Workshop on “Requirements of financial institutions on the financing of Workshop on “Requirements of financial institutions on the financing of gas infrastructure projects, Brussels, 9.11.06gas infrastructure projects, Brussels, 9.11.06

Regulatory requirements for new gas Regulatory requirements for new gas infrastructureinfrastructure

Michael ThomadakisMichael Thomadakis

RAERAE

2

Needs for Europe …Needs for Europe …EU Diversity of Supply Management?

(could this be a 2025 aspiration?)

10%10%

Russia

Caspian/Middle East

EU

Nth. African

LNG

Norway/Netherlands

10% = 83 bcma

4th Supply Corridor from 0 to 83 bcmarequires 4 - 20 bcmalines, capex ~ $15bn

10%

Existing infrastructure 4th Corridor requirement LNG requirement

LNG from 33to 83 bcma

27.5%

Blue Stream 16 bcma

Russia West 1&2 15 bcma

Ukraine 5 linesTotal 140 bcma

EuroPol 20 bcma

CAC 80 bcma- 5 lines

Norway lines 93 bcmaplus50 BcmaNetherlands supply

15%

2 lines total 31 bcmaexpansion +10 bcma

27.5%

EU Diversity of Supply Management?(could this be a 2020 aspiration?)

10-20%

10%

Russia

Caspian/Middle East

EU

Nth. African

LNG

Norway/Netherlands

4th Supply Corridor from 80 to 100 bcmarequires about 4 - 20 bcmalines (incl. LNG),

10-15%

Existing infrastructure 4th Corridor requirement LNG requirement

LNGto 100-150 bcma

27.5%

Blue Stream 16 bcma

Russia West 1&2 15 bcma

Ukraine 5 linesTotal 140 bcma

EuroPol 20 bcma

CAC 80 bcma- 5 lines

Norway lines 93 bcmaplus50 BcmaNetherlands supply

10-15%

2 lines total 31 bcmaexpansion +10 bcma

27.5%

Gas:

Source: EC

3

Needs for Europe (cont)…Needs for Europe (cont)… Reinforcement of existing pipelines Reinforcement of existing pipelines New pipelines, both at national and regional levelNew pipelines, both at national and regional level LNG facilitiesLNG facilities Storage facilitiesStorage facilities

Strong dependence on importsStrong dependence on imports Strong need for diversification of suppliesStrong need for diversification of supplies

Substantial investmentsSubstantial investments

4

Legal Framework…Legal Framework… Gas Directive 2003/55/ECGas Directive 2003/55/EC

TPA is the default regimeTPA is the default regime Exemptions from the default regime are permitted Exemptions from the default regime are permitted

if specific criteria are metif specific criteria are met

Regulation 1775/03 (tariffs, capacity allocation Regulation 1775/03 (tariffs, capacity allocation and congestion management, transparency and congestion management, transparency requirements, balancing) and the anticipated requirements, balancing) and the anticipated guidelinesguidelines

Energy Community Treaty: important since it Energy Community Treaty: important since it serves as a “bridge” to the Caspian regionserves as a “bridge” to the Caspian region

5

Regulatory requirements…Regulatory requirements…

Design regulation which will:Design regulation which will: Enhance security of supply, without destroying Enhance security of supply, without destroying

competitioncompetition Bring gas from new supply sources, without creating Bring gas from new supply sources, without creating

“new closed routes”“new closed routes” Provide incentives to investors, without enhancing Provide incentives to investors, without enhancing

“market power”“market power” Permit the entrance of new suppliers, even at a later Permit the entrance of new suppliers, even at a later

stagestage Permit the development of new markets and “gas Permit the development of new markets and “gas

hubs”, especially at the EU neighborhood hubs”, especially at the EU neighborhood Provide guarantees to investors and IFIs for a “fair Provide guarantees to investors and IFIs for a “fair

and equitable” return on investmentand equitable” return on investment

6

rTPA or Exemptions ? (1)…rTPA or Exemptions ? (1)… rTPA is the default regime:rTPA is the default regime:

Regulated Tariffs, approved by the RegulatorsRegulated Tariffs, approved by the Regulators Investors’ revenue is guaranteed through the tariffs Investors’ revenue is guaranteed through the tariffs butbut

return on investment is limited to the regulated WACCreturn on investment is limited to the regulated WACC The “investment” or “market” risk is transferred to the The “investment” or “market” risk is transferred to the

rate-payers, i.e. the market participants (“socialized” rate-payers, i.e. the market participants (“socialized” through the tariffs).through the tariffs).

Access to the networks Access to the networks mustmust follow certain “guidelines” follow certain “guidelines” (for EU member states), i.e Regulation 1775/2005(for EU member states), i.e Regulation 1775/2005

rTPA is required but not always feasible, especially for rTPA is required but not always feasible, especially for transittransit Transit routes may cross countries where the market Transit routes may cross countries where the market

size does not allow this risk to be taken (e.g. SEE)size does not allow this risk to be taken (e.g. SEE) Long term guarantees must be availableLong term guarantees must be available

7

rTPA or Exemptions ? (2)…rTPA or Exemptions ? (2)…Exemptions can be granted should the following tests are Exemptions can be granted should the following tests are

examined (Art. 22):examined (Art. 22):1. “enhance competition in gas supply and enhance security of supply”

2. “The level of risk attached to the investment is such that the investment would not take place unless an exemption is granted”

3. “The infrastructure must be owned by a natural or legal person which is separate at lest in terms of its legal from the system operators in whose systems that interconnector will be built”

