Investment workstream 22 January 2009 Cross-border gas transmission Investment project (I1) Update to RCC at account of project leader Erik Rakhou Project

Investment workstream

22 January 2009

Cross-border gas transmission

Investment project (I1)

Update to RCCat account of project leader

Erik Rakhou

Project is delivered in co-operation with I2

2 Investment workstream, GRI NW

Agenda update

1. Recap on conclusions 14 November 2008 and project as a whole

2. Interim results: where do we stand ?

3. Timetable on way forward

4. VT: in-depth update and discussion on key parameters

5. Annex


1. Recap 2008 (a)

• Large support to proceed with enhancement of regional investment climate

The support was informed by common input of TSOs, Regulators and Shippers.

- Eg. work on principles, questionnaire.

Questionnaire and SG proved need of a common regional approach with room for national specifics (“adapter” metaphore)

14 nov. ‘08 workshop signalled support of Ministries- (in view of very recent events support and interest is likely to be even much

stronger)


1. Recap 2008 (b)

• Work on 3 (strongly correlated) topics, with strongest accent and therefore workload on the test case:

Manual (with overview of current regulatory practices) Report on incentives (how to stimulate performance in

relation to investments) Virtual test (=VT) case (simulation on building virtual

pipelines in as real as possible environment)

• All 3 elements directed at 1 goal: By end of ‘09 to reach (path to) agreed regional

investment framework- This path consists of insight in working of incentive mechanisms, overview of current

regulatory practices and recommendations (if required) on how to enhance current practices and rules


Work in progress

2. Interim results: where do we stand?Manual: final draft to be distributed after 26-27 Feb workshop on VT, to be focused on key input parameters, tested in VT re: status quo reg. practices on investment

Report on incentives:A slowdown due to illness of 1 of authors; in AG of 20.1 a ‘PP draft’ was presented, a final presentation shall be done in 26/27 Feb VT workshop.

Virtual test case:ToR approved. Now detailed proposals are worked out.16 February first material distributed for 26-27 Feb kick-off workshop VT.


3. Timetable on way forward in 2009

22 January Update to RCC2 February Small working mtg with EFET/Operators

to pre-discuss materials for workshop ‘VT’X February Telco with AG on VT workshop10 February (Only if required) possibility to inform PBX February Proposal to inform (technical) RCC16 February Material for workshop is distributed26 – 27 February Kick-off meeting virtual test (Brussels)May 2nd Meeting virtual test (location ?)May/June SGSeptember 3rd Meeting virtual test (location ?)November Conclusions workshop virtual test (location ?)December Final results communicated


4. General. Why a virtual test? (a)

• Support from stakeholders and TSOs (SG and approval TOR): gas transmission infrastructure investment decisions should be made on the

basis of an “economic test” a rapid test to assess the viability and acceptability by using a business

simulation approach (a or some “virtual case tests”).

• Developing a virtual case provides the opportunity to better understand how all the parameters at stake interact within an investment process and how to address them to facilitate a common approach to capacity development. This would hardly be possible studying a concrete case due to the lack of generality related to its specifics.

• Seeking to learn of the implications of this hypothesis and the “test” should involve regulators, stakeholders and TSOs.

the necessary detail that would need to be defined and the environmental (attitude, regulatory, legal) changes that might need to happen to implement such an approach.

The approach, to be tested within the GRI NW by all or a subset of TSOs/regulators.

• It is envisaged that the project would involve both pre-work and homework for regulators, TSOs and stakeholders as well as attendance and participation during 2009.

At least 1/d month, at certain period involving up to “Excel”-experts

Barnes, Alex


4. Outcomes (b): ToR. • Quote ToR (p.4): “do the findings show that under tested framework(s)

regional x-border investments shall happen in timely, efficient and sufficient manner?”

• If findings are supported, an advise on enhancement shall be addressed to governments and other relevant parties by end of December.

Shippers TSOs

Regulatory framework balances risk/reward in market (incl. Consumers interest)


4. How shall test look like in detail? (c) Summary based on insights from AG in Bonn, building on earlier work

Goals, striven for, next to ToR, could be more precised as:

Content output:- Test key parameters of (regional) regulatory systems and resulting effects on investment behavior of

TSOs/shippers- Test innovative suggestions to incentivize investment, where appropriateProcess output:- Valuable learning by real experts in test environment on co-operation/co-ordination- Rework the results in advise report to policy makers- In qualitative but realistic terms- Accounting key assumptions and simplifications (and therefore not investigated parameters)

Agree on (Scope all elements of) “Decision tree” of the test in/by kick-off workshop 26-27 February

- See next slide

Define objectives of participants during the VT

- See next slide

- In


4. How shall test look like in detail? (d) Summary based on insights from AG in Bonn, building on earlier work

Scope of testStep 1: Define 4-5 scenarios of regulatory framework (see minutes AG and an illustrative VT

parameters summary) Frameworks could be based on i.a. connecting hubs of NL, GE, FR, BE. by a virtual pipeline. For trigger it is simplified that “physical

congestion” between hubs is proven. Elements from other regional frameworks could be tested as well in 1 of the scenarios. Frameworks should reflect that there are various frameworks at different sides of the border (key to realism).

