DTE INFORMATION AND CONSULTATION DOCUMENT: LNG REGULATION AND ACCESS
Response from Centrica plc Introduction
Centrica has a number of existing activities and interests in the Dutch gas market, as follows:
• as owner of Oxxio, which serves around 180,000 retail gas customers; • as supplier of gas to a number of Dutch buyers via the UK-Belgium
Interconnector pipeline;
• as buyer of gas from Gasunie Trading & Supply, under a long term contract, to be delivered via the BBL pipeline; and
• as a trader of gas at the TTF.
We are also keen to develop our position in the Dutch energy market, both directly and via potential gas transit arrangements.
Given these activities and objectives, we have an interest in the terms for construction of and access to potential future LNG regasification/import terminals in The Netherlands.
We also have direct experience of the contractual arrangements relating to such terminals via our acquisition (announced in March 2005) of 3.4 bcm/a capacity rights in the second phase of Grain LNG, in the UK, for 20 years as from late 2008. In addition, we and our partners are seeking planning
permission to develop a further LNG import and regasification terminal on Canvey Island in south east England.
Centrica therefore welcomes the current DTe consultation process and is pleased to have this opportunity of responding to the Information and Consultation Document issued in February 2006.
Overview
Before responding to the individual questions raised by the DTe, it may be helpful to summarise our approach to the consultation as a whole.
It seems to us that the two key questions for the DTe are the following: • Should the potential new terminals be subject to regulated third party
access (RTPA), as with Zeebrugge 2 in Belgium, or should they be exempted as with the UK terminals at Grain, Milford Haven and South Hook?
• If they are to be exempted from RTPA, on what conditions should that exemption be granted?
• that the facility would not have been built if the exemption were not granted; and
• that the granting of an exemption will not be detrimental to competition. In our view:
• a lack of available entry capacity is currently the biggest constraint on the development of competition in the Dutch (H) gas market;
• this will be ameliorated only slowly via the provision of new GTS capacity pursuant to the current open season process;
• the predominant goal should therefore be to ensure (a) that LNG terminal capacity which is commercially justified gets built (as
recognised in paragraph 61 of the consultation document) and (b) that any available LNG import capacity is used to the maximum
commercially-justifiable extent;
• it is important to recognise that the commercial case for LNG terminal development is very largely dependent on long term throughput agreements;
• it is also critical to ensure that transmission entry capacity, at the relevant locations, is made available on the right timescale and appropriately regulated.
There is therefore an important balance to be struck between (a) incentives to invest and (b) regulatory safeguards as to the use of the facility, once
constructed. In the UK, for example, both Ofgem and the European
Commission accepted that the three LNG terminals now under construction would not have been built without an exemption from RTPA. However, a number of regulatory safeguards were incorporated into the terms of the exemption.
If the potential Dutch LNG terminals were not considered viable by their sponsors, on the basis of regulated third party access, then we believe that exemption should be considered, provided that certain critical safeguards are in place, especially in terms of:
• information transparency;
• special restrictions on players who are already dominant in the wholesale gas market; and
• “anti-hoarding” measures, to ensure secondary trading and the maximum commercial utilisation of available import/regasification capacity.
Response to the consultation questions
Our response is structured around the consultation questions raised by the DTe and summarised in Annexe 3 to the Consultation Document.
Qu. 1: subject to appropriate safeguards, as mentioned above, we share the view that potential LNG terminals would be beneficial in terms of both
Qu. 2: we do not see any significant potential negative effects that could not be managed via appropriate regulatory safeguards. Even in the event of exemption from RTPA, it is unlikely (given the recommended safeguards) that holders of LNG import and regasification capacity rights would have
significant market power in The Netherlands.
Qu. 3: we have not carried out any independent investigation of this matter, but the observation does not surprise us. It is certainly the case in other markets with which we are familiar (UK, Belgium, North America) that the number of suitable sites for LNG import terminals is rather limited.
Qu. 4: one can certainly be sceptical as to whether all 4 terminals will in fact get built. However, we remain of the view that there are significant existing constraints around available entry capacity into The Netherlands and that a significant addition in the form of LNG terminals would be a positive benefit, so long as the investment (including throughout commitments) can be justified commercially.
Qu. 5: the answer to this question depends partly on which aspects of the regulatory regime are under consideration. The first criterion is surely relevant to most issues; the second and third may be so, but we are not sure they are germane on all points. Regarding the second point, The Netherlands is not (nor is it likely to be) heavily dependent on LNG. As to the third point, we understand that the number of suitable sites is in fact rather limited but (with reference to UK experience) we consider that the first criterion is much more likely to be the decisive one.
