry-exit system, and the transparency and liquidity of the NBP have been very important factors in attracting new sources of gas to the UK to replace declining indigenous reserves

• Since market-liberalization, the UK Government has avoided the temptation to make significant interventions, which has been an important factor in order not to deter much-needed market investment. For example, interventions that could have such an effect might be the provision of financial support for the construction of new storage facilities, or the capping of spot prices.

• While the UK experience demonstrates that (with the appropriate framework in place) the market can deliver significant levels of investment to maintain security of supply, this will not necessarily be a comfortable experience. The just-in-time (or maybe not-quite-in-time) nature of the new importation infrastructure in the UK a decade ago is not surprising given that a) these are very large and complex engineer projects, with all the associated risks of delay, and b) private investors have an incentive to minimize the time that their capital is tied up for before they start to see a return.

Table 11: UK gas importation infrastructure

Importation infrastructure

Type Location Year

Commissioned Annual Capacity

(bcm)

Vesterled Pipeline St Fergus 1978 14.2

Interconnector Pipeline Bacton 1998 (expanded

2007) 26.9

Isle of Grain LNG Kent 2005-2010 20.4





Langeled Pipeline Easington 2006 26.3

BBL Pipeline Pipeline Bacton 2006 19.5

Tampen Pipeline St Fergus 2007 9.8

South Hook LNG Milford Haven 2009-2010 21.0

Dragon 1 LNG Milford Haven 2009-2010 7.6

Gjoa Pipeline St Fergus 2010 6.2

TOTAL 151.9

Learning points from the UK unbundling experience

More broadly, we have identified the following conclusions from the UK experience:

• The development of competition was slow while British Gas was an integrated monopoly. It took three competition reviews to create the framework in which it would flourish. In hindsight, the strength of UK competition policy (and the associated authorities) was a key factor in ensuring the development of the liberalized market.

• While physical, financial and informational separation of the VIU was one of the factors that allowed competition to develop successfully, the structure of the market framework was key to its success. A huge amount was accomplished before ownership unbundling: the Network Code was developed, and the initial phases of domestic competition were rolled out.

• Ownership unbundling (and the subsequent restructurings) was not forced on British Gas; it happened for good business reasons. In particular, British Gas realized that a gas supply business competing openly across all sectors of the market posed very different challenges from a capital-intensive, regulated monopoly gas transportation business. The need for clear management focus on each of these two businesses was a key driver behind the decision to demerge.

• The implementation of the Network Code and domestic competition, and ownership unbundling of the VIU all took place prior to the first EU Gas Directive in 1998. The UK experience has therefore had a strong influence on the development of European policy. In particular, the EU Target Model for Network Codes has been heavily based on the commercial framework adopted in the UK.

• Shareholders have gained significantly as a result of the restructuring that has taken place within the gas sector. As a crude illustration – and ignoring dividends - the combined value of shares in Centrica, BG Group and National Grid is now around £21, from £1.35 at privatization (a fifteen-fold increase). By contrast, the FTSE 100 is approximately four times higher now than at the time of privatization.

• It is more difficult to gauge the value for consumers. First, the energy world today is totally different from the energy world at the time of privatization, making comparisons difficult. Second, we can never know what could have been achieved with strong regulation rather than domestic competition. Nevertheless, domestic gas prices in the UK are generally among the lowest of all European countries, which may be evidence that market liberalization has been beneficial for consumers. It would be hard to ascribe any of this





benefit to ownership unbundling, though, since we can never know what would have happened had British Gas not decided to demerge.

• As described above, the UK unbundling experience has extended into a range of ancillary activities. This carries a risk of over-complication, so it is important to ensure that the cost of reforms can be expected to outweigh the benefits and that the industry and regulator are not distracted from more pressing or important challenges.

4.3. Unbundling in France This sections’ focus is on the unbundling efforts and its process in France. The VIU, long time known as GDF Suez (recently rebranded as Engie) was a prime example of state owned monopoly that practically governed the entire French gas system until its transmission network was unbundled into an independent TSO - GRTgaz. After a brief introduction, unbundling in France is scrutinized mainly in regards to: Motivation, Practical implementation, and corporate restructuring. Steps taken towards the governance and organizational reform of the newly established TSO are described in more detail.

4.3.1. Background

Engie (former GDF Suez)

For many years, GDF Suez was considered as one of the largest energy utilities worldwide. It was established after the merger between Gaz de France and Suez in 2008, later in 2015 renamed to Engie.

The company’s corporate structure includes every part of the gas value chain with operations in more than 70 countries, employing more than 200,000 people. It has been organized in six business lines as described in the figure below. With the transposition of the First and Second Gas Directive into French law, legal unbundling of the transmission network operator was put in place in 2005. The rest of the infrastructure businesses in France (LNG, gas storage) followed the same path in 2008.

Figure 15: The group structure of Engie with its main infrastructure business line

GRTgaz

Today the TSO GRTgaz (Gestionnaire du Réseau de Transport Gaz) covers transmission pipelines with a length of over 32,000km, transporting around 60 bcm of natural gas to its customers, and employing close to 3,000 people. With annual investments of € 660 million (2014) on expansion and maintenance





of the network, the company aims to reconcile competitiveness, security of supply and environmental protection. As a regulated network operator GRTgaz is subject to the rules of the Third Energy Package and is obliged to follow EU’s unbundling requirements. GRTgaz is since 2012 certified as an independent gas TSO following the ITO model, under the majority ownership of Engie (former GDF Suez) and with a minority stake (25%) held by SGI. GRTgaz has also stakes in other transmission systems in the EU, most notably in the central European pipeline MEGAL owned by its subsidiary GRTgaz Deutschland.

Motivation and Rationale

The French Government has a long tradition in keeping an active role in strategic sectors. Within the OECD countries, France’s has the most valuable portfolio of publically listed companies. Among others it includes energy, rail and airline services, mail and telecom, car making and airspace or defence equipment with an overall value of around $110 billion (2014)36. Arguably, one of the most robust and valuable companies which the French state has owned is the world’s largest utility - Engie. Initially the French Government owned 80% of GDF, resulting in just over 35% in the new company GDF Suez. The share of the state was further decreased in 2014 to 33 % and the French government looks to further re-capitalisation.37 Overall the government has remained the largest shareholder in the company ever since its creation.

Rationale for the ITO Model

Before the unbundling structure took its place, GRTgaz was a firm part of the traditional vertically integrated gas undertaking GDF Suez, allowing the VIU to maintain its monopolistic position on the French gas market. The French gas system was practically owned by the company; above all as a consequence of the ownership structure it featured some robust state control. The strong French state involvement and control over its energy system was largely related to the country’s import dependency on fossil fuels. Consequently, and as described in the report on Natural Gas Market Assessment, this has for many decades shaped France’s priorities in the energy policy towards security of supply. When deregulation and liberalisation trends started to emerge around the First (1998) and Second Gas Directive (2003), France demonstrated some forceful resistance on changing its gas system to a more open market based mechanism. Eventually the government advanced in efforts of market opening, TPA, and also unbundling requirements while being able to keep considerable control over the gas system, mainly through ownership rights and governance structure in GDFSuez and the TSO.

In 2005 when legal unbundling was finally implemented, the new legal entity GRTgaz was established. With the Third Directive, France considered the main provisions and especially ownership unbundling as deficient. It led a group of MSs to convince the EC to include other unbundling options (ISO and ITO), precisely for reasons of ownership of assets based on fundamental property rights. As France does not

36 The Economist estimates; print. ed. 28/06/2014 37 Under a 2006 law, the state must keep at least one third of the gas company’s capital. This might have changed with the adoption of the ‘Florange law’ in 2014 which specified all listed French firms must begin granting double voting rights to investors who have held registered shares for at least two years, unless two-thirds of shareholders have voted against this rule. Hence the new provision might allow the state to further sell part of its stake in Engie without losing its decision powers.

25% acquisition by Société d’Infrastructures Gazières (SIG)

SIG’s acquisition of 25% of GRTgaz, reducing GDF Suez’s stake to 75% was another major event in 2011. SIG is a public consortium consisting of the Caisse des Dépôts and its subsidiaries CDC Infrastructures and CNP Assurances. It was seen as a sensible move to bring in a strong and long-term public investor at the time of embarking on the new future path. The investment supported GRTgaz’s plans as a new unbundled TSO to further expand outside France with acquisitions in Germany and Austria. On the other hand it also helped to raise 1.1 billion EUR to

GDF Suez and reduced its debt.





have any significant gas exploration and production infrastructure, the transmission network is logically seen as the only gas industrial asset. Since the EC also rejected any commercial interest, this argument was used during the negotiations with the EC on French resistance to unbundling. Therefore, the motivation and rationale for the ITO model must be seen as the French government being the majority owner of GDFSuez with a conviction of keeping its role in strategic sectors of the economy. In other words, there was considerable opposition on full privatisation.

4.3.2. Practical Implementation Steps in Unbundling of GRTgaz

The practical implementation of imposing an ITO model on GRTgaz started in 2011 and included a multiple set of actions by various stakeholders such as the EC, French government and the regulator (CRE) as well as the GDFSuez and GRTgaz. The final certification of the French transmission operator by the CRE was issued in 2012, after the EC’s approval. However some practical implementation steps of the unbundling process such as separation of IT systems were still ongoing in 2015.

In this chapter we will look into the most relevant actions of unbundling of GRTgaz. Namely the change in governance of the TSO to its owner, legal and regulatory amendments that facilitated the transition as well as more corporate and operational changes of the newly unbundled transmission network operator.

4.3.2.1. Amendments of Legal and Regulatory Framework

The codification of the French Energy Code

Gas Directive 2009/73 was transposed into French law by the adoption of the Ordinance codifying the legislative part of the French Energy Code - Order No. 2011-504 of 9 May 2011.

The codification of the Energy Code meant largely to bring together all relevant legal acts under one roof. It also set a condition for further inclusion of any relevant energy laws under the same Code. ‘"Any provision in the energy laws are intended to be included, subject to the necessary changes to ensure compliance with the hierarchy of norms, a collection of the existing laws, or even a clarification of the legal situation existing on certain issues. Obsolete provisions can be repealed’ quoted the report to the President of the Republic.

Next, the Order No. 2011 – 504 not only codified the Energy Code but also brought new provisions in regards to the Third Energy Package. The most significant elements of the new legislation concerned unbundling, increased powers and duties of the regulator, and issues around compliance and the certification process.

• Under the Energy Code, main provisions concerning the unbundling of network can be found under Title I, Chapter I, Section 2 – ‘Organisation of transmission networks’.

• In addition new powers and duties of the Regulator (CRE) are to found under Title III.

• Next, Title IV includes also the provisions concerning projections of supply and demand balance by TSO and the role of state in the security of supply.

• The role of Compliance officer as set in the Directive is obligatory and as such it was also transposed into the Energy Code under the Art. L.111- 34. She adheres to the rules of independence stipulated by the Code. The role and duties are more specifically described below under Organizational Structure.

Based on the new Energy Code, after investigation, and taking into account the opinion of the European Commission, CRE considered in its deliberations of January 26th, 2012 that the measures taken by GRTgaz as well as its commitment to implement other obligations in the near future, were satisfactory enough to guarantee its independence vis-à-vis the vertically integrated undertaking. Thus, GRTgaz was certified as ITO.





4.3.2.2. Governance Reform of GRTgaz

GRTgaz is a private limited company (société anonyme) created on 1 January 2005. As common for large French companies, supervision by the shareholder and executive operations are divided in two. The board of directors represents the owner’s (shareholder’s) interest, while the management board runs the daily operations. Here, we will concentrate on the shareholder’s control.

After the transposition of the Directive 2009/72 into the French law by opting for the ITO model and the acquisition of 25% by SIG in 2011, the governance reform of GRTgaz was the prime and the most visible implementation step taken. The governance structure was enlarged and diversified, taking account of new owners as well as compliance with new regulatory requirements. Figure 16 gives an overview of the changes.

Figure 16: The governance structure of GRTgaz before and after the unbundling process

The Board of Directors

GRTgaz is governed by a Board of Directors of seventeen people. Fourteen are appointed by the general meeting of shareholders, nine of whom are representatives of Engie, three represent SGI and two are independent. The other three are elected from among the employees, a change that was introduced when the company made its shares available to employees so that they can be more closely involved in the growth and performance of their company. Directors are appointed for a five-year term and a Directors’ Charter sets out their rights and obligations. It is presided by the chairman of the Board.

In addition the board is accompanied by four non-voting members. These are the CEO of GRTgaz, a French Government Commissioner, the GRTgaz central work council representative, and the Compliance Officer.

The Board of Directors is advised and supported by three special committees:

• the Investment Committee examines investment policy and gives general advice on investment proposals;





• the Accounts Committee ensures that suitable accounting methods are being applied and examines and advises on the accounts and financial plans;

• the Remuneration and Selection Committee examines and gives an opinion on the fees paid to the Directors and the Chief Executive Officer, and on the applicants for these positions.

Governance structure and issues raised in the process of ITO certification

During the certification process, both the CRE and the European Commission repeatedly studied the statues of GRTgaz in establishing the Board of Directors as well as the Executive Management Board. The Gas Directive provides very explicitly for a detailed division of powers between those two bodies, and both institutions. The EC found the first draft ITO request as insufficient in this regard. Main points of non-compliance are described in Table 12.

Table 12: Governance structure and issues raised in the process of ITO certification Topic Description Required Action

1. Independence of Supervisory Board (Board of Directors)

Directive, Art. 20 requires the independence of the Supervisory Board applying to at least half of the members minus one.

For GRTgaz (17 members) this means that at least eight members must be independent such that they cannot have exercised any professional position or have had any responsibility, interest or business relationship, directly or indirectly, with any part of the VIU, or with its controlling shareholders, for a period of three years prior to their appointment.

The nine members from GDF Suez disqualified automatically. SGI members can be regarded as independent only if is it proved that SGI as a minority shareholder has no controlling influence in GRTgaz. Also, it appeared unclear whether some of the independent members still hold ties to the VIU, especially in regards to financial interests on the VIU.

The independent members sell their financial interests, or as a minimum hand them over to an independent trustee.

2. Powers between various bodies of the ITO

According to the draft statutes of GRTgaz, authorisation by the Supervisory Body (Board of Directors) is required for certain decisions by the Management Board relating to loans, credits, and settlements in case of litigations, above a certain threshold. These thresholds are defined by the Supervisory Body. The Commission underlined that thresholds should not be set at a too low level as this could undermine the autonomy of the Management Board enshrined in the Gas Directive. The Commission had doubts whether these thresholds allow the ITO to be autonomous.

The EC asked the CRE to establish an appropriate level of these thresholds.

3. The competence to prepare Ten Year

The competence to prepare Ten Year Development Plan and submission of this lies exclusively with the management of the TSO.

The regulator required that the exclusive competence of the





Development Plan

Both, the CRE and the EC found that also the Supervisory Board had been given competence to take decisions on individual investment decisions in TYDP.

Management Board in this respect is unambiguously defined in the statues of GRTgaz.

4.3.2.3. Corporate Restructuring of GRTgaz

Following the governance structure, this section will present some of the most relevant issues concerning the organizational and operational aspects of GRTgaz from a perspective of daily-run business of the transmission network. Subsequently, the following items are discussed:

• Organizational (management) structure

• Contractual arrangements

• Separation of IT Systems

• Separation of auditors.

Organizational Structure

Figure 17: Management chart of GRTgaz, blue boxes represent executive management board





The Executive Management and operational organization

The Executive Management is appointed by the Board of Directors and is responsible for the daily business of the company. At the moment it consists of 8 top managers, including the Chief Executive Officer (CEO) and:

• Chief Operating Officer

• Chief Strategy & Marketing Officer

• Director of Legal Affairs

• Finance Director

• Director at the Head Office

• General Secretary (the Code of Conduct)

• Director of Human Resources

Overall the executive management includes or is complemented by business and unit line management as described in the Figure. For a fully functional organisation, GRTgaz applies a management system that aims to satisfy network users/customers while also complying with French and European regulations, including the NRA. The Code of Conduct is an integral part of this system.

Code of Conduct

The Code of Conduct describes the internal organisational measures taken by GRTgaz to guard against discriminatory practices, as required by Article L.111-22 of the French Energy Code. It sets out the policy to be followed by all personnel with regard to all stakeholders in relation to TSO’s activities. Most importantly these rules cover areas of:

• Confidentiality of commercially sensitive information:

o protective measures,

o as a clause in employees’ contracts,

o information disclosure,

o staff leaving GRTgaz;

• Transparency in the conditions for access to the transmission system:

o technical requirements for connection to the transmission system,

o information on the supply service, connection and terms of delivery,

o system engineering work and unavailability

• Non-discriminatory application of the regulations on access to the transmission system:

o design of services,

o capacity reservation request handling,

o application of the capacity allocation and congestion handling rules,

o supply request handling and provision of allocation information,

o service billing and payment terms,

o complaint recording and handling,

o external communications

The Code of Conduct and associated reference documentation are the responsibility of the General Secretary who also suggests any necessary changes, and informs the compliance officer. After





consultation with the compliance officer, the general secretary suggests to senior management the internal inspection plan to be implemented by units together with the internal audits necessary for checking application of the code. The General Secretary approves the units’ action plans relative to the code. The Secretary’s office informs and advises units as regards application of the Code of Conduct making use of the nominated representatives within each unit, and assists units with their internal communication. Any question relating to application of the Code of Conduct rules is to be submitted to the General Secretary’s office.

The Compliance Officer

In accordance with article L. 111-34 of the French energy code, since October 2011, GRTgaz has a manager in charge of monitoring compliance of its practices with the independence requirements to which GRTgaz is now subject. This manager is in charge of verifying that GRTgaz applies all of the commitments set forth in the Code of Conduct. The Compliance officer supplies annual reports and without delay informs the NRA of all matters relating to the independence of the TSO.

The compliance officer is appointed by the Board of Directors after the nomination of the CEO and approval of the NRA. It is a full time position and the compliance Officer is a non-voting member of the Board of Directors.

Table 13: Organization structure and issues raised in the process of ITO certification Topic Description Required Action

1. Independence of the Management Board

Independence of Management in the Directive mainly concerns that the majority of members of the Board cannot exercise any professional position or have had any responsibility, interest or business relationship, directly or indirectly, with any part of the VIU, or with its controlling shareholders, for a period of three years before their appointment.

At the time of applying for certification, GRTgaz had a Management of only three members, i.e. at least two need to be independent. Nevertheless from the draft documentations it was not possible to investigate this point. In addition, it appeared that some members still maintained their interests in the VIU.

Same strict independence requirements apply also to personnel directly reporting to the Management Board on matters related to the operations, maintenance or development of the network.

The EC required further clarification, i.e. documentation on managers and people directly reporting to management on specific issues.

On the financial ties the Commission required that these members sell their financial interests, or as a minimum hand them over to an independent trustee.

2. The Compliance Officer

The Compliance Officer must fulfil similar requirements of independence which relate to the majority of members of the Management Board. The EC was not able to clarify from the draft documentation whether the Compliance Officer was independent.

The EC requested the regulator to investigate this case further.

3. Employees’ independence

The independence of employees was also highly scrutinised during the process of certification. It appeared that the VIU had a coordinated remuneration policy for its managers, which includes the managers of the ITO. Decisions on

At the request of CRE the remuneration policy was replaced by an obligation to inform the branch of the VIU a





salary increases, including of managers of the ITO, could only be taken after the opinion of a specific branch of the VIU. Such practice is incompatible with the independence requirements of the Gas Directive, which stipulates inter alia that remuneration of employees of the ITO shall not depend on activities or results of the VIU other than those of the ITO.

In addition the VIU had an overall career management program for its high potentials and managers, including for those of the ITO.

posteriori about any salary increases of the management of the ITO.

The EC preferred no interference between ITO and VIU, and suggested the reporting only to the Board of Directors.

Contractual Arrangements

Article L.111-17 of the Energy Code states that all commercial and financial agreements between TSO, on one hand, and the VIU or any company controlled by its owner, on the other, must be consistent with market conditions and subject to the approval of the CRE. TSO’s services which are to the benefit of the VIU are permitted only if they do not give rise to any discrimination between network users, and do not distort competition. Two type of contracts are concerned:

• Services provided to the ITO by other parts of the VIU. During and after the certification several contracts to the ITO have been investigated and amended or renewed between GRTgaz and the VIU. Often these contracts are confidential and not open for public consolations. Nevertheless, the Commission considered that in contracts for services provided to the ITO by other parts of the VIU, namely services concerning IT, treasury services (loans), research and development, or electricity supply contracts to GRTgaz delivery stations, should have been revised in accordance with the principles to ensure full independence of the ITO. However the majority of those were approved.

• Services provided by the ITO to other parts of the VIU. The number of services provided by the ITO to the VIU was significantly higher and the Commission asked the NRA to intensify its investigation mainly in regards to the apprehensions of cross-subsidization. Main actions are described in the table below.

Table 14: Contractual arrangements and issues raised in the process of ITO certification Topic Description Required Action

1. Services provided by the ITO to the VIU

The Commission took the view that in the analysis of the contracts concerned, the CRE should assess, in situations where a functioning market for the services concerned cannot be identified, whether the terms of the service contract can be considered cost reflective so as to ensure that there is no undue cross subsidization. This analysis was not always made in the draft decision.

CRE was asked to consistently make detailed analysis of this problem and take its outcome into account in the final certification decision.

Separation of IT Systems

As prescribed in the Gas Directive and the Energy Code the ITO shall not share IT systems or equipment with any part of the VIU, nor use the same consultants or external contractors for IT systems or equipment, and security access systems.

As IT systems of transmission operators are quite complex systems concerning business confidentiality and security of the network, easy and straightforward separation from the VIU might be difficult. In the case of GRTgaz, the IT unbundling programme is slowly coming to an end in 2016, more than four years





after official certification. The investment expenditure on this programme for the last year was EUR 4 million, down from EUR 17 million in 2014, and EUR 19 million in 2013.

The Commission was concerned about the potential conflicts of interests and abuses related to the use of commercially sensitive data that could take place as long as IT systems have not been separated. The EC was furthermore concerned about the duration of the period which is proposed to bring the IT systems in conformity with the requirement of the Directive, and the absence of a detailed roadmap towards complete separation. In 2011 they examined whether the IT systems of GRTgaz can reasonably be separated by an earlier date than by the end of 2014, and to require from GRTgaz a detailed roadmap as well as effective transitory measures to reduce any risk of conflicts of interests and abuses pending complete separation.

The core of the separation programme took place during the first two years. GRTgaz’s information system was a hybrid environment comprising 500 servers, 300 applications (core business and support) and around 60 databases. Data flows had to be migrated to this new unified environment.38

Eight waves of interleaving were planned in relation to structural and business needs. For each wave, a specific methodology was designed (cloning, moving, reconstructing, adapting, etc.) with precise criteria for each step. The project was executed in three stages:

• Launch phase: studying the architecture of the target solution, analysing the risks and defining a schedule

• Execution phase: technical installation and adaptation, installation and business acceptance, and a trial and actual switch-over

• Post switch-over phase: updating the documentation, VSR, corrections and adjustments, and source decommissioning.

Separation of Auditors

External Audit

According to the Directive, auditors of the ITO cannot be the same as the auditors of other parts of the VIU. The Commission supported the CRE in requiring GRTgaz to change its statutes to ensure that the auditors who audit the ITO and those who audit other parts of the VIU cannot be the same.

Internal Audit

To ensure compliance with the obligations stipulated in the Code of Conduct and the effectiveness of the provisions taken, GRTgaz sets out an internal inspection programme verifying:

• compliance with the independence rules,

• that the services on offer, policy, and investment decisions match customer expectations, while complying with the government-approved tariff framework,

• the appropriateness of internal procedures to service implementation,

• that required practices are implemented,

• Successful completion of the ten-year development plan. This inspection programme uses the methods and tools of the internal audit and inspection functions. It is followed if need be by implementation of the remedial measures deemed appropriate on the basis of the failures found, an analysis of their causes and their risks as regards breaches of the rules on independence, protecting commercially sensitive information, transparency and non-discrimination between system customers.

38 Fujitsu, case study: GRTgaz; 08/2015





4.3.3. Lessons Learned Legally established in 2005, GRTgaz continue to follow the EC liberalization efforts in 2012 when it was certified as the largest independent French gas TSO according to the ITO model. The ownership has largely remained in the hands of the former VIU, Engie group, to which the French state is the major shareholder.

In terms of compliance with the EU’s legislation concerning the creation of the Internal Market, transparent structure and non-discriminatory operations, or contributions to increase levels of security of supply, GRTgaz and France respectively achieved substantial advancements.

• By merging different consumer zones the French TSO tries to put in practice EU’s long-term strategy on the Internal Market. GRTgaz was able to successfully merge the French network from seven to currently two consumer zones in the last 10 years. These mergers often involves substantial infrastructure work to reinforce the French gas grid and elimination of bottlenecks that frequently cause higher prices, currently only in the south of the country.

• As far as transparent operational structure concerned, GRTgaz generally fully satisfies the regulator and its compliance. A serious obstacle during the transition and unbundling process is the separation of IT system which has been a lengthy process and is often criticized from the side of the EC. On the other hand, IT operations pose some serious and sensitive challenges and their handling was also expected to last years before the system is completely independent from the VIU.

• Last but not least security of supply remains a key issue for GRTgaz. As any other TSO it must be able to cope with an increase in delivery volumes during extremely cold weather. This is further emphasised by French regulation on public service obligation that puts security of supply high on agenda compared to other EU countries and it is partly responsible for determining where GRTgaz also targets investment. As a result France enjoys a good position in terms of security of supply when measured for instance by N-1 standard.

Despite the state’s interest in the French energy sector and vehement resistance to unbundling, the transition to an independent transmission operator can be regarded as a success. Today GRTgaz represents one of the leading gas TSOs in Europe with considerable expansionary policy in acquisitions.

4.4. Lessons from developments in the EU

4.4.1. Lessons from the creation of the Internal Energy Market

The development of the Internal Energy Market (IEM) in the EU has been ongoing for over 20 years. The objectives of this project are based on achieving the following by 2025:

• Establishing liquid, competitive and integrated wholesale energy market

• Enhancing Europe’s security of supply and channelling the external element of IEM

• Developing a functioning retail market that benefits consumers

• Moving to a low carbon society with increased renewables and smart, flexible responsive energy supply

• Building stakeholder dialogue, cooperation and new governance arrangements Below we focus on lessons learned in relation to the first three of these objectives:

Establishing liquid, competitive and integrated wholesale energy market

The idea behind striving to a large supranational and liquid wholesale gas market is that it offers higher benefits to market parties and end-users than isolated national markets, in terms of competitive prices





that lead to lower costs for end-users, and transparent price formation allowing market parties to hedge their price and volume risks at low cost.

Therefore, the objective of the Gas Target Model is to create a “competitive European gas market, comprising entry-exit zones with liquid virtual trading points, where market integration is served by appropriate levels of infrastructure, which is utilised efficiently and enables gas to move freely between market areas to the locations where it is most highly valued by gas market participants”.39 A series of metrics have been formulated to evaluate how well-functioning the gas market is.

In its latest market monitoring report, ACER concluded that “Across the EU, gas price formation is increasingly being driven by gas-on-gas competition, a tendency backed by robust natural gas trade center development. In recent years, natural gas trading centers have been playing an increased role in gas trading and in the shorter-term hedging of physical supply portfolios. Consequently, natural gas trade centers prices have become a stable form of price reference to which long-term supply contracts can be indexed.”

Although liquidity of gas natural gas trading centers has been steadily increasing over the past years, there are large differences between the natural gas trading centers. In some countries, trading natural gas trading centers still play a minimal role. In those countries there are limited or no short-term competitive wholesale prices signals to attract additional gas supplies to meet demand. It seems likely that only a few natural gas trading centers will become price reference natural gas trading centers (with the British NBP and the Dutch TTF already established in this way). Gas will be traded at other natural gas trading centers with prices based on these reference natural gas trading centers.

Enhancing Europe’s security of supply and channelling the external element of IEM

Especially after the gas interruptions in 2009 and 2014 and prevailing tensions between Ukraine and Russia, security of Europe’s gas supply is high on the agenda. National, regional and EU measures have been developed to mitigate emergency situations, including efficient use of gas storage (also across national borders) and encouraging the integration of unconventional gas and LNG. This process is still ongoing, and the ‘Winter Package’ of February 2016 calls for further improvements and additional measures.

The stress test exercise showed that a severe disruption of gas supplies from the east (i.e. Russia) would still have large impacts across the whole EU. Some areas, notably in the East of Europe, would still suffer severe economic and social impacts as a result of missing volumes of gas. Already in 2009 the estimated loss in GDP of Bulgaria reached 9% as a result of the gas crisis and the stress tests exercise showed that missing gas volumes could put at stake more than 80% of the gas consumption of some Member States (e.g. Finland).

Western Member States would also feel the impact of such disruptions in the form of increased gas prices as a result of gas scarcity in the East. For example, during the gas disruption in 2009, wholesale gas prices in the UK were affected. The UK authorities estimate that if the supply cut-off had been prolonged, further price increases would have been expected. Furthermore, during the cold spell of 2012 wholesale day-ahead gas prices increased by more than 50% on the European natural gas trading centers compared to levels registered before the cold weather. Notably in Italy prices reached 65€/MWh from 38€/MWh, while in UK, Germany and Austria prices kept aligned and reached 38€/MWh from levels of 23€/MWh.

In 2015 a public consultation on security of gas supply was held. Responding to the consultation, most public authorities focused on deficiencies in cooperation between Member States, while private undertakings and associations insisted that market measures should be the priority in tackling security of supply issues. In most cases, the proposed options differed depending on the state of the gas market

39 http://www.acer.europa.eu/events/presentation-of-acer-gas-target-model-/documents/european%20gas%20target%20model%20review%20and%20update.pdf

http://www.acer.europa.eu/events/presentation-of-acer-gas-target-model-/documents/european%20gas%20target%20model%20review%20and%20update.pdf

http://www.acer.europa.eu/events/presentation-of-acer-gas-target-model-/documents/european%20gas%20target%20model%20review%20and%20update.pdf





in which the respondent operates. For example, the more mature and developed the market the higher confidence in market measures.

It should be kept in mind that the security of supply situation is the result of a number of problems of different nature and magnitude. The most significant problem is that countries only have purely national approaches to their security of supply policies that lead to sub-optimal measures. The stress test exercise has shown how a cooperative approach among countries would significantly dampen the impacts of very severe disruption scenarios.

The second problem stems from external factors, notably the behaviour of third country suppliers, not properly factored in the design of security of supply policies. Another external risk is the lack of proper involvement of the EU neighbouring countries in the security of supply policy.

The third problem relates to infrastructure that is not sufficiently available or not sufficiently protected. Physical connections between sources (production, LNG, storage) and consumption areas is a prerequisite for satisfying demand and thus SoS. Moreover, countries tend to focus on physical aspects only, whilst overlooking 'newer' types of risks such as risks relating to cybersecurity or risks relating to a change of ownership.

The proposal for a revised Gas Security of Supply Regulation of the EU therefore focusses on addressing those problems.

Related to the latter problem, the EC also notes the following: “The Energy Security Strategy identified a need to better protect key energy infrastructure against the risk of a take-over by a foreign entity, which aim at penetrating European markets or hampering diversification rather than developing an integrated EU network or infrastructure. Experience with recent take-overs (and planned take-overs) of strategic energy assets in Europe shows that the risks are serious, notably where the buyer is controlled by a third country, which may exercise political influence on the owner/operator of the infrastructure and require the latter not to respect EU law or to take decisions that go against the strategic interests of the countries or regions concerned.“40

Such risk related to foreign take-over of strategic gas assets has for example been an issue in Greece, in the process of certifying DEFSA. It shows that the certification tool is not sufficient to prove that the security of supply of the Member State is not at risk when foreign companies take over ownership of TSOs. This is even more so in case of LNG and storage infrastructure, which is not subject to certification. Of course, at national level, countries (e.g. Finland, Germany, Slovenia, UK) have put in place measures to screen foreign investments, or to limit the participation by foreign companies, in order to control gas security of supply.

Developing a functioning retail market that benefits consumers

The Gas Directive provides for well-functioning and transparent retail markets, such that Member States shall ensure that the roles and responsibilities of all market parties (TSOs, DSOs, supply undertakings) as well as customers are defined with respect to contractual arrangements, commitment to customers, data exchange and settlement rules, data ownership and metering responsibility.

Based on a range of key competition indicators, the most competitive gas markets for households are Great Britain, the Netherlands, Slovenia, the Czech Republic and Spain, while weak retail market competition in gas is found in Lithuania, Greece and Latvia. The indicators include market concentration, number of suppliers, ability to compare prices easily, annual net entry, switching rates, number of offers per supplier, expectations of customers about (the comparability of) offers and the average mark-up.

40 European Commission, Impact Assessment Accompanying the Proposal for a Regulation concerning measures to safeguard security of gas supply. SWD(2016) 25/2





In the EU, many markets are highly concentrated, with low switching activity by consumers and high retail prices, despite falling wholesale prices.

Although switching is still increasing, the majority of household consumers do not participate actively in the market by exercising choice among suppliers and offers, which in turn generate less competitive pressure. Only in Portugal, Ireland, the UK and Spain are a substantial number of household consumers now supplied by a supplier other than the previous monopoly incumbent.

Falling gas wholesale prices in all countries except Portugal have affected final gas prices charged to households and, more so, industrial consumers.41 The effects of falling wholesale gas prices on gas retail prices can be expected to have been less pronounced in those countries in which network charges, taxes and levies account for a significant share of the final price of the gas supplied (i.e. Denmark, Sweden and Finland, where they account for more than 60% of the final price). ACER concludes that the link between wholesale prices and the energy component of retail prices is still weak and points to potential competition problems.

4.4.2. Insights from unbundling examples in the EU Below we have identified some general insights drawn from the examples of unbundling within the EU discussed in this report.

• It is natural that VIUs generally prefer not to be unbundled. Resistance to the unbundling process has therefore been common in EU examples. Even in the UK, where OU took place as a choice of the integrated company, this was after many years of resistance and followed mandated physical, financial and informational separation a few years earlier.

• However, EU examples demonstrate that unbundled companies can thrive once free to focus on their specific activities within the market. For example, in 2015 the TSO in the Netherlands transported 96 bcm of gas, with 243 fte and resulting in a revenue of 1178 million euro. These figures have been more or less constant since unbundling in 2005, although the number of employees have somewhat increased (from 189 fte in 2007). Since unbundling, the holding company of the TSO has developed various activities, such as buying a TSO in Germany, develop an interconnection pipeline with a separate dedicated TSO (BBL Company), developing the Gate LNG terminal, taking a share in Nord Stream, providing gas storage services (EnergyStock) and developing a green gas certification system (Vertogas). For comparison, the commercial supply company GasTerra realised a revenue of 14.7 billion euro with 169 fte and buying/selling a volume of 70.3 bcm. Profits of GasTerra are kept constant throughout the years (at ca. 40 million euro annually) as agreed between the owners of the company. This is done by adjusting the purchasing price of gas produced by NAM (Shell and ExxonMobil), who is also one of the owners of GasTerra.

• There is no right or wrong choice of approach to unbundling; rather, the chosen method for BOTAŞ should reflect the particular context and circumstances within Turkey and the Turkish energy market.

• Once unbundled, the TSO and supply company are very different businesses with very different pressures. Allowing the individual companies to focus fully on their own businesses is a benefit of the unbundling process. It helps to recognise this early in the process and to allow (and even encourage) the separate entities to assume their new identities as quickly as possible. In the UK example, the real value of OU over (something similar to) ITO was not about the functioning of the market, but was about the success of the respective unbundled companies. In particular, the TSO only became fully comfortable in its own skin when it recognised that there was real value in being a regulated utility and merged with the regulated electricity transmission business.

41 Over the past few years, gas wholesale prices have been falling due, inter alia, to lower demand, high storage levels at the end of the 2013/2014 winter season, declining LNG and oil prices and the renegotiation of gas supply contracts.





• The full benefits of unbundling will only be realised if sufficient attention is paid to the development of a competitive market. This is particularly important in the context of a country with concerns over security of supply. For example, the development of an accessible and liquid market for gas trading was fundamental to the success of the UK regime and crucially important from a security of supply perspective.

• Related to the previous point, the government and regulator have to be very careful to avoid market interventions in order not to deter private sector investment. If the market observes government intervention (or even the possibility of it), the riskiness of its potential investments is likely to rise, and their value will fall commensurately.

• Last but not least, it is important that the unbundled entities are furnished with the necessary physical and technological capabilities as well as the required human resources policies that will enable them to retain skilled personnel. Such staff resources would not only ensure a smooth transition but also help functional sustainability.





5. Unbundling Model Suggestions for BOTAŞ This chapter gives information on the current status of BOTAŞ. The organisational structure, business processes, products and services of BOTAŞ in its current status are addressed. Based on this information, the proposed unbundled structure is introduced.

5.1. Current Status of Turkey

5.1.1. Legal and Legislative Framework BOTAŞ was established based on the Decree No. 7/7871 in accordance with the Crude Oil Pipeline Agreement signed between the Governments of the Republic of Turkey and the Republic of Iraq on 27.08.1973. BOTAŞ was restructured as a State Owned Enterprise (SOE) based on the Decree of the Council of Ministers No. 96/6526 dated 08.02.1995.

