NL-2500 BH Den Haag The Netherlands

6 March 2003 Mr. Ivo Verdonkschot

Clustermanager Regulation, DTe Wijnhaven 24

2511 GA Den Haag Postbus 16326

NL-2500 BH Den Haag The Netherlands

Dear Mr Verdonkschot,

Gas Transmission System Operator for The Netherlands Information and Consultation Document, January 2003

The role of the TSO is central to the successful operation of a competitive gas market in The Netherlands. Clarification of the responsibilities of market parties is essential in preserving security of supply and for the promotion of effective competition. BP welcomes the consultation as an important step in this process and is pleased to respond as a major new entrant in gas supply.

The outcome will involve confirmation of existing roles and transfer of other responsibilities to TSO, and must recognise the transitional nature of process. Responsibilities may therefore need to be amended over time to reflect changes in market structure. We have assumed that they should be valid under the existing ownership structure of Gasunie, under state ownership following the proposed restructuring, and under independent private ownership. The response below has been tailored accordingly.

Answers to detailed questions are provided as an attachment. In summary, the main points are as follows:

· Ultimate responsibility for safety and security of the system can only lie with the TSO.

Although as a general rule, shippers should seek to balance their own portfolios, the TSO must have tools to take action to maintain the safe operation of the system in the event that a system imbalance arises. This should be done in the context of a competitive market.

· It is therefore important to address how TSOs can meet this fundamental responsibility at the same time as creating the level playing field which is necessary for sustainable competition. Third party access provisions must be transparent and non-discriminatory both in terms of the contractual arrangements and the way they are enforced, and must not be unduly onerous in such a way that creates or reinforces an unnecessary barrier to entry.

· The basis for regulation of services offered by the TSO should reflect the degree of competition to provide these services: access to transportation and to some ancillary services will be on the basis of exclusivity i.e. there is expected to be an ongoing natural monopoly. In other areas where competition may emerge, then regulation should ensure

BP Energy Witan Gate House 500-600 Witan Gate Milton Keynes MK9 1ES UK

that existing service providers may not abuse a dominant position to prevent economic access to the transportation system for others.

· BP believes it is both possible and highly desirable to promote competition in the G-gas market on a level playing field with the H-gas market. This can be achieved through operation of the transportation system to allow a “quality exchange” via the establishment of a balancing market, provided that appropriate tools and rights are given to the TSO. It is thus possible to create a single merged hub at the TTF.

Should you wish to discuss any of the points raised, we would be pleased to meet with you at your request

Yours sincerely,

Douglas B. Wood

Director, European Regulatory Affairs

BP Gas, Power & Renewables

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Attachment

BP response to DTe consultation on TSO – detailed points

1. What other interests do you feel should be included in the consideration of whether a certain interpretation of the organization and tasks of the TSO is desirable?

Unbundling: a clear statement of unbundling provisions under current and future ownership would be helpful. This could include separation of management and accounts, access to information, enforcement of contracts in a non-discriminatory manner and the establishment of a compliance programme or compliance officer to ensure that this is carried out effectively.

This could also form the basis for other system operators.

Promotion of competition: a clear statement of the TSO’s responsibility to facilitate and to promote competition between suppliers would provide an important principle for DTe to assess proposed modifications to transportation arrangements (see below).

Future modification of access arrangements: it is important that transportation arrangements may be modified in response to developments in competition such as the provision of new services. It is desirable for this to happen on an ongoing basis, as long as it can be achieved in a transparent manner, with appropriate notice and transitional arrangements. As owner of access arrangements, the TSO could be responsible to develop such a process, although and independent authority such as the DTe should act as arbiter on whether proposed changes should go ahead.

Standards of performance: as TSOs may seek to reduce costs through reduced standards of service, it is recommended that a series of performance measures be established. These could include issues such as the timely provision of accurate data and response times on capacity requests.

Interconnection and interoperability: as the system is interconnected with other systems (upstream, neighbouring countries, distribution systems and storage systems) a general obligation to promote interoperability would be helpful. This could also include grid connection agreements for large users such as power stations and other major facilities (see also below).