4. “Charges are levied on users of that infrastructure”

5. “The exemption is not to the detriment of competition or the effective functioning of the internal gas market, or the efficient functioning of the regulated system to which the infrastructure is connected”

Can be “looked-at” in the following way:

8

Key Concepts for DerogationKey Concepts for Derogation

1.1. The “Risk is Such” TestThe “Risk is Such” Test

2.2. Open Seasons, Use-it-or-Lose-itOpen Seasons, Use-it-or-Lose-it

3.3. Independence of the Project CompanyIndependence of the Project Company

4.4. Short-term ContractsShort-term Contracts

5.5. Security of SupplySecurity of Supply

6.6. Impact on Interconnected SystemImpact on Interconnected System

En

han

ce C

omp

etit

ion

9

The “Risk is Such” TestThe “Risk is Such” Test

Two Possible Interpretations: Two Possible Interpretations:

No. 1: Investors must prove they cannot tolerate regulated accessNo. 1: Investors must prove they cannot tolerate regulated access

No. 2: Regulator decides whether regulated access is desirableNo. 2: Regulator decides whether regulated access is desirable

Maximum Return Set at Cost of Capital

Investor will Accept, if Recovery Guaranteed

Traditional Regulation (central planning approach):

Ratepayers bearUtilisation risk

But, “Risk is Such That”

•Regulator “wants out” of central planning

• Investors, not ratepayers should bear utilisation risk

10

Open seasonOpen season Open season conducted Open season conducted beforebefore deciding on eventual capacity deciding on eventual capacity

If there is a lot of demand, expand the capacity (If there is a lot of demand, expand the capacity (specific provisions specific provisions must be there, when this is not technologically feasiblemust be there, when this is not technologically feasible).).

Imposes no risk on project sponsors– they only build to match long-Imposes no risk on project sponsors– they only build to match long-term commitments.term commitments.

Allows competitors to join in.Allows competitors to join in.

Use-it-or-Lose-it:Use-it-or-Lose-it: If holders of long-term capacity don’t need it, should sell it.If holders of long-term capacity don’t need it, should sell it.

Only possible objection: want to “undersize” project, hoard Only possible objection: want to “undersize” project, hoard capacitycapacity

Investment would not “facilitate competition”Investment would not “facilitate competition”

11

Short-term contractsShort-term contractsOffering short-term contracts helps competitionOffering short-term contracts helps competition

However, project sponsors do not want to bear the risk of short-term However, project sponsors do not want to bear the risk of short-term capacity salescapacity sales

Pipelines from countries with dominant producers cannot rely on spot salesPipelines from countries with dominant producers cannot rely on spot sales

No liquid “spot LNG” market yetNo liquid “spot LNG” market yet

Possible SolutionPossible Solutionss:: Part of the capacity may be subject to ordinary and/or incentivized TPA Part of the capacity may be subject to ordinary and/or incentivized TPA

regime, according to conditions as envisaged in Art. 22(3.b.iii) of Dir. regime, according to conditions as envisaged in Art. 22(3.b.iii) of Dir. 2003/55 2003/55

Regulator Regulator may amay ask TSO to buy some capacity in open season, project sk TSO to buy some capacity in open season, project sponsor therefore receives a long-term commitment.sponsor therefore receives a long-term commitment.

TSO resells capacity to market on short-term basis.TSO resells capacity to market on short-term basis.

Ratepayers bear some utilisation risk, but they benefit from competitive Ratepayers bear some utilisation risk, but they benefit from competitive effect.effect.

12

What do we need ?…What do we need ?… Combine “traditional” tools with those of the “open Combine “traditional” tools with those of the “open

market” approach:market” approach: Grant exemptions when necessary, but leave some Grant exemptions when necessary, but leave some

part under rTPA (under regulatory decision but with part under rTPA (under regulatory decision but with full guarantees to investors)full guarantees to investors)

Apply rTPA but with long term commitments on Apply rTPA but with long term commitments on capacity and on the setting of the tariffscapacity and on the setting of the tariffs

Develop clear rules which go beyond the borders:Develop clear rules which go beyond the borders: On collaboration between regulatory authorities (e.g. On collaboration between regulatory authorities (e.g.

unified regulatory decisions on cross-border unified regulatory decisions on cross-border investments)investments)

On the harmonization of the rights and obligations of On the harmonization of the rights and obligations of the investorsthe investors

On commitments from the governmentsOn commitments from the governments

13

Way Forward ?Way Forward ? These issues have been already faced in some parts of These issues have been already faced in some parts of

Europe (and in some cases addressed)Europe (and in some cases addressed) There is a clear need for an important debate on these There is a clear need for an important debate on these

issues issues right nowright now Decisions must be taken for the long termDecisions must be taken for the long term The EC, Regulators, TSOs and the Financing Institutions The EC, Regulators, TSOs and the Financing Institutions

must work together, with the view to reach a consensusmust work together, with the view to reach a consensus Guidelines on the development of new gas infrastructure Guidelines on the development of new gas infrastructure

at a pan-European level must be elaboratedat a pan-European level must be elaborated ERGEG will start the corresponding work very soonERGEG will start the corresponding work very soon

14

Thank you for your attentionThank you for your attention

Dr. Michael ThomadakisDr. Michael Thomadakis

Vice PresidentVice President

Greek Regulatory Authority for EnergyGreek Regulatory Authority for Energy

69 Panepistimiou Avenue69 Panepistimiou Avenue

thom@rae.grthom@rae.gr

+ 30 210 3727465+ 30 210 3727465

www.rae.grwww.rae.gr