The main areas of activity of BOTAŞ as defined in its Charter published in the Official Gazette no. 22261 on 17.04.1995 are as follows: “To construct and cause to be constructed any oil, oil product and natural gas pipelines in and out of Turkey, to take over, purchase or rent constructed pipelines, to transport oil, oil products and natural gas through pipelines, to purchase and sell crude oil to be transported through pipelines, to engage in any activity for the supply of oil and natural gas abroad, such as exploration, drilling, production, transportation, storage and refining.” The historical process of BOTAŞ is illustrated in Figure 18.





Figure 18: History of BOTAŞ

1974 Establishment

1977

1984

1988

1994

1996

1997

1999

2001

2002

2003

2005

2006

2007

2011

2012

2013

2015

1986

1987

Iraq-Turkey Crude Oil Pipeline 1

Batman-Dörtyol Crude Oil Pipeline

assigned to BOTAŞ.

Ceyhan-Kırıkkale Crude Oil Pipeline

commissioned.Natural gas imported from Russia for the

first time. Iraq-Turkey Crude Oil Pipeline

2 commissioned.Natural Gas Operations District Management

became operational.

Natural gas started to be used in the residential

and commercial sector in Ankara.

BOTAS International Limited (BIL) established.

BOTAS became a shareholder of

TURUSGAS with a share of 35%.

Natural gas storage and re-production service

agreement signed with TPAO.

LNG import from Nigeria started.

Marmara Ereğlisi LNG terminal

completed and became operational.

LNG import from Algeria started.

Gas purchased from Iran for the first

time.

Kayseri Operation Management and

Bursa, İzmir, Erzurum, Konya,

Çarşamba and Kırklareli Branch Offices

became operational.

Istanbul Operations Management became

operational.Gas import started from the Blue Stream

natural gas pipeline.

Kahramanmaraş Branch Office became

operational.

Oil loaded from BTC Crude Oil Main

Export Pipeline in Ceyhan for the first

time.First natural gas export to Greece. First natural

gas purchase from Azerbaijan. First contract

assignment agreement signed between

BOTAŞ, Gazprom, Shell Enerji A.S.

Contract for the construction of Tuz Lake

Natural Gas Underground Storage

Project signed.TANAP Shareholding Agreement signed

between BOTASŞ TPAO and SOCAR.

TPIC assigned to BOTAŞ by the

Decision of the Council of Ministers.

Construction works for Erzincan and

Mucur Compressor Stations completed.

Construction works for Eskişehir Compressor

Station completed. BOTAŞ became a

shareholder of TANAP Natural Gas

Transmission Inc. with a share of 30%. The

number of compressor stations rose to 9, the

number of provinces supplied with natural gas

rose to 77, and the length of natural gas

pipelines reached 12,964 km.





With the Natural Gas Market Law no. 4646, published in the Official Gazette on May 2, 2011, the monopolistic position of BOTAŞ in relation to the importation, distribution, sale (excluding intra-city sales) and pricing of natural gas was amended. Natural Gas Market Law sets out the rights and responsibilities of all real and legal persons with respect to the importation, transmission, distribution, storage, marketing, trading and exportation of natural gas, and in this context BOTAŞ carries on its operations as market player.

The Laws, Decrees, Regulations and Directives to which BOTAŞ is subject are listed in the Annex.

5.1.2. Duties and Responsibilities of BOTAŞ

5.1.2.1. Organisational Structure

The headquarters of the General Directorate of BOTAŞ is situated in Ankara. Its provincial organisation includes 2 Regional Directorates, 2 Operation Directorates subordinate to the Regional Directorates, 8 Branch Offices and 2 independent Operations Managements. Its directorate organisation is illustrated in Figure 19.

Figure 19: Regional and Operations Managements and Branch Offices of BOTAŞ

In addition to this organisational structure, BOTAŞ also has subsidiaries and affiliates. BOTAŞ International Limited was established as a subsidiary of BOTAŞ with a view to engaging into activities for the meeting of oil, natural gas and LNG needs of Turkey. It currently operates the part of the Baku-Tbilisi-Ceyhan Crude Oil Main Export Pipeline in Turkey.

Turkish Petroleum International Company, which had been a subsidiary of Turkish Petroleum Corporation (TPAO), was assigned to BOTAŞ on 12.07.2013.

BOTAŞ also has a share of 30% in TANAP Doğalgaz İletim A.Ş., established by the State Oil Company of Azerbaijan Republic (SOCAR), and a share of 35% in TURUSGAZ Taahhut Pazarlama ve Ticaret A.S., established by Turkish-Russian cooperation.

BOTAŞ General Directorate is composed of the Board of Inspection, 1st Legal Advisory, Board of Directors Management, Press and Public Relations Advisor, 13 Departments and 2 Project Directorates. The Board of Directors is at the top of the organisational chart. The Board consists of 1 Chairman and

Natural Gas

Operations District

Management

(Ankara, Yapracık)

Oil Operations District

Management

(Adana, Ceyhan)

Kayseri Operations

Management

Istanbul Operations

Management

Dörtyol Operations

Management

Erzurum, Konya,

Çarşamba and

Kahramanmaraş

Branch Offices

Kırklareli, Bursa and

Izmir Branch Offices

LNG Terminal

Operations

Management

Marmara Ereğlisi LNG

Terminal





5 members. The Chairman of the Board is the General Manager, and there are additionally 5 Deputy General Managers. The current organisational structure of BOTAŞ is illustrated in Figure 20.

Figure 20: Organisational chart of BOTAŞ

5.1.2.2. Areas of Activity

The activities of BOTAŞ can be grouped into 5 categories: crude oil activities, natural gas activities, natural gas trading activities, LNG activities and underground storage activities.

Crude Oil Activities

Turkey’s demand for crude oil is met through the oil pipelines constructed and operated by BOTAŞ. These pipelines are Iraq-Turkey Crude Oil Pipeline, Ceyhan-Kırıkkale Crude Oil Pipeline, Batman-Dörtyol Pipeline, and Baku-Tbilisi-Ceyhan Crude Oil Pipeline.

Among them, the most important one is the Baku-Tbilisi-Ceyhan Crude Oil Pipeline, the first step of the “East-West Energy Corridor” vision. The crude oil produced in Azerbaijan is transported to Ceyhan terminal for distribution to Turkey and various destinations in the world.The line is operated by BOTAŞ International Limited. The transportation capacity of the line is 50 million tons/year.

Commissioned in 1976, the part of the Iraq-Turkey Crude Oil Pipeline in Turkey belongs to BOTAŞ and has a crude oil transportation capacity of 70.9 million tons/year. Thanks to its telecommunication system and the main control centres in the country, it can be automatically controlled.

Another line is the Ceyhan-Kırıkkale Crude Oil Pipeline, commissioned in 1986. Its transportation capacity is 7.2 million tons/year.

Chairman of the Board and General

Manager

Deputy General

Manager

Deputy General

Manager

Deputy General

Manager

Deputy General

Manager

Deputy General

Manager

Board of Inspection

Legal Advisor

Management Operations

Coordination Office

Private Office

BOTAS International

Limited (BIL)

Baku-Tbilisi-Ceyhan COPL

Project Directorate

Turkish Petroleum

International Company

(TPIC)

Department of Finance and

Accounting

Department of Natural Gas

Marketing and Sales

Supply Department

Department of

Administrative and Social

Affairs


Underground Storage

LNG Operations

Management


Supply and Export

Department of Press and

Public Relations

Human Resources

Department

Dörtyol Operations

Management

Oil Operations

Management

Natural Gas Operations

Management

Department of Land,

Construction and

Expropriation

Department of Oil, LNG

and Marine Operations

Department of Strategy

Development

Department of Engineering

and Contracting

Department of Telecom

SCADA and Information

Technologies

Department of International

Projects

Department of Quality,

Training and Development

TANAP Expropriation

Directorate

Department of Support

Services





Batman-Dörtyol Crude Oil Pipeline, the first crude oil pipeline of Turkey, was assigned to BOTAŞ in 1984, and has a capacity of 4.5 million tons/year.

Natural Gas Transportation Activities

The control centre of the natural gas transmission system is in Yapracık, Ankara. The total length of the transmission system is 12,562 km.

The Russian Federation-Turkey Natural Gas Transmission Line, one of the main transmission lines, enters Turkey through the border with Bulgaria and reaches Ankara. The commissioning of the entire line was completed in 1988. The line has compressor stations and main metering stations on it.

Another main transmission line, East Anatolia Natural Gas Main Transmission Line, provides transportation of natural gas from the sources on the East, notably in Iran. The line has a length of 1,491 km, and was commissioned at the end of 2001. For the utilisation of the full capacity of the line, Erzincan Compressor Station was completed and commissioned in 2013.

Russia-Samsun-Ankara Natural Gas Transmission Line (Blue Stream) was commissioned in 2003. It extends the part of the Blue Stream Project in Turkey to Ankara, and interconnects it with Malkoclar-Ankara transmission line.

Turkey-Greece Natural Gas Pipeline is one of the significant projects that render Turkey an energy corridor. With this natural gas pipeline, a step was taken to become the fourth main natural gas line of the European Union.

Finally, as per the agreement concluded between BOTAŞ and SOCAR in 2001 for the transportation of the gas to be produced in Azerbaijan’s Shah Deniz field to Turkey, the Azerbaijan-Turkey (Shah Deniz) Natural Gas Pipeline was commissioned in 2007. Turkey’s direct access to energy reserves has increased and brought it to an important position with regard to security of energy.

Natural Gas Trading Activities

For the purpose of ensuring the security of natural gas supply of Turkey, BOTAŞ has long-term gas purchase and sale agreements with 5 countries possessing natural gas reserves (Russia, Algeria, Nigeria, Iran and Azerbaijan).

Additionally, it has Phase II Agreement with Azerbaijan and a natural gas agreement with Turkmenistan, but the delivery has not started yet. BOTAŞ only imported natural gas until the conclusion of the export agreement with Greece in 2003, and started export activities as from 2007.

Figure 21: Distribution of BOTAŞ’s natural gas imports by sources (2014)

Liquefied Natural Gas (LNG) Activities

In order to ensure diversification of natural gas sources and enhance the security of supply, BOTAŞ imports liquefied natural gas (LNG) in addition to natural gas. For importation of LNG, BOTAŞ has purchase and sale agreements with Algeria (4.4 billion cubic meter) and Nigeria (1.3 billion cubic meter). Additionally, spot LNG is purchased from companies operating in the LNG market where necessary for the security of supply.

43,6%

22,7%

15,3%

10,7%

3,6% 4,1%Russia

Iran

Azerbaijan

Algeria

Nigeria

Spot LNG





Started to be constructed in 1989 and completed in 1994, Marmara Ereğlisi LNG Terminal was established both as a base load facility and as a peak load reducer where necessary. Its main functions are to store the imported LNG and to dispatch a desired amount of stored LNG to the Russian Federation-Turkey Natural Gas Pipeline by gasifying it. It has a natural gas dispatch capacity of 685,000 Nm3/h, and 3 storage tanks, each with a capacity of 85,000 m3.

Underground Storage Activities

Storage activities are used to be able to manage the supply-demand balance between seasons. They ensure the storage of natural gas in the periods when consumption is low, and the balancing of supply and demand in the periods when consumption is high by dispatching gas into the transmission system. Moreover, the secondary tasks include formation of reserves against disruptions in the gas supply, ensuring of supply and demand equilibrium between summer and winter, and prevention of price fluctuations.

With the completion and full commissioning of the Tuzgölü natural gas underground storage facility, whose construction agreement was signed on June 15, 2011, Turkey’s total natural gas storage capacity is expected to increase by 1 billion m3.

Furthermore, North Marmara and Değirmenköy Underground Natural Gas Storage Facilities, which were commissioned in 2007 and are owned by TPAO, are in the process of assignment to BOTAŞ in order to increase the storage and gas input capacity. From the site with a total capacity of 2.6 billion m3 in the North Marmara and Değirmenköy sites, the capacity allocated to BOTAŞ in 2014-2015 was 2.1 billion m3, and it is open to third party access. The facility’s operations include the injection of the gas received from the National Transmission Network to the reservoirs and the dispatch of the gas back produced in the reservoirs to the National Transmission Network.

5.2. Unbundling in the Turkish gas sector In the previous sections of the report, a clear definition of rules and regulations applying for the transmission branch of BOTAŞ in line with all of the unbundling models have been described. As seen in Section 3.3.2, the ISO option is a model scarcely applied in EU. This reality questions its essential usefulness in complying with the unbundling requirements, or at least it presents the model as uneasy to follow, especially in a certification process. Furthermore, both the Ministry and BOTAŞ reached the consensus that ISO option is not appropriate for Turkish gas market. As the two prevailing models widely used in the EU are full Ownership Unbundling (OU) and the Independent Transmission Operator (ITO) models, pros and cons of these 2 models will be evaluated for unbundling of BOTAŞ.

The draft NGML re-iterates the requirement for BOTAŞ to split into different entities, for gas transportation, operation of storage and LNG facilities, and for trading and marketing activities. Assuming that the separate companies would still be held by the Treasury, this would at least fulfil the requirements for legal unbundling. Additionally, current NGML entails unbundling of the accounts for the transportation, operation of storage facilities, sales and import activities. In order to fully comply with Directive 2009/73/EC, it would be necessary to ring-fence the future TSO with rules safeguarding independence and non-discriminatory behaviour as in the ITO model, or providing complete adaptation to the OU model will be necessary.

Functional separations of BOTAŞ according to the current situation, the target described in the existing NGML, the model described in the draft NGML, and suggestions for OU and ITO alternatives can be summarized as follows:





Figure 22: Functional separation alternatives

Dotted lines denote the limit of activities of each company.

Green boxes denote the legally and functionally separated companies.

The activities in light grey boxes do not have explicit references in the current NGML.

Starred boxes denote the companies that can be privatized. The existing NGML describes supply, transmission, LNG and underground storage activities as separate (despite the fact that there is no differentiation among LNG and underground storage), all of which are to be privatized except transmission. The draft NGML groups LNG and underground storage activities together, and deletes the privatization reference.

5.2.1. TSO unbundling To decide which model would be best applied, two of the models’ advantages and disadvantages should be compared regarding the Turkish gas market.

According to the EU Directive, if Turkey opts for the OU model, the TSO assets and operations should be carved out as well and subsequently transferred to the new owner(s). MENR can only exercise control over either the TSO or the supply entity. Another public body (potentially another Ministry) should be appointed for the ownership and control of the other entity. In the certification process, the EC, based the EMRA’s investigation, will check in detail whether or not the two public bodies have separate decision making powers, e.g. by investigating the legal structure of the state administration and the regulations determining the competences of ministries. It should be demonstrated that the two bodies are not under the common influence of another public entity in violation of the unbundling rules. If the Turkish government wants to proceed with privatization, the other entity (presumably the supply entity) should be brought to market. BOTAŞ logo and trademark is recommended to be kept with the supply company (also suggested in the draft NGML).

For the ITO unbundling option, the Directive requires the ITO to be organised in the legal form of a limited liability company (and with a clear separate corporate identity, communication and branding). The MENR can remain as the owner of the company. If the Turkish government wants to proceed with privatization in case of ITO model with full split, BOTAŞ logo and trademark can be used at the parent entity as a holding company.

Current NGML Draft NGML OU Suggestion ITO Suggestion

Transmission

LNG

Underground

Storage

Import

Export

Wholesale

Transmission

LNG

Underground

Storage

Import

Export

Wholesale

Transmission

LNG

Underground

Storage

Import

Export

Wholesale

Transmission

LNG

Underground

Storage

Import

Export

Wholesale

Transmission

LNG

Underground

Storage

Import

Export

Wholesale





In order to reach a conclusion on which model to apply for unbundling of BOTAŞ, one shall consider the pros and cons of each model under the circumstances in Turkey which is detailed in Table 15. In the OU option, as the TSO and supply entities are owned by different bodies (i.e. different ministries), it is considered as less advantageous compared to ITO option and this is indicated with red sign. When rendering of services is evaluated, OU option presents no restrictions. However for ITO option, it is prohibited to render services from the supply entity to the TSO within the scope of the Directive. ITO option is more flexible compared to the OU option as it allows transition to OU and ISO models. Another field to compare OU and ITO options is administrative effort, in which both of the options will result with administrative burden. In the OU option as both of the newly established companies will be owned by different ministries, the communication between them will result in administrative effort. On the other hand, ITO model also bears burden as there will ring-fencing rules applied between two companies which will be considerably larger compared to OU option. Both of the models are expected to enhance the competition environment and it is relatively higher for the OU option.

Table 15: OU and ITO model in Turkey

Ownership Unbundling Independent Transmission

Operator

Vertical integration of TransCo

No, however TransCo can have non-controlling minority shares.

Yes

Public ownership

Yes, however TransCo and SupplyCo are separate legal entities owned by different ministries

Yes

Shared service restrictions No restrictions

Strong restrictions on TransCo for hiring / exchange of personnel and/or lease of services

Model flexibility Irreversible Leaves the option for OU/ISO open

Administrative effort

Administrative burden due to ensuring coordination between different ministries

High level of administrative

burden for compliance

requirements

Improvement of competition conditions

Gives positive signals for market and improves competition considerably

Improvement, but probably less than with OU

shows that the option evaluated in given axis, is advantageous.

shows that the option evaluated in given axis, has limited advantages. shows that the option evaluated in given axis, is disadvantageous.

As independence is the ultimate goal in unbundling, ITO and OU are the two pathways to reach that target. In both models, the minimum requirements of legal (and consequently accounting), organizational and informational unbundling shall be in place. On top of these steps, the final step is to ensure independence of the TSO in one of the following steps;

• Under the OU model; the newly established entities shall be governed by different independent public bodies, which can practically be different Ministries.

• Under the ITO model; In order to guarantee that the ITO is independent in practice and does not pursue discriminatory conducts, the ITO establishes a compliance programme and appoints a compliance officer. The compliance officer is to be appointed by the Supervisory Body of the ITO, subject to the approval by the National Regulatory Authority.





The ITO model requires establishment of a Supervisory Board and appointment of a compliance officer which both increase the compliance on the ITO. These independence requirements are naturally met in case the legal entities are governed by different public bodies or Ministries.

A new model: ITO +

From the EU Directive’s perspective, unbundling according to the OU model would be the most straightforward. However, given the current structure and governance of the Turkish gas sector, the mid/long term strategies and gas supply security concerns, practice of placing entities acting in the same sector / industry under different public bodies / Ministries is not common, if observed at all. Even though the ITO model finds a more solid support as it gathers two different entities under single body, it carries important disadvantages. First of all, the vertically integrated unit structure will continue and the target that are set together with the unbundling will not be fully achieved. It is believed that improvement in the competition environment will not be maximized when supply entity is a shareholder of TSO or supply entity is operated together with TSO under holding structure. Furthermore, ITO will bring large administrative burden and limitation on rendering of services and personnel.

Considering these reasons, a new model specially adopted to the conditions and characteristics of Turkey named as “ITO+” which merges the advantages of OU and ITO model listed under the categories in Table 15 is created. The disadvantages of ITO model which are vertically integrated unit, administrative burden, and limits on rendering of services and weak competition environment and OU model which are obligation to separate the ownerships are eliminated with the new ITO+ model and advantages are combined.

Figure 23: Suggested unbundling model

In the ITO+ model, the two companies, SupplyCo and TransCo, will be placed under MENR as different entities. Therefore, as in the ownership unbundling model, TSO and supply entity will be two different companies with no association between them yet, placed under the same ministry. To ensure TSO is independent and does not pursue discriminatory conducts, similar to ITO option a compliance programme should be established and a compliance officer should be appointed. Additionally, a Supervisory Body should be assigned too as in the ITO model. Even though the term “Supervisory Board” is not included in provisions of the Turkish Commercial Code, as stated in the Section 3.6.5.3 of this report, it is possible that in case the Board of Directors transfer all of its powers to the executive board, the Board of Directors become the supervisory board. The restrictions for rendering services as described in Section 3.3.3.1 and 3.3.3.2 of this report will still be applicable for the ITO+42 model.

The advantages for the new suggested models are summarized in Table 16.

42 According to the BOTAŞ's comments submitted on 9.11.2016, BOTAŞ suggests to incorporate an energy conglomerate structure including two separate companies (BOTAŞ Transmission Company and BOTAŞ Supply Company) which are fully owned by the conglomerate.





Table 16: Features of ITO+ model in Turkey

Independent Transmission Operator +

Vertical integration of TransCo No

Public ownership Yes, but TSO and supply company are separate legal entities.

Shared service restrictions There will be some restrictions according to the compliance program

Model flexibility Ownership Unbundling and Independent System Operator models are still available

Administrative effort High level of administrative effort compared to Ownership Unbundling


Enhances competition as much as Ownership Unbundling


shows that the option evaluated in given axis, has limited advantages. shows that the option evaluated in given axis, is disadvantageous.

In the new structure, it is suggested that the newly established SupplyCo should continue its operations under the name of BOTAŞ to ensure recognition of brand in international markets and continuity of its influence. As seen in different European examples, TransCo can be named as BOTAŞ TransGas or similar to benefit from the BOTAŞ brand and take role in international projects. The establishment of the transmission system operator in question through removal of the transmission assets from the current BOTAŞ and the retainment of contracts and liabilities relating to supply by the current BOTAŞ is believed to be most appropriate option. A discussed in Section 3.6.2 and 3.6.4 of this report, it is recommended that the Transmission Company be established through partial split-off. To ensure BOTAŞ will legally continue its existence and no significant amendment will be required to be made in the current long-term contracts, full-split is not preferable. Furthermore, sales of asset can bring significant disadvantages in terms of tax related issues.

Even though there exist no application of ITO+ option in EU, considering the natural gas sector in Turkey, ITO+ is believed to be an appropriate unbundling option for Turkey including but not limited to the reasons listed below:

Integration of advantages: The difficulties arising from the application of ITO option as vertically integrated unit, administrative burden, limits on rendering of services and weak competition and from the application of OU option as different ownerships and irreversibility are eliminated with the ITO+ model and the advantages of each model are integrated.

Suitability to Turkish energy market: An unbundling model which includes more than a single legal entity under MENR after the unbundling process has been successfully implemented and operating in Turkish electricity market.

Room for improvement: In case of further increase in the independency of the unbundled entities under the same Ministry is desired in the future, liberalization, public offering or relocating under a different Ministry is possible. It also enables change into other unbundling options as Ownership Unbundling and Independent System Operator.

Alignment with EU Acquis: According to Directive 2009/72/EC, it is possible that unbundling model which provide further unbundling compared to the ITO option is possible to be approved by the EC. Consequently, a model similar to ITO which includes Supervisory Board, compliance programme and compliance officers and limits on rendering of services is believed to be in line with the EU Acquis and will not create difficulties during the certification process.





Additionally, determination of number of TSOs will operate in the transmission operations is important issue to be considered during unbundling process. In this sense, there are two possible approaches. First approach is having single TSO. If the national legislation requires the appointment of a single TSO, the establishment of a second TSO will not be possible. The TSO will be the only party that can provide regulated transmission services. Depending on the legal framework, however, other parties may be allowed to invest in transmission pipes. As the TSO is the single provider of regulated transmission services it should be enabled to operate the transmission assets owned by such other investors. For this reason the TSO will need to conclude agreements with the asset owners, e.g. leasing agreement.

Second approach is having multiple TSOs. If the national legislation allows the existence of multiple TSOs, then the construction of new pipelines can be connected with the establishment of a second TSO which is the case of Turkey. The existence of multiple TSOs in EU is possible. According to EU regulation, TSOs should be certified by the national regulators. In practice, most of the countries have a single TSO. Germany is an example in the EU in having several TSOs active within the country.

Having a single TSO may ensure some advantages in terms of a single interface on basic operational processes (capacity management, nominations, balancing) and no need of coordination with other operators.

5.2.2. LNG and Underground Regarding gas storage and LNG facilities43, it can be argued that BOTAŞ Marmara Ereğlisi LNG Terminal and TPAO Silivri underground storage form an integrated part of the transmission business (required for coordination and system stability). BOTAŞ Tuz Gölü underground storage which is currently under construction will also be similarly important for the transmission activities. For any unbundling model, separate accounts for the storage and LNG businesses are required, also to facilitate a tailored pricing regime and regulation of access. As a next step, both organizational and administrative unbundling for LNG terminals and gas storing facilities can be realized in order to decreasing cross-subsidise and increasing transparency in the upcoming periods,

LNG Facilities

BOTAŞ currently owns and operates the Marmara LNG facility which is regarded as a critical component for maintaining grid pressure. During times of peak demand (especially in winter), there is a local/regional constraint in the system for which the LNG delivery schedule has to provide the solution. In that case, delivery from ship to LNG facility almost equals delivery from facility to grid. Note, that in the context of EU regulation, the part of LNG facilities used for storage is regarded as storage facility rather than LNG facility, for which somewhat different access rules apply. However, the portion used for production operations and facilities reserved exclusively for TSOs in carrying out their functions are excluded. With this in mind, and given the fact that the Marmara LNG terminal is essential to relieve regional grid constraints during times of peak demand, resulting in the critical function of the terminal in solving congestion in the transmission system.

As said, an LNG terminal can be owned by a company that is not involved in purchase and selling of gas, and this can be the TSO (TransCo) or another operator. In this case, the terminal regasifies and stores LNG from multiple sources based on market demand for such services. The LNG operator does not take ownership of the LNG received and sold.

Translating such a situation to Turkey would mean that:

• Marmara LNG terminal can stay with TransCo but any activities related to the purchasing and selling of gas should stay outside TransCo’s business. The privately owned Aliağa LNG terminal is not affected by this move.

• The accounts of the Marmara LNG terminal should be kept separate from the accounts of the transmission activities.

43 Although not explicitly mentioned in the Gas Directive, a floating storage and re-gasification unit (FSRU) can be regarded as an LNG facility.





• Marmara LNG terminal will be subject to regulated access set by EMRA.

• TPA will be provided to SupplyCo and any other party on a non-discriminatory basis.

• TransCo may be allowed some specific rights (included in the access / usage rules) of the LNG terminal for the purposes of system security.

Note that it is not prescribed that any new LNG facilities should be owned by the TransCo. New LNG

terminals can be developed and operated by third parties (as has been the case with Aliağa LNG). New

LNG terminals will also be subject to regulated access. However, the approach of EU to allow

exemptions under specific conditions may also be applied in Turkey by making changes in the tariff

framework. It should be noted that the Draft NGML already foresees some tax incentives for new LNG

investments.

The alternative option is also possible. Marmara LNG can be owned by the SupplyCo or any other company different from the TSO, and this company may also be involved in purchase and selling of gas. In such cases the terminal is often part of an integrated gas supply chain. However, the terminal still is obliged to provide TPA to its capacity to third parties at regulated conditions. The TransCo can also contract services from the LNG operators. The regulated TPA is the default regime in the EU for existing terminal, however there is a possibility of exemptions for new LNG terminals.

In case Marmara LNG is combined with the TransCo or SupplyCo, even though there is no requirement for legal unbundling, Marmara LNG should keep separate accounts and EMRA should regulate the TPA. If Marmara LNG is an independent company, LNG system operator should be designated and compliance with TPA rules should be ensured. In Table 17, different options for Marmara LNG Terminal is compared and summarized.

Table 17: Unbundling of Marmara LNG

Marmara LNG combined with TransCo

Marmara LNG combined with SupplyCo

Marmara LNG as an independent company

System security and stability

TransCo does not take ownership of the gas transferred via the LNG terminal. However, TransCo may be allowed some specific rights (included in the access / usage rules) of the LNG terminal for the purposes of system security and stability.

In addition to its critical role in the market, SupplyCo can serve to the TransCo for system security and stability. However as services will be indirect, effects will be limited.

The independent company can serve to all SupplyCo and TransCo. However as services will be indirect, effects will be limited.

Managing and maintaining the grid pressure and congestions

TransCo may be allowed some specific rights (included in the access / usage rules) of the LNG terminal which can be used to maintain the grid pressure and managing the congestions.

As SupplyCo is not allowed to have some specific rights (included in the access / usage rules) of the LNG terminal, it cannot operate to maintain the grid pressure and manage the congestions.

The independent LNG operator cannot operate directly to maintain the grid pressure and manage the congestions however serve indirectly for the TransCo.

Third party access

Third party access to be provided to any party, including SupplyCo, on

Third party access to be provided to any party, including TransCo, on a

As the LNG terminal would be independent, third party access is guaranteed.





a non-discriminatory basis

non-discriminatory basis.


Requires additional regulation and supervision to guarantee third part access and independence.

Requires less additional regulation and supervision to guarantee third part access and independence compared to the option in which Marmara LNG is combined with TransCo.

Requires less additional regulation and supervision to guarantee third part access and independence compared to the option in which Marmara LNG is combined with TransCo or SupplyCo.


Improvement will be less than the option with independent LNG operator.

Improvement will be less than the option with independent LNG operator.

Improvement will be larger than the option with Marmara LNG combined with TransCo or SupplyCo.


shows that the option evaluated in given axis, has limited advantages.

shows that the option evaluated in given axis, is disadvantageous.

When the listed options are examined, the option in which Marmara LNG is combined with the TransCo is considered as the best option. LNG as an integrated part of the transmission business can provide following benefits.

• coordinating system stability,

• maintaining grid pressure, and,

• relieving regional grid congestions during times of peak demand. Thus, LNG facilities should be considered as a part of TransCo. The gas purchased and sold through LNG facilities should stay outside TransCo’s business and SupplyCo should take ownership of the gas transferred via the LNG terminal.

Storage Facilities

For the unbundling of and access to the Tuzgölü/Sultanhanı storage facility currently under construction by BOTAŞ, the definition of ‘storage facility’ in the Gas Directive is relevant. According to the Directive, the storage facilities with the following functions are excluded from the scope of definition of ‘storage facilities’:

• The portion of storage facilities used for production operations is excluded from the scope to the definition. This is for example the case in the Netherlands where Norg, Grijpskerk and Alkmaar are declared part of the Groningen production system and are not offering storage capacity to third parties.

• Also excluded from the scope of definition of ‘storage facility’ are those storages that are exclusively (i.e. in whole, not in part) reserved for TSOs in carrying out their functions. The interpretative note44 explains that ‘In order to fulfil its tasks related to system stability, a TSO will typically need to buy and sell certain quantities of gas, and it will need to resort to certain

44 Commission staff working paper – Interpretative note on Directive 2009/73/EC concerning common rules for the internal market in natural gas – Third-party access to storage facilities. 22 January 2010.





facilities to store such gas.’ Therefore, exclusive reservation of a storage facility can only apply to facilities ‘which by their function and dimension are conceptualised as tools to guarantee system stability.’ Consequently, facilities reserved exclusively for TSOs can only be those that are technically and in terms of size designed and suitable for system stability purposes. This may in particular include fast responding overground facilities with limited capacity. The remainder (and in most Member States the majority) of facilities will consequently be treated as ‘storage facilities’ under the definition of the Directive.

Note however that Member States may resort to measures in accordance with Article 3 of the Gas Directive on storage system operators (SSOs) to the benefit of TSOs. The TSO could then be given priority with regard to storage capacities to be allocated to it whilst the charges incurred would be those applicable to parties other than the TSO. Also note that the use of storage facilities for balancing purposes does not fall under the exclusive use by a TSO. Balancing is a task distinct from ensuring system stability. Balancing must be market-based. Therefore, the TSO charges the network users for its costs for using the storage capacity. Those costs have to be market-based, which means that TSOs have to purchase storage capacity in the market, ruling out a priori any exclusive use of a storage facility by a TSO for balancing purposes.

Should a Member State decide to maintain a gas reserve in a storage that cannot be used for commercial purposes but is left aside for exceptional emergencies (e.g. strategic storages or strategic stocks), such storage is still considered a storage facility under the definition of the Gas Directive. The Directive does not provide for special treatment of such storages but it allows Member States to take such measures under Article 3(2) Gas Directive under strict conditions, requiring a notification to the Commission under Article 3(11) Gas Directive.

Tuzgölü/Sultanhanı storage will not be used for production operations and no gas production will take place. Furthermore, the storage volume of Tuzgölü/Sultanhanı indicates that the facility is more than just required by the TSO for system stability, and thus does not qualify for exclusive reservation for the TSO. Given the above mentioned provisions, the Tuzgölü/Sultanhanı facility has to be regarded as ‘storage facility’ in terms of the Gas Directive and a SSO shall be designated for the facility.

If the SSO is part of a VIU, it should be legally and functionally unbundled from other activities not related to transmission, distribution and storage (see the example in France). Chinese walls (confidentiality) should be established between the SSO and the supply branch of the VIU. A fully ownership unbundled SSO (which is at the same time the owner of the storage facility) is compliant, irrespective of whether it is the same company as the fully ownership unbundled TSO or a separate one.

The unbundling (and TPA) obligation only applies to operators of those storage facilities that are technically and/or economically necessary for providing efficient access to the system (Article 33) for the supply of customers. Therefore, the obligation to unbundle legally and functionally does not apply to those operators of storage facilities that have no obligation under the Gas Directive to grant TPA either on a negotiated or on a regulated basis.

The National Regulatory Authority is required to define and publish criteria according to which the technical or economic necessity may be determined. The main principles are explained in the interpretative note. The definition of criteria consists at least of the following:

• An analysis of the availability and need for (different types of) flexibility for gas supply;

• An analysis of the available instruments to meet the different types of flexibility;

• A checklist according to which the access regime is determined. For the Tuzgölü/Sultanhanı storage facility it means that Turkey or EMRA should analyse the availability and need for flexibility for gas supply, and the available instruments to meet the different types of flexibility. As a result of these analyses, in case it is argued that the Tuzgölü/Sultanhanı storage facility is technically and/or economically necessary to supply customers (at least in part), the SSO for the facility should unbundle with the following options:





• The storage facility is combined with the unbundled TransCo. Independence / Chinese walls are applicable for the SSO.

• The SupplyCo owns the storage facility and is the SSO. The storage facility is legally and functionally separated, with independence criteria applicable for the SSO (Chinese walls).

• The SSO is a private company or under state ownership and independent from the SupplyCo.

The first option indicated above bears further options within itself. SSO can be a division in the TransCo as well as a subsidiary of the TransCo. When these two options are compared, it is evaluated that SSO as a division of the TransCo is more plausible regarding the Turkey’s natural gas market and operations. Therefore, under the Option 1, the choice of including the SSO as division of the TransCo is considered. In Table 18, each option listed above is compared according to different criteria. For any option, keeping separate accounts for storage activities is required.

Table 18: Unbundling underground natural gas storage facility

Storage facility is a division in of the TransCo

The SupplyCo owns the storage facility and is legally and functionally separated

Independent Storage System Operator

System security and stability

TransCo does not take ownership of the gas stored. However, TransCo may be allowed some specific rights (included in the access / usage rules) of the storage facility for the purposes of its specific duties for system security and stability.

In addition to its critical role in the market, SupplyCo can serve to the TransCo for system security and stability. However as services will be indirect, effects will be limited.

The independent Storage System Operator can serve to all SupplyCo and TransCo. However as services will be indirect, effects will be limited

Increasing the efficiency of storage operations and monetary value

TransCo may be allowed some specific rights (included in the access / usage rules) of the storage facility which can be used to increase the efficiency of storage operations and monetary value.

As SupplyCo is not allowed to have some specific rights (included in the access / usage rules) of the storage facility, the increase in the efficiency of storage operations and monetary value may be limited.

As independent Storage System Operator is not allowed to have some specific rights (included in the access / usage rules) of the storage facility, the increase in the efficiency of storage operations and monetary value may be limited.

Third party access

Third party access to be provided to any party, including SupplyCo, on a non-discriminatory basis.

Third party access to be provided to any party, including TransCo, on a non-discriminatory basis.

As the storage facility would be independent, third party access is guaranteed.




Requires less additional regulation and supervision to guarantee third part access and independence





compared to the other options.


Improvement will be less than the option with independent Storage System Operator.

Improvement will be less than the option with independent Storage System Operator.

Improvement will be larger than the other two options.


shows that the option evaluated in given axis, has limited advantages.

shows that the option evaluated in given axis, is disadvantageous.

Next the choice between regulated TPA and negotiated TPA should be made. Therefore, Turkey or EMRA has to establish whether there is

• a flexibility market (effective competition between flexibility services, including storage)

• effective access to storage, i.e. a sufficiently large amount of capacity offered to the market each year

• a sufficiently large and dispersed number of storage clients.

If the answer to those questions is positive, negotiated TPA can be applied. In general, in the EU negotiated TPA is found in Members States with rather competitive and open markets and a variety of gas storage facilities and clients (e.g. UK, Germany, Austria, France, Netherlands, Czech Republic).

Assuming that the Turkish market for gas flexibility and access to storage is still developing, it is believe that negotiated TPA is not very suitable and regulated TPA would be the appropriate choice.

When the options compared above are analysed, it is suggested to position the storage facility as a division of the TransCo. Keeping the storage facilities as an integrated part of the transmission business is suggested due to following reasons:

• To support easy operating interface with the TransCo for provision storage services for system security reasons.

