TARIFF NETWORK CODEIMPLEMENTATION

Network Codes Team, Gas Department

Madrid Forum, 23-24 October 2019

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.The Agency Tariff Methodology reports» Process and deadline» Resulting reference price methodologies (‘RPMs’)» Trends and trade-offs» Transparency about assessment» Issues and possible improvements

.Allowed Revenue report» Transparency for the RPM» Observations (cost of capital, capital expenditures, efficiency)

Content of the presentation

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan

NL 0 0 12 Mar - 25 May 10 Dec 0 0 0 0 √SE 0 0 #### #### 30 Apr - 30 Jul 13 Dec #### #### #### #### #### 0 0 0 0 √RO 0 0 #### #### 1 May - 14 Sept 15 Mar #### #### 0 0 0 0 √NI 0 0 #### #### #### #### 30 Jun - 30 Aug 17 Dec #### #### #### #### #### 0 0 0 0 √DK 0 0 #### #### #### #### #### 15 Aug - 16 Nov 31 May 0 0 0 0 √PT 0 0 #### #### #### #### #### 17 Aug - 17 Oct 18 Mar #### #### 0 0 0 0 √PL 0 0 #### #### #### #### #### #### 28 Aug - 31 Oct 29 Mar #### #### 0 0 0 0 √

PL‐Yamal 0 0 #### #### #### #### #### #### 28 Aug - 31 Oct 29 Mar #### #### 0 0 0 0 √SI 0 0 #### #### #### #### #### #### 31 Aug - 31 Oct 29 Mar #### #### 0 0 0 0 √IUK 0 0 #### #### #### #### #### #### #### 4 Oct - 3 Nov 28 Mar #### #### 0 0 0 0 √BE 0 0 #### #### #### #### #### #### #### 8 Oct - 7 Dec 7 May 0 0 0 0 √IT 0 0 #### #### #### #### #### #### #### 16 Oct - 17 dec 28 Mar #### #### 0 0 0 0 √DE 0 0 #### #### #### #### #### #### #### 17 Oct - 17 Dec 29 Mar #### #### 0 0 0 TBC √CZ 0 0 #### #### #### #### #### #### #### 1 Oct - 31 Dec 27 May 0 0 0 0 √EL 0 0 #### #### #### #### #### #### #### 10 Oct - 31 Jan 31 May 0 0 0 0 √HU #### #### #### #### #### #### #### #### 31 Oct - 15 Jan 6 Jun 0 0 0 √SK 0 #### #### #### #### #### #### #### #### 6 Nov -6 Jan 7 Jun 0 0 0 √IE 0 #### #### #### #### #### #### #### #### #### 11 Dec - 11 Feb 11 Jun 0 0 0 √HR #### #### #### #### #### #### #### #### #### #### 18 Dec - 18 Feb 23 May 0 0 0 0 √AT 0 0 #### #### #### #### #### #### #### #### #### #### #### 31 Jan - 31 Mar #### 0 0 0 Repeat Communic.BBL 0 0 #### #### #### #### #### #### #### #### #### #### #### 25 Feb - 25 Mar 3 Jun 0 0 √LT 0 0 #### #### #### #### #### #### #### #### #### #### #### #### 5 Mar - 6 May 0 √EE 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 27 May -26 Jul 0 √FR 0 IC 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 23 Jul -5 Oct 0

ES 0 TSO 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 2 31 Jul -30 Sept 0

LV 0 NRA 0 0 0 0 0 0 0 0 0 0 0 0 0 0 30 Aug - 9 Oct 0

BG 0 0 0 0 0 0 TBC 0

GB Consultation launch - closing Final decision 0 TBC 0

FI 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Derogated 0 0 0 2020 0

30-Sep

2018 2019 May 2019

deadline

ACER Analysis

10-Oct

TAR final consultation timeline

* Updated 15 October 2019

Deadline for publishing the NRA motivated decision

Consultation information available

at ACER’s website link

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. Large amount of information shared with stakeholders and the Agency, although not always sufficient for building full a understanding of the methodologies:

» Positive experience: NRAs & TSOs made an effort to increase clarity and provide information in English

» Room for improvement:• partial /inconsistent information provision.• simplified models not fully allowing to calculate and forecast tariffs.