Steps 2-4 are: Define commitment process (“tender” letter by TSOs) Define how shippers react (eg several iterations like in VT suggested, via ‘price schedule’)

“crucial to organise realistic input and therefore possibly anonymity” An execution step: eg at certain NPV-level investment is done (that is more outcome, then input)

Agree on Objectives of the “participants during test” Eg Regulators strive to maximize consumer welfare Eg TSOs shall invest if X (50%) of NPV test is met Eg Shippers want capacity at max. cost x, depending on their market view (use common “shipper roles” according to which shippers

shall adopt a certain risk appetite)

- In


4. How do we see VT on 26 and 27 february and afterwards? (e)

• 26 and 27 February is the “scoping” kick-off w.s. 26 February

Why Test ? Input from Manual work and Incentive study on current

investment climate Walk through test steps and make choices

27 February 2nd Walk through the test Definitive choices and homework for May

• May, September Moments to present, check outcomes Most work in between

• November Conclusions and recommendations


4. Main question to RCC (f):what parameters do we find key to take aboard in VT?

• Discussion of key parameters (see hand-out)


5. Annex: project details


Recap on project in 1 slide

• The projects goals is by end of 2009 to have a (path to) “agreed framework for sound (regional) investment climate

This path consists of insight in working of incentive mechanisms, overview of current regulatory practices and recommendations (if required) on how to enhance current practices and rules

• 2008 delivered as result large support to proceed with enhancement of regional investment climate AND an (informed by large knowhow) path on how we get to enhancement

“Manual”Current

framework from 1 perspective

“Incentives study”Current

framework from other perspective

Virtual Test =>

Advise on agreed

framework

15 Investment workstream, GRI NW 15

Annex: “crystall ball” on VT: Possible preview of some statements by end of 2009...

• “We solved part of the problem”, more work to be done...• The investment experts learned in practice what new

common approach could be, hopefully this helps real projects...

• We learned that especially detailed assumptions can radically change outcomes: key is in compatible national detailed approaches...

• We found 100 problems, but now feel we should at least solve the following 3...

• Key was getting from drawing table to actually doing it...


THE MANUAL FOR NEAR TERM INVESTMENT PROCEDURES FOR (X-BORDER) TRANSMISSION

Table of Contents• Introduction• Regulatory model• Type of investment• Investment Planning• Determining whether an investment proposal is efficient, required and

sufficient• Allocation of risks (cross border only)• Allocation of costs (tariff based only)• Bearing the costs and risks• Determining allowed return

Annex - Definitions

UNDER DRAFT.To be focused at key parametersNeeded for VT.


Incentives study: work in progress Aspects of investment climate to be analysed further (a) (in virtual test case/experiment)

1. Open Seasons/identifying demand a. signals about future demandb. long-term commitment by shippers (risk sharing)

2. Regulatory schemesa. higher rate of return for taking on more risk (risk sharing)b. longer regulatory periodc. The role of ex ante approval

3. Coordinationa. how to achieve coordinated investment plans

4. What happens if TSOs don’t build?

UNDER DRAFT.


Incentives study: work in progress Aspects to be considered further (b)

Theories underpinning incentives Reward risk taking/penalise poor decisions Risk sharing – consumers/shippers/network companies Encouraging efficiency Different treatment for replacement and extension

Problems in applying principles Informational asymmetry – do regulators know enough? To adapt to cross-border, how could benefits and costs be

shared on either side of the border? Persuading network operators to develop an appetite for

risk The role network companies play may need to significantly

evolve

UNDER DRAFT.


a. What shall be projects outcome by end of ’09? Roadmap steers...

Quote Roadmap from “9 building blocks of our successful regional market by 2012”:

“The investment climate should be such that investments in capacity… are sufficient and timely and persistent physical congestion is avoided.

Investments should facilitate gas supplies from diverse sources to meet the need for secure gas supplies”

See point III, p. 10

Encourage(d)

Sound Regional

Investment

Climate

By end of 2009


b. What shall be projects outcome by end of ‘09? Projectplan details...

• Agreed framework for a sound (regional) investment climate

By means of a thorough confirmation via market consultation

- Using common principles proposed by NW-EU TSOs

Leading to a ‘side-letter to MoU’ between Regulators and any additionally, based on consultation outcome, required measures (e.g. testing in pilot projects)

• Mechanism(s) for incentives for TSO’s, encouraging regulated investment

By means of a report on incentives- Including addressing question of alternatives

(next) to user commitments as basis for investment

Leading, if required, to advise of GRI NW on adjustment of regulatory framework by either governments and/or regulators

Encourage(d)

Sound Regional

Investment

Climate

By end of 2009

Documents

Investment workstream 22 January 2009 Cross-border gas transmission Investment project (I1) Update to RCC at account of project leader Erik Rakhou Project