review of nts entry charge setting arrangements - ia 1 july 2010

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Review of NTS entry charge setting arrangements - IA 1 July 2010

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Page 1: Review of NTS entry charge setting arrangements - IA 1 July 2010

Review of NTS entry charge setting

arrangements - IA

1 July 2010

Page 2: Review of NTS entry charge setting arrangements - IA 1 July 2010

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Background

• Concerns that revenue from entry capacity auctions declining• TO commodity charge accounting for majority of TO allowed

revenue– Level of TO commodity charge also volatile

• Review group established to investigate current charging arrangements– Aim to identify charging or UNC mods which maximise TO

allowed revenue collected through auctions, maximise long term bookings and incentivise security of supply amongst others

• One charging mod and two UNC mods proposed by NGG as a result of review

Page 3: Review of NTS entry charge setting arrangements - IA 1 July 2010

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Main reasons for under recovery

• Price paid– Reserve price discounts

• Model changes– Transcost prices were generally lower than transportation

model• Amount of capacity

– Shippers don’t book in line with Ten Year Statement at full reserve price

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GCM19 summary

• Removal of daily entry capacity reserve price discounts– 33% reserve price discount for day ahead daily system entry

capacity (DADSEC)– 100% reserve price discount for within day daily system entry

capacity (WDDSEC)

• Eight responses to consultation; five in support, three against

Page 5: Review of NTS entry charge setting arrangements - IA 1 July 2010

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Industry views - GCM 19

• Pros– Removal of discounts could increase auction revenue– Increase long term booking and improve network planning– Prevent cross subsidisation of short term Shippers by Shippers who book

medium and long term capacity– Improves cost reflectivity

• Cons– Could reduce market liquidity by reducing volume of short term capacity

available to traders– Could further undue preference for Shippers at existing entry points– Implementation could increase regulatory uncertainty

Page 6: Review of NTS entry charge setting arrangements - IA 1 July 2010

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UNC 284

• UNC 284 necessary to facilitate GCM 19 changes in UNC– Requires GCM 19 to be approved

• Proposes to remove zero auction reserve price for WDDSEC– Removes references to zero reserve price in the UNC

• Zero reserve price for daily interruptible capacity will still apply

Page 7: Review of NTS entry charge setting arrangements - IA 1 July 2010

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Industry views - UNC 284

• Pros– Arguments similar to GCM 19– Could encourage longer term capacity bookings– Better distribution of charges

• Cons– Not consistent with zero price auction licence obligation– No profiling of impacts on different classes of Shipper– Effect on declining North Sea fields– Substitution, transfer and trade increased risk long term

capacity not available

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UNC 285

• UIOLI capacity released based on daily unutilised firm capacity– Available to Shippers with zero reserve price

• UNC 285 limits UIOLI release to when no more than 10% of firm baseline entry capacity is unsold– Threshold calculated after monthly auction

• No change to ability for NGG to release discretionary interruptible capacity

Page 9: Review of NTS entry charge setting arrangements - IA 1 July 2010

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Industry views - UNC 285

• Pros– Incentivise purchase of long term capacity– Facilitate secondary market trading– Remove preference for users of existing capacity– Increase likelihood non-firm capacity interrupted

• Cons– Risk interruptible capacity not released– Reduce attractiveness of UK market

Page 10: Review of NTS entry charge setting arrangements - IA 1 July 2010

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“Proposal 3”

• Proposal to reallocate on the day sales of baseline capacity as TO revenue– Removes these revenues from buy back incentive and capacity

neutrality mechanism

• IA contains high level assessment of likely impact against UNC objectives and Ofgem statutory duties

Page 11: Review of NTS entry charge setting arrangements - IA 1 July 2010

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Ofgem view – GCM 19

• Promoting efficiency and avoiding undue preference– Current system exposes all shippers to the marginal costs of

their actions• No undue preference implied by zero reserve price

– Imposition of price barriers could hinder the efficient use of the system

• Facilitate competition– No evidence GCM 19 would improve price predictability– But little effect on liquidity or competition either

Page 12: Review of NTS entry charge setting arrangements - IA 1 July 2010

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Ofgem view – GCM 19 contd

• Cost reflectivity– MC of providing short term capacity low– Reflective of costs of providing that capacity

• Developments in transportation business– Proposal reacts to increasing commodity element of allowed

revenues– But question whether it take other important developments

into effect• Provisionally preferred approach is to veto GCM 19

Page 13: Review of NTS entry charge setting arrangements - IA 1 July 2010

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Ofgem view – UNC 284

• Consequential modification– Required if GCM 19 implemented

• Do not consider UNC 284 in its own right meets UNC relevant objectives

• Provisional view is to veto UNC 284

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Ofgem view – UNC 285

• Efficient and economic operation of NTS– Likelihood that no on the day capacity available due to UNC 285 is low– NGG still required to provide firm on the day zero reserve price capacity– Interruptible users do not impose costs on the system and contribute to

system costs via commodity charge• Efficient discharge of licence obligations

– Current interruptible price set through auctions – complies with EU regulations

• Effective competition– Limited effect on secondary market trading– Overall limits amount of capacity available to market – Negative impact on short term liquidity

• Provisional view is to veto UNC 285

Page 15: Review of NTS entry charge setting arrangements - IA 1 July 2010

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Ofgem view – proposal 3

• Efficient discharge of licence obligations– Does not take account of allocation of TO/SO activities at price

control• Would need further analysis

• Securing effective competition– Decrease in TO commodity charge insignificant

• Protecting consumers– Unlikely to have any effect as amount of TO allowed revenue

will not change

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Other issues

• IA also considers:– Interaction of options to approve/veto combinations of

proposals– Qualitative factors

• None of these offer compelling reasons to change our view with respect to the proposals

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Next steps

• IA consultation finishes 22 July

• GCM19 will come into effect if not vetoed prior to 1 August

• Ofgem looking to issue a decision by 30 July

• In view of timeline, early responses appreciated!

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