Office of Energy Regulation - UIOLI consultation document
June 2009
For original document in Dutch please go to:
http://www.energiekamer.nl/nederlands/gas/regelgeving/secundaire_regelgeving/Codes/codes_2008/uioli.asp
1. Introduction
The use of existing import capacity needs to be improved in order to expand opportunities for importing gas. This is one of the conclusions of the 2007 Energy Market Monitor. The Monitor demonstrates that the capacity of some import and export connections are fully contracted but not fully used, while the market requires extra transmission capacity. This is a case of contractual congestion. The Netherlands
Competition Authority (NMa) believes that better use of transmission capacity is essential to the development of a properly functioning market.
This view is shared by the European Commission. The Commission is encouraging initiatives whereby transmission capacity is made reavailable to the market via secondary trading. Furthermore, EC Regulation 1775/2005 (henceforth: the Regulation) obliges Transmission System Operators (TSOs) to make unused capacity reavailable via the primary market1. his obligation is also known as the ‘use-it-or-lose-it’ principle, or UIOLI.
The UIOLI criteria in the Regulation apply to transmission capacity at all entry and exit points. In practice, however, contractual congestion in the Netherlands only occurs at import and export connections. The Regulation is determinative and binding with respect to UIOLI, but should be seen as a minimum regulation. There is room for manoeuvre for elaborating on and defining specific criteria in national legislation. In view of the importance of applying UIOLI, the NMa’s Executive Board (henceforth: the Board) intends to include criteria on UIOLI in the technical regulations for gas. This is also the conclusion in the ruling on the appeal against the Board’s decision on gas regulations part 1 (dated 27 June 2006, reference 101929-49). In this, the Board concludes that in order for (article five of) the Regulation to function effectively, more detailed measures need to be included in the technical regulations.
This consultation is aimed at gathering information on UIOLI from market parties as an initial step towards amending the technical regulations.
Intended amendments
The Regulation holds TSOs responsible for the best possible use of transmission capacity. It is important to note that the Regulation’s criteria are binding. This means that TSOs are currently already obliged to reoffer via the primary market any unused transmission capacity which is not offered on a secondary market by the capacity holder. Where possible, TSOs are obliged to offer unused capacity as firm capacity, but at least on an interruptible and day-ahead basis.
However, the Regulation does allow room for manoeuvre for determining certain aspects in national legislation. In summary, the Regulation allows the following to be determined:
- the length of contracts
- the distribution of revenue arising from released interruptible capacity - a reasonable price for interruptible capacity
- the conditions under which unused capacity may be offered as firm capacity
The Board intends to include the above points in the technical regulations. In doing so, the Board deems it important that the amendments to the technical regulations contribute to implementation of the UIOLI
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criteria for TSOs, and to the usability of offered capacity for market parties.
Unused capacity
One major issue is how unused capacity is offered to the market. TSOs are at least obliged to offer interruptible capacity on a day-ahead basis. And, on the basis of article 2.2, paragraph 4 of the Guidelines, where applicable, TSOs must do everything within reason to offer at least part of their unused capacity as firm capacity to the market. Shippers are chiefly interested in booking capacity using both long and short-term contracts. The technical regulations must state when TSOs are entitled to make unused capacity available to the market on a firm basis.
With a view to achieving this, the required amount of ‘unused capacity’ needs to be established. The Regulation defines ‘unused capacity’ as capacity which has not been nominated. In principle, the capacity holder retains the right of nomination. This means that TSOs can only offer firm capacity via UIOLI once it is clear that it will not be nominated by the primary capacity holder. As shippers are entitled to re-nominate capacity up to two hours prior to delivery, it is theoretically only possible for TSOs to offer remaining capacity as firm capacity within two hours of delivery.
This situation is not in accordance with the objective of UIOLI – to encourage better use of transmission capacity. After all, if the application of UIOLI does not actually offer shippers extra opportunities for obtaining capacity or access to the market, then this does not contribute to better use of transmission capacity.
This consultation document will look at how firm capacity could be offered. This matter is also dealt with in the ERGEG consultation document on capacity allocation and congestion management2.
2 ERGEG principles: Capacity allocation and congestion management in natural gas transmission networks. An ERGEG Public Consultation Document. Ref: E08-GFG-41-09.
2. Consultation
Network users may sell unused transmission capacity on the secondary market. The aim is to use capacity efficiently, to remove barriers to effective competition caused by insufficient access to unused capacity, and to improve entry to the network for new market participants. If network users do not offer the unused capacity via the secondary market at a reasonable price, on the basis of the Regulation TSOs are obliged to offer this capacity via the primary market.
This document poses a number of questions about UIOLI. Answers to these questions provided by market parties and representative organisations will be used by NMa to gauge the ideas and wishes of network users and network operators on a number of specific topics concerning UIOLI. The ultimate objective is to add the required UIOLI criteria to the gas transmission regulations.
