FLAME

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Convergence of Non-Discriminatory Systems of
Access to the Gas System and Congestion
Management Across EuropeMay 15, 2002
Boaz Moselle (boazm_at_brattle.co.uk)
The Brattle Group
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Introduction

• Study will analyse
• Physical system (including flows and congestion).
  
• Alternative ways of defining capacity.
• Capacity allocation and congestion management.
• Alternative approaches to new infrastructure
  development.
• Tarification
• Fundamental principles.
• indicative tariffs under alternative systems.
• Implications of pipe-to-pipe competition.

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Introduction

• Today we will present some preliminary indicative
  conclusions
• Ongoing work, likely to evolve as a result of
  current interactions with CEER and GTE.
• We are sharing ideas and views with CEER via gas
  working group/informal contact.
• Have had a constructive discussion of principles
  with GTE
• GTE accepts the relevance of flows for analysing
  national tariff systems, but does not see the
  relevance of flows for cross-border analysis.
• However, GTE has agreed to provide feedback on
  our analysis of physical system, as well as some
  additional data items.

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The Physical System

• Our consultants Jacobs Engineering have used
  publicly available data to analyse the physical
  system
• Compare annual cross-border flows with max flow
  capacities.
• Compare peak flows with max flow capacities.
• Some preliminary/indicative conclusions
• General absence of congestion almost all MS have
  sufficient import/export capacity to deal with
  normal flows.
• However, transport capacity to France, Spain and
  Portugal is limitedcan cause congestion when
  gas from northwest Europe or Russia is required.
• Also see congestion in Switzerland of gas flowing
  to Italy.
• We have provided a draft of the Jacobs work to
  GTE and to CEER Gas WG, await feedback.

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Alternative Definitions of Capacity

• Least flexible definition, point-to-point, is
  unreasonably restrictive, discriminates against
  entrants, and deters competition.
• Choice between other definitions depends on
  trade-off
• More flexible definition fosters competition,
  liquidity.
• Less flexible definition may allow TSO to sell
  more firm capacity, and protect against any
  possible threat to system stability.
• Right trade-off depends on network configuration
  and flows.
• In context of the European system, CEERs
  preference for entry/exit is reasonable. But
  TSOs should have right to demonstrate that
  specific system characteristics make entry/exit
  inappropriate for them.

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Alternative Definitions of Capacity

• If entry/exit is inappropriate, find minimum
  necessary reduction in shipper flexibility to
  solve problems.
• Decisions should be made with help of gas flow
  modelling.
• MS regulators should share experience in
  analysing and evaluating these trade-offs.

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Capacity Allocation and Congestion Management

• Appropriate rules depend on extent of congestion
• With no congestion, first-come, first-served is
  acceptable.
• With contractual congestion, can consider a
  two-stage approach
• Ex-ante release of capacity that the incumbent
  has booked in excess of its customer volume.
• Implement a rule for automatic resale of
  capacity when a customer switchesnew supplier
  has automatic right to purchase from the old
  supplier the capacity it previously used to
  supply the customer.
• In the case of physical congestion, we recommend
  the use of auctions to allocate scarce capacity
• Auctions are non-discriminatory, and efficient.
• Need safeguards against abuse by dominant players.

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New Infrastructure Development

• Sustained congestion signals need for system
  expansion. We consider
• Role of LT capacity contracts and secondary
  markets.
• Transparency and planning.
• Potential role for merchant lines.
• LT contracts and active secondary markets create
  effective price signals for system expansion, can
  be used to allocate risk and help finance new
  infrastructure.
• Indicative planning and secondary market signals
  are complementary in infrastructure development.
• New development would be facilitated by
  publication of detailed information on existing
  networks, forecast expansions etc

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New Infrastructure Development

• Merchant lines present both significant
  advantages and potential risks. Advantages
  include
• Efficient risk allocation.
• Safeguard against capacity shortage (risk that
  regulators may under-estimate demand, or
  mis-estimate cost of capital).
• Chief disadvantages of merchant lines
• Danger of market power abuse (e.g., under-sizing,
  excessive tariffs, discriminatory allocation).
• Distortion due to existing tariff system
  (inefficient bypass).
• Authorities should analyse problems carefully,
  ensure they are addressed before allowing
  merchant lines. Report will discuss possible
  approaches to these problems.

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Tarification

• First conclusiondistance-based tariffs cannot be
  cost-reflective in most MS
• Distance-based tariffs fail to reflect costs
  because of divergence between contract and
  physical paths.
• Discriminate against entrants because incumbent
  enjoys advantage of portfolio effect.
• For pipe-to-pipe competition to set tariffs, need
  strong evidence of real and active competition
• Simple existence of two pipes is not enough.
• Ongoing work develop indicative tariffs under
  alternative systems.