Gas distribution and the Greek case

Transcription

1 Gas distribution and the Greek case Gerasimos Avlonitis Head of Energy Systems Analysis Department The Energy Community Gas Distribution Conference Zagreb

2 Outline The Regulatory Context The Greek Case Greek Gas Market and Distribution The Tender Regulation of the EPAs: : The Licence Regulation of final gas prices EPA Performance Conclusion Way Forward

3 The regulatory context

4 Gas distribution: A formal definition Formally, gas distribution refers only to the activity of transporting gas through a low/medium pressure grid, while supply of gas refers only o to the commercial part of selling the gas to the customer Accordingly, EU Directive 2003/55/EC defines: distribution means the transport of natural gas through local or regional pipeline networks with a view to its delivery to customers, but not including supply Distribution networks, like transmission, are considered natural monopolies because of economies of scale involved Therefore, in a liberalized market distribution and supply of gas s are considered separate activities

5 EU regulatory framework The directive provides for a separate Distribution System Operator (DSO) responsible for: the development of an efficient and secure system the operation and maintenance of the system open access to system users on a non-discriminatory basis Effective unbundling must be implemented where DSOs are part of a vertical integrated undertaking at least in terms of their: legal form accounts organization decision making from other activities 5

6 EU regulatory framework II Despite the formal definition, traditionally, local distribution companies were awarded exclusive rights to distribute gas in specified areas as and offer a bundle service (distribution, supply and other services such as billing, connections, safety inspections) since, there is limited scope for competition in some distribution systems due to the limitations on the size of the market (small, geographically restricted networks, usually in cities): Exploitation of economies of scale and density Therefore, a common practice worldwide is that: Both distribution and supply activities are performed by the same company under exclusive rights for a certain period of time (monopolistic concession) A special provision of the EU Gas Directive (article 28) allows for the possibility of concession arrangements in gas distribution even today

7 The Greek Case

8 Greek Gas Market and Distribution

9 Overview of the Greek gas market Natural gas has been introduced to the Greek energy mix in 1996 Derogation from EU Directive until 2006 The market was organized around a typical public utility model, by the Gas Law of 1995: Establishment of the Public Gas Corporation (DEPA S.A.): State-owned by more than 65% Vertically integrated company Monopoly rights in all parts of the gas value chain GREEK GREEK STATE STATE 65% 35% HELLENIC HELLENIC PETROLEUM PETROLEUM DEPA DEPA S.A. S.A. 9

10 Overview of the Greek gas market II DEPA had the exclusive right to operate, maintain and develop the National Natural Gas System (Transmission System and LNG Terminal) DEPA was the only importer of gas in Greece and also had the exclusive rights for the supply of gas in the country: These rights could only be transferred for limited geographical areas and for small consumers to special companies that would be established for the purpose of gas distribution ( (the EDAs) The EDAs could further transfer these rights to Gas Supply Companies (the EPAs) ) for a period of time from 25 to 35 years. EPAs would be established by the EDAs and private investors after an international tender. The concession regime 10

11 Step 1: Selection of geographical areas Thessaloniki Thessalia Attiki 11

12 Step 2: Establishment of Gas Distribution Companies (the EDAs) GREEK GREEK STATE STATE 65% 35% HELLENIC HELLENIC PETROLEUM PETROLEUM DEPA S.A. S.A. 100% Gas Gas Distribution Co Co EDA EDA Thessaloniki 100% Gas Gas Distribution Co Co EDA EDA Thessalia Thessalia 100% Gas Gas Distribution Co Co EDA EDA Attiki Attiki 12

13 Step 3: International Tender to attract private investors for establishing, along with the EDAs,, a Gas Supply Company (EPA) for each geographical area With exclusive (monopoly) rights: To plan, design, construct, operate and exploit the Distribution System in the area To sell gas to small consumers in this area For thirty (30) years

14 The Tender

15 Tender structure Interested parties were asked to make an offer (Bid) in order to participate by 49% and get the management of the Gas Supply Company (EPA) EPA would be established immediately after the completion of the Tender, between the Successful Bidder and the respective EDA The EDA will contribute to the new company: Already constructed, at the time of the tender, distribution network (medium and low pressure) The exclusive right to develop and exploit the distribution network in the Tender Area for 30 years The Investor contributes: Cash (the Bid) for the operation of the company and the development ent of the network for the 30-year duration of the concession Criterion for selecting the Successful Bidder: Highest Bid 15