Connection Agreements: for interconnected systems, new production sources and large loads such as power stations, the TSO will wish to ensure that operating parameters are clearly defined such that interconnected facilities will perform inside an acceptable operating envelope. For competition, it is important that these agreements to not discriminate unduly.

A standard form for these agreements will help the regulator to ensure the absence of such discrimination. Obligations to conclude such agreements within an acceptable period could also constitute part of the Standards of Performance described above.

Transitional arrangements: while the market becomes established, and there are expected changes in market structure, some transitional arrangements may help market parties to implement and to respond to changes. This would also help avoid sudden shifts in the value of commercial positions which would otherwise deter market entry through increased uncertainty.

Discretionary application of access terms: it is important to identify the extent to which the TSO is able to exercise discretion over application of transport access terms as it is possible to use this to behave in a discriminatory manner. If necessary, these areas should be subject to review by the regulatory authority, particularly during the period when the transportation function is under common ownership with a competitive trading and supply business.

2. Do you feel that the management and maintenance tasks for the transmission network are

sufficiently regulated in article 10 of the Gas Act? If not, why not?

In a competitive market, it is possible for technical operational issues related to maintenance and safety to assume greater commercial relevance, both for the TSO who may be under increased financial pressure, and for the users of the system, who may feel that maintenance or safety programmes are in some way discriminatory or inappropriate.

We suggest that programmes should be subject to approval by an external national authority for health and safety issues, such as Stoomwezen.

3. How do you feel that we should deal with the installation and expansion of the transmission network?

TSOs must be appropriately rewarded for necessary investment at a rate of return which is commensurate with the level of risk. Some investment may be rolled into the general asset base and recovered through general charges. Where connection charges can be related to a single user, TSO may recover such “shallow” charges directly, subject to regulation of that charge in the absence of competition in connections. This could be addressed in a pricing methodology statement.

However, this does not compel TSO to make necessary investments in reinforcement. It may be possible for a privatised entity to raise revenues by restricting capacity through a delay in an investment programme, or to frustrate competition by refusing to make a connection. We suggest this latter arrangement is best managed through an obligation to connect if the party requesting is willing to pay (this could be an interpretation of Article 17 of Gas Directive 98/30). The obligation to make investments in necessary reinforcements in the system is best achieved through regulatory oversight. TSO would prepare on an annual basis its best estimate for system usage over the next (say) 10 years, and its capital expenditure plan to carry out the necessary investment in the system to meet projected growth or other changes in flows on the network.

4. What options do you feel a TSO should have in order to be able to execute the task of maintaining system integrity?

The starting point for system balance will relate to obligations on system users. However, there will be times when the system is out of balance, when individual shippers may not know whether individual action on their part is required and when the TSO must take action to avoid system disruption. This can easily arise when consumption or production information is not available during the balancing period to which they relate, for example when meter readings are received after a delay.

To ensure a balance in the system a series of tools should be available to TSO, along with general principles for their sequence of usage. As far as possible, the use of these tools should not interfere with the efficient functioning of the market; however, we recognise that the need to run a safe system is paramount, and in the last resort, the TSO will need considerable discretion to avoid risk to life and limb.

We would suggest, therefore, that a balancing market should be established. Parties would be able to offer to sell gas to the TSO or bid to buy gas from the TSO. Where a balancing action is required, the TSO could accept the necessary bids and offers in price order, taking into account any special considerations on gas quality, location or lead time.

As the Groningen field is the major supplier of flexibility to the Dutch market, special arrangements may need to be put in place to ensure its continued availability. In other developed markets, prices in the balancing market strongly influence prices in the spot market. It is therefore essential to ensure that private parties are not able to use control over this facility to influence prices in the traded market.

In the event that the balancing market is unable to provide the necessary flexibility, it may be

prudent, especially during an initial transitional phase, for the TSO to have access to other

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tools to maintain system integrity. These could include interruptible transportation, or access to gas in store held for insurance against extreme winters or failures in part of the network.