» Overall, transparency improved, but not to the same level across Member States.. Best practices:

» Clear consultation and well managed process: NL.

» Transparency on long term capacity bookings and revenue: HR.

» Constructive interactions with the Agency: DK, IT.

General remarks

RPMs chosen across EU

Note: The map represents the RPMs proposed in the final consultations (not necessarily those in the NRA motivated decisions).

Postage Stamp Capacity Weighted Distance Matrix Distance to virtual point Other

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How much we know about the tariff decisiontriangle?

. The impact of these choices should be assessed against the Article 7 (of NC TAR) principles.

. Clarity on the choices made was missing in many consultations.

Transparency

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. Policy goals had clear impact on tariffs but were not always made explicit, hence could not be fully assessed.

o Transit countries with significant volume risk. The NC TAR does not provide specific measures to protect domestic users. The options chosen can lead to partial incompliance with NC TAR rules. The measures chosen were not clearly assessed in the consultation.

o Networks with few supply sources. Some options may seek at lowering the costs to additional sources/ entries. Such options often went beyond the rules of the NC TAR (by socialising LNG regasification costs).

o Networks with points in competition. Some consultations proposed questionable options such as an incompliant application of benchmarking (SK), or the lowering of tariffs associated to specific points (PT).. The promotion of wholesale competition on the national market led to many

consultations proposing postage stamp methodologies or the equalisation of entry points.. Equal tariffs for domestic customers often led to the equalisation of all domestic exits. . The expansion of networks led to the use of more complex methodologies providing locational signals that were based on unit costs (IE, PT).

National policy goals differ, so the NC is applied indifferent contexts

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. Complex methodologies imply a trade-off between transparency and cost-reflectivity:

» Postage stamp methodologies provided greater transparency, but simplified the attribution of costs.

» Simplified tariff models were not sufficient to calculate and forecast tariffs in case of complex methodologies.

. The Agency required and received additional information from NRAs/TSOs to assess the consultations.

» Cooperation with ACER and NRAs was generally positive.» Information was not sufficient or was not made available in time upon request (BE, EE).» The Agency suggested in some cases to extend the consultation and/or to publish

additional information (DK, EL, FR, PL, RO).

. Overall, the information released did not match the information needed to fully understand the methodologies. The Agency suggests to extend or repeat consultation when this is the case.

Transparency has greatly improved, but not sufficiently

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. In general, the Agency missed:

» A justification of the choice of cost drivers.

» A clear explanation of the characteristics of the network.

» These elements reduced the usefulness of the comparison tools of the NC TAR (cost allocation assessment, comparison with CWD, etc.)

. The CAA and the comparison with the CWD was often not well adapted to assess the appropriateness of the RPMs:

» The CAA requires distinguishing the physical cost drivers that are correlated to the actual costs (technical capacity and distance) from the drivers used to charge network users (e.g. booked capacity, commodity).

» CAA is useful, but not sufficient (heterogeneous capacity products and asset depreciation).

. In the absence of such information, RPMs could only be partially assessed.

The assessment of the proposed RPMs was often insufficient …

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. The Agency noticed that in several consultations specific services were excluded from the scope of the NC TAR.. The scope of application in the NC TAR shall be based on the definition of ‘access to networks’, which requires a good understanding of the impact services have on network access (may require legal clarification). . The Agency interpreted this definition in a broad manner to include services that are provided on the occasion of accessing natural gas transmission networks or in connection with such access.. All services ‘related to access to network’ should fall under the NC TAR and should be considered as transmission or non-transmission services.

Scope of application of the NC TAR: access to networks

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. Regional networks. Parts of a transmission network purely dedicated to supply domestic consumers can be one of the most important factors leading to cross-subsidisation between cross-system and intra-system.

. Difficult to solve, because the implementation of the definition of transmission/distribution was differently implemented:

» Multiple TSOs have distribution assets and considered those to be part of the transmission network, but

» the application of a single RPM leads to cross-subsidisation.

. The Agency’s guidance: » All transmission assets should be allocated using one single RPM.» If the RPM cannot properly allocate the costs of the regional

branches, these assets should be categorised as distribution.