• To support synergies related to integrated operation of the gas infrastructure

• To broadly reflect the existing experience in Turkey

• Similar arrangements have been observed in several Member States and accordingly certified by NRAs

The storage facility will provide storage services on non-discriminatory basis to interested parties (third party access) at regulated conditions set by EMRA. TransCo may be allowed some specific rights (included in the access / usage rules) of the storage facility for the purposes of its specific duties and will provide independent service to any party, including SupplyCo, on a non-discriminatory basis. As discussed before, separate accounts for the storage businesses are required.

The application for the suggested ITO+ model together with the underground natural gas storage facility and the LNG facility is depicted in Figure 24.





Figure 24: Overview of the Independent Transmission Operator+ (ITO+) for BOTAŞ

Independent Transmission Operator +

(ITO+)

Structure

LNG Facility

• LNG facility will remain together with the TransCo.

• In case Marmara LNG is combined with the TransCo, even

though there is no requirement for legal unbundling,

Marmara LNG should keep separate accounts

• In the future, LNG facility can be further unbundled from the

TransCo.

Underground

natural gas

storage facility

• Storage facility will remain together with the TransCo

• Storage facility has to be legally unbundled from the

SupplyCo and should keep separate accounts (both from

TransCo and SupplyCo).

• In the future, storage facility can be further unbundled from

the TransCo.

TransCo SupplyCo

LNG Facility

Underground natural

gas storage facility





6. Recommendations for Operational Aspects of Unbundling of BOTAŞ

6.1. Products, Customers and Markets

6.1.1. Transmission Company Products, Customers and Market

In the scope of transmission operations, TransCo should take various actions in the framework of operating transmission system and balancing market properly and provide products and services such as capacity reservations, capacity services, storage products and LNG products. The detailed explanations of products, services and markets are written down below.

Capacity Reservations

The transmission products should ensure that customers can access to transmission system and it should be designed for transmitting gas from the particular entry to particular exit point. To that end, the right for gas injection or consumption in the particular point of network via capacity reservations, should be provide to the customers. The conditions related to the capacity reservation should be determined in the Network Code on Capacity Allocation Mechanisms. The capacity reservation according to the customers' needs should be assessed in the two categories: duration and firmness. Capacity reservations can be presented to the shippers in the different time duration and firmness conditions by TransCo according to the conditions of natural gas market.

Duration

The capacity reservation can be designed as short-term or long-term. The short-term capacity reservations, generally, are for 1 year or shorter than 1 year, and are sold as quarterly, monthly and daily. The long-term capacity reservation, generally, are the perennial product that they are longer than one-year period.

The different durations for capacity reservations are created for meeting the different needs of clients. The long-term capacity reservations are sold, generally to meet the needs of forecasted capacity which the client can need in the future (i.e. for realizing the rights and commitments which are derived from long-termed purchase/sale contracts). The long-term products are the products which attracts both the shippers and transporter because they are providing operational and financial certainty.

On the other hand the short-term products meets the short-term needs of customers in the cases of the proper purchasing and supplying contracts are not available and the unutilised capacity is hard to sell. The customers (especially the suppliers and traders) find the opportunity to arbitrage, trade and twinning their supply profiles better. The short term products enables better optimizing the transmission capacity and supports trade liquidity and effective transmission operations.

The long-term products enables the network planning activities to be more predictable while reducing the risks regarding future cash flows and assets usage. In return, the short-term products provides flexibility to the adjust supply and demand positions. According to the changing conditions in the natural gas market, demand variation for the short and long term products can cause seasonal price volatility.

Firmness

The capacity reservations can be designed as interruptible and uninterruptible. The uninterruptible capacity guarantees the reserved capacity which is reserved for the network users of the TransCo, is always be available. In the interruptible capacity reservations, the





TransCo has the right to interrupt capacity availability in order to ensure the effectiveness of gas transmission operations. According to the third package (2009/73/AT), TransCo must inform the customers of interruptible capacity reservations in advance.

The interruptible capacity reservations, generally, are offered for customers to enter the market in the cases of running out of uninterruptible capacity reservations. In the scope of the conditions of third package (2009/73/AT), not just the uninterrupted capacities but also the interrupted capacities should be provided to customers.

Because of the availability of capacity reservation the customers are paying more to the uninterrupted capacities.

Capacity Services

In order to operate transmission systems more effectively, TransCo should provide backhaul, capacity transfer and capacity carrying products to the customers.

Backhaul

Backhaul is an interruptible service that can be offered to network users. The principle of backhaul is that capacity is sold at an entry or an exit point in the opposite direction of the dominant (forward) flow. This implies that backhaul capacity is usually sold as non-physical and on an interruptible basis as the physical forward flow cannot be guaranteed by the system operator. In pricing backhaul products network operators should take this interruptibility into account. The fact that actual operating costs are lower due to the reduction in the resulting forward flow direction can also be considered.

Capacity Transfer

The capacity transfer, is comprises the full or partially transfer of the reservation to another client. The capacity transfer can be realized according to the different terms. The capacity transfers, complies with the changing conditions of supply and demand and enables to transfer the unutilised capacity. In line with the quantities of transmission capacity which will be transfer, the rights and conditions of the entry-exit points are redefined. After the transfer, transferee and assignee are supposed to compensate the reserve capacity gas usage threshold value and to come to a necessary financial agreement.

Capacity Carrying

The capacity carrying is ensuring the customers to carry their capacities from specified exit point to a different exit point which has an unutilised capacity. In order to realize the capacity carrying, the carry capacity of TransCo is suited for meeting the demand in the related points and it’s supposed to maintain the gas transmission properly in the related points. After the capacity carrying the TransCo updates the capacity reserves for related exit points. The capacity carrying is only applied for the exit points and the capacity carrying between the customers (shippers) is unavailable.

The different periods of capacity products (yearly, seasonally, quarterly, monthly, intraday and day-ahead) of the TransCos in the EU countries exists in the figure below.





Figure 25: Capacity products in EU

It’s important for the development of the gas market and the meeting the customers’ needs to design the capacity reservations and services according to the expected developments in the Turkey’s natural gas market. For this reason, it’s necessary to increase variety of capacity products in the means of duration and firmness. Firstly, it’s suggested that the capacity reservations should be developed as seasonally, quarterly and monthly according to the short and long term capacity needs of customers.

As a result of developments in the market competition, day ahead capacity market should be established and operated. Thus, the daily capacity reservations products can be sold in these markets.

It’s considered that intra-day capacity markets is unnecessary for Turkey in the near future and the reason is that intraday markets are only available in highly developed gas markets such as England and Germany. Also, it’s suggested that the interruptible products which enables the transmission system to work more efficiently, should be developed according to the transmission networks condition.

In terms of capacity services, in addition to the current capacity transfer and capacity carrying it should be considered that the backhaul service which enables to operate the network more efficiently should be delivered in long-terms. The necessary arrangements should be realized in the Network Code on capacity allocation mechanisms in line with the diversification and developments related to the capacity reservation.

Storage Products

As a part of transmission system, storage facilities should be operated by the transmission company and also various products for both Transmission Company and 3rd parties should be developed. The various storage products to be offered are laid down in the Third Energy Package (2009/73/EC). As such, Article 15(2) of the Gas Regulation specifies that each storage system operator shall offer the product with the following features.

Duration

Storage products can be designed with short term duration and long term duration. Short-term products are those products with contract duration of less than one year (e.g. seasonal, quarterly, monthly, weekly, or daily). Long term products usually have duration longer than a year. Products with different durations can serve for different customers.

Customers who are making long term plans usually prefer long term products because of financial and operational predictability. These products are sold to meet future needs of customers.

Short term products are sold to meet short term needs of customers. With the help of short term products, customers can easily adjust their short term planning according to the changes in the market conditions. Also, short term products enable Transmission Company to operate storage facility more effectively.





Firmness

Uninterruptable storage product guarantees the reserved capacity which is reserved for the network users is always be available. Interruptible storage products can be interrupted by the storage system operator in favour of effective storage facility operations. These interruptions should be planned in advance and block the access of storage facility partially or completely. With respect to pricing, the price of the interruptible service should reflect the probability of interruption as stipulated by the 3rd Package. Thus, customers pay more for uninterruptable products.

Bundled and Unbundled

Regarding storage facility functions, one of the basic function of any gas storage facility is its ability to store gas. Gas also needs to be injected before it can be stored and withdrawn when required for supplying demand. When offering these different functions separately to the storage users, the storage system operator offers unbundled products. This means that it sells injection capacity, withdrawal capacity and storage volume independent of one another. In contrast to this, and in order to assure the storage system operator is not left with unmarketable capacities, it may sell all three products combined in a bundled product. A bundled product thus consists of a combination of injection capacity, withdrawal capacity and storage volume. When these bundled products are offered in predetermined sizes and ratios they are referred to as Standard Bundled Units (SBU). Clearly, purchasing solely injection capacity is of limited value when no storage volume has been purchased. Therefore, it is not uncommon that unbundled products are only sold to storage users who have already contracted SBUs, or that these unbundled products are only offered when the demand for SBUs is fulfilled. The unbundled products are then supplementary to the already booked bundled products.

After the handover of TPAO’s Silivri natural gas storage facility to BOTAŞ, TransCo should provide products to meet the needs of its transmission activities and 3rd party activities. In the first phase, storage products should be designed uninterruptable and bundled. It is also suggested that, initial products should also have long term duration and based on the changing needs of 3rd parties shorter products such as quarterly, monthly and daily products should be provided. In the long term, TransCo should provide interruptible products to ensure the effectiveness of storage operations.

LNG Products

As a part of transmission system, LNG terminals should be operated by TransCo and also various products for both Transmission Company and 3rd parties should be developed. Regarding the operations of LNG terminals, following basic activities are defined.

Brething and Unloading: Brething and unloading processes include transfer of liquefied natural gas from LNG ships to the LNG terminal.

Storage: Storage activities include storing the LNG and keeping it in liquid state until regasification and injection into the transmission system.

Regasification and Injection into the Transmission System: These activities include regasification of LNG in the liquid state and injection into the transmission system.

Access to LNG terminals may be offered through bundled products including the unloading of cargoes, the storage of liquefied gas and the regasification and sent-out on the gas transmission networks. Storage and regasification capacities can also be offered in the form of unbundled products.

Regarding sent-out services (i.e. entry into the transmission network), various durations are possible. Shippers can subscribe for example, to a monthly (30-day band) service or to a continuous (annual) service. Besides such standard types of service, a spot service can also be offered. Reservation of spot services could be based, for example, on non-nominated slots for a month ahead. Other services provided by LNG terminal operator are ship cooling and gas quality conversion. New services offered by LNG terminal operators to meet the market needs are stated below.





• Reloading: The transfer of LNG from the LNG reservoirs of the terminal into a vessel

• Transhipment: The direct transfer of LNG from one vessel into another

• Loading of bunkering ships: The loading of LNG on bunkering ships which transport LNG in smaller quantities supply to LNG-fuelled ships or LNG bunkering facilities for vessels

• Truck Loading: The loading of LNG on tank trucks which transport LNG in smaller quantities

• Rail loading: The loading of LNG on railcars These new services have a special focus on small scale LNG.

Most of these services are already being provided at various terminals around Europe, or are under development, with the exception of rail loading, which is not offered yet in Europe but could be a future option.

Regarding the LNG terminal activities and services, TransCo should design products to meet its transmission operations and 3rd parties including BOTAŞ. In the short term, brething and unloading, storage and regasification and injection products should be provided separately and bundled. According to the development in the LNG demand, TransCo should provide other services such as reloading, transhipment, loading of bunkering ships, truck loading and rail loading.

Balancing Activities

After the unbundling the TransCo will be responsible for the residual physical balancing in the gas

transmission network. Similar to the current situation, TransCo will be entitled to take balancing actions

when deemed necessary to ensure the physical balance of the transportation system and maintaining

system integrity by using the line pack or delivering to / extracting gas from the system. Ideally the

balancing energy should be procured using market-based mechanisms and based on short-term

standardised products.

During the absence of a functioning wholesale gas market, a balancing platform should be established.

On the OTC information on bids of Transco and offers of potential providers of balancing energy (based

inter alia on short term standardised products) will be made available.

Network users (shippers) will be in charge of their individual portfolio balancing. Each network user will

have an individual balancing account where the imbalances (positive and negative) of that particular

network user are accumulated. The imbalance will be administered in this balancing account. Network

users will be able to trade their imbalances, also ex-post at the virtual point. In order to further facilitate

this, network users will need to know their imbalance position and they need to know the imbalance

price in a timely manner.

According to the NC BAL, the imbalances should be settled at system marginal buy/sell price (based on the wholesale market / balancing platform).45 In addition, they may include a small adjustment to

incentivise network users to balance their portfolio.46 As in the early stages of the implementation of this

model there may not be operating liquid wholesale markets / balancing platforms, NC BAL envisages

an interim solution based on price proxies.

Overall, TransCo should aim to start setting imbalance price using shorter time periods (e.g. daily). For

the time being, a monthly price may be adequate but with the establishment of the balancing platform

shorter intervals should be used. The imbalance price should be set with reference to the cost of the

procured balancing energy or to the market transactions. TransCo can consider using symmetric mark-

ups or discounts, depending on whether the system is buying (discount) or the system is selling (mark-

up). Given the shippers’ responsibility to take care of their own portfolio balancing to the extent possible,

45 The imbalance prices need to include the cost for natural gas itself, as cash-out includes a title transfer

of gas between the users and the TransCo.

46 This is to disincentivize the users from sourcing gas through arbitrary imbalances.





buying from or selling to the system in the imbalance settlement should always be the least attractive

option. At the same time, the imbalance settlement price should be connected to actual market prices,

putting no undue penalty on shippers.

TransCo should be financially neutral to its balancing function. For this purpose TransCo can establish

a disbursement account that will be cleared monthly. The disbursement account can record the cost and

revenue of TransCo as follows:

• costs related to balancing services (e.g. purchasing gas for physical balancing purposes) and costs of purchasing imbalances from parties with imbalance surpluses

• revenues related to balancing services (e.g. selling gas for physical balancing purposes) and revenues from selling imbalances from parties with imbalance shortfalls

6.1.2. Supply Company Products, Customers and Markets It is important for BOTAŞ Supply Company to trade various products through different markets in order to regularly supply its customers with natural gas and fulfil its duties regarding natural gas trade, in that it can adapt to changing conditions of supply, demand and market. This part of the report introduces the market and products that BOTAŞ Supply Company can use within the scope of its supply operations.

Unorganised Markets

Parties wishing to engage in purchase and sale of natural gas through the unorganised markets, also known as over-the-counter markets, have the opportunity of meeting on a common platform and negotiate the contract terms among themselves. Products traded in the over-the-counter markets may be grouped into two categories.

• Products Based on Physical Delivery: Parties can determine, among themselves, the quantity, place of delivery, quality, and time of delivery of the natural gas and financial settlement, which are specified in the natural gas purchase and sale contracts, and can enter into bilateral agreements they need.

• Derivative Products: Over-the-counter markets allow various derivative products, such as swap contracts and option contracts, to be traded. Particularly, the purchase and sale transactions of products with different terms that are not based on physical delivery and are for different aims and expectations of players in developed markets are carried out.

Players in an over-the-counter market can fix their payments for natural gas trade and their income at a certain price or index them to the changing market conditions, due to their positions obtained by means of different bilateral agreements and derivative products. Thus, market players can engage in short and long-term trade of natural gas, enjoy operational and financial predictability and provide financial protection against fluctuations in the natural gas prices.

Over-the-counter markets are of great importance for BOTAŞ Supply Company to effectively fulfil its short and medium-term natural gas supply needs. In Turkey, products based on physical delivery are currently traded in the over-the-counter markets. It is recommended that BOTAŞ Supply Company make use of the opportunities of trade based on physical delivery through the over-the-counter markets by means of wholesale companies, other supply companies, natural gas distribution companies, import / export companies. Thus, a significant contribution will be made to the expansion of the market volume. With the trading of derivative products in the over-the-counter markets in the forthcoming period, BOTAŞ Supply Company may purchase and sell these products so that financial risk management can be handled more effectively

Organised Markets

The major superiority of organised markets to over-the-counter markets is that they have a clearing house. Consequently, market operator guarantees the trade transaction by becoming a party to the agreements concluded, and also the counterparty risk is eliminated among the market players. Moreover, all transactions carried out through organised markets are made available to market





participants in a transparent manner, and thus it is ensured that price signals are transmitted accurately and in a timely manner.

• Day Ahead Market

Day-ahead market enables its participants to purchase and sell natural gas one day in advance for the relevant day. This market is operated based on the logic that offers for the trading activities to be carried out on the next day are collected every day and the market is operated effectively and economically.

EPİAŞ is known to have initiated efforts to establish a day-ahead market for natural gas. Following the establishment of such a market in Turkey, the engaging in purchase and sale of natural gas by BOTAŞ Supply Company as a market participant in the day-ahead market, which is operated on a daily basis, will allow BOTAŞ Supply Company to carry on especially its short-term supply operations effectively and economically. Short positions foreseen to occur in the short-term due to the long-term contracts and variable consumption portfolio of BOTAŞ Supply Company can be closed out by making purchases and sales in the day-ahead market. However, the volume in this market should be restricted in terms of risk management due to the potential volatility of prices in the day-ahead market.

• Intraday Market

It enables participants to trade gas until a few hours before the beginning of the delivery that will be carried out in the remaining hours of the day. Participants of the intraday market have the opportunity to arrange their positions they took in the day-ahead market according to the conditions of supply and demand that change during that day. Thus, a participant who foresees that he will suffer some imbalance during the day may carry out a transaction that reverses the position he took in the day-ahead market or at least minimise the cost of imbalance.

Following the creation of a sufficient volume in the Day-Ahead Market to be established in Turkey, the establishment of an Intraday Market will be discussed as well. It is considered that such a market will be operated by EPİAŞ only in the medium/long-term. After the intraday market becomes operative, the authorities should consider the option that Supply Co BOTAŞ does business in the intraday market in order to avoid the imbalance risk and bring flexibility to daily natural gas supply operations according to the changing market conditions. Necessary changes should be made in the process and team structure to carry out transactions in the intraday market that will be operated on a round-the-clock basis.

• Futures and Derivatives Market

Unlike in the over-the-counter markets, the products in the organised markets are uniform products standardised in terms of quantity, place of delivery, time of delivery, quality and settlement. Thus, market players do not have the right to alter derivative products, and the fact that the products are standard provides a great advantage in terms of liquidity.

The participation of BOTAŞ Supply Company in the futures and derivatives markets will enable it to purchase and sell the long, medium and short-term contracts that it will need both for supply planning and financial predictability. Furthermore, the portfolios it will create using various derivative products will protect its proceeds from market and counterparty risks.

Currently, there are no futures and derivative products for the purchase and sale of natural gas in Turkey. It is expected that Istanbul Stock Exchange (BIST), which currently offers futures contracts for electricity in the Derivatives Market, will offer futures contracts for natural gas once the day-ahead market for natural gas becomes operative. BOTAŞ Supply Company may assume a market maker role for such contracts. It is expected that the transactions of these markets may only be possible only in the medium/long-term when the market depth will be ensured.





• Balancing Mechanism

In the case that the natural gas undertaken to be supplied as per the purchase and sale instructions within the scope of the day-ahead market activities cannot be supplied or that the purchased gas is less than what was undertaken, balancing gas may be purchased or sold to eliminate this imbalance in the network. In the case that the direction and size of the imbalance that occurs on a day when BOTAŞ Supply Company has short positions in relation to the purchase and sale of natural gas within the scope of supply operations are suitable, it will be appropriate for BOTAŞ Supply Company to purchase and sell balancing gas. In the case that imbalances are frequently experienced and the prices of balancing gas will be relatively higher than the day-ahead prices, particularly when there is a shortage of supply of natural gas, the strategic participation of BOTAŞ Supply Company in the balancing market will be important.

Once the balancing platform starts to be operated by the Transmission Company, BOTAŞ will be able to engage in activities in this market. It will also be possible for BOTAŞ to trade balancing gas in the organised natural gas markets in the forthcoming period. Additionally, SupplyCo BOTAŞ will be able to be an effective player in the tenders for standard and non-standard balancing services.

Wholesale Market

Within the scope of wholesale operations, natural gas supply companies may supply natural gas to industrial consumers and business firms that are eligible consumers and to electricity generation companies as well as to natural gas distribution companies engaged in retail sale activities, and may engage in trading activities with other import, export and wholesale companies.

In order to engage in activities in the wholesale market, BOTAŞ Supply Company needs to ensure gas input within the seasonal, daily and hourly flexibility limits of customers, and to plan the necessary supply and take storage measures in an attempt to meet the maximum natural gas off-takes.

Within the scope of wholesale operations, BOTAŞ Supply Company should set the quantity, time and price relating to the supply of natural gas mutually with eligible consumers and distribution companies by entering into bilateral agreements with them. Primarily, annual and fixed-price bilateral agreements should be preferred to ensure operational and financial predictability. Once the natural gas contracts in the market are diversified and the price signals are received properly, the conclusion of bilateral agreements indexed to the price of natural gas on various terms such as seasonal, quarterly and monthly will bring flexibility to the wholesale operations of BOTAŞ Supply Company. It is recommended that BOTAŞ Supply Company consider the natural gas purchase and sale opportunities with other import, export and wholesale companies so that it can fulfil its supply liabilities shorter than one year in a more balanced manner.

It is also recommended that BOTAŞ Supply Company analyse the credit risk of its customers and aim to have protection from market, economy and industry-specific risks while creating a customer portfolio within the scope of wholesale operations. Thus, BOTAŞ Supply Company needs to prefer customers that can fulfil their financial liabilities and to arrange its customer portfolio in such a manner that it will contain different customer profiles.

6.2. Management Structure and Organization In order to actualize and implement the Independent Transmission Operator + (ITO+) model effectively and successfully which would unbundle the current transmission and supply business for BOTAŞ, the organization structure of the newly established TransCo and SupplyCo should be designed. A gradual transition has been envisaged to reach the desired structure in order to have a fully functioning TransCo and SupplyCo, which will be established after unbundling BOTAŞ and the organizations are designed accordingly. In Section 6.2, the organization structures for the TransCo and SupplyCo are described in detail.





6.2.1. TransCo Governance and Organization Structure The TransCo, which will be carrying out BOTAŞ's existing transmission system planning, construction, maintenance and repair operations and transmission system operating functions, is also suggested to further undertake natural gas underground storage and LNG terminal operation functions to ensure reliable, efficient and productive functioning of transmission activities following the unbundling. System operating tasks is also takes part in addition to planning network assets and planning investments and network operating which are within the organization structure designed for the TransCo that has importance in terms of demand security. The activities which are conducted as a part of system operating such as capacity management, balancing, shipping control, short-term forecast and planning, have a great importance among the TransCo’s responsibilities. The technical capacity and personnel capacity should be improved in order to conducting the system operating activities successfully which gathers under a separate Deputy General Directorate. Apart from BOTAŞ's current structure, it's planned to include a Supervisory Board and a Compliance Manager in the new structure concerning independence related issues. Until the final organization structure for the TransCo is achieved, a gradual transition has been foreseen to ensure assigned functions and responsibilities of the TransCo are carried out smoothly. First of all, new concepts such as ‘compliance manager’ and ‘supervisory board’ which are required to ensure compliance of TransCo can cause complications in the early stages. In order to progress smoothly, roles of compliance manager and supervisory board can be delegated to EMRA in the short-term. Also, it has been considered that the Research and Development Department, Product Development and Tariffs Department and Capacity Management Department, which are depicted in Figure 26 in the final organization structure, are redundant in the short-term and have been excluded from the transmission period organization structure. The capacity tasks are carried on under an appropriate directorate in the transitional phase until the Capacity Management Directorate is formed because of the balancing market management also will be continuing in the transition period.Thus, it is believed following the unbundling, the final organization structure will be put in practice once the transition period organization structure is successfully functioning.





Figure 26: TransCo Organizational Transformation

The descriptions of departments of final organization structure, which is prepared according to the unbundling model, is given below in detail.

6.2.1.1. Governance Structure

Supervisory Board:

According to the EU Acquis, important decisions such as annual or long term financial planning concerning the assets and the stakeholders of the transmission company are taken in Supervisory Board. Being liable for compliance with unbundling requirements, Supervisory Board is entrusted with the appointment of a Compliance Manager. Supervisory Boards ensures gas transmission system is equally and transparently accessible for all supply companies.

Supervisory Board

Internal Audit Committee

1. Legal Advisory

Administration and Finance

DGM

Network and Asset

Management DGM

Strategy Development and

Corporate Affairs DGM

Natural Gas System

Operations DGM

Accounting and Finance

Department


Affairs Department

Natural Gas Underground

Storage Department

LNG Operations Management

Department

Press and Public Relations

Department

Human Resources

Department

İstanbul Natural Gas

Operations District

Management

Land, Construction and

Expropriation Department

Strategy Development

Department

Engineering and Contracting

Department

Telecom SCADA

Department

International Projects

Department

Quality, Training and

Development Department

Procurement

Department

Information Technologies

Department

Customer Relations

Department

Short Term Planning and

Forecasting Department

Network Planning Department

Regulatory Affairs

Department

Health, Safety and

Environment Department

General Manager

Compliance Manager

TransCo Organization Structure (Transition Period)

Delivery Control and

Balancing Department

Connection Management

Department

Network Maintenance and

Repair DepartmetLong Term Forecasting

Department

Kayseri Natural Gas

Operations District

Management

… Natural Gas Operations

District Management

Office of the Board of

Directors and Private Office

Units existing in

current structure

Units added

TransCo Organization Structure (Final)2

1

Supervisory Board

Internal Audit Committee

1. Legal Advisory


DGM

Network and Asset

Management DGM


Corporate Affairs DGM

Natural Gas System

Operations DGM


Department


Affairs Department

Natural Gas Underground

Storage Department

LNG Operations Management

Department


Department

Human Resources

Department

İstanbul Natural Gas

Operations District

Management

Land, Construction and

Expropriation Department


Department

Engineering and Contracting

Department

Telecom SCADA

Department

International Projects

Department



Procurement

Department


Department

Customer Relations

Department



Network Planning Department

Regulatory Affairs

Department

Health, Safety and

Environment Department

General Manager

Compliance Manager

Delivery Control and

Balancing Department

Connection Management

Department

Network Maintenance and

Repair DepartmetLong Term Forecasting

Department

Kayseri Natural Gas

Operations District

Management

… Natural Gas Operations

District Management



Research and Development

Department

Product Development and

Tariffs Department

Capacity Management

Department

Mevcut Durumda Bulunan Birimler

Yeni EklenenBirimler



Currently Existing

Departments

Newly Existing

Departments

Currently Existing

Departments

Newly Existing

Departments





Compliance Manager:

Compliance Manager takes charge in the examination of the impartiality and the transparency of activities conducted within the Company. Compliance Manager monitors the compliance program established for the purposes of compliance with unbundling requirements and reports to EMRA. Compliance Manager also works with the Supervisory Board.

Internal Audit Committee:

Primary function of Internal Audit Committee is to take part in defining and publishing the inspection standards. The Committee defines the areas to be audited, related units, processes and risk criteria in order to put the internal auditing activities in practice and prepares an audit plan. In accordance with the prepared internal audit plan, company and processes are subject to the system audit, compliance with regulations audit, financial audit and performance audit; the troubled issues are determined and the necessary solutions are generated. In the case of an act against the audit policy is observed, the Internal Audit Committee takes the issue to the person in charge and ensures that the act is inspected and the necessary steps are taken.

I. Legal Advisory:

Legal Advisory unit represents the company in the files of lawsuits against the company or lawsuits filed by the Company and execution proceedings and follows up these proceedings as a proxy. Legal advisory unit reviews the regulations, contract and specification drafts and expresses opinion. The unit also provides legal advice on company management issues to General Manager and Deputy General Manager.

Office of the Board of Directors and Private Office:

Office of the Board of Directors and Private Office facilitates coordination with executives and supports the establishment of the program. Office coordinates the meeting preparations concerning the executives, provides correspondences and generates other support documents. Office also conducts activities and processes in compliance with the regulation concerning the documents with high confidentiality levels.

6.2.1.2. Administration and Finance

Accounting and Finance Department:

Finance and Accounting Department is liable for conducting the budget, financial reporting, analysis and planning activities of the Company. Some responsibilities of the Department include; conducting the daily accounting activities and keeping records, controlling and confirming the expenses, realizing and controlling the necessary monthly and end-of-year accounts, conducting financial planning activities, keeping track of the records and calculations concerning tax, preparing financial statements and evaluating the Company performance in line with the objectives and budgets. In the Department, there are accounting, finance, treasury, tax accounting and compliance processes.

Human Resources Department:

Human Resources Department is liable for conducting human resources related activities in line with the Company strategies. These activities include; planning labour force in accordance with the short and long term needs, determining wages and bonuses, developing and implementing performance evaluation processes, developing and implementing training and development programs, conducting recruitment, leave of employment, dismissal processes, conducting payroll and personnel affairs, providing the integration of new employees and conducting communication activities with current employees.

Information Technologies Department:

IT Department is liable for conducting activities concerning the information technologies of the Company. Some responsibilities of the Department include; planning IT infrastructure, procuring, providing the necessary support services, managing the operations. This Department conducts activities in order for





the Company to have an integrated information system and facilitates the efficient conduct of all efforts. IT Department also carries out works on information security.

Administrative and Social Affairs Department:

Responsibilities of the Administrative and Social Affairs Department include; preparing necessary correspondences and documents, ensuring a smooth paper flow, keeping necessary archives, following up the necessary services concerning the maintenance and repair of the building. In addition to these, the Department keeps track of transportation, accommodation, cafeteria and similar services regarding the personnel. The Department also undertakes the employment of the security personnel for the building security and security related service procurement activities.

Engineering and Contracting Department:

Engineering and Contracting Department conducts engineering activities in relation to the procurement processes of the Company. Activities such as preparation of engineering contracts and mechanical projects, pipeline network planning and managing electric and automatization projects are conducted within the scope of the Department. Also the Department manages the studies related to geological surveys and of environmental impacts about the studies.

Quality, Training and Development Department:

Quality, Training and Development Department conducts activities to ensure Company operations proceed in accordance with the specific quality standards (ex. ISO 9000). The Department determines the structure and the scope of the quality policy, integrates national and international quality systems and controls the compliance to the quality standards. Quality, Training and Development Department organizes in-company quality trainings and keeps track of them. Improvement of the in-company processes and change management are also in the scope of the Department.

Procurement Department:

The Procurement Department, conducts activities in relation to the procurement processes of the Company. The Department manages service/merchandise demands, prepares related contracts, and manages necessary proposals, tenders and assessment processes. It carries out necessary archives and documentation activities related to procurement activities and as the main procurement unit, it generates the procedures. As being the central procurement unit, the Department generates the procedures for with/without tender purchases managed in the regional departments. The Department works in coordination with the Engineering and Contracting Department.

6.2.1.3. Network and Asset Management

Network Planning Department:

Network Planning Department conducts necessary network investment planning activities to reach the target service level. Service quality, technical quality and asset management policy are all prepared within this Department. In accordance with developed policies, the Department also coordinates regarding the asset planning of District Managements and works together with Information Technology and Network Maintenance and Repair Department. It works with the Information Technologies Department and Network Maintenance and Repair Department.

Land, Construction and Expropriation Department:

Land, Construction and Expropriation Department coordinates preliminary works regarding the planned or expected to be planned expropriation processes, follows up the necessary permits and manages these processes in accordance with the related law and regulations. Acquiring construction permits, conducting the construction and other necessary activities are also included in the responsibility of this Department. The Department also works in coordination with Natural Gas Operations District Managements and Network Planning Department.





Network Maintenance and Repair Department:

Network Maintenance and Repair Department is liable for the determination of the policies on maintenance of all facility and equipment, taking the associated regulations into consideration. The Department plans periodic maintenance and other maintenance/controls and develops an integrated maintenance plan in accordance with the determined policies. The Department manages the interventions for possible failures in the transmission system. Asset maintenance information management is conducted together with Information Technology Department.

Natural Gas Operations District Management:

Natural Gas Operations District Management is liable for conducting natural gas transmission activities in the districts as İstanbul and Kayseri Operations Managements. District Management implements the investment plans and maintenance policies, coordinated by Network Planning Department and Network Maintenance and Repair Department, in the districts and prepares necessary reports. In case of a failure in the system, District Management intervenes and informs the related departments.

Health, Safety and Environment Department:

Health, Safety and Environment Department is liable for providing the compliance to all environmental and safety rules and legal obligations. The Department continuously monitors and assesses corporate activities’ effect on environment and safety. Necessary measures are conducted with associated stakeholders. The Department communicates and coordinates with District Managements to provide local compliance as well.

Research and Development Department:

Research and Development Department keeps up with the recent developments which has taken place in the field of infrastructure and system utilized in the transmission activities and opts for carrying out the company's current transmission activities in an efficient, secure and cost-efficient manner. The Department realizes the budget discussions about the necessary product, service, and construction service consultancy procurement with EMRA in order to carry out these activities.

6.2.1.4. Strategy Development and Corporate Affairs

Strategy Development Department:

Strategy Development Department is liable for the determination of Company’s short, long and medium term objectives, vision and mission and strategic policies. Responsibilities of the Department include; monitoring and assessment of the performance measures defined in strategy, preparing necessary reports and presenting the reports to associated parties.

Regulatory Affairs Department:

Regulatory Affairs Department reviews the related regulation and assesses the effects of possible amendments. If changes occur in the regulation, the Department informs the associated units and coordinates the necessary compliance activities. The Department also follows up the works on regulation development and participates and expresses opinion in line with the strategy and policies of the Company. The Department follows the regulations of the countries in which the company is caring out its activities and ensures these activities are in accordance with the related country’s regulation. Especially in the context of EU acquis, the Department is entrusted with compliance related functions.

Long Term Forecasting Department:

Long Term Forecasting Department conducts the Forecasting work of the factors (economy, market, demand, etc.) that may have an effect on the long term objectives and strategies of the Company. The Department follows realization possibilities of the forecasts and updates the forecasts in accordance with the realizations and informs associated departments. Forecasting Department conducts activities co-ordinately with Network Planning Department.





Product Development and Tariffs Department:

Product Development and Tariffs Department is liable for tariff calculations in line with revenue requirements, according to the rules set by EMRA. In this process, Product Development and Tariffs Department is in communication with EMRA together with Regulatory Affairs Department and take part in the processes related to the determination of tariffs. Additionally, the Department develops new capacity and balancing products following the market trends and prices the newly developed products. Department works in coordination with Network Planning Department, Connection Management Department, Commercial Relations Department and Delivery Control and Balancing Department.

International Projects Department:

International Projects Department is responsible for the projects conducted by BOTAŞ from the international arena. The Department follows up the projects in operation, manages the relations with the stakeholders, keeps track of the compliance with the project plan and provides the control of the project output quality. The Department works on developing new projects and develops new projects with international visibility.

Press and Public Relations Department:

Press and Public Relations Department’s responsibilities include; generating a corporate identity, planning external corporate communication activities, preparing press releases and managing relations with the press. Moreover, the Department plans and conducts the social responsibility initiatives. It further performs local / international visibility and corporate communication activities. It further performs local / international visibility and corporate communication activities.

6.2.1.5. Natural Gas System Operations

Connection Management Department:

Connection Management Department is responsible for the management of the new connections to be made or the changes in the current connections in the system. The Department announces the processes concerning the applications and deadlines, indicates the prices and prepares the framework of the related contracts. The applications for new connections are processed in coordination with the Network Planning Department. Connection Management Department conducts activities in coordination with Commercial Relations Department and is responsible for fulfilling administrative duties of the Network Code with associated stakeholders. It is considered appropriate to Connection Management Department be under System Operations General Directorate rather than the Network and Asset General Directorate because it conducts activites such as contract conducting, performance reporting and system registry rather than physical connections. However, Connection Management Directorate keeps close contact with the Network Planning Directorate which is under the Network and Asset General Directorate while conducting these operations.

Short Term Planning and Forecasting Department:

Short Term Planning and Forecasting Department plans the management of daily and short term operations and forecasts demand, price and similar data that has impact on the operations. It has all tools necessary in order to evaluate all system information, short, middle and long term supply and demand balance. It fulfils functions such as statistical data gathering and reporting them which will become the inputs to the necessary forecast studies for the planning. Planning and forecasting works lead the management of the daily operations realized in the Delivery Control and Balancing Department.

Capacity Management Department:

Capacity Management Department is responsible for conducting entry/exit capacity processes that all parties who flow gas on the transmission system need to take. The Department is liable for the capacity allocations and operations.

Delivery Control ad Balancing Department:

Delivery Control and Balancing Department is responsible for the management and the control of the physical operations concerning gas. The Department keeps track of the parameters such as pressure,





pipeline capacity and gas quality and performs dispatching operations. The Department performs information exchange over the Electronic Bulletin Board with the shippers. It ensures the coordination with District Managements and manages states of emergency. It also ensures the presence of gas in real-time, in the required amounts by constantly controlling the transmission line. Gas trade is realized with market balancing purposes in existing markets and the Department manages the balancing market. The Department keeps track of the performance related to the operations and reports regularly. Data from Short Term Planning and Forecasting Department is the basis in management of the operations.

Customer Relations Department:

Customer Relations Department works with the Connection Management Department and manages the relations between the shippers and end-users. The Department responds the questions which comes from the shippers and end-users and works as help desk in necessary cases. It resolves the problems that occur in compliance with the Standard Shipping Contract and Connection Contract. The Department responses the needs of shippers related to the Electronic Bulletin Board in coordination with Information Technologies Department.