We would like to receive reasoned answers to the following questions: • Contract length for interruptible capacity
In accordance with the Regulation, GTS must offer unused capacity at least on an interruptible and day-ahead basis. However, longer-term interruptible contracts are also possible, such as weekly, monthly, quarterly, seasonal and year contracts, as well as contracts lasting several years.
1. Can you indicate which length of contract (for interruptible capacity) you would require? 2. What is the minimum amount of capacity that should be offered each time?
• Firm capacity
capacity up to two hours prior to delivery. As ‘unused capacity’ is defined as capacity which has not been nominated, capacity can only be earmarked as unused within two hours of delivery and subsequently offered as firm capacity. This could be solved by altering the rules for nomination and re-nomination. One option is to restrict the re-nomination entitlement, which would lead to earlier clarification on how much capacity will not be re-nominated. Another possibility is to convert the firm capacity which the primary capacity holder is not nominating into interruptible capacity so that this can be offered to the market as firm capacity. There may also be other options.
3. In your view, when should it be possible to earmark ‘unused capacity’? 4. How and under what conditions should GTS offer capacity as firm capacity?
5. Do you believe that restricting the re-nomination entitlement would be a correct step towards offering firm capacity, and why/why not?
6. What is your opinion on converting non-nominated (firm) capacity into interruptible capacity for the primary capacity holder?
• Allocation mechanism
The released capacity must be offered to market parties by the TSOs. The allocation mechanism and price for capacity are important here. Capacity must be allocated on the basis of contractual congestion. Allocation may be via an auction or a draw, but other mechanisms are also possible. The starting principle is that the mechanism is transparent and non-discriminatory. The Regulation stipulates that revenues derived from such sales must be split. One reasonable method is for the TSOs to receive a fee to cover the costs of applying UIOLI and for the primary capacity holder to be paid for the capacity. Depending on the chosen allocation method, it is possible that the sale generates a higher price than was paid by the original capacity holder.
7. Which allocation mechanism for released capacity do you think best fits UIOLI? 8. How should the price for capacity be determined?
9. What do you believe to be a fair division of revenue from the sale?
10. If GTS generates higher revenue than costs incurred, what should it do with this money?
• Other
Annex: relevant extracts from Regulation 1775/2005
Article 5, Paragraph 3
When transmission system operators conclude new transportation contracts or renegotiate existing transportation contracts, these contracts shall take into account the following principles: (a) in the event of contractual congestion, the transmission system operator shall offer unused capacity on the primary market at least on a day-ahead and interruptible basis; (b) network users who wish to re-sell or sublet their unused contracted capacity on the secondary market shall be entitled to do so. Member States may require notification or information of the transmission system operator by network users.
Article 5, Paragraph 4
When capacity contracted under existing transportation contracts remains unused and contractual congestion occurs, transmission system operators shall apply paragraph 3 unless this would infringe the requirements of the existing transportation contracts. Where this would infringe the existing transportation contracts, transmission system operators shall, following consultation with the competent authorities, submit a request to the network user for the use on the secondary market of unused capacity in accordance with paragraph 3.
Article 8
Each transmission system operator shall take reasonable steps to allow capacity rights to be freely tradable and to facilitate such trade. Every such operator shall develop harmonised transportation contracts and procedures on the primary market to facilitate secondary trade of capacity and recognise the transfer of primary capacity rights where notified by network users. The harmonised transportation contracts and procedures shall be notified to the regulatory authorities.
Text from guidelines adopted pursuant to Regulation 1775/2005
2. Principles underlying the capacity allocation mechanisms, congestion management procedures and their application in the event of contractual congestion.
2.1 Principles underlying capacity allocation mechanisms and congestion management procedures.
(1) Capacity allocation mechanisms and congestion management procedures shall facilitate the development of competition and liquid trading of capacity and shall be compatible with market
mechanisms including spot markets and trading hubs. They shall be flexible and capable of adapting to evolving market circumstances.
(2) These mechanisms and procedures shall take into account the integrity of the system concerned as well as security of supply.
(3) These mechanisms and procedures shall neither hamper the entry of new market participants nor create undue barriers to market entry. They shall not prevent market participants, including new market entrants and companies with a small market share, from competing effectively.
(4) These mechanisms and procedures shall provide appropriate economic signals for efficient and maximum use of technical capacity and facilitate investment in new infrastructure.
(5) Network users shall be advised about the type of circumstance that could affect the availability of contracted capacity. Information on interruption should reflect the level of information available to the transmission system operator.
(6) Should difficulties in meeting contractual delivery obligations arise due to system integrity issues, transmission system operators should notify network users and seek a nondiscriminatory solution without delay. Transmission system operators shall consult network users regarding procedures prior to their implementation and agree them with the regulatory authority.
2.2. Congestion management procedures in the event of contractual congestion.
price.
(2) Revenues from released interruptible capacity shall be split according to rules laid down or approved by the relevant regulatory authority. These rules shall be compatible with the requirement of an effective and efficient use of the system.
(3) A reasonable price for released interruptible capacity may be determined by the relevant regulatory authorities taking into account the specific circumstances prevailing.
