A response to the DTe consultation by Centrica plc 21st February 2003
Introduction
Centrica is pleased to respond to the DTe consultation dated January 2003 on the gas transmission system operator (TSO) in the Netherlands. The nature of the TSO’s role, the legal/regulatory framework for the TSO, and the organisation appointed will be critical to the development of the competitive gas market in the Netherlands.
It is unlikely that we in the UK are fully aware of certain of the detailed issues raised in the consultation. However Centrica is a potential user of the system, and the
appointment of the TSO in a key area of N.W. Europe will have major implications for the emergence of the single market. Against this background and with this qualification, Centrica offers the following comments.
Question 1:
We agree with the essential features of the TSO’s role, as set out in the consultation, and would not add to the list given. We would highlight the importance of
non-discrimination. This should apply not only to the terms under which ‘exclusive’ network services are provided to suppliers, but also to any ‘non-exclusive’ services which may be offered by the TSO e.g. storage, metering, connections, and also to the provision of information (see answer to Question 6-8 below). Where services are provided by the TSO or by another organisation in a monopoly position, it is essential that suppliers are given equal access to or use of such services, both exclusive or non-exclusive, as required by Article 8 of the current Gas Directive.
Question 2:
Article 10 of the Dutch Gas Act requires the TSO to operate, maintain and develop the network. We would observe that it is possible to distinguish the role of Transmission Asset Owner (TO) from System Operator (SO), with the former responsible for
maintenance and investment in system assets and the latter responsible for operating the network on a day-to-day basis.
Under this unbundled model, the nature of system operation is crucial. Correctly
Question 3:
In our view, it is not necessary for there to be any extension of the present ministerial powers to require investment. If new demand develops at local level (whether through market forces or ministerial intervention), such demand should give sufficient pricing signals to encourage the TSO (or in the unbundled model the TO) to invest as necessary to enable that demand to be met. By permitting the appropriate rate of return within the tariffs proposed by the network on condition that the TSO meets the capacity needs of connected customers and suitable security of supply and performance standards, the regulator can incentivise the TSO to ensure the requisite investment is made in
maintaining, upgrading or upsizing the network.
We do not even favour the creation of ministerial powers as a backstop provision. This would weaken the commercial pressure on the TSO; the TSO will tend to refrain from investing unless explicitly directed. We believe that an appropriate level of investment can best be ensured through carefully judged market rules and incentives rather than government intervention.
Questions 4 & 5:
In the first instance it is the responsibility of network users (shippers and suppliers) to aim to balance their supply and demand. Beyond this, a range of measures then exists for overall balancing of the system – LNG and other storage, increasing/reducing production, interruption etc. Properly offered, these measures will be valued and prioritised by the market to ensure the most economic balancing of the system and so maintain system integrity.
The TSO’s role is then to manage the system at minimum cost and in as fair and
transparent a way as possible. Any costs incurred by the TSO (e.g. in buying and selling gas for balancing purposes) must be economically and efficiently incurred, and those costs reflected on those responsible for the imbalance. If costs are found subsequently not to have been efficiently incurred, the regulator should challenge the TSO’s balancing policy by disallowing such costs in the computation of future network tariffs, and so prevent such excessive costs being recovered from users.
Questions 6, 7 & 8:
Essential to the above approach is the provision of information to market participants, to ensure a fair and transparent balancing regime and the most efficient operation of the system. In order that users are equipped to balance within the requisite period, the guiding policy should be that all data should be available at an aggregate level in a timely fashion – flows at input and offtake points, border capacity both used and unused, system buy/sell prices and information about planned/unplanned maintenance. Ideally all data/information should be provided electronically. In addition, historical data relative to the above should be available.
In this way the market can see how the network is managed in response to operational situations and will react to pricing signals, which result in the most economical use of the system.
Hubs make a valuable contribution to security of supply. The TSO should therefore facilitate and co-operate in the provision of all necessary services to allow deep and liquid hubs to develop. If the TSO is himself not a hub operator, he should co-operate with the hub operator, providing access to short-term services at the hub. From the TSO’s perspective, the hub operator should be seen as equally valid a user of the system as any other.
Question 10:
It is the TSO’s role to ensure the system is balanced overall. In so doing, it will incur costs, which should be reflected on users individually by means of imbalance charges at the NBP. The underlying principle should be that imbalance charges are cost related rather than penal in nature. Under such a regime, individual users will be correctly incentivised.