Telecom SCADA Department:

Telecom SCADA Department ensures the management of the systems concerning monitoring, measuring and the control of the flow in the gas transmission line. The Department examines the pipeline through data and reports on the flows by providing necessary recordings. Tracking of the pipeline is executed co-ordinately with Delivery Control and Balancing Department and necessary measures are conducted collectively. The Department also works with Information Technology Department on technical issues.

6.2.1.6. Storage ve LNG

Natural Gas Underground Storage Department:

Natural Gas Underground Storage Department is liable for operating the underground gas storages with respect to its Principles and Procedures on Use. Facility management actions, with planning, maintenance, work health and safety, of the facility in question are conducted by the Natural Gas Underground Storage Department. The processes included in administration and finance such as human resources, budgeting and finance and information technology are conducted in coordination with the centre.

LNG Operations Management Department:

BOTAŞ conducts the operation of Marmara Ereğlisi LNG Terminal, which is the only LNG terminal. Storing the imported LNG, gasifying the stored LNG in necessary amounts and piping are included among the responsibilities of LNG Operations Management and these services are provided all market participants. Network Planning Department and Network Maintenance and Repair Department implements the planning and maintenance policies, which are coordinated in centre, and realizes necessary reporting. The Department also works together co-ordinately with the Delivery Control and Balancing Department in daily operations Additionally, the Department is liable for coordinating port services conducted in Marmara Ereğlisi Terminal. The Department determines the rules and provide their applications and announces the tariffs for the services.

6.2.2. SupplyCo Governance and Organization Structure After the unbundling, the SupplyCo is going to continue BOTAŞ's current operations as natural gas export, import, marketing and domestic natural gas trade. Similar to current structure, Internal Audit Committee, 1.Legal Advisory, Office of the Board of Directors and Private Office will be included in the organization. Until the final organization structure for the SupplyCo is achieved, a gradual transition has been foreseen to ensure assigned functions and responsibilities of the SupplyCo are carried out smoothly. It has been considered that the Natural Gas Trade Department, Supply Department, Short-term Planning and Forecasting Department, Contracts and Customer Services Department, Product Development and Pricing Department, Risk Management Department and Portfolio Management Department, which are depicted in Figure 27 in the final organization structure, are redundant in the short-term and have been excluded from the transmission period organization structure. Thus, it is





believed following the unbundling, the final organization structure will be put in practice once the transition period organization structure is successfully functioning.





Figure 27: SupplyCo Organizational Transformation The descriptions of departments of final organization structure, which is prepared according to the unbundling model, is given below in detail.

6.2.2.1. Governance Structure

Internal Audit Committee:

Primary function of Internal Audit Committee is to take part in defining and publishing the inspection standards. The Committee defines the areas to be audited, related units, processes and risk criteria in order to put the internal auditing activities in practice and prepares an audit plan. In accordance with the prepared internal audit plan, company and processes are subject to the system audit, compliance with regulations audit, financial audit and performance audit; the troubled issues are determined and the necessary solutions are generated. In the case of an act against the audit policy is observed, the Internal


Department


Affairs Department


Department

Human Resources

Department


Department

Procurement

Department

International Business





DepartmentRegulation

Department

Natural Gas Import & Export

Department

Natural Gas Marketing

Department

Operational Control

Department

Contracts and Customer

Services Department

Long Term Planning and


Internall Audit Committee

1. Legal Advisory


DGM


International Relations DGMCommercial Operations DGM



SupplyCo Organization Structure (Transition Period)1

SupplyCo Organization Structure (Final)2

General Manager

Units existing in

current structure

Units added


Department


Affairs Department


Department

Human Resources

Department


Department

Procurement

Department

International Business





Department

Regulation

Department

Natural Gas Marketing

Department

Natural Gas Import & Export

Department

Natural Gas Supply

Department

Natural Gas Trading

Department

Operational Control

Department

Risk Management

Department

Contracts and Customer

Services Department

Long Term Planning and




Product Development and

Pricing Department

Portfolio Management

Department

Internall Audit Committee

1. Legal Advisory


DGMstrategy Development and

International Relations DGMCommercial Operations

DGM


Directors and Private OfficeGeneral Manager





Currently Existing

Departments

Newly Added

Departments

Currently Existing

Departments

Newly Added

Departments





Audit Committee takes the issue to the person in charge and ensures that the act is inspected and the necessary steps are taken.

I. Legal Advisory:

Legal Advisory unit represents the company in the files of lawsuits against the company or lawsuits filed by the Company and execution proceedings and follows up these proceedings as a proxy. Legal advisory unit reviews the regulations, contract and specification drafts and expresses opinion. The unit also provides legal advice on company management issues to General Manager and Deputy General Manager.

Office of the Board of Directors and Private Office:

Office of the Board of Directors and Private Office facilitates coordination with executives and supports the establishment of the program. Office coordinates the meeting preparations concerning the executives, provides correspondences and generates other support documents. Office also conducts activities and processes in compliance with the regulation concerning the documents with high confidentiality levels.

6.2.2.2. Administration and Finance

Accounting and Finance Department:

Finance and Accounting Department is liable for conducting the budget, financial reporting, analysis and planning activities of the Company. Some responsibilities of the Department include; conducting the daily accounting activities and keeping records, controlling and confirming the expenses, realizing and controlling the necessary monthly and end-of-year accounts, conducting financial planning activities, keeping track of the records and calculations concerning tax, preparing financial statements and evaluating the Company performance in line with the objectives and budgets. In the Department, there are accounting, finance, treasury, tax accounting and compliance processes.

Human Resources Department:

Human Resources Department is liable for conducting human resources related activities in line with the Company strategies. These activities include; planning labour force in accordance with the short and long term needs, determining wages and bonuses, developing and implementing performance evaluation processes, developing and implementing training and development programs, conducting recruitment, leave of employment, dismissal processes, conducting payroll and personnel affairs, providing the integration of new employees and conducting communication activities with current employees.

Information Technologies Department:

IT Department is liable for conducting activities concerning the information technologies of the Company. Some responsibilities of the Department include; planning IT infrastructure, procuring, providing the necessary support services, managing the operations. This Department conducts activities in order for the Company to have an integrated information system and facilitates the efficient conduct of all efforts. IT Department also carries out works on information security.

Administrative and Social Affairs Department:

Responsibilities of the Administrative and Social Affairs Department include; preparing necessary correspondences and documents, ensuring a smooth paper flow, keeping necessary archives, following up the necessary services concerning the maintenance and repair of the building. In addition to these, the Department keeps track of transportation, accommodation, cafeteria and similar services regarding the personnel. The Department also undertakes the employment of the security personnel for the building security and security related service procurement activities.

Procurement Department:

The Procurement Department, conducts activities in relation to the procurement processes of the Company. The Department manages service/merchandise demands, prepares related contracts, and





manages necessary proposals, tenders and assessment processes. It carries out necessary archives and documentation activities related to procurement activities and as the main procurement unit, it generates the procedures. As being the central procurement unit, the Department generates the procedures for with/without tender purchases managed in the regional departments.

Quality, Training and Development Department:

Quality, Training and Development Department conducts activities to ensure Company operations proceed in accordance with the specific quality standards (ex. ISO 9000). The Department determines the structure and the scope of the quality policy, integrates national and international quality systems and controls the compliance to the quality standards. Quality, Training and Development Department organizes in-company quality trainings and keeps track of them. Improvement of the in-company processes and change management are also in the scope of the Department.

6.2.2.3. Commercial Operations

Short Term Planning and Forecasting Department:

Short Term Planning and Forecasting Department plans the effective and lucrative management of short-term commercial operations and develops forecasting models for demand, price and similar data concerning the gas market that may affect the operations. The developed model is utilized to obtain forecast data. The Department provides input for the Natural Gas Trading Department, to facilitate the process of determining the buying and sales volumes.

Natural Gas Import & Export Department:

Natural Gas Import / Export Department makes short and long term bilateral agreements with foreign producers and suppliers and realizes transactions. These transactions are realized in line with the open position targets determined by Risk Management Department. Moreover, the Department manages contracts and is responsible for the appropriate application of the contract provisions.

Natural Gas Trading Department:

Natural Gas Trading Department, trades natural gas through organized markets to be initiated with other supply companies in Turkey and directly or over-the-counters markets. These transactions are realized in line with the forecasts by Short Term Planning and Forecasting Department, and with the open position targets determined by Risk Management Department. The Department enters offers in organized markets, which is initiated with the over-the-counter markets. The operation of transaction contracts and delivery coordination are responsibilities of this Department.

Natural Gas Supply Department:

Natural Gas Supply Department is responsible for supplying gas to the end users in Turkey. The Department supplies gas to Build-Operate/Build-Operate-Transfer plants and Natural Gas Distribution Companies through regulated tariffs and to industry and business customers who have the right to be eligible customers through non-regulated tariffs. Targeting eligible customer segments, determining the most applicable approaches and channels for selling gas under competitive conditions to these customers are among the duties of this Department. All supply actions are taken within the limits (amount, price, customer segment, etc.) determined by Risk Management Department.

Contracts and Customer Services Department:

Contracts and Customer Services Department is responsible for the communication between the customers that Natural Gas Supply Department concluded an agreement with. The Department keeps track of the end user customer contracts and makes sure these contracts are conducted smoothly. The Department also keeps track of the guarantees and coordinates customer issues if required.

Natural Gas Marketing Department:

Natural Gas Marketing Department is responsible for the determination of corporate brand identity and publicity, advertisement and sponsorship actions in line with the customer segments targeted with brand identity. The Department analyses market conditions, current and potential customers to that end and





generates a marketing Strategy within the framework of Company’s strategic plan. Marketing Strategy is applied by using internal and external sources. In order to develop eligible customer portfolio and to increase trading volume, the Department works on publicity, advertisement and sponsorship actions.

Operational Control Department:

Operational Control of Delivery Department takes charge in the planning of deliveries and making the necessary notifications to Transmission System Operator. In order to manage imbalances, the Department takes necessary measures co-ordinately with Natural Gas Trading Department. The Department is constantly in communication with Transmission System Operator on all administrative and technical issues.

6.2.2.4. Strategy Development and International Relations

Long Term Planning and Forecasting Department:

Long Term Planning and Forecasting Department forecasts the factors (economic indicators, energy prices, demand, etc.) that may have an effect on the long-term objectives and strategies of the Company. The Department follows realization of the forecasts, updates the forecasts in accordance with the realizations and informs associated departments. The Department conducts activities co-ordinately with Natural Gas Trading Department, Strategy Development Department and Risk Management Department.

Market Analysis Department follows and analyses the market dynamics that the Company is in and also targets such as growth, demand, market prices and competition conditions. The Department collects information concerning markets in which the Company would like to be active and informs Strategy Development Department and Risk Management Department concerning these analyses. The Department follows energy market closely and performs analyses on the position of all energy resources in the market.

Strategy Development Department:

Strategy Development Department is liable for the determination of Company’s short, long and medium term objectives, vision and mission and strategic policies. Responsibilities of the Department include; monitoring and assessment of the performance measures defined in strategy, preparing necessary reports and presenting the reports to associated parties. In fulfilment of duties, the Department utilizes Market Analysis Department’s and Long Term Planning and Forecasting Department’s works as input.

Product Development and Pricing Department:

Product Development and Pricing Department conducts activities in order to develop non-regulated new products for end-user customers. The Department subsequently initiates pricing process by taking into consideration the possible profits and costs of the developed products. The Department keeps track of the sales performance of existing and newly developed products and ceases the selling process of the products with low performances. In addition, the Department develops innovative products for wholesales trading activities.

Regulation Department:

Regulation and Tariff Department works on the related legislation and assesses the possible effects of amendments. The Department informs associated units when changes occur in the legislation and coordinates the necessary compliance activities. The Department also participates in the development process of the legislation and gives opinion in line with Company’s strategies and policies. The Department realizes tariff calculations in accordance with the rules determined by EMRA and negotiates with EMRA during this process. Within the scope of tariff calculations, the Department works co-ordinately with Natural Gas Supply Department. The Department follows the regulations of the countries in which the company is caring out its activities and ensures these activities are in accordance with the related country’s regulation. Especially in the context of EU acquis, the Department is entrusted with compliance related functions.





Risk Management Department:

Risk Management Department ensures the Management of the operational risks and market risks with the purpose of preserving corporate profits and healthy cash flow. The Department increases Company value with an effective risk management. To that end, the Department keeps track of the market indicators in coordination with Market Analysis Department and Long Term Planning and Forecasting Department. Policies and limits are determined by interpreting these indicators. The Department ensures the compliance to the policies and limits and takes necessary measures if required.

Portfolio Management Department:

Portfolio Management Department periodically calculates portfolio risks in order to manage credit risks of the Company and assesses outcomes. The Department also examines the total profitability and risks of the customers (end user and other supplier) in the portfolio on a segment basis. Credibility risk calculations on a customer basis for customers above the average are realized. The Department ensures that the measures are taken concerning the high-risk segments and customers. Prior to including new customers to the portfolio, the Department performs analyses and then approves if customers considered are appropriate.

International Business Development Department:

International Business Development Department, follows new investment opportunities. The Department conducts market researches with respect to the framework, identified by the Strategy Development Department. Benefiting from its visibility in the international arena, new joint ventures or companies are established in order to supply gas to the consumers in different geographic regions. The Department keeps track of current business development activities and manages the shareholder relations.

Press and Public Relations Department:

Press and Public Relations Department’s responsibilities include; generating a corporate identity, planning corporate communication activities off-company, preparing press releases and managing relations with the press. In line with its brand identity the Department conducts activities to promote visibility in international arena. It represents the company in international arena by participating various activities, seminars, conferences and workshops. The Department gives information about company's works and develops new relations. Moreover, the Department plans and conducts the social responsibility initiatives. It further performs local / international visibility and corporate communication activities.

6.3. Business Processes In an attempt to ensure that the duties and responsibilities of the Transmission and Supply Companies to be established after unbundling are set forth in full and that the activities are carried out effectively without leading to any confusion with regard to the definition of duties, the processes should be defined. This section of the report identifies the processes to be carried out by the directorates/departments in the organisational charts of the Transmission and Supply Companies to be established as per the proposed Independent Transmission Operator+ model (ITO+).

6.3.1. Business Processes of the Transmission Company The activities that need to be carried out according to the final organisational chart designed for BOTAŞ Transmission Company are first defined in the form of process groups, and the processes in each process group are explained in detail. Due to the nature of the transmission activities, processes may be included in the scope of duty of more than one department. Therefore, each process is matched with a department.




Joint Venture of Deloitte and DNV GL – April 2017 124

Figure 28: Processes of the Transmission Company

Network Maintenance

Integrated

Maintenance

Planning

Maintenance

Policy

Incident

Management

Asset Information

Management

Network Operations

Operation of

Installations

Construction and

Design

Network Capacity

Planning

Commissioning

and Handover

Asset

Management

Policy

Asset Safety and

Risk Management

Metering Policy

and Compliance

Natural Gas

Storage

Management

LNG Management

Strategy and Risk Management

Project

Management

Strategy

Management

Long-Term

Forecasting

Quality

Management

Tariff Calculation

Product

Development

Business

Processes

Improvement

Change

Management

System Operations

Short-Term

Forecasting

Contract

Management

Capacity

Management

Commercial

Balancing

Physical Balancing

Metering

Reporting

Invoicing

Operational

Support

Lead and

Opportunity

Management

International

Relations

Management

Corporate

Relations

Management

Press and Public

Relations

Management

Compliance with

International Legal

Rules

Compliance with

General Legal

Rules

Compliance with

EMRA Regulations

Contract

Management

Tender

Management and

Evaluation

Procurement

Sourcing Strategy

Management

Logistic PlanningOrder

Management

Goods and

Service

Acceptance

WarehousingLitigation

Execution

Proceedings

Legal Counselling

Human Resources ManagementLegislation and Legal

ManagementCorporate Affairs Procurement and Logistics

Compensation and

Benefits

Management

Payroll Operations

Career and

Performance

Management

Training and

Development

Recruitment

Personnel Affairs

Occupational

Health and Safety

Management

Retirement and

Leave

Management

Security

Management

Finance

Accounting

IT Infrastructure

Planning

IT Planning

Management and

Support Services

IT Asset

Management

Information

Security

Management

IT System

Operations

Security

Vehicle Fleet

Management

Facility

Management

Social Affairs

Support

Archive

Management

Document

Management

Office Equipment

Management

Accounting and Finance Facility ManagementInformation Technologies

Management

Treasury

Internal Audit

Tax Accounting

and Compliance

Management





6.3.1.1. System Operations

Capacity Management:

Process Owner: Capacity Management Department

It is ensured that the existing pipeline capacity of the company is operated in an uninterrupted, efficient and safe manner. Accordingly, the maximum daily off-take amount is set for entry and exit points, and capacity reservation is done. The evaluation of the applications of Shippers to be made within the gas year in relation to the idle capacity announced for the entry and exit points, and the calculation of the utilisation fees for the idle capacity on the basis of the periodical tariff are performed within the framework of the process. Capacity transfer transactions are carried out between Shippers. In the case that capacity or reserve capacity is exceeded, overcapacity fee is determined according to the tariff. In the case that demand is far higher than the total capacity at the entry and exit points, invitations are issued to tender for capacity, and the Network Planning Department is informed on the increase of capacity at those points.

Contract Management:

Process Owner: Connection Management Department

Contract management process includes the steps for the implementation of the agreement entered into between the Company and the Shipper wishing to use the transmission network. The preparation and follow-up of the contract framework of the applications for amendment in existing connections or new connections accepted are included in this process. In order to assess the connection, an input is received from the Network Capacity Planning process, and the implemented agreements provide inputs to the Network Dispatch, Balancing and Capacity Management processes.

Short-Term Forecasting:

Process Owner: Short-Term Planning and Forecasting

It includes the steps of developing short-term forecasting models based on demand, price, economic indicators and similar data that may affect the operations of the company. The process includes forecasts through planning and modelling studies, comparison of forecasted values obtained from the developed models with actual values, analysis of the deviations in the forecasts, and updating of the models based on the analyses. The results of the short-term forecasting studies provide inputs to the Network Dispatch, Balancing and Capacity Management processes.

Commercial Balancing:

Process Owner: Delivery Control and Balancing Department

The calculation and projection of the actual network balance based on capacity allocations, quantity notifications, amount of gas entering and taken off from network, amount of storage gas, consumption and losses as well as the predictions for such parameters are included in this process. Balancing instructions are given according to the projected and actual network balance. Within the framework of the process, the management of the EBB and a potential Balancing Platform is performed.

Physical Balancing:

Process Owner: Natural Gas Operations District Managements, Delivery Control and Balancing Department, Short-Term Planning and Forecasting Department

Physical balancing activities are composed of the following:

• Management and control of parameters such as pressure, pipeline capacity and gas quality,

• Modelling of network pressure settings,

• Planning and development of basic physical network assets and associated operations,

• Remote control of system units (distribution points, compressor stations, pressure regulators, etc.),

• Annual, monthly, weekly and daily planning of network capacity based on factors such as maintenance, repair and capacity decrease,

• Coordination with the network dispatch centres of other countries,





• Management of emergencies,

• Remote control of basic parameters such as pressure, capacity, and temperature at connection points,

• Provision of operational support in relation to the functioning of the processes while obtaining the necessary data from the measurement processes.

Metering:

Process Owner: Telecom SCADA Department

Within the scope of this process, (i) during the day: Instantaneous Amount of Flow, Instantaneous Higher Calorific Value and Instantaneous Delivery Pressure are measured; (ii) at the end of the day: Daily Total Amount, Daily Average Higher Calorific Value (Flow-Weighted) and Daily Average Delivery Pressure (Flow-Weighted) are measured. Hourly amounts of natural gas supply/off-take are followed up. Using the SCADA system, data are collected from the peripheral units of the company and are displayed and archived in real time. Additionally, the standards and procedures relating to the precision of metering required for the examination and adjustment of the equipment by which the meterings are performed. The metering process provides the balancing activities with the necessary information.

Invoicing:

Process Owner: Accounting and Finance Department

It includes the drawing up of invoices signed between the Transporter and the Company and the conveyance of the invoices to the counter party for payment in printed or electronic form. The invoicing process is carried out based on the fixed and variable costs stated in the transmission tariffs (capacity utilisation fee, redelivery fee, imbalance fee, etc.). The follow-up of the collection of the invoices drawn up is performed within the framework of this process. Shippers are liable to pay their invoices as stated in the Network Code, and the costs relating to short or late payments are determined according to the method in the Network Code.

Reporting:

Process Owner: Delivery Control and Balancing Department

Reporting process includes the publication of indicators regarding the capacity and balancing markets in order to ensure market transparency and demonstrate that the transmission service is offered equally to the parties. In this scope, the data tables regarding market activities need to be published via electronic platforms, and monthly and annual bulletins need to be prepared. Furthermore, the reports needed by the management are prepared in this process.

Operational Support:

Process Owner: Customer Relations Department

Operational support activities guarantee the uninterrupted continuity, effectiveness and security of 24/7 system operations. It includes the answering of the requests and complaints of Shippers in relation to the physical quality of gas and access to the EBB, and the resolution thereof through the relevant processes. Operational Support processes ensure continuous and uninterrupted performance of both load dispatch and balancing activities.

6.3.1.2. Network Operations

Network Capacity Planning:

Process Owner: Network Planning Department

It includes the planning for increasing the network capacity and putting of new pipelines into use in order to ensure the continuity of the existing transmission liabilities of the transmission company and to meet the increasing demand for natural gas. Network capacity planning process uses the outputs of the long-term forecasting process, and provides inputs to the construction and design process and the installation operations process.





Construction and Design:

Process Owner: Land, Construction and Expropriation Department, Engineering and Contracting Department

According to the planning made by the Network Capacity Planning, the preparation of specifications regarding the construction and design of the network capacity increases and new pipelines and network units (distribution points, compressor stations and compensators), the issuance of invitations to tender and the evaluation of bids are performed within the framework of this process.

Operation of Installations:

Process Owner: Land, Construction and Expropriation Department

Operations regarding the new capacity increase and the construction and installation of new pipelines according to the specifications provided by the construction and design processes for network expansion and capacity increase projects are included in this process. It includes the follow-up of the installations performed through service procurement by way of tender or otherwise.

Commissioning and Handover:

Process Owner: Land, Construction and Expropriation Department

Network capacity enhancement activities completed during the construction and design process, the checking of the new pipelines and network units whether they have been installed as stated in the specifications, and the test applications are performed within the scope of this process. Furthermore, it includes the necessary training, commissioning and handover activities.

Asset Management Policy:


Asset management policy includes the recoding and operating of the units relating to the pipeline of the transmission company (distribution points, compressor stations and compensators) as well as the activities for ensuring their security, inspection and maintenance, and their destruction when required. Asset management policy ensures that the assets are registered correctly in financial and managerial terms, protected, maintained, kept operative, and used in the most beneficial way for the company. The asset management policy chosen provides input to the asset safety and risk management.

Asset Safety and Risk Management:

Process Owner: Network Maintenance & Repair Department, Natural Gas Operations District Managements, Natural Gas Underground Storage Department, LNG Operations Management Department

Safety policies aimed at operating and using properly the pipelines and associated units (distribution points, compressor stations and compensators) owned by the transmission company need to be chosen and the necessary security measures should be taken. The process includes the regular monitoring of assets, the handling of any circumstance that may pose a risk, and the taking of preventive measures. It also includes the performance of insurance activities in relation to the risks that may occur regarding the assets.

Metering Policy and Compliance:


In order for the company to perform gas transmission through existing pipelines in an uninterrupted, efficient and safe manner, the transmission infrastructure should be operated under certain optimum operating conditions, and measurements and analyses should be conducted to ensure continuity of such conditions. The metering policy and compliance process includes the determination of at which points the meterings will be conducted at which frequency using which parameters, and of at which data intervals the suitability of the current state will be ensured. The metering policy chosen provides input to the metering processes.





Natural Gas Storage Management:

Process Owner: Natural Gas Underground Storage Department

It includes the balancing of the daily supply and demand by ensuring that natural gas is stored at times when the demand is low and dispatched to the transmission system at times when the consumption is high in order to manage the supply and demand equilibrium. Natural gas is injected to the natural gas storage facility from the pipelines, and in order to store the natural gas under the desired conditions, the gas that passes through the metering stations is subjected to filtering, compressing and cooling processes, and it is checked whether each process has been performed within the required parameters. The gas is re-transmitted from the storage facility to the pipelines, and in order to transmit it under the required conditions, it is subjected to dehydration, heating, compressing and drying processes, and it is checked whether each process has been performed within the required parameters. The procedures for the management of the storage facility should be determined, and the necessary maintenance/repair activities and measurement activities should be performed. Within the framework of this process, capacity announcement is made and capacity reservations are received prior to the storage year, and idle capacity announcement is made and necessary capacity reservations are received during the storage year. Storage service contract is concluded with the relevant companies. Daily capacity notifications are made. Storage service prices are in accordance with the storage tariff.

Liquefied Natural Gas (LNG) Management:

Process Owner: LNG Operations Management Department

It includes the transportation of liquefied natural gas from LNG vessels to the LNG terminal by tankers and the delivery of LNG to the terminal. According to the needs of the transmission company, natural gas is stored in the terminal in liquefied form or the liquefied natural gas is gasified again. In the process of gasification of the liquefied natural gas, it is subjected to dehydration and reheating using a vaporizer for the delivery of the gas with the desired quality into the network. The procedures for the management of the LNG terminal should be determined, and the necessary maintenance/repair activities and measurement activities should be performed. Within the framework of this process, capacity announcements are made and capacity reservations are received for the dispatch to the system and land prior to the gas year. Idle capacity announcements are made and necessary reservations are received during the year. Terminal service contract is concluded with the companies wishing to benefit from the facility, and a security process is carried out. Furthermore, unloading plans are made for the vessels.

6.3.1.3. Network Maintenance

Maintenance Policy:

Process Owner: Network Maintenance and Repair Department

It includes the formulation of policies regarding the regular maintenance operations required for the pipelines and system units (distribution points, compressor stations, pressure regulators, etc.) to be operated in an uninterrupted, efficient and safe manner and the unplanned maintenance operations required to be performed in cases of failure and emergency. The maintenance policy formulated provides input to processes such as integrated maintenance planning and incident management.

Integrated Maintenance Planning:

Process Owner: Network Maintenance and Repair Department

It includes the planning of the preparations required for the maintenance, repair, inspection, connection and renovation of any part of the transmission network in line with the maintenance policy or of all efforts required for any part of the transmission network to be put into service again. This process includes the determination of scheduled maintenances and maintenance days.





Incident Management:

Process Owner: Network Maintenance & Repair Department, Delivery Control and Balancing Department, Natural Gas Operations District Managements, Natural Gas Underground Storage Department, LNG Operations Management Department

It includes the formulation, and in case of emergency, the implementation of measures required to prevent, minimise the probability of occurrence of, overcome or bring under control any incident, eliminate or minimise any associated loss, and restore the natural gas flow and normal functioning of the transmission network.

Asset Information Management:

Process Owner: Network Maintenance & Repair Department, Network Planning Department

This process includes the recording of all information (technical features, date of commissioning, planned date of maintenance, planned date of replacement, failure logs, measures taken, supplier, responsible team, etc.) regarding the sub-components of the existing pipelines and the associated units (distribution points, compressor units and compensators) of the transmission company, and the analysis of such records through analytic methods. The development of forecasting models to formulate the maintenance requirements is performed in this process. The said activities are carried out in coordination with the IT Department.

6.3.1.4. Strategy and Risk Management

Long-Term Forecasting Studies

Process Owner: Long-Term Forecasting Department

It includes the conducting of long-term forecasting studies for the economy, money and capital markets, and the sectors in which the company is engaged in order to develop the company strategies and objectives and enhance the predictability of the factors affecting the activities of the company. Long-term forecasting studies for identifying in which consumption groups and in which regions the demand for natural gas will develop provide input to the Network Capacity Planning process for the analysis of the needs for natural gas transmission. The outputs of the process provide inputs to the strategy and quality management processes.

Strategy Management

Process Owner: Strategy Development Department

This process includes the analysis of external factors involving the assessment of economy, finance and political and regulatory environment, and the corporate analysis within the scope of the company’s mission, vision and objectives. 5-year strategic plans are prepared within the scope of this process. Strategic management process involves the setting of financial and operational objectives of the company by identifying its long-term expectations and the planning of its medium and long-term capital structure accordingly.

Project Management

Process Owner: Relevant Department

It includes the creation of a project timetable by determining the objectives and resource (capital, personnel and time) requirements for the projects carried out on the basis of the company and the units. The checking of whether the projects have attained the desired objectives without exceeding the budget and resources given is performed within the process.

Quality Management

Process Owner: Strategy Development Department, Quality, Training and Development Department

The quality management process includes the reporting of the attainment of the objectives through identification of Key Performance Indicators (KPI) on the basis of the company and the units, the monitoring of financial performance and customer satisfaction, and the comparison of the actual performance with the planning. Other steps included in the process are identification of deficiencies, creation of the business improvement plan and the updating of the corporate quality documents.





Product Development

Process Owner: Product Development and Tariffs Department

It includes the development of new capacity and balancing products in line with the market development. The products developed provide input to the pricing process, and the prices of the relevant product are set within the scope of this process.

Tariff Calculation

Process Owner: Product Development and Tariffs Department

It includes the creation of the tariffs for the transmission activities of the company by making calculations on the basis of the company’s annual revenue requirements and engaging in meetings with EMRA. The conducting of tariff creation studies for new capacity and balancing products on the basis of the inputs from the product development process is included in this process.

Business Processes Improvement

Process Owner: Quality, Training and Development Department

It includes the analysis of certain business cases on the basis of business improvement plans prepared within the framework of the Quality Management process, creation of improvement suggestions, and implementation thereof according to the priorities set. The findings obtained from the Internal Audit provide inputs to this process. The process variations identified trigger the Change Management and Quality Management processes.

Change Management


The identification and management of the change required to be made in the organisational structure, number of personnel and qualifications in order to successfully implement the processes that are newly designed or updated in relation to the improvement of processes are within the scope of this process. The identification of projects required to be implemented and the performance of activities for the implementation thereof are included in this process.

6.3.1.5. Human Resources Management

Recruitment

Process Owner: Human Resources Department

It includes the planning of required labour based on the personnel requests. The posting of job advertisements for new recruitment processes, the collection of CVs, the conducting of interviews, the evaluation of candidates and the making of recruitment decisions are included in this process.

Personnel Affairs


It includes the creation of personnel files and procedures for personnel affairs such as leave requests, appointment applications, seniority promotions and disciplinary punishments. Additionally, the recruitment, retirement and quitting processes provide input to the personnel affairs. Recruitment processes provide input to this process by communicating the new hires so that their personnel files can be prepared.



It includes the conducting of annual training need analysis and survey and the preparation of a training plan accordingly on the basis of the training budget allocated for that year. It includes the delivery of training courses based on the type of training (e-training, unplanned, planned) and the collection of training evaluation questionnaires and feedbacks. Recruitment processes provide input to this process by communicating the new hires. The necessary activities are carried out for the integration of new hires according to such inputs.





Compensation and Benefits Management


It includes the determination of benefits for the personnel, such as company vehicle, company telephone, performance-based and achievement-based additional salary (bonus) and retirement pension (premium). The provision of employees with benefits is done within the framework of this process. The activities included in these processes are carried out in coordination with the Procurement Department and the IT Department.

Payroll Operations


The payroll calculations made by calculating salary payments, bonuses, additional payments such as expenses and premiums and payment deductions is included in this process. During the payroll operations process, the necessary summaries are obtained from the payroll, social insurance premiums are calculated, and after the necessary approval processes, they are shared with the financial processes so that the necessary payments can be made to the relevant personnel. The activities included in these processes are carried out in coordination with the Department of Accounting and Finance. Additionally, the recruitment processes provide input to this process by communicating the new hires.

Career and Performance Management


The process of preparing a career roadmap includes the identification of the personnel’s career goals, the knowledge and qualifications they need to have, and the training courses they need to receive. The evaluation of performance of the personnel for their positions based on the specified criteria is included in the scope of this process. Recruitment process provides input to the career and performance management process by communicating the new hires.

Occupational Health and Safety Management

Process Owner: Health, Safety and Environment Department

By identifying the risk factors in the workplace taking into account the natural gas transmission activity, the risk procedures should be prepared, and measures should be taken and inspections should be performed accordingly. Measures and suggestions regarding the pipelines and system units (distribution points, compressor stations, and pressure regulators) are collected in a book, and after making the necessary updates it is handed over to the relevant management. By checking over the legislation on Occupational Health and Safety, necessary arrangements, if any, are made, the relevant units are informed and the OHS personnel are trained.

Retirement and Leave Management


The assessment of the leave requests by the reasons for quitting (by request of the employee, by request of the employer, expiry of the employment contract), the implementation of leave procedures, the calculation of allowances and compensations, and the preparation of the certification of release for leaving are performed within this process.

6.3.1.6. Corporate Affairs

Corporate Relations Management

Process Owner: Press and Public Relations Department

It includes the development of the media and corporate relations strategy on the basis of requests from different business units, the preparation of promotion materials, and the publication of announcements. It includes the maintenance of relations with local and international stakeholders. It is carried out in interaction with the Press and Public Relations management process.





International Relations Management:

Process Owner: Department of Press and Public Relations

International relations management process includes the representation of the Company in the international arena, the advertisement of the company and the brand by attending workshops, fairs and presentations, and international social aid efforts. The output of the process provides input to the new business fields and opportunity management process.

Lead and Opportunity Management:

Process Owner: International Projects Department

It includes the follow-up, coordination and planning of new business field and opportunities based on inputs from the International Relations Management process. The monitoring of the current international projects (i.e. TANAP) is performed within the scope of this process. It is carried out in coordination with the strategy management processes.

Press and Public Relations Management:


It includes the preparation of the company’s press statements, the conducting of public relations particularly in the regions through which the pipelines pass, the formulation and implementation of social aid policies. The relevant activities are carried out in interaction with the Corporate Relations Management process.

6.3.1.7. Legislation and Legal Management

Compliance with EMRA Regulations:

Process Owner: Regulatory Affairs Department

The regular following of the legislation related to the Company’s fields of activity in order to ensure compliance with the regulations of EMRA, the analysis of the impact of any change on the Company’s activities, and the notification of the relevant units and personnel are included in the scope of this process. The consolidation of the opinions on any draft legislation in accordance with the strategies and policies of the Company is also included in this process. The control of the compatibility of the business and functioning with the existing regulations, and the ensuring of in-house coordination in EMRA’s inspections are performed within the scope of this process. Furthermore, it includes the tariff talks with EMRA in coordination with the Product Development and Pricing processes.

Compliance with General Legal Rules:

Process Owner: 1. Legal Advisory

It includes the necessary steps for compliance with general legal rules such as contracts, regulations or law, excluding the regulations of EMRA. It includes the activities for raising awareness on legal rules in the Company. The follow-up of the changing and new rules and the implementation of the necessary control procedures in order to ensure compliance in any field are included in this process.

Compliance with International Legal Rules:

Process Owner: 1. Legal Advisory, Regulatory Affairs Department

It includes the necessary steps for compliance with international contracts, regulations and laws to which the Company is subject due to the regions it is operating in. The liabilities for compliance with international legal rules, which particularly arise out of the international projects carried out, and the EU Directives are followed within the framework of this process. The follow-up of the changing and new rules and the implementation of the necessary control procedures in order to ensure compliance with international legal rules are included in this process.

Legal Counselling:


It includes the provision of the Company’s other departments with oral and written opinions on contracts, legal disputes, and legal issues in the Company, and the review of matters for compliance with law.





Within the framework of this process, support is given to the efforts for providing opinion on legislative amendments.

Execution Proceedings:


It includes the listing of execution proceedings, appointment of lawyers, communication with parties failing to make their payments, preparation of necessary documents for execution proceedings, and preparation of execution proceedings files for parties failing to make their payments. It includes the bringing of execution action against any party failing to make their payments if no collection has been able to be made, the collection of the part of any debt paid, and initiation of attachment proceedings in relation to any part of debt that is unpaid.

Litigation:


It includes the representation of the Company in the legal actions to which the Company is a party, the bringing of action on behalf of the Company, the seeking of legal remedies, the pursuing of legal cases, the assessment and answering of interim decisions of courts, the preparation and keeping of records for the said activities, and the use thereof when required.

6.3.1.8. Procurement and Logistics

Procurement Sourcing Strategy Management:

Process Owner: Procurement Department

It includes the development of procurement strategies regarding which products and services should be procured by way of purchasing and which requirements should be sought for purchases by tender. Furthermore, by conducting purchasing analyses, strategic suppliers and product groups are identified, and supplier KPIs are created within the framework of this process. The output of this process provides input to the procurement processes such as tender management and evaluation, contract management, order management, goods and service and acceptance, warehousing and logistics.

Tender Management and Evaluation:


It includes the collection of needs specified by the relevant units and creation of purchasing forms, the management of tender processes and bargains, and the activities from the selection of supplier to the signing of the contract. The process uses the inputs from the procurement sourcing strategy process and transmits the outputs to the processes of contract management and goods and service acceptance.



It includes the management of the contract for the goods or services purchased. The elaboration of the contract framework and the follow-up of the signing are included in this process. The process uses the inputs from the tender management and evaluation process.