Qu. 6: as already stated, we do not consider the limited number of potential locations is a decisive point in terms of designing the regulatory regime. LNG will not generally be a separate “relevant market” in the Dutch context, but must be considered in the wider ambit of the (H) gas market as a whole. Qu 7: as the consultation document suggests, a number of different tariff structures can be considered and we do not favour an over-prescriptive regulatory approach. One might typically expect to see:
• a fixed availability charge for throughput capacity, combined with a separate (smaller) variable charge; or
• a throughput charge combined with a ship-or-pay provision.
Some flexibility can and should be maintained in this respect, even if the DTe reserves the right to approve the tariff methodology developed by the terminal operator.
Qu. 8: with reference to paragraph 62 of the consultation document, we would draw a distinction between secondary trading of (firm) capacity and a classic “use-it-or-lose-it” regime as applied (for example) to UK transmission system entry capacity. The latter typically works on the basis of short term
purchasing and shipping LNG cargoes are much longer. Our preferred approach would therefore be to:
• require the terminal operator to facilitate a secondary market in
capacity whereby long term capacity holders could, in the first instance, sell capacity which they do not expect to be using themselves and have the possibility of specifying a floor price for the sale;
• put in place a kind of modified lose-it” (in fact
“use-it-or-release-it”, henceforth “UIORI”) arrangement whereby capacity which is neither nominated nor sold is then released back onto the market, with a long enough notice period for third parties to be able to arrange their own cargoes. This period should normally be at least 10 days. In this case, we consider that a further auction process should be held, but without a floor price, and that the long term capacity holder should receive the proceeds (minus, where necessary, a small administration fee for the terminal operator);
• establish an incentive mechanism to encourage release on the part of long term shippers (e.g. some form of fee or penalty if slots are
nominated for use but not in fact utilised, for reasons other than force majeure); and
• oblige the terminal operator to facilitate the above, e.g. by effective management of the gas stocks in the terminal storage tanks and creation of common rules to facilitate usage by 3rd parties. Qu. 9: following the scheme outlined in our response to Qu.8, the key information required to facilitate this solution would include:
• overall capacity available at each LNG terminal, in each time slot for vessel unloading;
• capacity for sale in the secondary market, by time slot, and any floor prices specified by the long term capacity holders for the sale of that capacity;
• on a shorter notice period, as mentioned above, the capacity in each time slot which has not been nominated for use, either by the long term capacity holder or by a buyer of that capacity on the secondary market, and is therefore released for the “UIORI” auction;
• the aggregate daily output from the terminal, into the transmission (and, where appropriate, the local distribution) grid; and
• on each day, the amount of gas in store and the ullage in the LNG storage tanks at the terminal.
Instead, a project which is exempt from RTPA can auction capacity rights at a market price, as occurred in the case of Grain 2 in the UK, for example. Qu. 12: we note that a contract duration of 15 years could push up the unit cost of capacity, relative to a somewhat longer contract. As mentioned above, the long term capacity contracts at Grain 2 have a 20 year duration; we would consider this to be a reasonable maximum, with flexibility to be permitted below that maximum contract duration.
Qu. 13: it may be possible to finance LNG terminals with relatively high gearing, on the basis of long term throughput contracts. We believe that the payback period (including a reasonable return on investment) will typically be of the order 15-20 years.
Qu. 14: please see our response to question 8. We consider that long term capacity holders should first have the opportunity to sell surplus capacity onto the secondary market, with the possibility to set a reserve price. If capacity is neither sold nor nominated for use, then it should be released to third parties on shorter notice (UIORI).
Qu. 15: we consider that a secondary market could potentially operate from the month “M-2” through to the “UIORI” gate but, as mentioned in our
response to Qu. 8 above, we believe that UIORI should apply at a point much nearer in time to the delivery slot.
Qu. 16: we believe that a centralised secondary market may be
over-complex, at this stage, especially as it is unclear whether more than one LNG terminal will actually be built. Even if two or more terminals are built,
regasification capacity at different terminals is not readily substitutable unless there is also a workable secondary market (or UIOLI arrangement) in place, as regards transmission entry capacity. It would, however, be desirable to ensure consistency of arrangements, across two or more LNG terminals, including as regards the information/transparency requirements site out in our response to Qu. 9. In the interests of transparency, it could make sense for all relevant data to appear together on an appropriate site (e.g. the GTS
website), as well as on the websites of the individual LNG terminal operators. Qu. 17: we do not consider it necessary to set aside a set proportion of
terminal capacity for short term contracts. Instead, we believe that a combination of secondary market and UIORI provisions can ensure that capacity utilisation is maximised without eroding the investment proposition, or pushing up the cost of longer term capacity rights.
Qu. 18: as mentioned above, we favour the use of auctions rather than
regulated tariffs to sell capacity in the secondary market and allocate capacity released into the UIORI mechanism.
Qu. 20: we consider that (subject to various safeguards outlined above) LNG terminals are likely to have a positive effect on both competition and supply security. We also note that an exemption from RTPA can only be granted, under the EU Gas Directive of 2003, if this would not have a detrimental effect on competition.
Qu. 21: this is of course a matter of judgement. We simply note that Ofgem took the view that new LNG terminals in the UK would not be built without an exemption from RTPA, a view which was accepted by the European
Commission.
Qu. 22: this seems a sensible approach, in terms of facilitating effective regulation. In the UK, for example, the Isle of Grain LNG terminal is owned and operated by Grain LNG Ltd, a wholly-owned subsidiary of National Grid. Qu. 23: under an exemption approach, regulated tariffs play a much less important role than the consultation document appears to envisage. However, it would still be possible for the DTe to require price setting methodologies (including auctions) to be submitted for its approval, if it felt that to be appropriate.
Appendix:
Overview of consultation questions (original text in Dutch)
Vraag 1: Deelt u bovenstaande analyse? Zo nee, op welke punten deelt u de analyse niet en waarom?
Vraag 2: Naast mogelijke positieve invloeden, welke negatieve bijwerkingen van LNG ziet u, op zowel de mededinging als de leveringszekerheid?
Vraag 3: Wat vindt u van de observatie dat er een beperkt aantal locaties is voor de bouw van LNG terminals?
Vraag 4: Wat vindt u van de observatie dat de totale import capaciteit van deze 4 locaties relatief groot is ten opzichte van het binnenlands gebruik? Vraag 5: Wat vindt u van de observatie dat bovengenoemde drie criteria bepalend zijn voor het reguleringsregime?
Vraag 6: Wat vindt u van de redenering dat het beperkt aantal locaties voor LNG terminals in Nederland aanleiding geeft tot de noodzaak tot regulering van derdentoegang?
Vraag 7: Wat zou u ervan vinden als er geen uniforme methode van tariefberekening wordt voorgeschreven? Welke soorten
tariefberekeningsmethodieken acht u geschikt voor LNG-terminals?
Vraag 8: Wat vindt u van de conclusie dat de regulering zodanig moet worden ingericht dat het oppotten van capaciteit wordt tegengegaan?
Vraag 9: Welke soort informatie acht u nodig voor de stimulering van de gasmarkt? Welke publicatietermijn acht u redelijk?
Vraag 10: Bent u het er mee eens dat er geen absolute restricties zullen geleden voor zowel de eigenaar van de terminal, als voor de shipper?
Vraag 11: Wat vindt u van het voorstel dat een investeerder mag beslissen of hij kiest voor een capaciteitsuitbreiding zodat hij aan de vraag kan voldoen, of kiest voor een pro-rata verdeling? Welke manieren acht u geschikt om
kunstmatig overboeken te voorkomen?
Vraag 12: Wat vindt u van een maximale duur van lange termijn contracten? Zo ja, wat vindt u een acceptabele termijn, en waarom?
Vraag 13: Wat vindt u van het uitgangspunt dat een LNG-terminal niet met bijzondere middelen gefinancierd wordt en dat een terminal een break-even periode heeft van ongeveer 15 jaar?
systeem moeten voldoen? Wat vindt u een redelijke periode voor het bevestigen van capaciteit?
Vraag 15: Wat vindt u van de voorgestelde wijze waarop de secundaire markt vorm gegeven wordt?
Vraag 16: Kunt u zich vinden in de gedachte van een centrale secundaire markt, en waarom?
Vraag 17: Wat vindt u van het voorstel dat een deel van de capaciteit
gereserveerd dient te worden voor kortetermijncontracten? Zo ja, wat vindt u een redelijk percentage? En bent u het eens dat korte termijn contracten worden gedefinieerd als contracten met een looptijd korter dan of gelijk aan één jaar?
Vraag 18: Wat vindt u van de voorgestelde regulering, waarbij veilen een optie is voor de allocatie van korte termijn capaciteit?
Vraag 19: Wat vindt u van de voorgestelde regelgeving ten aanzien van het publiek maken van informatie omtrent voorwaarden, tarieven en
capaciteitsplanning?
Vraag 20: Wat vindt u van het voorstel om criterium A op deze wijze te toetsen?
Vraag 21: Wat vindt u van het voorstel om criterium B op deze wijze te toetsen?
Vraag 22: Wat vindt u van het voorstel om criterium C op deze wijze te toetsen?
Vraag 23: Wat vindt u van het voorstel om criterium D op deze wijze te toetsen?