Finally, in the event of a catastrophic failure, the TSO may need powers as a Network Emergency Coordinator. This would include interruption of firm customers, the right to require shippers to increase gas nominated into the system and, if necessary, to override nominations on gas sources. As this would suspend the market, it would result in huge legal problems and should only be permitted as a last resort.

5. How do you feel that the TSO can best be stimulated to use the most efficient balancing instrument?

In the early days of the creation of an independent system operator, it should be sufficient to incentivise efficient behaviour through regulatory obligation. First, we suggest that it is important to have balancing obligations on system users to discourage large players from creating balancing actions which they may subsequently be able to exploit through offering flexibility onto the balancing market. The operation of the balancing market must be sufficiently transparent so that apparently inefficient behaviour by the TSO can be quickly identified.

Perhaps at some future stage, financial incentives for the TSO could be considered, but only after the system has settled down following the substantial change that is expected over the next two years, and once there has been established a track record which can form a reasonable benchmark for future performance.

6. What information do you feel that a TSO must be able to provide on behalf of the safe and efficient management of the interconnected systems?

7. What information do you feel that a TSO should publicise to the network users?

Some important and commercially valuable information relates to the transportation business.

It may already be known to Gasunie Trade & Supply and can be expected to be passed to successor companies following the intended restructuring. This happens not only through possession of copied files and systems but also through staff experience and ongoing informal staff contact. It is impossible to remove this information advantage, but the discriminatory nature in which information may have been shared prior to management separation can be neutralised by making the information available to other system users.

The following is a non-exhaustive list of information whose publication would help achieve a level playing field.

· Detailed description of the network showing pipeline lengths, diameters, age, steel quality, location of compressors, location and capacity/capability of blending stations and quality conversion facilities. This enables shippers to model capacity availability, congestion, network reliability which are necessary for the evaluation of risk in long term capacity contracts, assignment of risk in customer contracts and to help steer future investment requirements for capacity expansion.

· Physical capacity, at all major entry and exit points, and what is already contracted.

Flows at all entry and exit points on an hourly basis (i.e. the balancing period) historical and projected in a seasonal normal year and an extreme winter.

· Network investment/reinforcement/maintenance/expansion plans and the planning assumptions behind them. Regularly updated reports on expected completion dates for work in progress that affects gas flows and available capacity.

· Pressure and gas quality at key points in the network on a real time or continuously updated basis. Information on whether the system is packing or draughting. Forecast of total system demand. Information on targets and acceptable operating ranges for pressure and quality.

· If a balancing market or flexibility mechanism is to be established, all bids and offers

should be displayed to all registered users. Balancing actions should be clear and

reported with justifications published as soon as practicable after the event. If other tools are used, information on these (availability and utilisation) should be published.

8. How do you feel that the confidentiality of company data should be guaranteed?

Flows should be published on an aggregated basis for all entry points and exit points. For end-consumers directly connected to the high pressure system, these may need to be aggregated to preserve confidentiality, although it may be desirable to publish usage of individual gas fired power generators to improve transparency in electricity competition. The TSO should not identify the number of users at any point in order to protect confidentiality at points with only one user.

9. How do you view the various marketplaces and what task should be the exclusive domain of the TSO with regard to them?

The following roles are the exclusive domain of the TSO:

· residual balancer of the network;

· responsibility for safe operation of network;

· the forward planning and design of the network to accommodate future changes in physical flows including new demand;

· provider of information.

The TSO may also be responsible, under regulatory oversight, to develop terms for access to the system and the process by which they are able to change in response to the evolving market.

10. Do you feel that individual imbalances should be adjusted? If so, how can this be realized and what should be the role of TSO in it?

Where possible, balancing costs should be targeted to users who caused an imbalance. Any remaining costs could be smeared amongst all system users. Where the TSO has not incurred costs (i.e. there has been no system imbalance), imbalances of individual users should be settled between them at a market reflective price. This can take place through a cashout mechanism and by imbalance trading between system users.

Ex post imbalance trading is also a means of incentivising shippers to help rectify a system imbalance even when their own account is balanced individually. If a shipper sees that the system is short of gas, even though its own account is balanced, it can come to the aid of the system by overdelivering in the knowledge that it can extract value from shippers who caused the system shortage. This information may only become available after the day, so can only be facilitated through ex post imbalance trading. In order to avoid unnecessary commercial action by the TSO, it is important that such activity is clearly communicated to the TSO via the nominations process.

11. What market-facilitating services do you feel that the TSO should in any case offer, and what are the advantages of the TSO offering these services?

In addition to the services mentioned, we would add:

· Metering: in particular the provision of reliable and timely data at the end of each balancing period.

· Security of supply: the provision of insurance products for peak gas supply in extreme circumstances where individual bookings are either uneconomic or may lead to an aggregate booking which significantly exceeds what is actually required, thereby leading to excess costs for consumers.

· Interruptible entry and exit capacity: consideration should also be given to transferability

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receipt and delivery points”. It avoids double booking for substitute flows in the absence of liquid secondary capacity markets.

· Virtual quality conversion through blending and substitution: see responses to questions 12-15 below and appendix.

The operation of a secondary market in capacity is of key importance, including publication of capacity utilisation, the release and resale of unutilised capacity and the facilitation of secondary trading.

12. To what extent do you feel that those offering quality conversion on the regional transport network can compete with those offering quality conversion on the national transport network?

13. Do you feel that there are factors present because of which the furthering of competition in the realm of quality conversion is not desirable?

14. How can possible hindrances to competition of quality conversion be taken away?

15. How do you feel that the TSO should offer the service of quality conversion, and why?

A more detailed description of a potential solution to the balancing regime which incorporates quality conversion is attached as an appendix. At present the reliance on physical conversion when contract substitution may be available as a more economic solution is creating a lack of access to the G-gas market in The Netherlands and the neighbouring countries. Until this is solved, the retention of fragmented markets will reduce competition available and therefore inhibit the economic efficiency of the combined systems.

In response to Q14 specifically, BP is not aware of a quality conversion service being available at the regional level

16. How do you feel the transmission network should be delineated?

A clear description of the network, for example through public access to a model of the network will help avoid potential problems of using pressure or pipeline diameter as proxies for such a definition, where there may be overlapping ranges between connected systems.

Access to the distribution systems should as far as possible reflect terms of access to transmission.

Footnotes on pp 17 and 30 describe the LNG facilities at Maasvlakte as part of the pipeline system. This is not an accurate representation of the facilities: they should be characterised as storage facilities, although special provisions may need to be made if they must be reserved exclusively by the TSO for the purposes of providing transmission support and network security.

17. What do you feel would be the advantages and disadvantages of appointing a single TSO in the Netherlands?

For systems that are not interconnected, or are not interdependent, there is no particular need to establish a single TSO, though there may be some cost advantages in doing so.

Conversely, there may even be some benefits in having multiple TSOs in order to establish benchmarked performance which could aid in regulation of the sector. Equally, there may be good commercial reasons why TSOs would wish to merge, but it is not necessary to force this.

Where systems are interconnected but TSOs remain independent, there may need to be special arrangements to ensure interoperability, similar to cross border arrangements, perhaps through Grid Connection Agreements, as described in question 1 above.

18. Which organization(s) do you feel should be considered to be appointed TSO? Why?

The appointee must be independent of trading and supply interests where it may have a financial benefit through the exercise of undue discrimination. The appointee must also have the necessary technical expertise and be financially stable. It is likely that this expertise may only reside in the existing organisations although in theory it may be possible to tender this to potential competitors (for example for one regional distribution system operator to run another’s system).

19. How do you feel that the supervision of the TSO should be handled?

We agree that regulation of TSOs can be broken down as described. Regulation of services which are expected to remain monopoly activities for the foreseeable future could be regulated differently to those where DTe expects competition to develop. Where economic access to the network requires also access to ancillary services such as quality conversion or blending, then these services should also be regulated.

It is important to define clearly the roles of the Government, the regulatory authority and the competition authority in this regard, even when there are overlapping competencies.

20. How do you feel that the behavioural rules of TSO and network users toward each other should be organized?

The TSO should have an obligation to consult with all interested parties. DTe may also wish to consider placing an obligation on the TSO to develop a code of conduct or to develop a formal process whereby the transportation contract (or the code of conduct) may evolve on a continuous basis in response to the developing market, rather than via a series of annual contracts, which may be substantially different from year to year. We recommend that the DTe chair an industry committee with representatives from all interested sectors, and with ultimate decision-making authority on whether amendments should proceed. For the sake of transparency, the objectives of the regulator should be clearly stated and defined in law. Due process, whereby the regulator must clearly demonstrate the basis for decisions could also be considered.

21. Which tasks do you feel should be carried out by the TSO exclusively, and why?

22. Which tasks do you feel should not be carried out by the TSO exclusively, and why?

23. Which tasks from the above overviews do you feel should absolutely not be carried out by the TSO, and why?

As for 19

Please note that the table shown in the Information and Consultation Document implies that

the regulation of some functions has been adequately addressed and needs no further

changes. BP believes that even although the legal basis for regulation of these services may

exist, the terms of regulation do not adequately facilitate the development of a competitive

gas market in The Netherlands. Further development of existing terms is essential in addition

to the introduction of new areas.

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Appendix

Creation of a unified competitive gas market in The Netherlands

The transportation infrastructure in The Netherlands has been developed to take advantage of diverse sources of different gas qualities available, both through local production and imports. Some subsystems operate over a wide range of gas quality, afforded by the ability of some network users to accept gas over this range. The TSO has the ability to use blending to move imbalances, to an extent, between these subsystems. G-gas flexibility can therefore indirectly be used to resolve a system imbalance outside purely G-gas subsystems, and similarly for H-gas.

This implicit quality conversion through substitution and blending could be defined explicitly as a transportation service, and be offered to third parties on a non-discriminatory basis. By doing so, it is possible to create a unified market in the Netherlands over all quality ranges, rather than a series of fragmented markets delineated by gas quality.

The current fragmented system means that only suppliers with access to both G-gas and H- gas are able to access customers economically in all parts of the network. Physical quality conversion services means that parts of the market are open to competition only in a technical but not economic sense.

Clearly the system has only limited flexibility to operate in this way, and consideration must be given to how such services would be allocated and priced. One possibility would be to define the capability of the system in terms of a capacity service and use congestion management techniques and a secondary market to allocate this capacity and to ensure that is used to optimal efficiency. Alternatively, it may be appropriate to offer this service on an interruptible basis and recover costs from exit capacity charges. An appropriate tariff structure should be subject to further discussion.

In the longer term, this would also provide the economic signals to the TSO for future investment in quality conversion, connections, and potentially the phaseover of G-gas customers to H-gas.

The operation of a balancing market could provide an immediate move towards this market unification. Gas quality would become another dimension of gas like location or lead time.

Parties bid flexibility into a central market. To the extent that the TSO can accept the cheapest gas and use system blending to smooth out imbalances in separate CV zones, this could be provided. Where this is not possible without pushing a CV zone outside an acceptable range, then TSO could accept bids out of price order e.g. to reduce Groningen and increase H-gas or vice versa. Where this flexibility is exhausted, stored gas or physical conversion of H-gas to L-gas could be taken as the next cheapest available source.

Because Groningen is the major source of G-gas, there may need to be some constraints on how this is offered. This will obviously be dependent on the assignation of Groningen purchase contracts under the Gasgebouw restructuring. Assignation to the new Maatschap Groningen would allow Groningen flexibility to be bid into the balancing market at regulated rates. Alternatively, there could be a commitment to bid in spare flexibility at a fixed buy/sell spread.

The benefits for the gas market in The Netherlands should be considerable both in terms of

increased efficiency, improved market signals and increased competition for customers,

although the issues are clearly complex. We would welcome further discussion on the main

issues that must be addressed to make a successful transition.