It is possible that individual users will be out of balance, yet the system overall may be in balance, in which case the imbalance charges will have to be a reasonable proxy for actual charges, but should still be levied to ensure the appropriate incentives on users to balance individually are maintained.
While overall system balancing is clearly the responsibility of the TSO, the TSO may choose to subcontract the administration of imbalance charges to a third party. Question 11:
The TSO should provide a flexibility market and bulletin board of system buy/sell deals and operational constraints. In the early days of a market, the TSO will need to be a market maker, itself brokering deals and supporting capacity transfers within the
balancing period until there is sufficient depth in the market. However the ownership of gas by the TSO should be viewed only as a transient measure while they are providing a regulated balancing service i.e. until a fully market–based balancing system has been established.
The TSO should be customer-focused, enabling system users to transact in the way they wish to (which will normally align with the balancing period on the system) e.g.
permitting daily trades where requested rather than restricting users to 12 month contracts.
Question 12 & 13:
We see no reason why companies offering quality conversion services at regional level should not compete with those offering such services at national level, nor why
competition in this area should not be promoted. To this end the TSO should state what services it requires as TSO and allow companies to bid to provide such services.
Questions 14 & 15:
Question 16 & 17:
As we noted in our comments under Question 2, it is possible to distinguish the role of Transmission Asset Owner from System Operator. We therefore see no difficulty, in principle, in there being a number of transmission systems, provided that where they are interconnected, there is a single system operator managing the multiple systems.
Having a single SO (i.e. TSO) ensures that at a national level systems are managed in aggregate in the most cost-effective and reliable manner, and that users have a single interface on basic operational processes – nominations, balancing, flexibility etc. Question 18:
Given that there could be more than one organisation capable of acting as the TSO in the Netherlands, some kind of tendering process is ideally required in order that the role is given to the most qualified organisation.
Question 19:
Article 10 of the Gas Directive requires the TSO to be independent of other activities within the gas chain. While ownership by a third party may be the preferred way of securing such independence, this is not the only way in which independence can be achieved; legal, organisational and managerial separation supported by tight regulation is equally valid. Again, while Government ownership is a possible means of
guaranteeing the independence of the TSO, a commercial undertaking, appropriately and closely regulated, can also satisfy the degree of independence required, while retaining the commercial focus that should be brought to bear on such matters.
In the UK, in the three years prior to 1997, British Gas plc was subject to rigorous separation requirements and a compliance regime which guaranteed the independence of Transco, the TSO in Great Britain. Such was the success of this separation that the company, seeing no corporate advantage to its continuing integration, voluntarily demerged, but demerger in February 1997 did not represent any increase in the degree of separation or independence previously existing.
Thus, short of independent ownership, the independence of the TSO must be guaranteed by tight regulation. Ringfencing TSO’s role, separating its ‘exclusive’ role from
commercial activities which might be undertaken by the same organisation, imposing Chinese Walls and ensuring all employees are informed of their obligations, overseeing separation by means of an independent compliance officer who is responsible directly to the Board and who provides reports to the regulator and users – these are elements which have been found from UK experience to be essential to the guaranteeing of TSO independence and market confidence in such circumstances.
Question 20:
We are not clear what is envisaged within a code of conduct. If it is to be the operational rules governing system users and the TSO – i.e. a network code – this should be developed at industry level (rather than by means of bilateral
mainly because of the risk that such an organisation will not be sufficiently close to the needs and problems of market participants. However, the regulator must ensure that the structure of the industry group responsible for determining market rules allows all interested parties to contribute their views, and that the solutions reached by the industry group meet the pro-competition and fairness criteria established by the
regulator. In assessing the latter, we accept that the regulator may wish to take advice from independent third party experts.
Question 21 - 23:
To summarise many of the above points, the TSO is responsible for operational
management of the network system or systems under its control; it is not necessary that the TSO also owns the system(s).
Regulatory pressure through pricing incentives or other means can be placed on the TSO (which in an unbundled model can in turn be reflected on the actual owner of the
system) to ensure the requisite investment in the system(s) is made and security of supply maintained.
The TSO must be customer focused and take account of the views of actual and potential system users and guidelines , if any, by national authorities.
The TSO in conjunction with industry participants is responsible for developing the network code, under the oversight of the regulator, and the TSO also ensures that the operational systems for balancing/flexibility purposes are in place.
This TSO role must be clearly distinguished from other activities which the TSO happens to carry out, e.g. quality conversion services. If not under independent ownership, the TSO’s independence must be safeguarded as necessary by internal separation, supported by a rigid compliance regime and regulatory oversight.