16 The deal: Incentives for attracting investors 1. Exclusive rights to: Develop, operate and exploit the distribution network in the Tender Area for 30 years Supply gas to all customers with an annual consumption < 100 GWh (~ 10 million cubic meters) in the Licence Area 2. Management of the EPA 3. Greek state and EU aid (grants) in order to develop the network and customer connections (service lines) 4. A favorable tax and depreciation regime for the company 5. Favorable natural gas taxation (zero Excise Tax, reduced VAT vs oil) 6. Tax incentives to consumers for switching to gas 7. Compulsory use of natural gas in certain areas or consumer categories 8. Reduced gas transportation cost for the first years of operation 9. Anchor loads: : Industrial consumers previously served by DEPA 16

17 The deal: Obligations for investors To operate in accordance with the provisions of a Gas Distribution License To develop the network at a certain length in the first seven years of operation To meet certain quality of service and safety standards To not exceed a certain rate-of of-return on investment, through regulation of prices (price cap) To transfer the assets back to EDA in the end of the concession period 17

18 The outcome Investor Bid (mil ) License Granted EPA Thessaloniki Italgas (ENI) 151 August 2000 EPA Thessalia Italgas (ENI) 38 August 2000 EPA Attiki Cinergy/Shell 170 November 2001

19 Greek Gas Market in 2001 GREEK GREEK STATE STATE 65% 35% HELLENIC HELLENIC PETROLEUM PETROLEUM DEPA DEPA S.A. S.A. 100% 100% Gas Gas Distribution Distribution Co Co Thessaloniki Thessaloniki 100% Gas Gas Distribution Distribution Co Co Thessalia Thessalia 51% 51% 51% Gas Gas Distribution Distribution Co Co Attiki Attiki Gas Gas Supply Supply Co Co Thessaloniki Thessaloniki Gas Gas Supply Supply Co Co Thessalia Thessalia 49% Gas Gas Supply Supply Co Co Attiki Attiki 49% Italgas Italgas 49% Cinergy/Shell 19

20 Regulation of the EPAs: The Licence

21 Licence: Regulation by contract A type of regulation by contract: where there is no regulatory or equivalent agency providing external review and revision of terms (particularly arly on prices) The License was granted to the EPA by means of a Decision of the Ministry of Development From its establishing law, RAE was set responsible for the control ol of compliance of EPA with the terms of its License To that end, RAE has the right to: Approve development plans Request any data regarding the activities of the EPA Initiate an investigation and, in case of breach of the License, impose to the EPA corrective measures or even financial penalties However, only the Minister has the right to: Modify the terms of the License Revoke the License under a strict negotiating framework defined in the license itself 21

22 Licence: Main provisions Duration: 30 years EPA must develop, maintain and operate the distribution network efficiently, reliably and safely within the specified geographical al area (the Licence Area) EPA is obliged to construct a specific length of new low-pressure (LP) network during the first 7 yrs of the license duration: 2000 km for Attiki 400 km for Thessaloniki 300 km for Thessaly EPA has the obligation to serve to all consumers who are located within a specific range from the distribution network (25 meters) 22

23 Licence: Main provisions II Quality of service provisions, mainly setting timeframes for: Addressing applications for connection to the grid Completing the connection Replying to customers complaints Safety requirements and standards (e.g. response times in accidents, specs of emergency call centres, interruptibility case of emergencies, customer protection etc) Monitoring and supervision: 5-year 5 development plan (ex-ante) and performance report (ex-post) Last but not least: Price Regulation in 23

24 Regulation of final gas prices

25 The scope for price regulation for EPAs EPAs will operate under a monopoly regime for a long period of time (30 years) in the respective area Small gas customers (domestic, small commercial etc) are captive customers of the EPA They cannot be served by another gas company due to exclusive rights of the EPA As soon as they switch to gas use, it is extremely unlikely that they will switch again to their old fuel if prices are high, due to the high cost of conversing the facilities Therefore, regulation is required to ensure that there will be no abuse of monopoly power An incentive-based regulation scheme has been applied: The companies are allowed to set their pricing policy freely, provided that pricing policy is transparent, prices are known to the consumers and are not discriminatory The revenue each company will collect each year cannot exceed a maximum amount ( revenue( cap ) 25

26 Revenue cap formula [ CGP(i) + DM (1 Inf(i)) ]- C(i-1) - K (i-1) MAR(i) = Q(i) + MAR(i): Maximum Allowed Revenue for year (i) ( )( Q(i): Quantities of gas sold in year (i) (MWh( MWh) CGP(i): Average city-gate price for year (i) ( /MWh( MWh) DM: Distribution Margin = 10,42 /MWh,, in 1998 prices Inf(i): Cumulative inflation from year 1998 up to year (i) (%) C (i-1) K (i-1) : Adjustment Factor 1: Excessive profits of year (i-1) ( )( : Adjustment Factor 2: Over/under-recovery recovery of MAR in year (i-1) ( )( 26