Network design transmission and distribution: regional networks

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. TSO tariffs include charges that are not related to the ‘access to gas transmission networks’, including:

» LNG costs;» Storage costs;» Levies.. The Agency could not analyse these aspects as they were not

clearly reported.. These charges can potentially lead to:» Cross-subsidisation of storage/LNG and transmission. » Distortion of competition between storage and LNG operators. » Allocation of costs associated with domestic users to IPs.. The Agency’s guidance: Follow closely Article 41(1)(f) of the

Gas Directive (‘no cross-subsidies between transmission, distribution, storage, LNG and supply activities’).

Cross‐subsidisation between storage/LNG and transmission

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. Higher level legislation shall be appropriately assessed and implemented, in particular the definitions.. Consistency is key in the implementation:

» Transparency to cover key aspects of policy choices, network characteristics and the design of the RPM.

» Appropriateness of cost drivers shall be assessed.» Meaningful use of NC TAR tools (CAA, CWD comparison, etc.).» Consultations should be complete and provide stakeholders with all the

required information & adapted to the proposed design. » The Agency observes that the extension of existing practices was not always

assessed against NC TAR requirements.. Currently the Agency’s analysis of the final consultation is not binding. Some stakeholders have suggested to make it binding, as NRAs’ motivated decisions have not always followed up the Agency’s recommendations.. ACER’s additional information requests showed that understanding the consultations/RPMs was not obvious.

What is relevant for implementation?

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.The Agency Tariff Methodology reports» Process and deadline» Resulting reference price methodologies» Trends and trade-offs» Transparency about assessment» Issues and possible improvements

.Allowed Revenue report» Transparency for the RPM» Observations (cost of capital, capital expenditures,

efficiency)

Content of the presentation

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. The Agency Reports (on the RPMs) revealed that: » Transparency on the allowed/target revenues is not always provided.» In exceptional cases consultations were based on allowed/target revenues not approved

by the NRAs. » In some cases, regulatory periods were not clearly defined and investments were

transferred to the upcoming regulatory period.» Changes in the allowed/target revenue from one regulatory period to the next were not

always clearly explained.» At times, the allowed/target revenue included significant premia that were not properly

assessed and made proportionate with TSO risks.» At times, past under-recoveries are logged to the allowed/target revenue without a

clear assessment.» At least in one case, the RAB had been subject to a recent and important re-evaluation

without a clear justification.. Transparency on allowed/target revenue remains partial and can hinder the compliance with Article 7 requirements (NC TAR) and to market integration.. The NC TAR does not fully support a systematic check of these issues by stakeholders or by the Agency.

Allowed Revenue: Not always transparent and properly justified

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Improving the efficiency of the revenue regimes: Findings from the 2018 report (1/2). Beyond transparency, other improvements could be considered.. High level guidance on the cost of capital:

» There is considerable variability in the cost of capital across EU.» Missing systematic assessment on the risk profile of the TSOs, when setting the

cost of capital.» There would be value in high-level guidance at the EU level to be used by NRAs to

develop more detailed rules, and to share more thinking and analysis across NRAs.

» A common method can facilitate more straight forward and consistent comparisons across TSOs.. Scrutiny on investments and benchmark of capital expenditures:

» Greater scrutiny would minimise costs and remove potential biases in relation to capital expenditure. Requires careful consideration by NRAs.

» Cost assessment approaches in many jurisdictions remain embryonic and relatively passive.

» Greater regulatory effort and appropriate resources in NRAs are required to challenge the cost assumptions of the TSOs by employing cost benchmarking techniques and measures.

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Improving the efficiency of the revenue regimes: Findings from the 2018 report (2/2)

. Extend benchmarking to CAPEX, create data reporting frameworks, incentivise better service quality:

» Incentive mechanisms that are in place are generally limited to OPEX with savings and losses kept. Consideration could be given to cover the entire revenue allowance (and not just OPEX).

» Reporting should be improved. In particular, incentive-based regulations require detailed reporting of costs and other parameters of performance and those should be pursued.

» Common EU framework for collecting TSO data, particularly if NRAs choose to employ more benchmarking methods in their cost assessments.

» Quality of the transmission network service needs to be given greater prominence in incentive-based regulation.