Order Management:


The collection of the needs specified by the relevant Departments, the creation of purchasing forms, and the placing of orders from the previously selected suppliers are performed within this process. The process uses the inputs from the procurement sourcing strategy process and transmits the outputs to the goods and service acceptance process.





Goods and Service Acceptance:


The delivery by the supplier company, the controls by the debit department, the recording of any defect detected, the inputting of stocks if the product or service is found to be appropriate, the calculation of allowances, the signing of the invoice by the procurement department, and the notification of the accounting department for payment are performed within the scope of the product and service process. The creation of supplier KPIs, the recording of supplier performances on the basis of KPIs, and the provision of feedbacks are also performed within this process. It includes the entering of supplier information into the system, the checking of candidates for whether they meet the supplier requirements, the recording of them into the system, and the regular updates. The information from the tender management and evaluation process and the order management process provide input to this process.

Warehousing:


It includes the placing of the supplier materials into the warehouse after delivery, the creation of stock entries, the delivery if requested, and the updating of the stock registry. Warehousing process proceeds in interaction with the logistic planning process.

Logistic Planning:


It includes the transportation of the relevant materials and products from the warehouse to the relevant place when requested by the relevant units. Particularly the materials and equipment that the District Managements need on the field are dispatched from the stock. The logistic planning process proceeds in interaction with the warehousing process.

6.3.1.9. Accounting and Finance

Accounting


The creation and archiving of accounting records are performed within the scope of the accounting process. It includes the cash accounting (payment and collection transactions) and bank accounting (recognition of bank accounts and statement of account transactions) transactions. The management of advance payments and expenses, the preparation of statement, and the elaboration of the financial activity report after the completion of the end-of-period transactions are performed within this process. The payments determined by the accounting process are concluded in the finance processes.

Finance


The finance process includes the budget management (creation and approval of the units’ budgets and the follow-up of the budget realisation) and the management of the payment orders created within the scope of different business processes. The payment requests from the accounting processes are performed within the scope of finance processes.

Security Management:


The securities for connection, connected system delivery and balancing gas agreements to which the Company is party in the capacity and balancing markets are taken, the transitory securities are checked before the expiry of the term so that the relevant unit is notified, the requests for the release of security are assessed, letters of guarantee are given when required, and the securities given are taken back within the scope of the security management process.





Treasury


Research for economy and money markets is conducted and fund management processes are carried out in coordination with the finance department within the scope of the treasury process. The objective of the process is to set a maximum value based on the yield and risk expectations of the Company.

Internal Audit

Process Owner: Internal Audit Committee

The examinations and investigations, the development of internal control standards, the internal audit planning, the internal audit execution and reporting operations, and the internal audit monitoring operations are performed within the scope of this process.

Tax Accounting and Compliance Management


It includes the calculation of taxes for transmission revenues and general taxes separately, and the preparation of the relevant tax returns. Within the scope of this process, accounting entries are created, notifications are sent to the accounting and finance departments so that payments can be made, the tax legislation and other relevant laws are followed, and if any amendment is made, the necessary notifications are made and the tax calculations are amended accordingly.

6.3.1.10. Information Technologies Management

IT Planning

Process Owner: IT Department

It includes the review of the IT strategy and objectives, the elaboration of the IT strategic plan, and the identification of the needs for software and hardware based on the plan elaborated. The coordination with the necessary purchasing and budget planning activities is also within the scope of this process.

IT Infrastructure Planning


IT infrastructure planning process includes the establishment of the database and network infrastructure by database, network and software management in the IT Department, the implementation of configuration changes, the notification of users, the monitoring of the database and network, and the follow-up of the software licenses. The infrastructural needs identified by the IT planning provide input to the IT infrastructure planning process.

Management and Support Services


It includes the categorisation of the requests for assistance from different request channels, the examination of the requests for software assistance, and the provision of the necessary solution. The confirmation that the request was fulfilled following the help desk processes, and the collection of the necessary feedbacks are also performed within this process.

IT Asset Management


It includes the activities for the management of the IT assets, such as the maintenance, repair and updating activities for the IT systems, maintenance of the operability of the existing systems, and the keeping of the systems under control. The activities under this process are carried out in coordination with the system operations processes.





IT System Operations


It includes the control and testing activities for the system and the network, and the backup and maintenance operations.

Information Security Management


The information security management process includes the activities for the elimination of risks regarding the misuse, loss, damage of information as well as its availability to wrong persons by protection of information and information infrastructure assets. It includes the identification and prioritisation of security requirements based on a security risk analysis to be conducted, and the implementation of such requirements by carrying out the necessary development procedures. The information security requirements identified within the IT planning process provide input to the information security management process. It is ensured that standards such as ISO 27001 and COBIT are implemented in the Company.

6.3.1.11. Facility Management

Facility Management

Process Owner: Administrative and Social Affairs Department

The improvement of the working environment, maintenance/repair/renovation and construction works, premises insurance operations, premises entry and exit and plant operations, as well as the management of other services such as cleaning, catering, gardening and landscaping are within this process.

Vehicle Fleet Management


Vehicle fleet management includes the formulation of vehicle fleet strategies, identification of annual vehicle requirements, identification of renting and purchasing requirements when vehicle needs arise, and keeping of records for such vehicles. Additionally, it is ensured that the vehicles required as per the relevant work order are identified and assigned, and that the vehicle fleet’s economic life is checked and the necessary actions are taken within the management of the vehicle park.

Security


The preparation of security labour schedules and shifts, and the performance of security works by way of service procurement or similar methods and employment of security personnel are within this process. Moreover, it includes the monitoring of the security personnel and security operations.

Archive Management


Under this process, the activities for the processing and management of the electronic archive in the company, such as any document, petition and replies to petitions are carried out. In addition, the keeping of documents in physical environment and the activities for the sorting out and destruction of documents that are performed in certain periods of each year are within the scope of this process. It is carried out in interaction with the general document management process.

Document Management


The incoming and outgoing document works are carried out within the scope of the Document Management process. Under the incoming document process, the documents are received from outside the company or from another department of the company, are conveyed to the relevant units/persons, and are filed and kept if required. Under the outgoing document process, the outgoing documents are numbered and recorded into the system, are sent, and date and document number are received from





the document recording units to track the documents. It is carried out in interaction with the archive management process.

Office Equipment Management


Under the Office Equipment Management process, the purchased goods were recorded as fixture, and the entrustment of fixtures are updated in cases of recruitment or quitting or whenever any wear or failure occurs or any need for renewal arises in relation to the existing fixtures.

Social Affairs Management


Under the social affairs management, the sport activities, dining organisations and any similar social activity carried out within the Company are planned and performed.

6.3.2. Business Processes of the Supply Company The activities that need to be carried out according to the final organisational chart designed for BOTAŞ Supply Company are first defined in the form of process groups, and the processes in each process group are explained in detail. Due to the nature of the supplier activities, processes may be included in the scope of duty of more than one department. Therefore, each process is matched with a department.




Joint Venture of Deloitte and DNV GL– August 2017 138

Figure 29: Processes of the Supply Company

Natural Gas Trade Management

Bilateral Trading

Over-the-Counter

Trading

Short-Term

Forecasting

Cross-Border

Trade

Exchange Trading

Product

Development

Back OfficeRisk Management

Commercial

Approval Rights

and Limits

Market Risk

Analysis

Portfolio AnalysisOperational Risk

Analysis

Invoicing

Settlement and

Reconciliation

Contract

Management

Payment and

Collection

Management

Security

Management

Pricing and

Modelling

End User Sales

Marketing

Management

Strategy Management

Strategy

Management

Long-Term

Forecasting

Project

Management

Quality

Management

Business

Processes

Improvement

Tariff Calculation

Change

Management

Lead and

Opportunity

Management

International

Relations

Management

Corporate

Relations

Management

Press and Public

Relations

Management

Compliance with

International Legal

Rules

Compliance with

General Legal

Rules

Compliance with

EMRA Regulations

Contract

Management

Tender

Management and

Evaluation

Procurement

Sourcing Strategy

Management

Order

Management

Goods and

Service

Acceptance

Litigation

Execution

Proceedings

Legal Counselling

Human Resources ManagementLegislation and Legal

ManagementCorporate Affairs Procurement

Compensation and

Benefits

Management

Payroll Operations

Career and

Performance

Management

Training and

Development

Recruitment

Personnel Affairs

Occupational

Health and Safety

Management

Retirement and

Leave

Management

Treasury

Finance

Accounting Internal Audit

Tax Accounting

and Compliance

Management

IT Infrastructure

Planning

IT Planning

Management and

Support Services

IT Asset

Management

Information

Security

Management

IT System

Operations

Security

Vehicle Fleet

Management

Facility

Management

Social Affairs

Support

Archive

Management

Document

Management

Office Equipment

Management

Accounting and Finance Facility ManagementInformation Technologies

Management

Operation Control

Management




Joint Venture of Deloitte and DNV GL– August 2017

139

6.3.2.1. Natural Gas Trade Management

Short-Term Forecasting:

Process Owner: Short-Term Planning and Forecasting Department

It includes the development of forecasting models based on demand, price, economic indicators and similar data that may affect the operations of the company. The process includes forecasts through planning and modelling studies, comparison of forecasted values obtained from the developed models with actual values, analysis of the deviations in the forecasts, and updating of the models based on the analyses. The forecast data obtained from the process of short-term forecasting studies provide input to the processes of trade, bilateral trade, cross-border trade in the over-the-counter markets relating to trade, and to the trading processes in the organised markets.

Over-the-Counter Trading:

Process Owner: Natural Gas Trading Department

It includes the activities regarding the trading operations carried out by the Company in the over-the-counter markets in the country. Under this process, the Company carries out purchase/sale transactions through standard and non-standard contracts in the over-the-counter markets in line with its portfolio management policy and according to its short position. The data from the short and long-term forecasting studies provide input to this process. Additionally, the outputs of the Commercial Approval Rights and Limits process have a determinant role in this process.

Bilateral Trading:


Under this process, contract terms are negotiated one-to-one with the purchasers and sellers in the country in order to determine the trading conditions, and once an agreement is reached the purchase/sale transactions are carried out. Bilateral trading transactions are carried out in line with the Company’s portfolio management policy and according to its short position. The data from the short and long-term prediction studies provide input to this process. Additionally, the outputs of the Commercial Approval Rights and Limits process have a determinant role in this process.

Cross-Border Trading:

Process Owner: Natural Gas Import/Export Department

It includes the necessary analysis and business development studies concerning cross-border trade activities. Under this process, purchase and sale transactions are carried out with other suppliers abroad. These commercial activities can be carried out both by bilateral agreements and through the over-the-counter markets and organised markets in the future. Under the cross-border trade process, the foreign markets and players can be monitored in order to maintain the productivity and profitability of the Company’s operations, and suitable countries and markets are identified. Purchase and sale transactions are carried out within the framework of the conditions of the markets in question. The data from the short and long-term prediction studies provide input to this process. Additionally, the outputs of the Commercial Approval Rights and Limits process have a determinant role in this process.

Exchange Trading:


It includes the commercial activities carried out in all domestic organised markets, whether spot or long-term. Spot market trade, where natural gas is purchased and sold to ensure short-term portfolio balance, is included in this process. Furthermore, the trading of future (standard) and derivative products, which contains long-term commercial activities and is carried out according to the long-term position objectives, is included in the organised markets process. The data from the short and long-term prediction studies provide input to this process. Additionally, the outputs of the Commercial Approval Rights and Limits process have a determinant role in this process.





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Product Development:

Process Owner: Product Development and Pricing Department

It includes the development of products, new tariffs and contracts linked to those tariffs for unregulated customers that have the end-user status and other suppliers within the framework of market requirements, Company’s strategy and the legislation. In this context, the evaluation of the sale performance of the existing and newly developed products are other steps included in this process. The products developed provide input to the pricing and modelling process.

Pricing and Modelling:

Process Owner: Product Development and Pricing Department

It includes the pricing studies taking into account the potential yield and costs of the products designated within the scope of product development. The development of appropriate pricing models and the use of such models in price calculations along with the developed products are included in this process. The outputs of the process are used in the processes of Sale to End Users, Trade in Over-the-Counter Markets, Bilateral Trade, Cross-Border Trade, and Trade in Organised Markets.

End Users Sales:

Process Owner: Natural Gas Supply Department

It includes the roles regarding natural gas supply to the end users in Turkey. The supply of gas to Natural Gas Distribution Companies from Build-and-Operate/Build-Operate-Transfer plants on the basis of regulated tariffs and to industrial and commercial customers that are entitled to be eligible consumers on the basis of unregulated tariffs is included in this process. Also, the identification of appropriate eligible consumer segments and appropriate sale channels is performed within this process. The outputs of product development, pricing and modelling processes provide input to the process.

Marketing Management:

Process Owner: Natural Gas Marketing Department

Under the marketing management process, the sector is monitored, customer analyses are conducted, sale opportunities are identified and regulatory constraints are evaluated, and as a result of such activities the marketing plan is developed. Based on the marketing planning, the branding and marketing campaigns are designed, and launching and publicity activities are carried out.

Operation Control Management:

Process Owner: Operation Control Department

The operation control management process includes the steps concerning the planning of deliveries and the management of imbalances. In this framework, the communication with the Transmission System Operator on administrative and technical issues, and the notifications via the Electronic Bulletin Board are performed within this process.

6.3.2.2. Risk Management

Portfolio Analysis:

Process Owner: Portfolio Management Department

It includes the activities for ensuring the counterparty risks are at a manageable level by exploring the different risk elements of the Company’s customer portfolio (credibility, concentration, etc.). Furthermore, the profitability of different customer (regulated and unregulated) portfolios is analysed within the framework of this process, and necessary arrangements are made to attain the level of return and risk targeted by the Company. Activities are carried out in coordination with the processes of operational risk analysis and market risk analysis.





141

Market Risk Analysis:

Process Owner: Risk Management Department

It includes the calculation of the loss that the supplier company may incur due to its short positions using different measuring methods (VaR, C-far, PaR, etc.) by analysing the changes observed in the market prices and the trading volume. In this scope, both the natural gas prices and other commodities whose prices are indexed to the price of natural gas are included into the calculations along with exchange rates. It includes the elaboration of reports in accordance with the return and risk targets set by the Company. The outputs of the process are used in the Commercial Approval Rights and Limits process.

Commercial Approval Rights and Limits:


It includes the identification of the actions that can be taken by the teams in the supplier company carrying out activities in the over-the-counter markets, organised markets, bilateral agreements and cross-border trade activities and of the upper/lower price and volume limits. Thus, it is ensured that the level of return and the level of risk targeted by the Company in general are attained. The outputs of the process are used in the Operational Risk Analysis process.

Operational Risk Analysis:


It includes the identification of different risk elements (employees, systems, processes and external incidents) in relation to the supplier company’s operational processes, the preparation of risk catalogues accordingly, and the monitoring of the implementation of the identified controls. Thus, the uninterrupted and correct functioning of the existing operational processes is ensured. The outputs of the Portfolio Analysis and Commercial Approval Rights and Limits processes are made use of. The outputs of the process affect all other business processes.

6.3.2.3. Back Office



It includes the conclusion of contracts with parties under agreed terms. The periodical follow-up of the contract conclusion process and implementation of the contract is included in this process. The process proceeds with the process of Trade in Over-the-Counter Markets in which the business is done, as well as the processes of Bilateral Trade, Cross-Border Trade and Sale to End Users.

Settlement and Reconciliation:


It is composed of the comparison of the settlement data calculated by the Transmission System Operator and the Organised Market Operator with the data calculated by the Company, and the making of the necessary application for correction if any difference is found as well as the follow-up of the application. Once an agreement is reached with respect to the receivables, the relevant activities are carried out within the framework of the invoicing process.

Invoicing:


It includes the drawing up of invoices based on the calculated invoice amounts and the conveyance of the invoices in printed or electronic form to the relevant parties for payment. Activities for the invoicing of the calculated amounts are carried out in coordination with the processes of Accounting and Finance. The invoicing process is carried out according to the regulated tariff for customers supplied with gas on the basis of the regulated tariff and according to the contract terms for other customers. The output from the Contract Management provides input to the Invoicing process.





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Payment and Collection Management


The timely and complete fulfilment of the liabilities by the customers is checked and reported. Under this process, the receivables not collected from the customers until the due date are followed up for a certain period of time, and various notifications are sent according to the contract concluded. If the due amounts cannot still be collected after the statutory notifications, the contract is terminated and legal proceedings are initiated (including collection by execution). This process is carried out in coordination with the Execution Proceedings.

Security Management:


Under this process, security is taken from the customer/third parties, the transitory securities are checked before the expiry of the term so that the relevant unit is notified, the requests for the release of security given by the customer/third parties are assessed, letters of guarantee are given when required, and the securities given are taken back. Contract Management processes provide input to the security management process.

6.3.2.4. Strategy Management

Long-Term Forecasting

Process Owner: Long-Term Planning and Forecasting Department

It includes the conducting of long-term forecasting studies for the economy, money and capital markets, and the sectors in which the company is engaged in order to develop the company strategies and objectives and enhance the predictability of the factors affecting the activities of the company. By conducting long-term forecasting studies to identify in which customers groups and in which regions the demand for natural gas will develop, an analysis for supply of and demand for natural gas is conducted. The outputs of the process provide inputs to the strategy and quality management processes.

Strategy Management

Process Owner: Strategy Development Department

This process includes the analysis of external factors involving the assessment of economy, finance and political and regulatory environment, and the corporate analysis within the scope of the company’s mission, vision and objectives. 5-year strategic plans are prepared within the scope of this process. Strategic management process involves the setting of financial and operational objectives of the company by identifying its long-term expectations and the planning of its medium and long-term capital structure accordingly.

Project Management

Process Owner: Relevant Department

It includes the creation of a project timetable by determining the objectives and resource (capital, personnel and time) requirements for the projects carried out on the basis of the company and the units. The checking of whether the projects have attained the desired objectives without exceeding the budget and resources given is performed within the process.

Quality Management

Process Owner: Strategy Development Department, Quality, Training and Development Department

The quality management process includes the reporting of the attainment of the objectives through identification of Key Performance Indicators (KPI) on the basis of the company and the units, the monitoring of financial performance and customer satisfaction, and the comparison of the actual performance with the planning. Other steps included in the process are identification of deficiencies, creation of the business improvement plan and the updating of the corporate quality documents.





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Tariff Calculation

Process Owner: Regulation Department

It includes the calculation of the relevant tariffs for customers supplied with gas on the basis of the regulated tariff according to the Company’s annual revenue requirements, and engagement in talks with EMRA, and notification of the relevant units for the implementation of the tariffs in accordance with the rules specified by EMRA.

Business Processes Improvement


It includes the analysis of certain business cases on the basis of business improvement plans prepared within the framework of the Quality Management process, creation of improvement suggestions, and implementation thereof according to the priorities set. The findings obtained from the Internal Audit provide inputs to this process. The process variations identified trigger the Change Management and Quality Management processes.

Change Management


The identification and management of the change required to be made in the organisational structure, number of personnel and qualifications in order to successfully implement the processes that are newly designed or updated in relation to the improvement of processes are within the scope of this process. The identification of projects required to be implemented and the performance of activities for the implementation thereof are included in this process.

6.3.2.5. Human Resources Management

Recruitment


It includes the planning of required labour based on the personnel requests. The posting of job advertisements for new recruitment processes, the collection of CVs, the conducting of interviews, the evaluation of candidates and the making of recruitment decisions are included in this process.

Personnel Affairs


It includes the creation of personnel files and procedures for personnel affairs such as leave requests, appointment applications, seniority promotions and disciplinary punishments. Additionally, the recruitment, retirement and quitting processes provide input to the personnel affairs. Recruitment processes provide input to this process by communicating the new hires so that their personnel files can be prepared.



It includes the conducting of annual training need analysis and survey and the preparation of a training plan accordingly on the basis of the training budget allocated for that year. It includes the delivery of training courses based on the type of training (e-training, unplanned, planned) and the collection of training evaluation questionnaires and feedbacks. Recruitment processes provide input to this process by communicating the new hires. The necessary activities are carried out for the integration of new hires according to such inputs.

Compensation and Benefits Management


It includes the determination of benefits for the personnel, such as company vehicle, company telephone, performance-based and achievement-based additional salary (bonus) and retirement





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pension (premium). The provision of employees with benefits is done within the framework of this process. The activities included in these processes are carried out in coordination with the Procurement Department and the IT Department.

Payroll Operations


The payroll calculations made by calculating salary payments, bonuses, additional payments such as expenses and premiums and payment deductions is included in this process. During the payroll operations process, the necessary summaries are obtained from the payroll, social insurance premiums are calculated, and after the necessary approval processes, they are shared with the financial processes so that the necessary payments can be made to the relevant personnel. The activities included in these processes are carried out in coordination with the Department of Accounting and Finance. Additionally, the recruitment processes provide input to this process by communicating the new hires.

Career and Performance Management


The process of preparing a career roadmap includes the identification of the personnel’s career goals, the knowledge and qualifications they need to have, and the training courses they need to receive. The evaluation of performance of the personnel for their positions based on the specified criteria is included in the scope of this process. Recruitment process provides input to the career and performance management process by communicating the new hires.

Occupational Health and Safety Management

Process Owner: Health, Safety and Environment Department

By identifying the risk factors in the workplace taking into account the natural gas supply activity, the risk procedures should be prepared, and measures should be taken and inspections should be performed accordingly. Measures and suggestions are collected in a book, and after making the necessary updates it is handed over to the relevant management. By checking over the legislation on Occupational Health and Safety, necessary arrangements, if any, are made, the relevant units are informed and the OHS personnel are trained.

Retirement and Leave Management


The assessment of the leave requests by the reasons for quitting (by request of the employee, by request of the employer, expiry of the employment contract), the implementation of leave procedures, the calculation of allowances and compensations, and the preparation of the certification of release for leaving are performed within this process.

6.3.2.6. Corporate Affairs

Corporate Relations Management


It includes the development of the media and corporate relations strategy on the basis of requests from different business units, the preparation of promotion materials, and the publication of announcements. It includes the maintenance of relations with local and international stakeholders. It is carried out in interaction with the Press and Public Relations management process.

International Relations Management:

Process Owner: Department of Press and Public Relations

International relations management process includes the representation of the Company in the international arena, the advertisement of the company and the brand by attending workshops, fairs and presentations, and international social aid efforts. The output of the process provides input to the new business fields and opportunity management process.





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Lead and Opportunity Management:

Process Owner: International Business Development Department

It includes the follow-up, coordination and planning of new cross-border trading opportunities based on inputs from the International Relations Management process. Developing the relations with current trading parties and looking for new opportunities is performed within the scope of this process. It is carried out in coordination with the strategy management processes.

Press and Public Relations Management:


It includes the preparation of the company’s press statements, the conducting of public relations particularly in the regions where cross-border trading agreements exists, the formulation and implementation of social aid policies. The relevant activities are carried out in interaction with the Corporate Relations Management process.

6.3.2.7. Legislation and Legal Management

Compliance with EMRA Regulations:

Process Owner: Regulation Department

The regular following of the legislation related to the Company’s fields of activity in order to ensure compliance with the regulations of EMRA, the analysis of the impact of any change on the Company’s activities, and the notification of the relevant units and personnel are included in the scope of this process. The consolidation of the opinions on any draft legislation in accordance with the strategies and policies of the Company is also included in this process. The control of the compatibility of the business and functioning with the existing regulations, and the ensuring of in-house coordination in EMRA’s inspections are performed within the scope of this process. Furthermore, it includes the tariff talks with EMRA in coordination with the Product Development and Pricing processes.

Compliance with General Legal Rules:


It includes the necessary steps for compliance with general legal rules such as contracts, regulations or law, excluding the regulations of EMRA. It includes the activities for raising awareness on legal rules in the Company. The follow-up of the changing and new rules and the implementation of the necessary control procedures in order to ensure compliance in any field are included in this process.

Compliance with International Legal Rules:

Process Owner: 1. Legal Advisory, Regulatory Affairs Department

It includes the necessary steps for compliance with international contracts, regulations and laws to which the Company is subject due to the markets it is operating in. The liabilities for compliance with international legal rules and the EU Directives are followed within the framework of this process. The follow-up of the changing and new rules and the implementation of the necessary control procedures in order to ensure compliance with international legal rules are included in this process.

Legal Counselling:


It includes the provision of the Company’s other departments with oral and written opinions on contracts, legal disputes, and legal issues in the Company, and the review of matters for compliance with law. Within the framework of this process, support is given to the efforts for providing opinion on legislative amendments.





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Execution Proceedings:


It includes the listing of execution proceedings, appointment of lawyers, communication with parties failing to make their payments, preparation of necessary documents for execution proceedings, and preparation of execution proceedings files for parties failing to make their payments. It includes the bringing of execution action against any party failing to make their payments if no collection has been able to be made, the collection of the part of any debt paid, and initiation of attachment proceedings in relation to any part of debt that is unpaid.

Litigation:


It includes the representation of the Company in the legal actions to which the Company is a party, the bringing of action on behalf of the Company, the seeking of legal remedies, the pursuing of legal cases, the assessment and answering of interim decisions of courts, the preparation and keeping of records for the said activities, and the use thereof when required.

6.3.2.8. Procurement and Logistics

Procurement Sourcing Strategy Management:


It includes the development of procurement strategies regarding which products and services should be procured by way of purchasing and which requirements should be sought for purchases by tender. Furthermore, by conducting purchasing analyses, strategic suppliers and product groups are identified, and supplier KPIs are created within the framework of this process. The output of this process provides input to the procurement processes such as tender management and evaluation, contract management, order management, goods and service and acceptance.

Tender Management and Evaluation:


It includes the collection of needs specified by the relevant units and creation of purchasing forms, the management of tender processes and bargains, and the activities from the selection of supplier to the signing of the contract. The process uses the inputs from the procurement sourcing strategy process and transmits the outputs to the processes of contract management and goods and service acceptance.



It includes the management of the contract for the goods or services purchased. The elaboration of the contract framework and the follow-up of the signing are included in this process. The process uses the inputs from the tender management and evaluation process.

Order Management:


The collection of the needs specified by the relevant Departments, the creation of purchasing forms, and the placing of orders from the previously selected suppliers are performed within this process. The process uses the inputs from the procurement sourcing strategy process and transmits the outputs to the goods and service acceptance process.

Goods and Service Acceptance:


The delivery by the supplier company, the controls by the debit department, the recording of any defect detected, the inputting of stocks if the product or service is found to be appropriate, the calculation of allowances, the signing of the invoice by the procurement department, and the notification of the





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accounting department for payment are performed within the scope of the product and service process. The recording of supplier performances on the basis of KPIs, and the provision of feedbacks are also performed within this process. The information from the tender management and evaluation process and the order management process provide input to this process.

6.3.2.9. Accounting and Finance

Accounting


The creation and archiving of accounting records are performed within the scope of the accounting process. It includes the cash accounting (payment and collection transactions) and bank accounting (recognition of bank accounts and statement of account transactions) transactions. The management of advance payments and expenses, the preparation of statement, and the elaboration of the financial activity report after the completion of the end-of-period transactions are performed within this process. The payments determined by the accounting process are concluded in the finance processes.

Finance


The finance process includes the budget management (creation and approval of the units’ budgets and the follow-up of the budget realisation) and the management of the payment orders created within the scope of different business processes. The payment requests from the accounting processes are performed within the scope of finance processes. The requests for payments are received, the conditions against payments are checked, the approvals from the relevant Departments are followed and the records are kept in this process.

Treasury


Research for economy and money markets is conducted and fund management processes are carried out in coordination with the finance department within the scope of the treasury process. The objective of the process is to set a maximum value based on the yield and risk expectations of the Company.

Internal Audit

Process Owner: Internal Audit Committee

The examinations and investigations, the development of internal control standards, the internal audit planning, the internal audit execution and reporting operations, and the internal audit monitoring operations are performed within the scope of this process.

Tax Accounting and Compliance Management


It includes the calculation of relevant taxes and the preparation of the relevant tax returns. Within the scope of this process, accounting entries are created, notifications are sent to the accounting and finance departments so that payments can be made, the tax legislation and other relevant laws are followed, and if any amendment is made, the necessary notifications are made and the tax calculations are amended accordingly.

6.3.2.10. Information Technologies Management

IT Planning


It includes the review of the IT strategy and objectives, the elaboration of the IT strategic plan, and the identification of the needs for software and hardware based on the plan elaborated. The coordination with the necessary purchasing and budget planning activities is also within the scope of this process.





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IT Infrastructure Planning


IT infrastructure planning process includes the establishment of the database and network infrastructure by database, network and software management in the IT Department, the implementation of configuration changes, the notification of users, the monitoring of the database and network, and the follow-up of the software licenses. The infrastructural needs identified by the IT planning provide input to the IT infrastructure planning process.

Management and Support Services


It includes the categorisation of the requests for assistance from different request channels, the examination of the requests for software assistance, and the provision of the necessary solution. The confirmation that the request was fulfilled following the help desk processes, and the collection of the necessary feedbacks are also performed within this process.

IT Asset Management


It includes the activities for the management of the IT assets, such as the maintenance, repair and updating activities for the IT systems, maintenance of the operability of the existing systems, and the keeping of the systems under control. The activities under this process are carried out in coordination with the system operations processes.

IT System Operations


It includes the control and testing activities for the system and the network, and the backup and maintenance operations.

Information Security Management


The information security management process includes the activities for the elimination of risks regarding the misuse, loss, damage of information as well as its availability to wrong persons by protection of information and information infrastructure assets. It includes the identification and prioritisation of security requirements based on a security risk analysis to be conducted, and the implementation of such requirements by carrying out the necessary development procedures. The information security requirements identified within the IT planning process provide input to the information security management process. It is ensured that standards such as ISO 27001 and COBIT are implemented in the Company.

6.3.2.11. Facility Management

Facility Management


The improvement of the working environment, maintenance/repair/renovation and construction works, premises insurance operations, premises entry and exit and plant operations, as well as the management of other services such as cleaning, catering, gardening and landscaping are within this process.

Vehicle Fleet Management


Vehicle fleet management includes the formulation of vehicle fleet strategies, identification of annual vehicle requirements, identification of renting and purchasing requirements when vehicle needs arise, and keeping of records for such vehicles. Additionally, it is ensured that the vehicles required as per the





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relevant work order are identified and assigned, and that the vehicle fleet’s economic life is checked and the necessary actions are taken within the management of the vehicle park.

Security


The preparation of security labour schedules and shifts, and the performance of security works by way of service procurement or similar methods and employment of security personnel are within this process. Moreover, it includes the monitoring of the security personnel and security operations.

Archive Management


Under this process, the activities for the processing and management of the electronic archive in the company, such as any document, petition and replies to petitions are carried out. In addition, the keeping of documents in physical environment and the activities for the sorting out and destruction of documents that are performed in certain periods of each year are within the scope of this process. It is carried out in interaction with the general document management process.

Document Management


The incoming and outgoing document works are carried out within the scope of the Document Management process. Under the incoming document process, the documents are received from outside the company or from another department of the company, are conveyed to the relevant units/persons, and are filed and kept if required. Under the outgoing document process, the outgoing documents are numbered and recorded into the system, are sent, and date and document number are received from the document recording units to track the documents. It is carried out in interaction with the archive management process.

Office Equipment Management


Under the Office Equipment Management process, the purchased goods were recorded as fixture, and the entrustment of fixtures are updated in cases of recruitment or quitting or whenever any wear or failure occurs or any need for renewal arises in relation to the existing fixtures.

Social Affairs Management


Under the social affairs management, the sport activities, dining organisations and any similar social activity carried out within the Company are planned and performed.

6.4. Technological Infrastructure

The purpose of the unbundling of the IT is to ensure that the Transmission Company to be established

carries out its activities independently. During the unbundling of the systems, the objectives to be

pursued should be transparency, non-discrimination and promotion of competition. The Transmission

Company should ensure that the information is shared without discrimination, simultaneously and with

the same scope in such a manner as to avoid any detrimental effect on competition. Furthermore,

necessary measures should be taken to ensure that the commercially sensitive information possessed

by the Transmission Company due to the nature of the transmission activities is protected. The

information in question should not result in any unfair economic benefit or discrimination for any supplier

company.

The remaining part of this Chapter summarises the IT systems and technologies required for both

companies to be established in consequence of the unbundling





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6.4.1. Transmission Company’s Technological Infrastructure Looking at the organisational chart and business processes of the Transmission Company given in Sections 5.2 and 5.3, one can see that the Transmission Company needs to have certain IT systems to manage and carry out its operations. This section presents a comprehensive list of the systems along with some remarks.

Pipelines Integrity Management System

These systems ensure that operations are performed safely and efficiently. They document the risk of the pipelines and gas distribution network in and outside the borders as well as monitoring compliance with the legislation and providing information on their integrity. The risk in the pipeline system can be observed instantaneously, and thus it is ensured that operations are cost-efficient and the economic life of parts is prolonged. Also, it is possible to perform data management by recording any planning, application and control operation within the system. By monitoring the condition of assets within their economic life, risks are assessed and the necessary preventive measures are taken.

These applications can provide integrated services with the Corporate Resource Planning and Geographical Information Systems.

Hydraulic Simulation System

Another system that can be used by the Transmission Company is the tools that perform the simulation and hydraulic modelling of the pipelines. These systems provide hydraulic models for the design of the pipelines, detect leakages online and ensure optimisation of the operations and performance.

Network Reliability System

With network reliability systems, it is possible to model complicated natural gas facilities and conduct analyses based on qualitative and quantitative indicators relating to design, operation and maintenance. By demonstrating the data on the facility in an integrated manner with the modelled facility, it is possible to represent the facility and thus make more accurate predictions by following the performance indicators. With different scenarios, it is also possible to see the effects on the optimisation of the key performance indicators.

Geographical Information System

These systems are the programs in which geographical data are kept and analysed. They are capable of showing the model of the company’s assets and data through a single platform, and enable users to see the infrastructure and assets owned by the company in an integrated manner and graphically on advanced maps. With the implementation of GIS, operations can be supported in different fields such as asset management, planning and analysis, mobility and operational awareness.

Natural gas operations include operations that encompass vast geographical areas. The establishment of a GIS may contribute to many issues, including the protection of the vicinity of the pipeline.

SCADA System

It is of critical importance to accurately measure the data of the transmitted gas by precise measurement tools in order to manage the natural gas transmission system efficiently and effectively. SCADA enables users to observe, collect and process the data relating to the gas transmitted. It is possible to interact with the control machinery and devices (valve, pump, and engine) according to the data obtained from the SCADA system. These systems also record the activities carried out within the system. The intervening action carried out on the system according to the SCADA data may be both manual and automatic. SCADA systems provide the operator and other employees with the data and analyses required for these interventions, and thus aim at enhancing the efficiency of operations. Effectively used SCADA systems provide significant savings in terms of time and costs.





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Automatic Meter Reading System

Automatic meter reading systems enable the collection of meter data by remote reading at the desired intervals. Automatic meter reading systems decrease the error rate at the invoicing stage, increase customer satisfaction and ensure employees’ safety. Automatic meter reading systems operated in an integrated manner with the SCADA system decrease the failure response time and render emergency management more effective. Moreover, integration of Automatic Meter Reading System and Settlement and Invoicing System should be enabled.

Capacity Management System

Capacity management systems run the capacity products and tender mechanisms in an integrated manner within a single platform on the basis of the relevant network operation principles. Thus, the access to the capacity market becomes easier, and the remaining transmission capacity can be reviewed by observing the allocable points on the system. Thus, the operations that are of critical importance for the stability and management of the transmission system, such as capacity allocation and entry/exit capacity management are carried out.

There is a capacity management platform named PRISMA, developed in Europe by Austria, Belgium, Denmark, Germany, France, Italy and Netherlands to create a common capacity platform, and currently used by 37 countries. Put into service in April 2013, this program is the first program in Europe that performs the allocation of the natural gas market transmission capacity in an integrated manner. With this program, a step has been taken towards an integrated European gas market. PRISMA both offers an integrated capacity platform and meets the countries’ own regional demands, and contains additional functions.

Balancing Platform

Transmission Company may procure short-term balancing products through the natural gas balancing platform. The integrated and regional balance of the network is monitored through the SCADA system. In the event that the previously set imbalance threshold is exceeded, the most cost-effective offer is selected by means of the software, and notices are given to the relevant market participant. Furthermore, the actions taken by participants to eliminate the imbalance are recorded. The control of any circumstance that may impede the production, failure or network operation of the facilities within the network is important for the balancing action to be taken instantaneously and on time. Hence, the changes in the status of the units that may affect and be affected by the imbalance are recorded in the system. The system’s matching algorithm should be compatible for both continuous and tender type matching. By way of tender type matching, the Transmission Company may procure the balancing services through the same platform.

The reporting of balancing actions is of exceptional importance to ensure the transparency of the market. With the new system to be established, periodical reports should be submitted to the relevant participants and the general market, and should provide input to settlements.

Settlement and Invoicing System

It enables the performance of settlement and invoicing actions regarding business transactions. For this purpose, settlement schedules, market participants, calculation rules and fixed parameters are recorded in the system. Thus, the performance of operations is facilitated using the database maintained, even if the management and settlement of the business transaction is complicated (e.g. different counterparties of settlement at different times). Another important parameter for settlement calculations is the measurement data. With the data to be obtained from the SCADA and Automatic Meter Reading systems, the preliminary settlement values can be calculated. Upon the review of the objections to the preliminary settlement values, the final settlement values and the relevant invoices are published on the system. The Settlement and Invoicing System and the Corporate Resources Planning System should be operated in an integrated manner. Thus, invoice amounts, information on debts and receivables, collections and information on payments can be transferred between the two systems.





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Settlement and invoicing processes can be carried out both for capacity allocations and balancing activities on an independent system, and the processes in questions can be carried within the relevant systems as well.

Dispatching System

Dispatching systems are the tools that establish a connection between the staff in charge of dispatch and the site personnel, and thus ensure the safety of the site personnel. Staff in charge of dispatch are responsible for carrying out the operations by reviewing many data coming from different sources, and dispatching systems make the necessary information available to the staff in charge of dispatch through a single platform. Dispatching systems possess the features and functions required for the operations to be carried out efficiently, reliably and properly. These systems can be supplemented with many features as required, and may contain additional functions such as incident control. Dispatching system can be operated in an integrated manner with the Balancing Platform, and can also be positioned as a module of the Balancing Platform.

Corporate Resource Planning System

As mentioned for natural gas supplier companies, the collection, retention, management and interpretation of the data are of critical importance for the Transmission Company. For the Transmission Companies that make high investments and are situated in a complicated supply chain, the efficient performance of daily operations is ensured by the use of Corporate Resource Planning systems. With the help of Corporate Resource Planning Systems, operational efficiency is enhanced by keeping the purchasing and supplier management issues under control, and additionally costs are kept under control and resource planning is performed efficiently.

The requirements of the company and the local characteristics should be taken into consideration at the stage of installation of Corporate Resource Planning Systems. The integration of local legislative requirements and the obtaining of opinions from local experts are important at the stage of system installation.

Human Resources Management System

These system are used to conduct the human resources processes effectively. Thus, the processes in which administrative load is intense recorded and monitored in electronic environment. These systems enable the maintenance of the historical records of employees as well as the data on their skills, educational background and salaries. Recruitment, employment withdrawal, labour management, training planning, leave management and similar processes are carried out within this system. With modules such as salary and payroll management, the salary accounts of employees can be tracked automatically by looking at their employment and leave times. These systems can be implemented both in an integrated manner with the Corporate Resources Planning System and independently.

Legal Management System

As mentioned for the natural gas supplier companies, they are the systems that ensure the performance of all legal processes of the company through a single platform. Legal Management System offers solutions for the follow-up of execution files and execution proceedings. All legal files and follow-up documentation are contained in the system, and it is possible to prepare reports based on them. It allows for the tracking of execution proceedings and files through the general phases of any execution or proceeding, financial position, collections, payment plans, tracking documents and similar applications. At the same time, users can be informed of processes with limited term by automatic reminders within the system. Turkey usually implements local solutions due to compliance with the legislation.

Electronic Document Management System

Electronic document management system includes the transfer of documents in physical environment to electronic environment, and the production, arrangement, control and archiving of documents in electronic environment. Thus, the documents can be accessed more easily and in a shorter period of time, the document approval processes fast-tracked, and archiving processes are facilitated. These systems need to be designed flexibly in such a manner as to meet the requirements of the company.





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They should also possess features allowing for the scanning and retention of physical documents. Electronic Document Management System should be operated in an integrated manner with the Corporate Resource Planning System.

6.4.2. Supply Company’s Technological Infrastructure Looking at the organisational chart and business processes of the Supply Company given in Sections 5.2 and 5.3, one can see that the Supply Company needs to have certain IT systems to manage and carry out its operations. This section presents a comprehensive list of the systems along with some remarks.

Energy Trade and Risk Management System

Risk management strategies should be developed to act in harmony with the variable nature of the natural gas industry and make decisions in the sector. Coordination and data integration between management and business processes should be ensured to develop such strategies. Thus, transparency and efficiency of decision-making processes may be ensured, and by certifying coordination between middle office and back office functions, the speed of taking action in business processes may be increased.

Energy Trade and Risk Management Systems help see clearly and manage the physical and financial positions in the portfolio for natural gas. They facilitate the management of business transactions and the risks associated with such transactions. Through a single platform, risk parameters are observed, business transactions are tracked, and positions are managed. Additionally, the performance of physical balancing and reconciliation processes is ensured. By collecting all data and processes on a single platform, efficiency and transparency between the front, middle and back offices are ensured.

For the establishment of the Energy Trade and Risk Management System, the level of maturity of the company and market should be analysed and appropriate modules should be established. Initially, the modules suitable for gas trade should be developed according to the Turkish market conditions, and then modules that allow for trading in financial markets in line with the market development should be implemented.

Retail Sale Operations System

It ensures effective management of the costs of retail sale operations, efficient performance of customer operations and fast-tracking of the implementation of strategic decisions. It gathers different processes such as data management, customer contract management, profit and flow forecasts, and reporting on a single platform. The most important feature brought by the system is that it offers solutions for meter data by ensuring access to, and collection and verification of, various meter data. Thus, complicated invoicing processes can be carried out by data collection, verification, prediction and calculation processes. Demand and price forecasting modules can be used in an integrated manner with the retail sale operations system, and can also be implemented as software specialised in this field.

Demand Forecast System

They are used to forecast the demand of customers in the portfolio for natural gas in the short and long-term. Different systems can be used for forecasts for the short and long-term, and it is also possible to develop different forecast models based on different algorithms within the same system. Artificial neural network models are particularly used in the short-term, whereas econometric or techno-economic models can be used in the long-term. In order to be able to perform capacity allocations accurately, customer-based forecasts need to be made, particularly for customers with high consumption. Region-based aggregate forecasts can be made for customers with low consumption. Wholesale amounts can be directly included into the calculations in accordance with the company strategies.

Price Forecast System

The purpose of a price forecast system is to predict the prices to be formed in the international natural gas markets and the natural gas market to be established in Turkey. In developing models based on supply and demand, the change in the prices of other commodities indexed to natural gas should also





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be taken into account. Additionally, the volatilities due to exchange rate should be taken into account in the models. With the maturation of the market structure in Turkey, it is recommended that such software be put into use in the forthcoming period.

Corporate Resource Planning System

The collection, retention, management and interpretation of the data are of critical importance for the natural gas supply companies. In the Supply Companies that make high investments and are situated in a complicated supply chain, the efficient performance of daily operations is ensured by the use of Corporate Resource Planning systems. With the Corporate Resource Planning Systems, operational efficiency is enhanced by keeping the purchasing and supplier management issues under control, and additionally costs are kept under control and resource planning is performed efficiently.

The requirements of the company and the local characteristics should be taken into consideration at the stage of installation of Corporate Resource Planning Systems. The integration of local legislative requirements and the obtaining of opinions from local experts are important at the stage of system installation. With the increasing volume of trade, the integration of the Energy Trade and Risk Management System and the Retail Sale Operations System will be more important. In accordance with the designated processes, the invoices can be drawn up both through such systems and the Corporate Resource Planning System. In any case, consolidated accounts of receivables and debts should be recorded on the Corporate Resource Planning System.

Human Resources Management System

It is used to carry out the human resources processes effectively. Thus, the processes in which administrative load is intense recorded and monitored in electronic environment. These systems enable the maintenance of the historical records of employees as well as the data on their skills, educational background and salaries. Recruitment, employment withdrawal, labour management, training planning, leave management and similar processes are carried out within this system. With modules such as salary and payroll management, the salary accounts of employees can be tracked automatically by looking at their employment and leave times. These systems can be implemented both in an integrated manner with the Corporate Resources Planning System and independently.

Legal Management System

They are the systems that ensure the performance of all legal processes of the company through a single platform. Legal Management System offers solutions for the follow-up of execution files and execution proceedings. All legal files and follow-up documentation are contained in the system, and it is possible to prepare reports based on them. It allows for the tracking of execution proceedings and files through the general phases of any execution or proceeding, financial position, collections, payment plans, tracking documents and similar applications. At the same time, users can be informed of processes with limited term by automatic reminders within the system. Turkey usually implements local solutions due to compliance with the legislation.

Electronic Document Management System

Electronic document management system includes the transfer of documents in physical environment to electronic environment, and the production, arrangement, control and archiving of documents in electronic environment. Thus, the documents can be accessed more easily and in a shorter period of time, the document approval processes fast-tracked, and archiving processes are facilitated. These systems need to be designed flexibly in such a manner as to meet the requirements of the company. They should also possess features allowing for the scanning and retention of physical documents. Electronic Document Management System should be operated in an integrated manner with the Corporate Resource Planning System. These systems can be implemented both in an integrated manner with the Corporate Resources Planning System and independently.





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7. Roadmap for Unbundling

7.1. Action Steps In line with the unbundling model proposed in Chapter 5 and the target operation model for unbundled companies given in Chapter 6, the action steps that would support the process of transition to the targeted state are addressed in this Chapter. In this framework, both the actions to be completed to successfully implement unbundling and the information required to be provided to the European Commission in the process of certification of the unbundling model are taken into account. Actions for the unbundling of BOTAŞ with a view to supporting the liberalisation of the Turkish natural gas market are listed in Table 19 along with the responsible parties and action details.

Table 19: Actions for the unbundling of BOTAŞ

Action

Responsible Party

Details

1 Establishment of the Steering Committee

MENR

Ministry of Development

Secretairat of Treasury

A Steering Committee needs to be established under the responsibility of the MENR, Ministry of Development and Secretairat of Treasury for the initiation and management of the unbundling process. It is recommended that this committee be managed at the highest level possible and that sub-committees be established for specific tasks. This committee will focus on the overall reform process for the liberalisation of the natural gas market, and activities concerning unbundling will be carried out by the sub-committees.

2 Elaboration and approval of the final unbundling plan

MENR

In order for the unbundling model proposed for BOTAŞ by the relevant sub-committee to be finalised and for the structure targeted accordingly to be implemented, the model needs to be approved by the MENR.

3

Submission of the unbundling plan to the Secretariat of the Energy Community47

MENR

In order for the proposed ITO+ model to be subjected to preliminary assessment to verify its compliance with the criterial set forth in the EU Directives, the targeted unbundling plan needs to be submitted to the Secretariat of the EU Energy Community.

4

Submission of the proposed unbundling model to the European Commission for certification48

EMRA

In order for EMRA to provide the certification demonstrating that the new proposed model meets the criteria set forth in the EU Directives and that a new Transmission Company has been established in accordance with such criteria, an opinion needs to be obtained from the European Commission. For this purpose, the EMRA should take a decision for preliminary certification and submit it to the European Commission. Upon the affirmative opinion of the European Union, the EMRA should complete the certification.

47 EU member countries are responsible for the activities which are in this step. If Turkey won’t be an EU member or in the period of being an EU member, this step might skipped. 48 EU member countries are responsible for the activities which are in this step. If Turkey won’t be an EU member or in the period of being am EU member, this step might skipped.





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Action

Responsible Party

Details

5

Making necessary amendments to the Natural Gas Market Law

MENR and the Turkish Parliament

Amendments should be made, which would support the change towards the structure targeted in the existing Natural Gas Market Law. The preliminary preparations for the amendment of the law accordingly should be made by the MENR, and the draft should be proposed in the Parliament. The draft should contain ring-fencing rules required for ensuring the independence of the Transmission Company.

6

Making necessary amendments to the secondary legislation49

MENR and EMRA

In order for the unbundling model developed as per the EU Directives to be implemented properly and effectively, amendments should be made to the secondary legislation. In this framework, particularly the following Regulations should be revised:

NGM Licensing Regulation

NGM Tariffs Regulation

NGM Underground Natural Gas Storage Facility Basic Operation Regulation

NGM Transmission Network Operation Regulation

Communiqué on LNG Transmission

Energy Market Notification Regulation Furthermore, it should be determined how the rights and liabilities of BOTAŞ arising from its current licenses and contracts will be addressed. It should be elaborated how the ring-fencing rules to be set forth in the Law will be applied. Rules for third party access to underground storage facilities and LNG Terminals should be reviewed. It should be re-addressed how the balancing will be performed in the unbundled structure.

7

Identification of the revenue cap of the Transmission Company and the tariffs to be applied

EMRA

The revenue cap to be applied for the Transmission Company in relation to transmission, storage and LNG activities and the regulated tariffs should be reviewed by the EMRA, taking into account the new cost structure. This action should be taken in parallel to the secondary legislation revisions.

8

Identification of transmission-related assets, rights and responsibilities arising from licenses and contracts, and human resources

BOTAŞ

The relevant assets, rights and responsibilities arising from licenses and contracts, and human resources of BOTAŞ need to be transferred to the Transmission Company to be established upon unbundling Thus, the elements that are currently owned by BOTAŞ and are required for the Transmission Company to fulfil its duties should be identified.

9 Conducting due diligence

BOTAŞ Due diligence should be conducted to identify the contracts and assets planned to be transferred to the

49EU member countries are responsible for the activities which are in this step. If Turkey won’t be an EU member or in the period of being an EU member, this step might skipped.





157

Action

Responsible Party

Details

Transmission Company upon unbundling. In this framework, technical, legal, taxational and commercial due diligence should be performed in relation to the assets concerning transmission activities (network, storage and LNG). Moreover, financial due diligence should be conducted in relation to the accounts concerning transmission, storage and LNG activities. Finally, due diligence should be conducted in relation to the human resources dealing with transmission activities.

10

Elaboration of the Establishment Law for the Transmission Company

MENR and the Turkish Parliament

A law of establishment should be enacted to put the new transmission company into operation. The said law of establishment should specify in detail the duties and powers, organisational structure, decision-making processes, Board of Directors, Supervisory Board, executive board, relevant committees, compliance department and reporting liabilities of the Transmission Company as well as how the ring-fencing rules will be applied and the financial provisions. Accordingly, the MENR will elaborate a draft law and propose it to the Parliament. The management structures which is mandatory in line with the EU Directives can be skipped, if Turkey won’t be an EU member or in the period of being a EU member.

11

Designation and appointment of the Supervisory Board and Compliance Officer50

MENR

A Supervisory Board and a Compliance Officer should be designated and appointed, which would allow for monitoring and guaranteeing that the rules of independence under the EU Directives are complied with.

12

Establishment of the Transmission Company and the assignment of the relevant assets and human resources

MENR

Upon the approval of the Establishment Law by the Parliament, the Transmission Company should begin its operations. Until the new Transmission Company reaches the conditions where it is able to independently fulfil its liabilities concerning transmission, storage and LNG, the said duties should be continued to be carried out by BOTAŞ during the transition period. Immediately after the establishment, the limited human resources will be transferred, and the actions 14, 15 and 16 should be taken. When these actions have been taken and the Transmission Company is ready for independent operation, the transfer of the remaining assets and human resources should be completed, and the Transmission Company should begin carrying out all duties concerning transmission, storage and LNG.

13 Making applications for transmission,

Transmission Company

Pursuant to NGM Licensing Regulation (Article 5), the rights and responsibilities of BOTAŞ arising from the

50 EU member countries are responsible for the activities which are in this step. If Turkey won’t be an EU member or in the period of being an EU member, this step might skipped.





158

Action

Responsible Party

Details

storage and LNG licenses

current licenses cannot be assigned to the new Transmission Company to be established. Thus, the necessary license applications should be made by the new Transmission Company to be established. The Transmission Company should make applications for license regarding transmission, storage and LNG activities, and should document by those licenses that it meets the specified criteria and is eligible to carry out such activities.

14

Identification of critical logistic and infrastructural requirements

Transmission Company

In order for the Transmission Company to independently perform the duties assigned to it, the critical logistic and infrastructural requirements need to be identified. The requirements in question may contain elements such as buildings, vehicles, equipment and technological infrastructure. During the requirement identification phase, the assets that will be transferred from BOTAŞ to the Transmission Company after unbundling should be taken into account.

15 Critical recruitments

Transmission Company and Supply Company

Both companies to be established after unbundling should have the human resources required for them to continue their critical activities. Recruitments should be done to ensure that the operations are carried out independently.

16 Implementation of critical IT solutions


Both companies to be established after unbundling should put in place the IT solutions and additional improvements required to continue their critical activities. The independence of the IT infrastructure of the Transmission Company should be ensured.

17 Identification of the company vision and mission


During the process of creating corporate identity, both companies need to identify their vision and mission that would steer their own strategies.

18 Elaboration of the five-year strategic plan


The strategic approaches of the companies should be identified, and the relevant plans should be elaborated. The said plans should contain the development projects to be carried out in 5 years time.

The actions listed to implement the unbundling plan are expected to be completed within different periods of time in a certain order. The schedule in Figure 30 gives the order of priority for each action. In the case that the relevant institutions and organisations collaborate in coordination with each other, the said actions are expected to be completed in 2 years time and the unbundling is expected to be implemented in the beginning of the 3rd year.

The relations in the action plan are illustrated by arrows (), and the related actions need to be considered together.





159

According to the plan, upon the establishment of the Steering Committee (1), the actions to be immediately carried out will be the elaboration and approval of the final unbundling plan (2) and the making of the necessary amendments to the Natural Gas Market Law (5). However, the action concerning the making of necessary amendments to the Natural Gas Market Law will continue within the framework of the comments to be received from the European Commission during the first year, and will be concluded at the end of the year. Following the approval of the final unbundling plan and its submission to the Secretariat of the Energy Community (3), the plan will be revised according to the comments received, and the proposed unbundling model will be submitted to the European Commission for approval and certification. The receipt of the necessary approvals and from the European Commission and the completion of the necessary amendments to the Natural Gas Market Law will initiate the necessary amendments to the secondary legislation (6) and the elaboration of the Establishment Law for the Transmission Company. The preparations for the secondary legislation and the setting of revenue cap and tariffs (7) will be mutually effective.

As of the beginning of the second year, the identification of the transmission-related assets, the rights and liabilities arising from licenses and contracts, and the human resources (8) will be initiated, and a due diligence will be conducted afterwards (9). Following the enactment of the Establishment Law and the due diligence, the establishment of the Transmission Company and the transfer of the relevant assets and human resources (12) will be initiated. It is recommended that a limited transfer of human resources be performed initially, and the duties of the Transmission Company be carried out by BOTAŞ during this process. The Supervisory Board and the Compliance Officer need to be designated and appointed (11) at the establishment stage. The actions to be taken with limited human resources immediately after the establishment will the applications for transmission, storage and LNG licenses (13), identification of the critical logistic and infrastructural requirements (14), critical recruitments (15) and implementation of IT solutions (16), respectively. Once the newly established Transmission Company is completely ready for becoming operational, the remaining human resources will be transferred, and the Transmission Company will begin operating.

As of the third year, the vision and mission of the Transmission Company and the Supply Company will be set (17) and the five-year strategic plan will be elaborated accordingly (18).





Figure 30: Roadmap for the unbundling of BOTAŞ

First Year Second Year Third Year

1. Establishment of the Steering Committee

2. Elaboration and approval of the final unbundling plan

3. Submission of the unbundling plan to the Secretariat of the Energy Community

4. Submission of the proposed unbundling model to the European Commission for

certification

5. Making necessary amendments to the Natural Gas Market Law

6. Making necessary amendments to the secondary legislation

7. Identification of the revenue cap of the TransCo and the tariffs to be applied

8. Identification of transmission-related assets, rights and responsibilities arising

from licenses and contracts, and human resources

9. Conducting due diligence

10. Elaboration of the Establishment Law for the TransCo

11. Designation and appointment of the Supervisory Board and Compliance Officer

12. Establishment of the TransCo and the assignment of the relevant assets and

human resources

13. Making applications for transmission, storage and LNG licenses

14. Identification of critical logistic and infrastructural requirements

15. Critical recruitments

16. Implementation of critical IT solutions

17. Identification of the company vision and mission

18. Elaboration of the five-year strategic plan




Joint Venture of Deloitte ve DNV GL – August 2017 161

7.2. Suggested Amendments to the Natural Gas Market Law

This chapter brings forwards suggestions for amendment to the Natural Gas Market Law No. 4646 within the framework of the unbundling of BOTAŞ and gives the reasons for such amendments. A potential amendment to the Natural Gas Market Law will definitely be far more comprehensive. Other suggested amendments concerning the issues mentioned in the NGMAR previously submitted under Task 3 will be presented in the form of an annotation independently from this report.

Restructuring of BOTAŞ

Basic Considerations:

Although BOTAŞ has a vertically integrated structure, its unbundling has long been required by Law. It is specified in the Provisional Article 2 of the Natural Gas Market Law as follows:

“The vertically integrated legal entity nature of BOTAŞ, except for the distribution activity,

shall continue until the year 2009. After this date, BOTAŞ shall be restructured into a

horizontally integrated legal entity. Among the legal entities to be formed as a result of

restructuring, only the company that has the gas purchase and sale contracts and will

perform import activities shall represent BOTAŞ and shall be called BOTAŞ. Among the

companies to be formed as a result of restructuring, the companies, other than the one

engaged in transmission activities, shall be privatised within two years.”

The planned unbundled could not be achieved within the period of time required by the law, and the unbundling model is expected to be reviewed in the amendment. In the relevant provisions of the Law, the expression used in not unbundling, but transition from the vertically integrated legal entity to the horizontally integrated legal entity. The horizontally integrated legal entity is defined in Article 3 as follows:

“Horizontally integrated legal entity: A legal entity that carries out at least one of the

activities of natural gas production, transmission, distribution, importation, exportation,

storage or sale and at the same time conducts another activity not included in the natural

gas sector,”

Therefore, it follows from this that each company to be established upon the unbundling of BOTAŞ is required to be engaged in activities not included in the natural gas sector as well. Furthermore, there is an explicit provision concerning the privatisation of the companies other than the Transmission Company.

Another provision regarding unbundling is related to the unbundling of accounts. It is specified in the Provisional Article 2 of the Law as follows:

“The unbundling of the accounts of BOTAŞ regarding its transmission, storage, sales and

import activities, shall be carried out within twelve months following the end of the

preparation term.”

Suggested Amendment to the Law:

The unbundling of BOTAŞ is of critical importance for the liberalisation of the Turkish Natural Gas Market. Therefore, the determination towards it should be retained in the Law. However, the unbundling model should be clearly defined in compliance with the EU Directives. As the expression “horizontally integrated structure” suggests the activities not included in the natural gas sector, it would be more appropriate to clearly specify the unbundling model, rather than defining unbundling in this way. As stated in Chapter 5 of this report, the unbundling model proposed for BOTAŞ is the Independent Transmission Operator (ITO+) model adapted for Turkey. As per this model, it is recommended that the current brand identity and supply-related contractual liabilities of BOTAŞ be maintained and its liabilities concerning transmission, LNG and underground storage be transferred to the company/companies to





be established through partial split-off. It is considered that it would be more appropriate to state in the Law that the remaining liabilities of BOTAŞ after unbundling will be limited to import, export and wholesale activities, rather than defining in the Law the new company that will be engaged in transmission, LNG and underground storage activities. Thus, this will be clear the way for the unbundling of transmission, LNG and underground storage activities in the future.51

The priority access of the Transmission Company to the LNG and underground storage facilities should be limited for reasons of system security. The options required pursuant to the EU Regulations are full access, priority access or access under the same conditions as other suppliers. Considering its effect both on system security and the liberalisation of the market, priority access seems to be most appropriate option to ensure system security.

It should be ensured that transmission, LNG and underground storage activities are carried out in accordance with the principle of impartiality. It is recommended that this issue be addressed both in the Natural Gas Market Law and the establishment law of the relevant company or companies. The Natural Gas Market Law may contain a provision as follows:

“The company and/or companies engaged in transmission, LNG and underground storage

activities shall offer services equally and impartially to other supply companies operating in

the market. The considerations regarding the equal and impartial provision of services by

the company that will be engaged in the transmission activity shall be addressed in the

establishment law of the company.”

In the event that the transmission, LNG and underground storage activities are carried out by the same company, the principle of unbundling of accounts for the said activities should be maintained to ensure the transparent monitoring of the implementation of rules for third party access.

The provision requiring that the company that will supply natural gas represent BOTAŞ and be called BOTAŞ is considered affirmative, and is recommended to be retained. Furthermore, in the case that the Ownership Unbundling (OU) model is preferred in the future, the Law should leave the door open for transition to this model, and binding provisions concerning privatisation should be removed from the text.

Reason:

Pursuant to the relevant EU acquis, 3 main unbundling options are provided: i) Ownership Unbundling (OU); ii) Independent System Operator (ISO) and iii) Independent Transmission Operator (ITO). Ownership Unbundling (OU) and Independent Transmission Operator (ITO) options are widely used in the EU, but the EU Directives prioritise particularly the Ownership Unbundling (OU) model. Taking into account the conditions specific to Turkey, a new model named “ITO+” is proposed, which combines the advantages of the Ownership Unbundling (OU) and the Independent Transmission Operator (ITO) models and is adapted to the conditions of Turkey. The practical difficulties of the Independent Transmission Operator model, namely, vertically integrated undertaking, administrative burdens, service restrictions and weak competitive environment, as well as the requirement of different ownership under the Ownership Unbundling model and the irreversibility of the model are eliminated by the ITO+ model, which combines the advantageous aspects of the two models.

It is of critical importance to maintain the recognition of BOTAŞ brand in international markets and the continuity of its power. Moreover, the transfer of the current supply contracts to another company will bring with it many challenges. For these reasons, it is recommended that the transmission company be

51 Although it is recommended in the Law that no arrangement be made regarding the performance of transmission, LNG and underground storage activities by one single company or more than one company, this report recommends that the Transmission Company to be established upon unbundling be engaged in LNG and underground storage activities as well. Thus, it is considered that the necessary actions to be taken by the Transmission Company to ensure system security will be much more efficient.





established through partial split-off and the nature of the existing legal entity of BOTAŞ be maintained. Similar approaches were adopted during unbundling processes in many European countries.

In the event that Ownership Unbundling (OU) option is selected instead of ITO+, the subordination of BOTAŞ to a different Ministry, or its privatisation or public offering options may be discussed. Thus, it is recommended that no binding provisions concerning privatisation be used in the Law.

Reduction of the Market Share of BOTAŞ


The currently applicable Natural Gas Market Law contains some provisions aiming to reduce the market share of BOTAŞ to around 20%, and the steps to be taken under this objective are described. The relevant provision in the Natural Gas Market Law is a provisional article as follows:

“Following the promulgation date of this Law, BOTAŞ may not enter into any new natural

gas purchase contract, excluding liquefied natural gas (LNG), until its imports are reduced

to the twenty percent of the national consumption. Until the total annual amount of imports

by BOTAŞ is reduced to twenty percent of the annual national consumption until 2009,

BOTAŞ shall issue invitations to tender for transfer among the other companies, who are

qualified for importation license and regarding whom a preliminary approval is received

from the selling company for transfer of agreement, with regard to partial or complete

transfer of the existing natural gas purchase or sale agreements along with all rights and

liabilities.”

In view of the developments that have occurred since 2001 when the Natural Gas Market Law entered into force, gas contracts corresponding to a total amount of 10 bcm were transferred to the private sector through contract assignment (4 bcm) and renewal of some contracts that expired (6 bcm), and the market share of BOTAŞ has been reduced to 80%. However, this is far above the targeted market share specified in the Natural Gas Market Law. Considering the past experiences of the European Union countries in this field, it is safe to say that the objective of ensuring a market share of 20% for BOTAŞ is an aggressive goal. The developments experienced in the EU countries and comprehensive assessments in relation to this issue are given in Task 3 - Natural Gas Market Assessment Report.

The market share of the dominant market player is an important indicator regarding the effective functioning of the market, but is not the only indicator in this area.52 As addressed under the title “Setting the Natural Gas Sale Prices of BOTAŞ in a Cost-Reflective Manner”, the indicators of the EU Gas Target Model developed by CEER contain many indicators that can be reference in this sphere. In addition to the market share of the dominant market player, the market shares and effectiveness of other players in the market, the availability and effectiveness of market places and product that enable the trading of gas, the issues on the security of supply and other issues relating to the development of the market should be taken into account as a whole. EMRA should regularly track the indicators of the EU Gas Target Model or other similar indicators and factors, monitor the effectiveness of the natural gas market, and ensure that the necessary measures are identified and implemented in a timely manner. From this perspective, it would be appropriate if the EMRA sets this target level of market share dynamically within the framework of market monitoring activities it will carry out, rather than setting a static target level of market share for the dominant market player in the Law. In this framework, it is recommended that the relevant text in the Law be amended.

Even though it is not included in the scope of the Natural Gas Market, it should be emphasised that the competition-related issues will be followed as currently done by the Competition Authority, and that it is essential to collaborate, within the framework of the provisions of the Competition Law, with the

52 As an example Herfindahl-Hirschman index, number of demand resources, waste demand index and market density can be given and their detailed examination can be found in Natural Gas Market Screening Report within the Task 3





Competition Authority with respect to the sanctions to be brought forward in consequence of the monitoring activities to be carried out by the EMRA.


The target given in the text of the Law regarding the reduction of the market share of BOTAŞ to 20% should be removed. Instead, the duty of the EMRA in relation to the monitoring of the effective functioning of the natural gas market should be explicitly stated. The methods to be employed to perform this duty should be identified by the EMRA (indicators of the EU Gas Target Model or similar indicators specific to Turkey), but the method to be employed and its results should be expressly made public. The suggested provision in relation to this is as follows:

“The functioning of the Turkish natural gas market shall be monitored within the framework

of the criteria to be identified and announced by the Authority. The factors impeding the

effective functioning of the market and the measures to eliminate such factors shall be

determined by the Authority, which shall also follow up the implementation of the measures,

and the results of the measures shall be regularly announced to the public.”

The monitoring of the market share of BOTAŞ, the setting of the target market share, and the measures to be taken if its dominance in the market continues should be a part of the market effectiveness efforts to be made by the EMRA.

Reason:

The market share of BOTAŞ, which has a dominant position, is an important factor in terms of the effective functioning of the natural gas market, but is not the only factor. Thus, the effective functioning of the market needs to be addressed within the framework of an integrated approach by the EMRA, the regulator of the market. This duty should be expressly assigned to the EMRA by a provision of law. EMRA should identify the indicators required to be monitored to ensure effective functioning of the market, and should make public such indicators and the results of monitoring activities within the framework of the principle of transparency. EMRA should be responsible for taking measures to eliminate the factors impeding the effective functioning of the market (in coordination with the Competition Authority when required) and following up the implementation of such measures.

Setting the Natural Gas Sale Prices of BOTAŞ in a Cost-Reflective Manner


Wholesale prices in the Turkish natural gas market are not regulated and are freely set between the parties. This is specified in Article 11 of the Natural Gas Market Law as follows:

“Wholesale Tariff: The Authority shall identify the elements and conditions to be relied on

in the natural gas sale tariffs. Sale prices shall be freely set, within the framework of such

principles, by the parties involved in the purchase and sale of natural gas.”

The freely set wholesale prices in an effectively functioning market place is an appropriate approach, but the prices need to be regulated in the face of the risk that a dominant player among the market players may misuse its dominant position to affect the price formation. In order to obviate the potential effects of BOTAŞ Supply Company, as a dominant player with a market share of 80%, on price formation, it is recommended that the prices be regulated as specified in the text of the Law given below.


It would be appropriate to include this text as a provisional article. The following statement may be included into the text;

“It is essential to set the natural gas sale prices of BOTAŞ Supply Company in such a

manner as to meet the supply and operating costs of natural gas and to allow for the earning

of reasonable profits by the company. However in the case of locating the bad use of

dominance or the implementation of destructive pricing and in similar cases including





regulation of the BOTAŞ Supply Company’s natural gas sale pricesnecessary consecutive

measures are taken by the Authority until an effectively functioning natural gas market is

established.”

Reason:

As BOTAŞ Supply Company has a dominant position in the market, it is recommended that a Provisional Article specify within the framework of which principles the prices will be set “until an effectively functioning natural gas market is established”. The setting of prices by BOTAŞ Supply Company in a cost reflective manner that allows for the earning of reasonable profits without disrupting the functioning of the market is an appropriate approach. BOTAŞ may set the natural gas sale prices on its own within the framework of these principles, but the EMRA, as the regulatory Authority, is also allowed to regulate the prices of BOTAŞ within the framework of the same principles (i.e. taking ahead of destructive pricing or overpricing). The relevant criteria for the effective functioning of the natural gas market should be identified by the EMRA, which as the regulatory Authority should also monitor compliance of the market with such criteria and it should be interfered with consecutive measures, if necessary. The criteria to be identified by the EMRA may be implemented in determining the formation of an effectively functioning market place. Furthermore, for this purpose the EMRA may take into account the indicators of the EU Gas Target Model developed by the CEER. This is addressed in detail in Task 3 - Natural Gas Market Assessment Report, and the relevant criteria are specified below:

Market Participants’ Needs

• Trading board volume

• Bid – offer spread

• Price levels sensitivity

• Number of transactions

Market health

• Herfindahl-Hirschmann Index

• Number of supply sources

• Residual supply index

• Market intensity Once the EMRA announces that the formation of an effectively functioning market place has been achieved within the framework of the criteria specified above and/or other criteria identified by the EMRA, the price regulation on BOTAŞ may be completely removed. Moreover, in the case that regulated tariff groups (last resort supplier tariff or types of social tariffs for vulnerable consumers, etc.) maintain their existence at the stage of opening the natural gas market to full competition, BOTAŞ Supply Company may continue supplying gas to these tariff groups under regulated conditions.





Annex: The Laws, Decrees, Regulations and Directives to which BOTAŞ is subject

The laws BOTAŞ is liable to enforce

Law no. 2477 on the Appointment of Executives

Law no. 3346 on the Arrangement of the Audit of State Economic Enterprises and Their Funds by the Turkish Parliament

Law no. 5510 on Social Insurances and General Health Insurance

Law no. 4586 on Transit Passage of Oil Through Pipelines

Natural Gas Market Law no. 4646

Public Procurement Law no. 4734

Labour Law no. 4857

Right to Information Law no. 4982

Oil Market Law no. 5015

Measures and Settings Law no. 3516

Law no. 6183 on Collection Procedure of Public Receivables

Law no. 3473 on Destruction of Documents and Materials No More Required to be Retained

Law no. 5620 on Temporary Employees

Court of Accounts Law no. 6085

Turkish Code of Commerce no. 6102

Law no. 6331 on Occupational Health and Safety

Law no. 5018 on Public Finance Management and Control

Law no. 6356 on Trade Unions and Collective Bargaining Agreements

VAT Law no. 3065

Expropriation Law no. 2942

Zoning Law no. 3194

Pasture Law no. 4342

Oil Law no. 6326

Customs Law no. 4458

Electronic Signature Law no. 5070

The decrees BOTAŞ is liable to enforce

Decree no. 233

Decree no. 399

Decree no. 527





The regulations BOTAŞ is liable to enforce

Regulation on the Procedures and Principles for Sale and Renting of Immovables Owned by BOTAŞ General Directorate

Regulation on Acquisition of Information

State Archive Services Regulation

Implementing Regulation on Escrowed Works

Technical Safety and Environmental Regulation on the Construction and Operation of Crude Oil and Natural Gas Pipeline Facilities

Out-of-scope Personnel Regulation

Regulation on Procurement of Goods and Services

Regulation on Procedures and Principles for Official Correspondence

Supervisory Board Regulation

The directives BOTAŞ is liable to enforce

Directive on Authority on Duty and Call Officer

Directive on Keeping of Cash and Securities

Reward Directive

Directive on Fire Prevention and Extinction in Oil Facilities

Fixed Asset Directive

Internship Directive

Insurance Directive

Directive on Control Procedures for Commercial Measurement of Natural Gas

Directive

on the Procedures and Principles for Tracking and Collection of Receivables of BOTAŞ Regarding Natural Gas

Legal Affairs Directive

Disciplinary Directive for Out-of-scope Personnel

Directive on Personal Protective Equipment, Work Clothing and Apparel Assistance

Stock Control and Warehouse Directive

Publicity and Public Relations Directive

Directive on the Dwelling in the General Directorate and Other Affiliated Places

Allowance Directive

Cafeteria Services Directive

Directive on Scholarship Students Abroad

Directive on the Principles for Driving Heavy and Light Vehicles

Directive on the Limits of Authority of the General Manager

Directive on the Principles for the Appointment of Assistant Experts as Expert

On-the-job Training Directive

Directive on the Wage, Transfer and Promotion of in-scope Personnel

Directive on Accounting, Plan, Program, Budget and Working Report





Annex 2 – EU Natural Gas Companies

















Organizational Information and Business Units

Board of Directors:Chairman - Antonio Llardén Carratalá,

Chief Executive Officer - Marcelino Oreja Arburúa

Board Members:

Antonio Hernández Mancha (Independent), Luis Javier Navarro Vigil

(Other External Director), Ana Palacio Vallelersundi (Independent), Martí

Parellada Sabata (Independent), Jesús Máximo Pedrosa Ortega

(Proprietary. Proposed by SEPI), Ramón Pérez Simarro (Independent)

Isabel Tocino Biscarolasaga (Independent), Rosa Rodríguez Díaz

(Independent), Gonzalo Solana González (Independent), Sociedad Estatal

de Participaciones Industriales - SEPI - (Proprietary. Represented by

Federico Ferrer Delso), Luis Valero Artola (Independent)

Organizational Structure:

Key Indicators, Activities and Subsidiaries

Main Activities:• Natural gas transmission and underground storage infrastructures.

• LNG logistics infrastructures and solutions (bunkering and storage

• platforms).

• Also present in Latin America (Mexico, Chile and Peru) and Europe

(Sweden, Italy, Greece and Albania).

• Involved in the construction of the Trans Adriatic Pipeline (TAP), which

will link Greece, Albania and Italy, and holds a stake in Swedegas, the

operator of the Swedish gas system..

Key Indicators:Imports to Spain National Network (GWh, 2012): 392,599

Subsidiaries:N/A

Full Name: Enagas

Executive: Marcelino Oreja Arburua / Antonio Llarden

Turnover: EUR 1.28 billion

Assets: EUR 7.04 billion

Employees: 1,149

EU Unbundling Model: Ownership Unbundling

Origin Country: SpainFree Float; 95%

Sociedad Estatal de Participaciones

Industriales (SEPI); 5%

Upstream Supply Transmission Distribution Retail





Corporate Strategies, Values, Governance, Mission and Stakeholders

Current Strategies:Three pillars of growth as (1) participate in the integration of the European

natural gas market (2) develop natural gas infrastructures in growth

markets and (3) strengthen Enagás‘ position as global LNG expert.

Strategic drivers and company objectives can be summarized as:

• Efforts in operating efficiency: Improve the company's

• financial results

• Realistic/profitable investment plan: Consolidate regulated

• revenues

• Focus on international growth: Launch of the company's Strategic

Plan

• Sustainability as a framework for developing Enagas’ business:

Help the development of the company through sustainability and good

governance

Values:Efficiency, Innovation, Sustainability, Transparency, Integrity, Security,

Team work

Mission: To develop and manage gas infrastructure in a secure, efficient and

sustainable manner; complying responsibly with prevailing legislation and

helping guarantee supply, particularly in the role as the Technical System

Manager in Spain; offering the experience, knowledge and best practices

to create value for the stakeholders.

Governance:• General Shareholders Meeting

• Board of Directors

• Audit and Compliance Committee

• Appointments, Remuneration an CSR Committee

Structure of the Board of Directors: Total number of directors is 13 with:

• 8 independent directors

• 2 proprietary directors

• 2 executive directors

• 1 other external director

Stakeholders:• Spanish Gas System Shippers/Operators,

• ENTSOG,

• CFE Mexicana,

• International Investment Partners.

Full Name: Enagas

Executive: Marcelino Oreja Arburua / Antonio Llarden



Employees: 1,149


Origin Country: SpainFree Float; 95%

Sociedad Estatal de Participaciones

Industriales (SEPI); 5%





















Board of Directors:Administrator / President – Ion Sterian

Administrator / CEO Petru Ion Vaduva

Administrator - Bogdan George Iliescu

Administrator - Andrei Rizoiu

Administrator - Radu Stefan Cernov


Organizational Information and Business Units Key Indicators, Activities and Subsidiaries

Main Activities:Domestic and International Natural Gas Transmission

Key Indicators:Gas consumption in Romania (TWh, 2012): 145

Subsidiaries:None

Full Name: SNTGN Transgaz SA

Executive: Sterian Ion

Turnover: EUR 370 thousand

Assets: EUR 1.05 million

Employees: 4,820

EU Unbundling Model: Independent System Operator

Origin Country: Romania

Romanian State, Ministry of Economy,

Trade and Business

Environment59%

Natural and Legal Persons

41%







Current Strategies:The National Gas Transmission Company, “TRANSGAZ” S.A., established

based on Governmental Decision no. 334/28 April 2000, is the Romanian

legal person operating as a trading joint-stock company, under the

Romanian legislation and its By-laws.

"TRANSGAZ"S.A. aims at the achievement of the national strategy on:

• transmission

• international transit

• natural gas dispatching

• Research-design in the field of natural gas transmission

• by performing, under the Romanian legislation, commercial deeds

proper to its object of activity agreed in its By-laws.

Values:• Safety, quality, efficiency, social responsibility

Mission:• Implementation of a participative management in all the fields of action

of Transgaz.

• Harmonization of the specific regulation with the EU legislation in the

field of natural gas.

• Drawing up regulatory projects and lobby actions supporting such

projects.

• Rehabilitation, modernization and development of the NTS according to

the main consumption directions.

• NTS interconnection with the transmission systems of the neighbouring

countries.

Governance:The current organizational structure is a general staff hierarchical-

functional structure. TRANSGAZ consists of functional entities (divisions,

directions, departments, offices, sections, etc.) and production entities

(regional operating centres, sectors, labs, workshops, etc.) The

management bodies within TRANSGAZ are the Board of Administration

and the General Assembly of the Shareholders. The Board of

Administration assigns the company’s management to the Director

General. The Director General represents the company in terms of third

party relationships. TRANSGAZ’ Director General is responsible for

management related decision making to the extent permitted by the

company’s core business and in compliance with the exclusive authority

granted by law or by the Incorporation Document to the Board of

Administration or to the General Assembly of the Shareholders. The

undertakings and responsibilities of the functional and productive entities

are described in the company’s Organization and Functioning Regulation.

Advisory Committees: Nomination and Remuneration, Audit and Rating,

SNT’s Safety and Security, Strategy and Development, Regulation and

Relations with Public Authorities. Monitoring and assessment report on the

activity of the advisory committees are shared. Company is also compliant

to SNTGN Transgaz SA Corporate Governance Rules and Corporate

Governance Code - Bucharest Stock Exchange

Structure of the Board of Directors: N/A

Stakeholders: National, regional and local governments, regulatory authorities, the

shareholder, customers, suppliers, local residents, the media and nature

conservation and environmental organisations.

Full Name: SNTGN Transgaz SA

Executive: Sterian Ion

Turnover: EUR 370 thousand


Employees: 4,820

EU Unbundling Model: Independent System Operator

Origin Country: Romania

Romanian State, Ministry of Economy,

Trade and Business

Environment59%

Natural and Legal Persons

41%






Board of Directors:Chairman of the TIGF SA Board of Directors - Francois-Raymond Dumas

Director, Information Systems - Didier BERTANA

Secretary General - Olivier ROBINET

Director Operations - Jean-Louis OLIVET

Director, Commercial Development - Jean-Loup MINEBOIS

Managing Director - Monique DELAMARE

Director, Finance, Purchasing and Legal - Hervé FLEURY

Director, Health, Safety, Environment, Quality - Bruno TOSTAIN



Main Activities:TIGF offers and develops natural gas transport and storage solutions for

the European market.

Key Indicators:%16 of the French gas transits through the TIGF grid.

Gas storage capacity (Gm3): 6.0

Gas transported (2014, TWh): 143

Subsidiaries:N/A

Full Name: Total Infrastructures Gaz France

Executive: Francois-Raymond Dumas

Turnover: EUR 418 Million


Employees: ~500


Origin Country: France

SNAM45%

GIC35%

EDF20%







Current Strategies:TIGF’s aim is to fulfil its purpose by adapting to changes in French and

European regulations, by guaranteeing the development of gas

infrastructure to the satisfaction of current and future customers, by

helping to ensure the security of European supplies.

• In the short term, TIGF will complete the development projects for

interconnections with ENAGAS and GRTgaz, chosen for the Western

Corridor (the Artère de l’Adour pipeline in 2015, the Sauveterre-de-

Guyenne compressor station in 2017).

• In the medium term, TIGF will complete the Gascogne-Midi project to

create a single French marketplace (2018).

• In the long term, TIGF is working on a possible new interconnection

(MidCat) between France and Spain to be achieved by 2022.

Values:• Security

• Professionalism

• Solidarity

• Ambition

• Respect.

Mission:TIGF’s mission is to offer and develop natural gas transport and storage

solutions for the European market, abiding by the principles of sustainable

development, guaranteeing reliability and safety to meet the highest

standards in the industry.

Governance:N/A

Structure of the Board of Directors:N/A

Stakeholders: Employees, landowners, Institutional stakeholders, local education

institutions

Full Name: Total Infrastructures Gaz France

Executive: Francois-Raymond Dumas

Turnover: EUR 418 Million


Employees: ~500



SNAM45%

GIC35%

EDF20%






Board of Directors:Chairman and Non-executive Diretor – Carlo Malacarne

Chief Executive Officer – Marco Alvera

Independent Director - Sabrina Bruno

Independent Director – Monica de Virgilis

Non-executive Director - Yunpeng He

Independent Director – Lucia Morselli

Non- executive Director – Alessandor Tonetti



Main Activities:

• Natural gas transportation

• Natural gas storage

• Natural gas Regasification,

• Urban distribution

Manages a national transportation network including 9 storage

sites, 1 regasification plant and a local distribution network

Operates in Austria, France, United Kingdom

Shareholder of the TAP (The Trans Adriatic Pipeline) project.

Key Indicators:

Available Storage Capacity (bcm): 11.4

6.4 million active meters at as redelivery points.

Subsidiaries by Activity:

• GNL ITALIA: Regasification

• SNAM RETE GAS: Transmission

• STOGIT: Storage

• Italgas: Distribution

Full Name: Snam S.P.A

Executive: Marco Alevra

Turnover: EUR 3,56 billion

Assets: N/A

Employees: 6,072


Origin Country: Italy

CDP Reti S.r.l61%

ENI17%

Bank of Italy2%

Treasury Share0%

Retail Investors

20%







Current Strategies:In 2015 – 2018 period, Snam presents a robust strategy, focusing on four

strategic priorities that preserve its low risk profile.

• Selective Portfolio Management: Aiming at high-quality investment

opportunities in Italy, focusing on two strategic gas corridors and

providing country risk diversification in Europe,

• Operational Management: Progressing from asset owner to market

facilitator and keeping up with cost control actions,

• Financial Discipline: Managing CAPEX to meet business environment

requirements, maintaining a solid and efficient capital structure, M&A

providing returns’ accretion

• Attractive and Sustainable Returns: Driving value creation for all

stakeholders

According to the 2015-2018 strategic plan investments:

• Transport and Regasification (approx. 3.1 billion euro)

• Storage (approx. 0.5 billion euro)

• Distribution (approx. 1.5 billion euro)

Values:• Transparency, honesty, fair play.

Mission:Favours the right conditions for fair energy cost by managing the gas

system efficiently, developing infrastructure and providing integrated

services for the market. It promotes the integration of the European

networks, including through strategic partnerships with the biggest

operators in the sector, along the main continental energy corridors.

Governance:Snam issues shares that are listed on the MTA managed by Borsa Italiana

S.p.A., and therefore fulfils all legislative and regulatory obligations related

to stock market listing.

The Bylaws define the Company’s governance model and the main rules

for the functioning of corporate bodies.

Snam has adopted a traditional administration and control system.

The Bylaws outline the functions and activities of the following corporate

bodies:

• Shareholders’ Meeting,

• Board of Directors,

• Board of Statutory Auditors.

Structure of the Board of Directors:Snam's bylaws stipulate that at least one director (if the board has no more

than seven members) or at least three directors (if the board has more than

seven members) must be independent. The Shareholders’ Meeting is a

decision-making body through which shareholders appoint the Board of

Directors and the Board of Statutory Auditors. Composition of Board of

Directors:

• Chairman

• The CEO

• 7 Directors: Should all be non-executive directors of whom at least 5

should be independent

The composition of the Board of Directors should contain adequate gender

diversity and complementary experiences and expertise.

Stakeholders: Associations, authorities, customers, suppliers, investors,

institutions, media, people and other operators

Full Name: Snam S.P.A

Executive: Marco Alvera


Assets: N/A

Employees: 6,072



CDP Reti S.r.l61%

ENI17%

Bank of Italy2%

Treasury Share0%

Retail Investors

20%














Board of Directors:CEO, John Zettergren

Chairman, Deputy Director – International Business Development, Fluxys –

Ben De Waele

Strategy and Business Development General Manager – Enagás - Jesús

Saldaña

Technical & Commercial Director – Enagás - Fernando Impuesto

Sales Manager – Fluxys - Pieterjan Renier

Employee Representative – Linus Hellman

Employee Representative - Håkan Jiresten

Organizational Structure:N/A


Main Activities:• Main service is the transmission of natural gas. Transmission

customers – distribution system owners, industrial users and vehicle

gas filling stations – have facilities that are connected to transmission

system.

• From storage facility, Swedegas can offer gas storage for gas trading

companies.

Key Indicators: Gas transmitted (TWh): 15

Storage facility capacity (GWh): 105

Subsidiaries:None

Full Name: Swedegas

Executive: John Zettergren

Turnover: EUR 42 million

Assets: N/A

Employees: 40


Origin Country: Sweden

Enagas50%

Fluxys50%







Current Strategies:• Swedegas is working to ensure that by 2020, 20% of the gas in

Swedegas’ system is renewable. In order to achieve this ambition,

Swedegas is investing in smart energy systems.

• By 2050, gas supplies will be 100 per cent carbon-neutral. Swedegas

has signed an agreement to this effect – Green Gas Commitment –

together with other European gas infrastructure companies.

Values:N/A

Mission:As the leading company in the gas industry, Swedegas will develop and

invest in an infrastructure that will promote the realization of a sustainable,

competitive society.

Governance:N/A

Structure of the Board of Directors:Swedegas has been acquired by the Spanish and Belgian gas

transmission companies Enagás and Fluxys, who have made a joint

acquisition of Swedegas on a 50-50% basis.

Board of Directors:

• Chairman & Deputy Director - Fluxys

• Strategy and Business Development General Manager – Enagas

• Technical and Commercial Director – Enagas

• Sales Manager – Fluxys

• 2 employee representatives

Stakeholders:33 municipal areas, several industries and combined heat and power

plants, gas producer, gas supplier, balance administrator, distribution

system operator, gas users, storage owner, system balance Administrator.

Full Name: Swedegas

Executive: John Zettergren


Assets: N/A

Employees: 40


Origin Country: Sweden

Enagas50%

Fluxys50%






Board of Directors:

Chairman of the Board of Directors and of the Executive Committee

- Rodrigo Costa

Executive Director - João Faria Conceição, Gonçalo Morais Soares

Vice-Chairman - Guangchao Zhu

Director – Mengrong Cheng, Longhua Jiang, Omar Al-Wahaibi,

Jorde Magalhaes Correia, Jose Luis Arnaut (Independent)

Director/Member of Audit Committee – Manuel Sebastiao

(Independent), Gonçalo Gil Mata (Independent), Maria Estela

(Independent)



Main Activities:• The high pressure (HP) transmission and the overall technical

management of the national natural gas system, the reception, storage

and regasification of liquefied natural gas and the underground storage

of gas,

• REN Gasodutos, S.A., REN Atlântico – Terminal de GNL, S.A. and

REN Armazenagem, S.A. (respectively), companies from the REN

Group, have been public service concession holders since 2006, and

the licence is for a period of 40 years. Transmission system operator;

storage and transportation of LNG

Key Gas Indicators:Consumption (Twh) 45.3,

Annual Variation in Natural Gas Consumption (%) -5.4

Outputs From National Natural Gas Transportation Grid (Twh) 45.5

Length Of High-pressure Gas Pipelines (Km) 1,375

Underground Gas Storage Capacity (Mm3, max Cap. Available): 170.3

Subsidiaries:• The high-pressure transmission of natural gas – through REN

Gasodutos

• General technical management of the SNGN – through REN

Gasodutos

• Reception, storage and regasification of LNG – through REN Atlântico

Underground storage of natural gas – through REN Armazenagem

• Management of the supplier switching process – through REN

Gasodutos

Full Name: Redes Energéticas Nacionais

Executive: Emílio Rui Vilar



Employees: 640


Origin Country: Portugal

Free Float30%

AÇÕES PRÓPRIAS1%

RED ELÉCTRICA

CORPORACIÓN, S.A

5%OLIREN, SGPS, S.A.

5%

GESTMIN, SGPS, S.A.

6%

EGF - GCF, S.A.3%

STATE GRID OF CHINA;

%25

OMAN OIL15%

EDP GROUP5%

FIDELIDADE - COMPANHIA DE SEGUROS, S.A.

5%







Current Strategies:REN aims to be one of the most efficient energy transmission operators,

while creating value to the parts - shareholders, workers, clients, local

communities, partners and suppliers - in a sustainable development

framework by complementing its focus in Portugal with the pursuit of

opportunities abroad, while excelling in the operational management of the

assets under REN’s control. REN intends to execute the following:

• Keep investing to address Portugal's power and gas infrastructure long-

term needs, complemented by a permanent drive to improve

performance and quality of service, in order to provide a reliable,

secure and efficient service at the lower possible cost for the country

and the consumers;

• Further promote the integration of electricity transmission, gas transport

and facilities management, streamlining the organization and striving

for the identification and implementation of cost efficient measures and

processes with its operational efficiency efforts;

• Ensure the sustainability of the business by investing on R&D and

technological grid performance and reliability, and by promoting

environmental friendly actions at all levels of the organization.

• Implement a clear internationalization agenda since it is an opportunity

to find additional growth options and lower regulatory and financial risk

as well.

Values: Biodiversity, Sustainability, Quality

Mission: To ensure an uninterrupted supply of electricity and natural gas

at the lowest cost with quality and safety

Stakeholders: Electricity and gas suppliers are the main stakeholders.

Governance:Board of Directors – Manages the company's business affairs,

Audit Committee – Supervises and monitor's the company' activity

Pursuant to this corporate governance model, the company's overall

management is the responsibility of the Board of Directors, its everyday

running is the job of the Executive Committee and the supervision and

monitoring of its activity is allocated to the Audit Committee. The Statutory

Auditor examines the company's financial statements. It therefore falls to

the shareholders at the General Meeting, the company's highest authority,

to elect the Board of Directors, which includes the Audit Committee, and

appoint the chairmen of the management and supervisory bodies. In turn,

the Board of Directors appoints the members of the Executive Committee,

including its chairman.

Structure of the Board of Directors: The Board of Directors consists

of a minimum of 7 and maximum of 15 members. Currently, The Board of

Directors consists of 13 members, including a total of 10 non-executive

members. The Board of Directors shall include a number of non-executive

members ensuring effective ability to supervise, monitor and assess the

activity of the executive members. REN considers that the proportion of

independent directors is suitable given the number of executive directors

and the total number of directors, taking particularly into account:

• the adopted governance model, in other words an Executive

Committee consisting of three executive directors and an Audit

Committee, consisting of three independent members and a further

seven non-executive directors, which ensures the effectiveness of the

oversight of the executive directors;

• the size of the company, its shareholder structure and the relevant free

float.

Full Name: Redes Energéticas Nacionais

Executive: Emílio Rui Vilar



Employees: 640


Origin Country: Portugal

Free Float30%

AÇÕES PRÓPRIAS1%

RED ELÉCTRICA

CORPORACIÓN, S.A

5%OLIREN, SGPS, S.A.

5%

GESTMIN, SGPS, S.A.

6%

EGF - GCF, S.A.3%

STATE GRID OF CHINA;

%25

OMAN OIL15%

EDP GROUP5%

FIDELIDADE - COMPANHIA DE SEGUROS, S.A.

5%






Board of Directors:General Manager - Marjan Eberlinc

Deputy General Manager - M.Sc. Sarah Jezernik



Main Activities:• Transmission of natural gas through the Slovenian natural gas

transmission system,

• Planning and development of the natural gas transmission system,

• Calibration and maintenance of gas meters and correctors,

• Education of those working in the energy industry.

Key Indicators:10.1 million Sm3/day at border entry points

To 5.7 million Sm3/day at border exit points in Slovenia

Subsidiaries:100% owned Geoplin d.o.o. Ljubljana

Full Name: Plinovodi

Executive: Marjan Eberlinc



Employees: 159

EU Unbundling Model: Independent Transmission Operator

Origin Country: Slovenia

Government of Slovenia

100%







Current Strategies:The Company actively joined the preparation of the GRIP ten-year

development plans and the new ENTSOG ten-year network development

plan, whereby many activities were aimed at the identification and inclusion

of the planned pipelines into priority projects of common interest (PCI). A

great deal of attention is put on human resource management. Plinovodi

ensures continuous education and training for quality performance of tasks,

and optimizes business processes and organization. Furthermore, the

Company participates every year in a survey in which the quality of the

relationship between employees and organization is analysed. To enhance

the personal development of employees and further improve a successful,

effective and creative mutual cooperation of employees, the Company

started a project called the School of Internal Communication.

Values:

• Quality

• Safety at work

• Nature protection

• Managing all types of risk

Mission:Put Slovenia on the map of regionally and Europe-wide significant states

for cross-border transmission of natural gas.

Governance:Every year, a ten-year development plan is elaborated and checked

through public consultation with the stakeholders.


Stakeholders: Employees, authorities, suppliers and customers

Full Name: Plinovodi

Executive: Marjan Eberlinc



Employees: 159


Origin Country: Slovenia

Government of Slovenia

100%






Board of Directors:CEO - Andreas Rau

Business Development - Michael

Kehr

Capacity Sales – Erik Kolstö

Corporate Office - Martin Kolář

Human Resources - Jan Doskočil

Internal Audit - Zuzana Hrnčířová

Legal, Regulation and

Communication - Peter Hejma

Program Office - Jitka Kafková


COO - Radek Benčík

Asset Engineering - Miroslav Holý

Asset Maintenance - Jan Měřička

Asset Operation - Petr Koutný

CFO - Václav Hrach

Controlling, Accounting & Tax - Jan

Martinec

IT - Zdeněk Haloda

Procurement, Fleet & Facility - Peter

Belošovič

Treasury - Petr Jablonský


Main Activities:Services of Net4Gas include:

• International transit of natural gas across the Czech Republic

• National transmission of natural gas to partners in the Czech Republic

• Operation of a flexible, demand-oriented transmission system, and the

provision of associated commercial and technical services.

Key Indicators:Transportation (bcm): 45 (10-20 % domestic consumption)

Length of pipeline operated (km): 3800

Subsidiaries:N/A

Full Name: Net4Gas

Executive: Andreas Rau



Employees: 506


Origin Country: Czech Republic

Allianz Infrastructure

Czech HoldCo II S.à

r.l. 50%

Borealis Novus Parent B.V.

50%







Current Strategies:Along with the range of attractive capacity products, Net4Gas offers its

customers, increasing its asset flexibility by building and optimizing new

and existing cross-border interconnectors allows the company to respond

swiftly to changing gas flow patterns in Europe, while strongly supporting

further market integration. The company Net4Gas strives for operational

excellence to meet its customers’ expectations and to manage the financial

and operational demands of increasing regulation and growing competition

on energy markets. Net4Gas will continue to take a pro-active role in the

development of the new EU gas market structure guided by the Vision for a

European Gas Target Model, and by doing so will contribute to the creation

of functioning gas markets, especially in Central and Eastern Europe

where the Company operates. In achieving visions and attaining strategic

goals, Net4Gas receives major sponsorship from its strong and long-term

oriented shareholders, who thus safeguard the fulfilment of the company

strategy. Net4Gas is also fully aware of its corporate social responsibility,

and the company strictly follows an environmental policy committed to both

present and future generations.

Values:• Asset Flexibility, Operational Excellence, New Market Design

Mission:Our mission is to secure efficient, safe and reliable gas transmission

services for our customers 24 hours a day, 7 days a week, and to provide

sufficient capacities in all supply situations based on a non-discriminatory

and transparent approach.

Governance:• Separate nominating/corporate governance committee

• Corporate governance guidelines (NYSE)

• Compensation committee

• Separate audit committee


Stakeholders:Natural gas traders are main stakeholders.

Full Name: Net4Gas

Executive: Andreas Rau



Employees: 506


Origin Country: Czech Republic

Allianz Infrastructure

Czech HoldCo II S.à

r.l. 50%

Borealis Novus Parent B.V.

50%






Board of Directors:President of the Management Board - Tomasz Stępień

Vice-President of the Management Board - Artur Zawartko



Main Activities:GAZ-SYSTEM’s key task is the transport of gas via the transmission

network throughout the country to supply with gas the distribution networks

and final customers connected to the transmission system.

Main activities include:

• Establishing conditions for the development of a competitive gas

market in Poland and companies from the sector,

• Developing gas interconnectors with the neighbouring countries as part

of the European gas network,

• Establishing a modern gas network in Poland and providing state-of-

the-art services to ensure that the network is optimally used.

Key Indicators:Quantities of natural gas transported out of which by the Company (2014,

billion m3): 16.5

Subsidiaries:N/A

Full Name: Gas Transmission Operator GAZ-SYSTEM S.A.

Executive: Jan Chadam



Employees: 2,520


Origin Country: Poland

Poland Ministry of Treasury

100%







Current Strategies:• Safety: Ensure safe operation of the transmission system as an

element of the European gas pipeline network.

• Market development: Create optimum conditions in Poland for the

development of a liberalised market for natural gas as an

environmentally friendly fuel.

• Effective management: Ensure effective and sustainable

improvement of the company's operational and organizational

performance.

• European partner: Build the position of the company as a significant

player in the natural gas market in the European Union, particularly in

the Central and Eastern Europe region.

• Sustainable development: Manage the company from a sustainable

development perspective

Values:• Responsibility

• Commitment

• Teamwork

• Professionalism

• Respect

Mission:We ensure safe and secure transport of natural gas in Poland and actively

develop an integrated transmission system in Europe. In our day-to-day

activities, we care for the environment and are guided by the principles of

sustainable development.

Governance:GAZ-SYSTEM S.A. is committed to continuous improvement of its services

as a way to increased customer satisfaction.

The Company has implemented a Management System based on

recognised international standards with a view to achieving the position of

a modern and efficiently managed company that provides transmission

services matching the European standards and relies on environmentally

sound and safe technology solutions that ensure, at the same time, the

security of information assets.

In addition, one of the objectives to the Management System is to prevent

accidents at work, occupational diseases and potential hazards through

on-going monitoring of activities with respect to health and safety at work,

effective implementation of corrective and preventive measures, as well as

systematic improvement of the professional qualifications of employees.;

As far as the Company's impact on the environment is concerned, the

efforts are focused on the mitigation of environmental pollution through

minimizing all kinds of emissions and the quantity of waste produced.

Structure of the Board of Directors:Board of Directors are selected in the Shareholder Meeting where the

State Treasury is the only shareholder of the company.

Stakeholders: RWE Polska S.A. is one of the key stakeholders.

Full Name: Gas Transmission Operator GAZ-SYSTEM S.A.

Executive: Jan Chadam



Employees: 2,520


Origin Country: Poland

Poland Ministry of Treasury

100%






Board of Directors:CEO - Annie Krist

Assets Manager - Cees Hut

Manager Finance & Control - Erik Elzinga

Manager - Dick Zelhorst

Manager Gas Transport - Klaas Beukema

Manager Network Planning - Bart Jan Hoevers



Main Activities:• Owns and manages the national gas transport network in the

Netherlands

• Responsible for selling gas transport services, executing gas transport

and developing the Dutch gas transport network.

GTS’s responsibilities include:

• the economic management, operation and development of the gas

transport network;

• monitoring a safe, reliable and efficient transport system;

• sufficient transport capacity;

• the connection with other networks, both national and international;

• the execution of public tasks in the field of security of supply (including

peak deliveries and

• emergency deliveries) and the small fields policy;

• managing gas quality; and

• balancing the network.

Key Indicators:Gas transported (2014, TWh): 976

Subsidiaries:• Gasunie Deutschland in Germany

• Gasunie Transport Services (GTS) in the Netherlands.

Full Name: Gasunie Transport Services B.V.

Executive: Annie Krist



Employees: ~200


Origin Country: Netherlands

N.V. Nederlandse

Gasunie100%







Current Strategies:The gas market is evolving and Gasunie wants to develop its strategy in

line with this evolving market in order to be – and remain into the future – a

relevant player in the gas transport market and in the transition towards a

sustainable energy supply in north-west Europe.

On the basis of this reconsideration, the management of Gasunie

Transport Services expects that, in the coming 10 to 15 years, the demand

for gas and gas transport capacity will gradually decrease. However, it was

also concluded that gas, and therefore also Gasunie’s gas infrastructure, is

likely to play an important role in the transition towards a sustainable

energy supply in northwest Europe for a very long time to come.

Values:

• Quality

• Safety

• Security of Supply

• Collaboration

Mission:GTS offers gas transport services in a customer-oriented and transparent

way. Safety, reliability, sustainability and cost effectiveness are central in

everything done. GTA serve the public interest and work professionally on

value creation for stakeholders.

Governance:N/A





Full Name: Gasunie Transport Services B.V.

Executive: Annie Krist



Employees: ~200


Origin Country: Netherlands

N.V. Nederlandse

Gasunie100%






Board of Directors:Chairman of the Executive Board and CEO - Rainer Seele

CFO, Responsible for Finance – Reinhard Florey

Executive Board Member, Responsible for Upstream (Exploration &

Production - Johann Pleininger

Executive Board Member, Responsible for Downstream (Refining &

Marketing as well as Gas & Power) - Manfred Leitner



Main Activities:Oil and gas exploration and production, natural gas trading and

transportation, oil refining, electricity generation, fuel stations.

Key Indicators:Gas Production (kboe/d): 150

Proved Gas Reserves (mn boe): 585

Gas Sales and Trading Volumes (TWh): 486

Gas Storage Volume sold (TWh): 30,74

Subsidiaries:OMV Refining & Marketing GmbH (100%)

OMV Exploration & Production GmbH (100%)

OMV Gas & Power GmbH (100%)

OMV Solutions GmbH (100%)

OMV Deutschland (100%)

Gas Connect Austria (100%)

OMV Petrol Ofisi (99%)

OMV Petrom SA (51%)

Borealis (36%)

Full Name: Österreichische Mineralölverwaltung

Executive: Rainer Seele


Assets: EUR 33,9 billion

Employees: 24,100


Origin Country: Austria

ÖBIB,formerly ÖIAG32%

IPIC25%

Own Shares

0%

Free Float43%







Current Strategies:• Upstream: Value over volume growth

‒ Lower cost and increase capital efficiency

‒ Focus on 3 core and selected development areas

‒ Achieve Reserve Replacement Rate of 100%

‒ Long-term strategic partnerships

• Downstream Gas: Restructure and grow volume

‒ Create lean North West European gas sales business

‒ Divest up to 49% of Gas Connect Austria and invest in non-

regulated Nord Stream 2 project

‒ Minimize power activities

• Downstream Oil: Strong cash generator

‒ Maintain strict capital and cost discipline

‒ Strengthen integrated margin

‒ Divest OMV Petrol Ofisi

2016 Strategies can be summarized as: Focus on cash and costs, achieve

sustainable position in Upstream, restructure Downstream Gas and

continue to strengthen competitiveness of Downstream Oil

Values: Eco-efficiency, eco-innovation, skills to succeed

Mission: OMV seek, find and produce oil and gas on four continents.

OMV supply millions of people with energy, heating, mobility as well as

products and services that are essential to daily life.

OMV carry out this task and achieve these objectives with values that

motivate us to face future challenges, reinforce the sense of identity and

distinguish us from competitors.

Stakeholders: Suppliers and contractors, customers, science/research,

competitors, government authorities, employees,

Governance:Good cooperation between management and the control and audit bodies

is essential to respect and further the interests of all shareholders and instil

confidence in OMV’s stakeholders. OMV Aktiengesellschaft complies with

the Austrian Code of Corporate Governance and its aim to establish a

system of management and control that is accountable and is geared to

create sustainable, long-term value. In 2004 the organizational structure

was changed into a holding company. The management holding provides

for a flat management structure which is clear and transparent. Faster

decision-making processes combined with increased responsibility allow

OMV to concentrate on customer requirements and market demands.

Some corporate governance items: Corporate Governance Code,

Executive Board, Supervisory Board, Directors‘ Dealings, Directors'

Holdings, General Meeting, Articles of Association, Compliance

Management

Structure of the Board of Directors:• The Supervisory Board shall consist of at least 6 members elected by

the General Meeting and of the members nominated in accordance

with the Austrian Labour Constitutional Act. It consists of ten members

representing the shareholders and are appointed by the shareholders

in an Annual General Meeting. Austrian law requires that for every two

shareholder representatives one employee representative is nominated

by the works council to the Supervisory Board. Therefore, five

employee representatives sit on the Supervisory Board.

• The appointment of members of the Executive Board and, where

applicable, deputy members, and also the revocation of such

appointments shall be carried out by the Supervisory Board.

Full Name: Österreichische Mineralölverwaltung

Executive: Rainer Seele


Assets: EUR 33,9 billion

Employees: 24,100



ÖBIB,formerly ÖIAG32%

IPIC25%

Own Shares

0%

Free Float43%






Board of Directors:Managing Director and Member of Management Board - Dr. Harald Stindl

Managing Director and Member of Management Board - Magistrate Stefan

Wagenhofer

Head of Sales Transmission Department - Stefan Königshofer

Head of Sales Distribution - Dr. Gerhard Siegl



Main Activities:Gas Transmission and Distribution System Operator

• Operates and constructs natural gas high-pressure pipelines

• Responsible for marketing and provision of transport capacity at border

points and the transport capacity required for domestic natural gas

demand

Key Indicators:Transported Gas per year (2014): 149 bcm

Natural gas high-pressure pipeline grid: 900 km

Subsidiaries:None

Full Name: Gas Connect Austria GMBH

Executive: Dr. Harald Stindl / Magistrate Stefan Wagenhofer

Turnover: EUR 263.23 million

Assets: EUR 750 million

Employees: 280



OMV100%







Current Strategies:• Security of supply, the provision of a modern, high-performance

pipeline grid: As long-distance and distribution grid operator, Gas

Connect Austria aims to secure the long-term supply of natural gas

together with producers, storage facilities, and downstream grid

operators.

• People, satisfying the future needs of all stakeholders:

Communication with land owners, chamber of agriculture

representatives and local councils before, during and after construction

is important. Gas Connect Austria believes in fair, neighbourly

relationships with communities, and it is a priority to actively engage

them.

• Environment, reducing environmental impacts for a better quality

of life: Gas Connect Austria’s goal is to keep the impact on the

environment as low as possible and to prevent unnecessary

environmental damage in advance.

• Third party Access, pioneering liberalization: The Austrian Natural

Gas Act requires non-discriminatory access to the gas transmission

network. Gas Connect Austria’a answer is a compliance program that is

firmly rooted in the corporate philosophy..

Values: Responsibility, fairness, vision

Governance:• Shareholders Meeting

• Board of Directors

• Board of Statutory Auditors, Committees: Control and Risk

Compensation

• Nomination and Corporate Governance

• Related Parties


Mission: Gas Connect Austria operates and constructs natural gas high-pressure

pipelines in Austria. The company is also responsible for the marketing and

provision of transport capacity at border points, so called entry and exit

capacities, and the transport capacity required for domestic natural gas

demand. With an experienced team of experts, Gas Connect Austria offers

customers market-oriented and innovative natural gas transport solutions.

Stakeholders:OMV is the main stakeholder.

Full Name: Gas Connect Austria GMBH

Executive: Dr. Harald Stindl / Magistrate Stefan Wagenhofer



Employees: 280



OMV100%





Board of Directors:Managing Director and CEO, Pascal De Buck,

Chief Financial Officer, Paul Tummers

Chief Commercial Officer, Arno Büx

Chief Technical Officer, Peter Verhaeghe


Organizational Information and Business Units Key Indicators, Activities and Subsidiaries

Main Activities:Fluxys Belgium is the independent operator of both the natural gas

transmission grid and storage infrastructure in Belgium.

Fluxys Belgium activities include:

• Transmission

• Storage

• Liquefied natural gas (LNG) terminalling

Key Indicators:401.6 TWh imported,160.4 transmitted for the Belgian market

241 transmitted to neighbouring networks

13,3 TWh LNG regasified and transmitted through the Fluxys Belgium

pipeline network.

Subsidiaries:• Balansys – 50%

• Fluxys LNG – 100%

• Flux Re – 100%

• Prisma – 9,2%

Full Name: Fluxys Belgium NV

Executive: Pascal De Buck



Employees: 1,026


Origin Country: Belgium

Publigas78%

Caisse de depot et placement du Quebec

20%

Employees and Management

0%

Federal Holding and Investment Company

2%







Current Strategies:Fluxys Belgium is planning to roll out investment projects totalling €683

million over the period 2016-2025. These projects aim to consolidate

Belgium’s role as an international crossroads of gas flows and to continue

shoring up the country’s security of supply at the most competitive prices

possible.

The total amount of investments scheduled for the period 2016-2025 is

down on the overall budget for 2015-2024. This decline is also a logical

development. As a result of major investments made in the past few years,

the Belgian grid has reached a high level of maturity.

The indicative investment programme for 2016-2025 does not include any

grid enhancement projects aiming to connect new electric power stations.

Fluxys Belgium’s grid has the offtake capacities needed to cover additional

needs, although it is important that when selecting a site, the new power

station projects take into account the capacities available on the Fluxys

Belgium grid so as to avoid pointless enhancement costs.

Values:

• Competitive prices, professionalism and commitment, safety and

environment, solid team work, good neighbour relations

Mission:Ensure security of supply and connect and promote liquid trading places

Operate infrastructure safely, efficiently and sustainably

Provide quality services tailored to market needs

Create long-term value for shareholders

Governance:Fluxys Belgium’s corporate bodies are mainly composed of Board of

Directors and Executive Board.

Under the Board of Directors, there are four committees as Strategic

Committee, Audit Committee, Appointment and Remuneration Committee

and Corporate Governance Committee.

Structure of the Board of Directors:Fluxys’ Board of Directors is made up of 12 members who are appointed

by the general meeting.

• Eight of them are appointed on the recommendation of Publigas,

• Two of them are appointed on the recommendation of the Caisse de

dépôt et placement du Québec,

• One is appointed on the recommendation of the Federal Holding and

Investment Company

• One is a member of the Fluxys Belgium Executive Board.

Stakeholders:National, regional and local governments, regulatory authorities, the


conservation and environmental organizations.

Full Name: Fluxys Belgium NV

Executive: Pascal De Buck



Employees: 1,026


Origin Country: Belgium

Publigas78%

Caisse de depot et placement du Quebec

20%

Employees and Management

0%

Federal Holding and Investment Company

2%






Board of Directors:N/A



Main Activities:

Operate, build and maintain the natural gas network in Ireland.

Key Indicators:Total amount of gas transported (2014, GWh): 50,163

Pipeline network (km): 13,000

Subsidiaries:Aurora Telecom, power fibre network operator

Full Name: Gas Networks Ireland

Executive: Liam O’Sullivan(Managing Director)

Turnover: N/A

Assets: N/A

Employees: N/A


Origin Country: Ireland

Ervia100%







Current Strategies:• Providing safe, sustainable, efficient and reliable services to all

customers.

• Operating responsibly in the markets and communities in which

company is present and safeguard the environment for the future.

• Growing and developing the natural gas network.

• Growing the business through innovation and expansion into other

utility-based sectors.

• Achieving excellence across the business by ensuring that people are

engaged and empowered, that they "live" the organisation's values and

that their skills and capabilities are aligned with the corporate strategy

as it evolves.

Highlights:

• €65.5m investment and maintenance programme completed on time

and on budget

• €34m in funding approved to twin a 50km on-shore pipeline between

Ireland and Scotland, ensure security of Ireland’s gas supply

• Successfully rebranded to Gas Networks Ireland from Bord Gáis

Networks

Values:

• Collaboration, performance, customer service, safety, integrity

Mission:Provide safe, reliable, efficient and sustainable utility solutions, which are

valued by the customers.

Governance:• The day to day coordination and management of Corporate

Responsibility at Gas Networks Ireland is conducted by Corporate

Responsibility Manager and the Corporate Affairs team, working in

close collaboration with key functions of the business, including HR,

Environment, Facilities, Customer Care, Service Delivery, Safety, Asset

Management, Workflow and of course our staff.

• The Head of Corporate Affairs reports directly to the MD of Gas

Networks Ireland on Corporate Responsibility on a regular basis and

works continuously with management team on various elements of CR

strategy.

• Sustainability reporting





Full Name: Gas Networks Ireland

Executive: Liam O’Sullivan(Managing Director)

Turnover: N/A

Assets: N/A

Employees: N/A


Origin Country: Ireland

Ervia100%






Board of Directors:Chairman – Dr. Aleksandras Spruogis

Vice – Chairman – Agnė Petravičienė

Member – Dainius Bražiūnas

Member – Rolandas Zukas

Independent Member – Nerijus Datkūnas



Main Activities:• Natural gas transmission in the territory of Lithuania,

• Balancing of natural gas flows in the transmission system,

• Transmission of natural gas (transportation of natural gas through high

pressure pipelines) to system users, and operation, maintenance and

development of natural gas transmission system,

• Administration of the LNG-funds, i.e. funds intended to compensate for

the costs of the construction, operation and maintenance of the

Liquefied Natural Gas terminal, its infrastructure and connector.

Key Indicators:Quantities of natural gas transmitted out of which by the Company (2014,

million m3): 2,562

In 2014, the Company purchased from system users a total of 1,620.4

thousand m3 (16,852.2 MWh) and sold 202.2 thousand m3 (2,102.9 MWh)

of balancing gas.

Subsidiaries:N/A

Full Name: AB Amber Grid

Executive: Dr. Aleksandras Spruogis



Employees: 361


Origin Country: Lithuania

UAB EPSO-G (Lithuania)

97%

Minority Shareholders

3%







Current Strategies:AB Amber Grid’s strategic directions can be summarized under 3

directions:

1. Transformation into a Transmission System Operator operating in the

single gas market,

2. The creation of the necessary infrastructure,

3. Increasing the efficiency and modernisation.

Values:

• Mutual trust;

• Competence;

• Cooperation;

• Openness;

• Responsibility;

• Result-orientation.

Mission:AB Amber Grid‘s mission is safeguarding national strategic interests by

efficient development of gas transmission system, assurance of reliable

gas transportation, active contribution to the development of an integrated

European gas transmission system and creation conditions for the

development of a competitive gas market.




Governance:• The Company‘s corporate governance implements the principles of

good management and corporate governance policies applicable to

state-controlled companies.

• The monitoring of the Strategy shall be carried out on a systematic and

regular basis, and the information on the results of the monitoring shall

be used in the Company‘s management/governance process and/or

presented to other interested parties

Structure of the Board of Directors:The Board shall be the Company’s collegial management body consisting

of 5 members elected by the Meeting for 4 years’ term of office. A member

of the Board may continuously serve maximum 2 (two) subsequent full

terms of Office. Members of the Board shall be elected by ensuring the

principle of proper representation of all shareholders’ rights in the Board.

Given this principle, the candidates to the members of the Board shall be

proposed by proposing:

• at least 2 candidates to the members of the Board from the managing

staff of the Parent Company,

• at least 2 candidates to the members of the Board from the managing

staff of the Company,

• at least 1 candidate to the members of the Board shall be an

independent person.

Any of the Company’s shareholders shall be entitled to propose a

candidate to the independent members of the Board. Where candidates to

the members of the Board are proposed, first priority shall be given to the

candidate’s competence and the need to ensure that the Board comprises

all the required competences within the main areas supervised by the

Board.

Full Name: AB Amber Grid

Executive: Dr. Aleksandras Spruogis



Employees: 361


Origin Country: Lithuania

UAB EPSO-G (Lithuania)

97%

Minority Shareholders

3%






Board of Directors:CEO - Janos Laszlo Feher

Chairman – Dr Janos Zsuga

Director of System Management and Capacity Trading – Zoltan Gellenyı



Main Activities:• Maintenance and development of the high-pressure transmission

pipeline system, including off-take and delivery of natural gas

transmitted along the high-pressure pipeline to and from shippers,

Measurement of the quantity and quality of gas transmitted,

• Provision of central gas odourisation, pressure regulation and

protection against over-pressure.

Key Indicators:Total Gas Consumption (Hungary, 2014, bcm): 8.6

Subsidiaries:N/A

Full Name: Földgázszállító Zártkörűen Működő Részvénytársaság

Executive: János Fehér

Turnover: EUR 381 milion

Assets: EUR 1 billion

Employees: 800


Origin Country: Hungary

MOL Group100%







Current Strategies:FGSZ’s goal is to optimize the transmission and system operation costs, to

establish and maintain efficient and positive communication with its

business partners, to permanently reduce the load onto the environment

and to improve the safety at workplaces. The company is striving for

developing and maintaining effective communication with the people living

in the towns and villages involved in the natural gas transmission

operations.

To achieve its targets, FGSZ has highly-qualified employees with vast

professional experiences, up-to-date gas transmission technology

operating with high system availability indicators and regulated with remote

control technology, and one of its top priorities is to maintain this high

technical level and state-of-the art-status.

In order to perform maintenance and repair, the company embodies the

following systems;

• Quality Management System (QMS),

• Technical Security Management System (TSMS),

• Information Security Management System (ISMS),

• Welding Management System (WMS)

Values:• Health Protection, training, environmental rehabilitation

Governance:N/A


Mission:“We secure reliable and uninterrupted gas supply to the private and public

consumers, utilities and industrial consumers. Our responsibility is to

ensure the transparent and discrimination-free operability and balance of

the inter-cooperating natural gas system, while securing full compliance

with the legal and statutory regulations. We also assume an active role in

the liberalization of the national gas market, and support the competition

ion the natural gas market through providing transparent and

discrimination-free operations.”




Full Name: Földgázszállító Zártkörűen Működő Részvénytársaság

Executive: János Fehér

Turnover: EUR 381 milion


Employees: 800


Origin Country: Hungary

MOL Group100%






Board of Directors:Chairman - Natsikas Antonios

CEO - Xifaras Konstantinos

Member - Kotsos Ioannis

Member - Holevas Konstantinos

Member - Papalexis Christos

Member - Alexopoulos Georgios

Member - Panas Konstantinos

Member - Samouilidis Ioannis



Main Activities:• Operation of National Natural Gas System

• Transports gas form the Greek – Bulgarian border

• Transports gas from the Greek – Turkish border

Key Indicators:Gas demand (2012, bcm): 5.16

Total gas imports (2013, TWh): 41.8

Subsidiaries:South Stream Greece S.A (%50)

Full Name: National Natural Gas System Operator S.A.

Executive: Natsikas Antonios



Employees: 258


Origin Country: Greece

DEPA100%







Current Strategies:• Strengthening its corporate social responsibility, such as ensuring

competition in the domestic energy market

• Securing the energy supply, reducing greenhouse gas emissions

Values:

• Safeguarding and protecting human rights,

• Eliminating all forms of discrimination in the workplace,

• Protecting and maintaining transparency in business processes

Upholding the on-going training of employees, recognizing the right of

forming and maintaining a union,

• Strengthening the Voluntary Spirit and giving priority in contributing to

socially vulnerable groups.

Mission:N/A

Governance:N/A

Structure of the Board of Directors:DESFA S.A. is 100% subsidiary of DEPA S.A. which is 65% owned by

Greek State and 35% by Hellenic Petroleum.

For the management of the company, a clear reference is made at law

mentions that:

• For a time period of 10 years from the establishment of DESFA S.A:

and irrespectively of the shareholdings DEPA S.A. members of the

Board of Directors of DESFA S.S shall be appointed and revoked by as

joint decision of the Ministers of Economy and Finance and

Development.

• By a similar decision the Chairman and the Managing Director of the

Board of DESFA S.A. are appointed and revoked.




Full Name: National Natural Gas System Operator S.A.

Executive: Natsikas Antonios



Employees: 258


Origin Country: Greece

DEPA100%






























Board of Directors:Management Committee:

Chief Executive Officer – Thierry Trouve

Chief Operating Officer – Jean-Jacques Ciazynski

Chief Strategy & Marketing Officer – Olivier Aubert

Director, Legal Affairs Division – Remy Coin

Director of Human Resources - Herve Rambaud

Finance Director – Pierre Duvieusart

General Secretary – Pierre Astruc



Main Activities:• Transports natural gas on behalf of its customers, ensuring optimum

safety, cost and reliability.

• Delivers gas to recipients directly connected to the transmission

network: major industrial users, power plants that use natural gas to

produce electricity, public distribution networks and neighbouring

transmission networks.

• Expands its transmission capacity in order to meet market demand and

enhance security of supply for France and Europe.

Key Indicators:Gas Volume transported (2014, TWh): 583.2

(Adjacent networks: 444, LNG terminals: 69.4,Storage facilities: 69.8)

Subsidiaries:N/A

Full Name: GRT Gaz

Executive: Thierry Trouve



Employees: 2,965



Société d'infrastructure

25%

ENGIE75%







Current Strategies:• Developing the transmission network

• Development projects in the North Zone

• Development projects in the South Zone

• Decentralising the odourisation of natural gas

• Merging the North and South market zones

• Connecting Corsica to natural gas

Values:

• Safety

• Innovation

• Gender Equality

• Ethics

• Environment

• Landscape and Archaeological Heritage

• Agriculture and Silviculture

• Local Economy and Employment,

• Information and Consultation

Mission:GRTgaz’s mission is to deliver its customers’ natural gas under the best

conditions possible, whether in terms of cost, reliability or safety, and to

ensure its customers, suppliers, shippers and industrial consumers gain

access to the wholesale natural gas market.

Stakeholders: Gas shippers and industrial users are the main stakeholders.

Governance:The company is run by a Board of Directors. The roles of Chairman of the

Board of Directors and Chief Executive Officer are separate. Board

Members are appointed for a five-year term and a Board Members' Charter

sets out their rights and obligations. The Board of Directors is organised

into three consultant committees; (1) The Investment Committee examines

the investment policy and gives an overall opinion on investment

proposals. (2) The Accounts Committee ensures that suitable accounting

methods are being applied, and examines and formulates an opinion on

the accounts and financial proposals. (3) The Remuneration and Selection

Committee examines and formulates an opinion on the remuneration of

Board Members and the CEO, as well as on applications for these

positions.

Structure of the Board of Directors:75% of this company is owned by ENGIE and 25% by Société

d'Infrastructures Gazières, a public consortium comprised of CNP

Assurances, CDC Infrastructure and Caisse des Dépôts and 0.35% by the

employees of the company. The Board of Directors is comprised of 17

members:

• 14 Board Members appointed by the General Meeting of Shareholders,

including:

‒ 9 representatives of the GDF SUEZ Group

‒ 3 representatives of Société d'Infrastructures Gazières

‒ 2 independent Board Members

• 3 Board Members representing employees

A French government commissioner, The CEO of GRTgaz, A

representative of the Central Works Council and The Compliance Manager

are non-voting members of the Board of Directors:

Full Name: GRT Gaz

Executive: Thierry Trouve



Employees: 2,965



Société d'infrastructure

25%

ENGIE75%






Board of Directors:Chairman - Carlo Malacarne

Chief Executive Officer - Paolo Mosa

Director - Roberto Lugano

Director - Antonio Paccioretti

Director - Marco Reggiani



Main Activities:• Planning, building and managing gas transmission networks

Key Indicators:Natural Gas Injected into Gas Transportation Network (2014, bcm): 62.28

Transportation network (km): 33,339

Subsidiaries:

None

Full Name: Snam Rete Gas

Executive: Carlo Malacane

Turnover: N/A

Assets: N/A

Employees: 1,874



SNAM100%







Current Strategies:Snam’s strategy is focused on improving security and flexibility of the gas

system, as well as meeting capacity requirements in line with rising

demand in the medium and long term.

The Snam investment plan in the 2014-2017 period for the domestic

market amounts to 6 billion euro, and is aimed at:

• promote the diversification of gas sources,

• complete the reverse flow project in order to increase the gas transit to

European markets,

• develop infrastructure along Italy’s South-North backbone and in the Po

Valley, with the aim of further strengthening the security of the gas

system by increasing the transport capacity in the North of the Country,

while at the same time making physical export to northern Europe

possible,

• increase flexibility and liquidity of the domestic and European markets

by making new integrated services – among other things – available to

shippers.

The 2014-2017 plan for the transport business envisages an amount of

investments for 3.6 billion euro, aimed at an extension of the gas network

of about 1,000 km (+3% versus 32,306 km as at the end of 2013) and an

increase in the installed capacity of the compression stations of around 130

megawatts (+15% versus 867 megawatts at the end of 2013).

Values:

Corporate Sustainability

Governance:The governance system of Snam Rete Gas pursues the creation of value

for shareholders and, more generally, of stakeholders and is based on the

respect of principles of environmental, health and safety safeguard, with

particular focus on protection of workforce and respect of equal

opportunities; it also pursues the protection of interests of local

communities the company interacts with in its operational activities.

Structure of the Board of Directors:-

Mission:Snam Rete Gas' mission is to provide services of the highest reliability and

security to its customers, to ensure the development of infrastructure and

mobility in the Italian gas network whilst fostering competition and

safeguarding supply.

Stakeholders: Shareholders, managers, employees, clients, suppliers, public authorities

Full Name: Snam Rete Gas

Executive: Carlo Malacane

Turnover: N/A

Assets: N/A

Employees: 1,874



SNAM100%






Board of Directors:Chairman of the Board of Directors - Tomáš Mareček

Vice-Chairman of the Board of Directors - Robert Hančák

Member of the Board of Directors

Profile - Miroslav Bodnár

Member of the Board of Directors - Kamil Peteraj

Member of the Board of Directors - Mirek Topolánek



Main Activities:Operate a large-scale high-pressure gas transmission system in the

territory of the Slovak Republic.

Key Indicators:46.5 billion cubic meters transported (2014)

Subsidiaries:N/A

Full Name: Eustream

Executive: Rastislav Ňukovič



Employees: 802


Origin Country: Slovakia

SPP Infrastructure

A.S.100%







Current Strategies:The company Eustream consistently invests in new equipment and

environmental technologies so as to minimize the impact of transmission

system operation on the natural environment and increase the reliability,

safety and efficiency of transmission. Based on long-term forecasts of the

development of gas transmission through Slovakia and legislative

requirements on environmental protection, Eustream prepared a long-term

concept of change for transmission system infrastructure, which the

company proceeded to apply also in 2014. Investments are directed at

replacing obsolete equipment, modernizing existing units, technical

modification of the arrangement and setup of the whole transmission

system, so that Eustream is capable of reacting flexibly to the changing

requirements for transported gas volumes.

Values:

• Equal Treatment

• Safety

• Reliability

• Efficiency

• Transparency

Mission:To transport natural gas in Slovakia and through Slovakia to the European

markets. Eustream is the main entry gate and the biggest highway for

Russian gas in the EU. The business name “Eustream” is intended to

reflect this specific role.

Governance:N/A





Full Name: Eustream

Executive: Rastislav Ňukovič



Employees: 802


Origin Country: Slovakia

SPP Infrastructure

A.S.100%














Board of Directors:President and CEO - Peder Andreasen

Executive Vice President - Torben Thyregod



Main Activities:• Maintain the overall short-term and long-term security of electricity and

gas supply

• Develop the main Danish electricity and gas transmission infrastructure

• Create objective and transparent conditions for competition on the

energy markets and monitor that competition works

• Carry out coherent and holistic planning, taking account of future

Transmission capacity requirements and long-term security of supply

• Support eco-friendly power generation and the development and

demonstration of green energy production technologies

• Calculate the environmental impact of the energy system as a whole.

Key Indicators:2.9 nm3/year consumption in Denmark.

Subsidiaries:Energinet.dk Gas Storage A/S

Full Name: Energinet.dk

Executive: Torben Glar Nielsen - Executive Vice President



Employees: 738


Origin Country: Denmark

Danish Minister for Climate,Energy

and Building100%


Design and

Construction

System Development

and Electricity MarketElectricity Operation

Gas Market and

Operation

Legal and Administrative

Affairs

Strategy and

Communications

Executive Board

Finance and Market

Operations

IT

HR






Current Strategies:• High Level of Security of Supply

Energinet.dk guarantees the Danish society that the security of supply

will remain at its current high level. In other words, the green transition

must not reduce the level of security of supply.

• Efficient Transition

Energinet.dk takes responsibility for ensuring that the transition of the

Danish energy supply to renewable energy goes hand in hand with

affordable consumer energy prices by making investments, providing

efficient operation, illustrating possible courses of action through its

holistic energy analyses .

• Healthy Investment Climate

Energinet.dk's commits to contribute to creating a healthy investment

climate that enables the market players to make the most informed

investment decisions.

Values:

N/A

Mission:The purpose of Energinet.dk is to ensure energy for the Danish society -

now, tomorrow and for the years ahead. Therefore, Energinet.dk’s mission

is 'reliable energy for society'. As transmission system operator and owner

of the overall electricity and gas infrastructure, Energinet.dk plays a central

role when it comes to reliable energy.

Governance:Energinet.dk’s corporate governance framework consists of regulatory

requirements, the stock exchange rules applicable in Denmark, the Danish

Recommendations on Corporate Governance and Energinet.dk’s own

internal rules. The management values are in compliance with the

corporate governance principles and form the basis of Energinet.dk’s

internal governance model. The model describes the enterprise’s

framework, management structure and control environments. Quarterly

meetings are held to inform the Energy, Utilities and Climate Minister of the

status and development of Energinet.dk and of any other matters of

material financial or political significance.

Structure of the Board of Directors:The Danish Minister for Energy, Utilities and Climate is the sole owner of

Energinet.dk on behalf of the Danish state. The Minister ensures that

Energinet.dk complies with the provisions of the Danish Act on

Energinet.dk.

• Supervisory Board: Energinet.dk is headed by a Supervisory Board of

11 members. Eight of these members are appointed by the Energy,

Utilities and Climate Minister. The other members are employee

representatives.

• Executive Board: The Executive Board is in charge of day-to-day

management of Energinet.dk’s in accordance with the guidelines and

directions issued by the Supervisory Board.. The Supervisory Board

and the Executive Board are two independent bodies.

Stakeholders: DONG Energy, Danish Minister for Climate, Energy and Building, Gas

suppliers, distribution companies are the main stakeholders.

Full Name: Energinet.dk

Executive: Torben Glar Nielsen - Executive Vice President



Employees: 738


Origin Country: Denmark

Danish Minister for Climate,Energy

and Building100%






Board of Directors:Chairman of the Management Board - Tanya Trendafilova Zaharieva

Management Board Member - Delyan Valentinov Dimitrov

Executive Director and Management Board Member - Georgi Kirilov Gegov



Main Activities:• Owning and Operating Gas Transmission and Storage Facilities,

• Natural gas transmission on the territory of Bulgaria to natural gas

distribution companies and industrial consumers,

• Natural gas transmission through the territory of Bulgaria to the

countries Romania, Turkey, Greece and Macedonia,

• Natural gas storage for covering the seasonal fluctuations in

consumption and delivery of natural gas.

Key Indicators:Technical capacity for natural gas transit transmission amounts to 18,7

bcm/year

Subsidiaries:None

Full Name: Bulgartransgaz

Executive: Kiril Temelkov



Employees: 250


Origin Country: Bulgaria

Bulgarian Energy Holding

100%







Current Strategies:Bulgartransgaz EAD defined the following strategic objectives:

• Ensuring the security and reliability of the gas transmission system and

the Underground Gas Storage Chiren;

• Reliable and efficient operation of the gas transmission system under

the conditions of a liberalized gas market;

• Providing alternative routes and entry cross-border points enabling

natural gas supply from various sources to consumers in the country;

• Construction of new gas branches for gasification of new regions and

natural gas consumers;

• Optimization of the activities, business processes, rules and

procedures for providing easily accessible and quality services to its

customers.

Values:• Long-term Planning, safety, environment, international cooperation

Mission:Bulgartransgaz EAD mission is to provide natural gas transmission

according to the interests of the state and society, to ensure secure

conditions and gas market sustainable development in the country and the

region, to actively support the liberalization process in the spirit of the

common European energy policy.

The mission of the combined national gas operator follows both the

national energy legislation, and by European standards and the Third

Energy Liberalization Package.

Governance:In compliance with the provisions of the Energy Act and Directive 2009/73

(EC) dated March 2013 Bulgartransgaz is governed by a two-tier

organizational management structure:

• Supervisory Board consisting of a chairman and two members

• Management Board also consisting of a chairman and two members.





Full Name: Bulgartransgaz

Executive: Kiril Temelkov



Employees: 250


Origin Country: Bulgaria

Bulgarian Energy Holding

100%





Annex 3 – Memo on Pricing of Natural Gas Supply Contracts and Caps for Transmission Operator

1. GAS PRICING MECHANISMS IN EUROPE

This section presents an overview of the pricing mechanisms used in the natural gas business in Europe. The aim is to present how the pricing mechanisms have evolved and the mechanics behind such pricing mechanisms.

Traditional Model – Long-Term Contracts and Oil Indexation

Historically, natural gas supply contracts in Europe have included a pricing mechanism through which the natural gas sold under the contract was strictly linked to oil prices or other fuels considered to be potential “substitute” for natural gas (mainly fuel oil and other refined products). Such mechanism of oil indexation was ensured through ad-hoc price formulas. An example of such formula is provided below:

Pn = Po + MSlfo * PTFlfo *CFlfo *(Pn(lfo)-Po(lfo))

Where the final gas price (Pn) is a result of Po (base price or minimum price) plus a factor that is the product of the market share (MS) of the reference product (ex: fuel oil), a pass through factor (PTF) for the market share of the reference product, a conversion factor (CF to the desired unit of measure if the reference product is traded in a unit of measurement different from oil) and the change in the base price during a reference period (Pn(lfo)-Po(lfo)) for example in this case of light fuel oil).

The timing for the reflection of oil prices into gas prices under long-term contracts has generally been subject to a “12.0.6 adjustment mechanism”. This mechanism provides that the price of gas is indexed to the average price calculated in the price formula in the contract (as above) over the previous 12 month period, and that there is an interval of zero (0) months between the end of the 12 months period and the introduction of the price calculated in the formula. In addition, the price obtained through the formula is applied to the gas contract for the following 6 months.

In addition, long-term contracts general include specific “take-or-pay” quantities of natural gas that need to be offtaken by the buyer over a specific month or specific year (annual or monthly contracted quantities). Such quantities are defined as a percentage of the total volume of gas that can be delivered under the contract (historically in the range of 80-90% of the total contracted gas under the contract). The buyer is obliged to take these minimum quantities under the contract or pay for them anyway. This allows for the seller to leave volume risks with the buyer. At the time when the first long-term gas contracts were signed, state monopolies generally existed in most European markets, which lead upstream producers to have limited alternatives for potential alternative buyers, leaving them with limited control on the downstream market. The “take-or-pay” clause allowed upstream sellers to ensure that their gas volumes were offtaken or paid for under all circumstances Price risk is generally taken by the buyer through the link of gas prices to the price of other fuels considered as substitute. As a result, long-term gas contracts have historically included a clear allocation of price and volume risks split between the seller and the buyer.

Hub Pricing

A constant drive for market liberalization started already in the early 2000s in Europe. This process led to the gradual creation of trading hubs for natural gas and consequent hub pricing for gas exchanged over the hubs. A large majority of such gas has originally been “released” from long-term supply contracts. Trading at hubs has been developed either through organized “exchanges” (platforms providing clearing and settlement services for traders), or through over-the-counter (OTC) trading by





which traders have exchanged volumes of gas bilaterally without using the services of the exchange. A number of hubs have been created often on the basis of regulatory changes and overall market liberalization (for example, the National Balancing Point in the United Kingdom and the Title Transfer Facility in the Netherlands as example of the most liquid markets in Europe). Multiple types of “products” have been developed and are traded at these hubs including “day-ahead”, “month-ahead” and future contracts for natural gas delivery.

The correlation between the prices at different hubs has gradually increased during the years and the integration between different hubs in Europe has been to a large extent accomplished. Prices at these hubs are a result of supply and demand interactions.

Evolution Of Long-Term Contracts – Hub Price Indexation

The increase in market liberalization and hub pricing for natural gas traded in Europe has been one of the major driving forces that has pushed changes in the pricing mechanisms of long-term supply contracts. Upstream gas suppliers were no longer able to retain their own “captive markets” and they had to compete more and more with one another. An additional reason for changing the pricing mechanism for long-term gas supply contracts relied to a large extent in the combination of high oil prices and low economic growth that followed the financial crisis of 2008. Long-term gas supply contracts indexed exclusively to oil prices became gradually unsustainable for buyers forcing a change in the pricing mechanism. Hub-indexation provided a pricing mechanism more reflective of economic realities as well as of supply and demand dynamics in the market. The economic crisis generated what is usually called a “buyers’ market”, where hub prices promptly responded to supply and demand balance changes, and oil-indexed gas supply contracts failed to adjust to the new economic realities. European importers bound by long-term oil-indexed contracts to upstream producers were committed to purchase gas at high oil-indexed prices while their customers had access to more competitively hub priced gas. This situation gradually forced such European importers to firstly take the minimum amount of gas under their long-term “take or pay” supply agreements. They were consequently forced to ask for changes in the pricing mechanism of their long-term gas supply contracts to hub-indexation or go to arbitration with upstream producers.

The request for hub-indexation in pricing mechanism in gas supply contracts also reflected the fact that gas and oil were no longer competing fuels. The increasing availability of LNG to Europe and the overall liberalization process ongoing also contributed to the overall liquidity of the market and to making alternatives available to traditional suppliers. An increase in upstream competition combined with the economic downturn and need to competitively priced gas therefore also led to the overall change in gas pricing mechanisms.

Between 2010 and today, producers such as Gazprom and Statoil have agreed to a modification of the formulas in their long-term contracts, effectively breaking the link with oil prices and including other variables in their price calculations, such as prices for day-ahead or month-ahead products at liquid hubs. Hub-indexation has been included either fully or partially into long-term gas supply contracts. In some cases, one-off reductions have been granted to buyers for specific periods of time (see Gazprom’s experience below), rather than a long-term discount by adjusting the price formula components in the contracts. A specific quantification of the level of hub indexation in long-term gas supply contracts in Europe is difficult as these contracts are generally confidential. Estimates have been provided indicating that hub indexation might have been between 30% and 55% in 2013 with estimates close to 60% in 2014.

Statoil’s Experience

Statoil has broken the link between oil and gas pricing in its long-term contracts already in 2013. Market analysis suggests that Statoil has been quicker than other producers in changing its pricing mechanism under long-term gas supply contracts with large European importers such as Gasterra, E.On, RWE and Engie. In 2013, Statoil stated that almost half of its supplies to Europe were priced on the basis of gas-to-gas competition, and that all of its contracts with Germany and almost all of its contracts with Belgium,





the Netherlands, and the United Kingdom contained at least partial hub indexation. Fully hub-linked contracts were also put in place such as the one with Wintershall in 2012. Statoil also stated that it expected the majority of its contracts in the future to be hub-indexed. A 10 year agreement for the delivery of 45 Bcf of gas with Basf concluded that year was primarily linked to German hubs. The latest development in this direction has seen Statoil re-negotiate its long-term agreement with Engie at the end of November 2016, indicating that the pricing of the gas under such contract has become fully market reflective and indexed to French PEG hub. The supply contract with Statoil represents a fifth of its portfolio of long-term gas contracts in France. The change in pricing mechanism also allowed Statoil to regain control of flexibility in the supply chain and to sell it as a separate product or use it as a trading tool.

Gazprom’s Experience

Gazprom already introduced hub-indexation in its supply contracts in 2010 by introducing a 15% spot component in its contract with E.On. Arbitration proceedings later forced Gazprom to introduce hub indexation mechanisms in the contracts with other buyers. Gazprom has generally been more vocal than Statoil in defending the oil-indexation mechanism and it has given marginal concessions in terms of increased linkage to gas in reopener settlements with major European buyers. Gazprom reached a compromise with ENI and PGNIG through the introduction of an “indirect spot pricing” including the application of a “price corridor” by which the customer will pay an oil-indexed price for gas supplies if the oil-indexed price is within a specific range defined by the price of the Month-Ahead contract at a hub plus/minus a premium. If the price of oil-indexed gas exceeds the upper or lower band of this range, the relative higher or lower hub-indexed price (plus/minus premium) will be applied. The pressure for Gazprom to align its supply contracts with hub pricing however grew in 2012. Gazprom reviewed pricing conditions for Austria's Econgas, GWH Gashandel and Centrex, Italy's Eni and EGL, Germany's E.On Ruhrgas, WIEH, and WINGAS, Shell Energy Europe, Poland's PGNiG and Denmark's DONG, Dutch GasTerra, Romania's WIFE and Conef Energy, and Bulgaria's Bulgargaz. Gazprom made retroactive payments of Rb102.749 billion ($3.3 billion) to its customers in 2012, after revising prices of several gas supply contracts. Starting in 2012, data shows that the price of Russian gas imported to Europe has gradually aligned with TTF prices although the majority of Russian long-term contracts do not include a full hub indexation. In April 2016, Engie and Gazprom also agreed to change the pricing of their long-term contracts from oil to gas indexation.

The latest initiative taken by Gazprom in relation to new gas pricing mechanisms relates to the auctioning of natural gas volumes initiated by Gazprom in 2015. This mechanism complements the long-term supply contracts through which the company already delivers gas to Europe. Over 40 lots were sold to 15 clients with a total volume of 1.2 Bcm of gas. The auctions were also held in 2016 and they included volumes to the supplied to be Baltic States. More than 80 lots were sold to 6 clients with a total volume of more than 424 mcm of natural gas. The auction consists of two stages including a pre-qualification procedure and an auction and contract award procedure. The auction is held in rounds during a specified day and a reserve price is set for the lots sold. Specific delivery points are set by Gazprom in the auction documentation. Lots will be allocated to bidders offering the highest bidding price or on a first-come-first-serve basis if bid prices are equal.

Additional Effects Of Long-Term Contract Renegotiations

A side-effect of changing long-term gas contracts has also been the overall reduction of volumes traded under such contracts. Derogations to the take-or-pay principle or one-off discounts to the minimum contracted quantities included in the contracts have become necessary due to the difficulty for buyers in marketing the gas contracted. The modification of the traditional price setting mechanism “12.0.6” described above to shorter periods for price setting such as 6.0.3 or 3.0.3 schemes also represented some of the changes implemented following the latest rounds of renegotiations such as in the case of the ENI and Gazprom. Some negotiations also seem to have focused on the introduction of coal prices in the pricing mechanism but there have been no confirmation of this reference being implemented. Other changes in the long-term contracts include the possibility to open contract renegotiations more





regularly given the volatile market situation. Renegotiations of contracts should therefore become more frequent.

Latest Trend And Future Developments

Looking into the future, oil-indexation in long-term gas supply contracts, although largely diminished, should not be completely gone. The original rationale for oil indexation has disappeared. However, legacy contracts are still primarily oil-indexed and they represent the main source of marginal flexibility. In addition, as European domestic production declines, new sources of gas will need to be found. It is unlikely that new production will be financed and infrastructure built on the basis of contracts which are hub-indexed but would instead require oil-indexation. Additional LNG supplies will also only come to Europe if the hub prices are higher than the best alterative on a net-back basis (Asian markets). Most of these Asian markets still have a strong indexation to oil in their gas pricing mechanisms. The influence of oil-price indexation will most likely be determined by a combination of factors which include the level of market liberalization and competition increase going forward, the level of demand increase (or lack thereof) going forward (i.e. economic growth), the level of changes in the supply mix and need for additional supplies to Europe, as well as the availability of new LNG supplies and attractiveness of the European market compared to other markets. All of these variables are very difficult to predict but given the large number of variables at play, the pricing mechanisms for gas will most likely evolve in the future and adapt to changing market circumstances.

2. PRICE VERSUS REVENUE CAPS

This section presents an overview of the price and revenue cap practices used in the natural gas business in Europe. One basic difference between price and revenue caps is the way they respond to changes in the quantity demanded. Under a price cap, the regulated company’s revenue will move in the same direction as any change in the quantity demanded, and hence the risk of an unexpected change to demand can be said to lie with the regulated company. Under a (pure) revenue cap, the level of revenue is guaranteed for the regulated company, and does not depend on the demand changes.

The appropriateness of the different types of cap will depend partly on how the costs of providing the regulated service change with differences in demand. Assuming for example that the cost structure of a business is such that the average cost per unit sold does not vary with a change in the volume sold, a price cap appears appropriate (the business’ average revenue will not vary with a change in the volume sold and total costs will move in proportion with total revenue). On the other hand, if total costs change only little with differences in demand, then a revenue cap incorporating properly selected cost drivers may be a more appropriate means of price control. However, depending on how the price cap regime is designed, a price cap scheme may have the advantage of encouraging the service providers to establish efficient tariffs systems, e.g. using tariff basket caps.

International Experience

There is a general trend to apply revenue cap regulation for electricity and gas transmission and distribution network operators throughout Europe. The following table provides an overview of the regulatory regimes currently applied in Europe.

Country Electricity Gas

Transmission Distribution Transport Distribution

Austria Rate-of-return Revenue cap Revenue cap Revenue cap





Belgium Revenue cap

Denmark Revenue cap Revenue cap Rate-of-return

Finland Revenue cap

Great Britain Revenue cap Revenue cap Revenue cap Revenue cap

Germany Revenue cap Revenue cap Revenue cap Revenue cap

Ireland Revenue cap Revenue cap Revenue cap Revenue cap

Italy Price cap Price cap Revenue cap

Netherlands Revenue cap

Price cap

(until 2003),

Yardstick

regulation (from

2004)

Price cap Price cap

Norway Revenue cap (until

2006), Yardstick

regulation (from 2007)

Revenue cap (until

2006), Yardstick

regulation (from

2007)

- -

Portugal Revenue cap Revenue cap Rate-of-return Price cap

Spain Revenue cap Revenue cap Revenue cap Revenue cap

Sweden Revenue cap Revenue cap Rate-of-return

Source: DNV GL

Countries like Germany and Austria have implemented partially unlinked revenue caps, based on hindsight efficiency analysis on the total costs. One reason for this choice was to ensure equal and un-biased treatment of operational and capital expenditures. Another, equally important reason was to limit the administrative burden for the regulator. The latter is associated with the large number of regulated network operators, e.g. more than 860 electricity and 700 gas network companies in Germany.

Revenue cap regulation in Great Britain and Ireland has been implemented as linked cap regulation with an ex-ante assessment of cost projections (buildings blocks approach). In the course of the last two decades the regulation has been amended several times, though the main idea remained the same, namely prospective setting of the allowed revenue based on the projected cost reviewed by the regulator. The major motivation of this approach was to account for adequate and timely changes of the allowed revenue based on the current and expected changes in the obligation of the regulated companies.





Annex 4 – Motivation of Unbundling in Gas Sector












































Joint Venture of Deloitte and DNV GL – August 2017

This publication has been produced with the assistance of the European Union. The content of this

publication is the sole responsibility of the consultant. It can in no way be taken to reflect the views of

European Union or MENR.