27 Price regulation in EPAs In summary, the company: Has an incentive to reduce its operating costs in order to maximize ize its profit (improvement in efficiency) Is controlled for not making excessive profits - abusing its monopoly position Is partially protected in cases that low gas prices or any other reason has prevented it from recovering the MAR at a certain year, by allowing a portion of it to be recovered in the next year Is free to choose its pricing policy as soon as complying with the t revenue cap Different schemes (like setting the maximum price levels each year) have been used internationally e.g. distribution companies in Mexico 27

28 Pricing policy of EPAs The pricing policy of all EPAs,, consists of two different charges: 1. Connection Fee: 2. The gas supply price that is further split into two elements: The variable gas price (depending on the consumption) A fixed charge that is paid every month by each customer, (irrespectively of his consumption) 28

29 Pricing policy of EPA Attikis For the variable gas price (depending on the consumption) EPA 1 is using mostly a netback value approach e.g.: Dieselp,h + Dieselt,h + Dieselm,h GPDomestic = (1+ VAT) K GCV Diesel Competitive fuel final price ( /MWh) % Discount GP Domestic: Gas Price for domestic uses ( /MWh( MWh) DIESELp,h,h: Heating Diesel Price ( /1000( lt) DIESELt,h,h: Heating Diesel Taxes ( /1000( lt) DIESELm,h,h: Wholesaler Margin of Heating Diesel ( /1000( lt) GCV DIESEL: Gross Calorific Value of Diesel (kcal/1000 lt) : Units conversion factor (kcal/mwh MWh) VAT Value Added Tax for heating diesel (%) Κ: Discount factor incorporating differences in efficiency of the fuels 29

30 Pricing policy of EPA Thessalonikis For the variable gas price EPA 2 is applying two approaches A netback value approach for industrial consumers: A formula almost similar to what presented in the case of EPA1, but with different mix of competitive fuels For all other consumer categories, the variable gas price is calculated in a cost-based manner: GPFinal Consumer (i) = CGP + DM(i) GP(i) (i): The gas price for final consumer category (i) ( /MWh( MWh) CGP: The city-gate price of EPA 2 ( /MWh( MWh) DM(i): The distribution margin for consumer category (i) ( /MWh( MWh) 30

31 Comparison of final prices for two EPAs Normalised: 100 = GDC1 Jan GDC1 GDC2 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Month 31

32 EPA Performance

33 Low pressure network development km cumulative EPA Thessalia EPA Thessaloniki EPA Attiki

34 Number of customers EPA Thessalia EPA Thessaloniki EPA Attiki

35 Gas sales (MCM) EPA Thessalia EPA Thessaloniki EPA Attiki

36 Financial Performance Sales EPA Thessaloniki Profit / Loss before income tax Sales EPA Thessalia Profit / Loss before income tax ' ' Sales EPA Attikis Profit / Loss before income tax '

37 Conclusions/Way Forward

38 Liberalization and concessions A new Gas Law has been approved at the end of 2005, transposing Directive 2003/55/EC into the Greek legislation The European Directive and the new Gas Law respect the validity of all concessions that were granted prior to the entry into force of the t Directive: Existing EPAs will operate as usual Main new obligation: unbundling of accounts Existing EPAs are gradually becoming eligible customers (not exclusive supply from DEPA) New concessions are possible under certain conditions. The relevant process is currently underway for three new distribution areas in the country, following the same model

39 The Regulator s s proposals 1. To the distribution companies: Quality of Service: Improvement of connection times and publication of standard procedures for treating any customer requests Price issues: Long-term stability in the pricing policy More aggressive (i.e. more attractive for the customer) pricing policy 2. To the state: Further promotion of natural gas use, namely by: More incentives to consumes for the purchase of gas appliances and a boilers or the construction of their internal installations Strict measures for replacing HFO used in the industry with gas, whenever gas is available Safety issues: Standard mechanism for supervising proper maintenance in consumers internal installations Measures for the training and certification of specialised technicians on natural gas technologies 39

40 Conclusions Gas distribution in Greece has been developed successfully since 2001 Critical aspects of the success of the venture: A balanced mix of incentives and obligations to attract investors through a competitive procedure A long-term stable regulatory regime (License-Continuity of legislation) Things can be accelerated: More incentives for consumers switching to gas (State) Continuous improvement in the quality of service and long-term stability of pricing methodologies (EPAs( EPAs)

41 Thank you for your attention! Gerasimos Avlonitis Head of Energy Systems Analysis Department Costas Stamatis Gas Expert - Energy Systems Analysis Department Regulatory Authority for Energy (RAE) Panepistimiou 69, , Athens, Greece Tel: avlonitis@rae.gr, stamatis@rae.gr URL: