E.ON presentation (European regulatory aspects)

European Regulatory Aspects
Nina Scholz, Market Regulation
E.ON AG, Düsseldorf
3 March 2010

Contents
1. Corporate Profile
2. European Electricity Markets
3. Regulatory systems for networks tariffs
4. End consumer prices within the EU
5. EU challenges

An overview of us
• One of the world’s largest investor-owned power and gas companies.
• Roughly 93,500 employees generated sales of just under €87 billion in 2008.
• Clearly focused player with leading market positions in power and gas and
approximately 30 million customers.
• Operations in more than 30 countries.
• Created by VEBA-VIAG merger in June 2000.
Last updated: December 31, 2008

Our operations along the value chain
Power
Generation/
Production
Transmission/
Wholesale
Trading/
Supply
Distribution
Retail/
Sales
Gas
Exploration/
Production
Transmission/
Wholesale/
Gas Storage
Trading/
Supply
Distribution
Retail/
Sales

Our structure: superbly positioned, in all our markets
Central Europe MU
E.ON Energie AG
Munich
Pan-European Gas MU
E.ON Ruhrgas AG
Essen
Italy MU
E.ON Italia
Milan
Spain MU
E.ON España
Madrid
Corporate Center
E.ON AG
Düsseldorf
U.K. MU
E.ON UK plc
Coventry
Nordic MU
E.ON Nordic AB
Malmö
Russia MU
E.ON Russia Power
Moscow
U.S. Midwest MU
E.ON U.S. LLC
Louisville
Climate & Renewables MU
E.ON Climate & Renewables GmbH,
Düsseldorf
Energy Trading MU
E.ON Energy Trading AG
Düsseldorf
MU = market unit

Contents
1. Corporate Profile
2. European Electricity Markets
3. Regulatory systems for networks tariffs
4. End consumer prices within the EU
5. EU challenges

Highly meshed grids across Europe …
… but further interconnection capacities strongly demanded

Increasing physical exchanges …
… show an evolution from
previous national markets …
…show market evolution
between previous
national markets…
→ doubling of exchanges
every 10 years
… towards an Internal
Electricity Market (IEM) …

…but led to congestion almost “everywhere“ in Europe
DK
UK
NL
B
D
PL
E
F
CH
I
CZ
A
SL
SK
HU
90,00
80,00
70,00
UK
Entwicklung der Großhandelspreise (Frontjahr Base)
Frankreich
Deutschland
Belgien
Skandinavien
Congested border
EUR/MWh
60,00
50,00
Niederlande
40,00
30,00
20,00
Quelle: EST-TA
10.1.03 10.5.03 10.9.03 10.1.04 10.5.04 10.9.04 10.1.05 10.5.05 10.9.05 10.1.06 10.5.06 10.9.06 10.1.07 10.5.07

Extra-high voltage tariffs (electricity)
since 2004
T = 0
T
G
Transmission
Generation
~
~
L
Load
~

Inter-TSO Compensation
Basic idea:
• Exporting and importing countries pay into a fund
• Transiting countries receive compensations for hosting transits according
to costs occurred
Infrastructure
Losses
⇒ No incentives for new infrastructure, just compensation of costs

Coordination and transparency on investments
Nationally (Germany)
→ Efficiency proof against joint grid models with neighbouring TSOs
→ Efficiency proof against planning assumption (e.g. load growth, transists)
→ Every 2 years to report extensively on projects planned and reasons for
and quarterly on progress regarding single projects
Regionally
→ Coordination of grid maintenance and expansion projects
→ Regional investment plans
Europe wide
→ Publication of 10 year investment plan

Investment funding from congestion rents
• TSOs have to coordinate congestion
management to be operate either
by explicit or implicit auctions
→ Rents can flow into a common funds
→ Jointly useful projects can be paid from
• Regulation 1228/2003 allows to use
those congestion rents
→ for expanding interconnection capacities
→ for the operation of interconnection
→ for incorporate into national tariffs
France, UK
& Ireland
Central
West
South West
Northern Europe
Central East
Central
South
Baltic
States
Energy Community
(prev. Athens Forum)

Forward Price Development - Front Year Base
120.00
110.00
100.00
90.00
80.00
EUR/MWh
70.00
60.00
50.00
40.00
30.00
20.00
1.9.04 1.12.04 1.3.05 1.6.05 1.9.05 1.12.05 1.3.06 1.6.06 1.9.06 1.12.06 1.3.07 1.6.07 1.9.07 1.12.07 1.3.08 1.6.08 1.9.08 1.12.08 1.3.09 1.6.09
Source: EET MAP
France (OTC) ENDEX Netherlands (OTC) Nordpool UK (OTC) EEX

Contents
1. Corporate Profile
2. European Electricity Markets
3. Regulatory systems for networks tariffs
4. End consumer prices within the EU
5. EU challenges

EU Member States have different regulatory approaches
for distribution networks …
Revenue Cap
Possibility
of derogations
Price Cap
Efficiency Factor
Quality element
Benchmark System
Regulated
Asset Base

The revenue cap formula in Germany
noncontrollable
cost
efficient
cost
distribution
factor
inefficient
cost
inflation
factor
general
X
Expansion
factor
Quality
• Tax
• Charges payable
to upstream
network
operators
• …
• for removal of
inefficient cost
• plays the role of
the individual X
• derived from benchmarking
• for DSOs only
• takes into account
significant changes in
area, customers, or
maximum load

Key elements of the incentive regulation in Germany
• Start of incentive regulation: 1 January 2009
• Regulatory period:
• Start level of revenues:
• Revenue adjustment:
• General X:
• Individual X:
• Quality regulation:
• Investment budgets:
• Simplified system:
5 years
last approval before incentive regulation
(i.e. cost base 2006)
efficiency targets on controllable cost
(including capital cost)
1.25 % (1 st period), 1.50 % (2 nd period)
derived from benchmarking
(reduction of indiv. inefficiency in 2 periods)
yes, but introduction postponed
for grid extensions by TSOs
for very small network operators

Example UK: Building block approach
Allowed cost of
capital
Company specific
volumes at
benchmarked unit
cost
Efficiency
targets based
on OPEX
benchmarking
Bonus/penalty
from incentive
performance
Regulated network
charge
= Fixed return on + CAPEX + OPEX allowance +
capital
allowance
Incentives
Incentive
Gear up
Invest CAPEX to
deliver agreed
network outputs
at efficient cost.
Reduce OPEX
Outperform
Implications
• Agreed network output measures need to be delivered or the potential exists for
allowances to be clawed back
• The same incentive rate is applied to under/over spends for opex and capex
(with the exception of business support costs / non operational capex where a
100% incentive rate applies)
• Application of approach probably limited to countries with low number of
operators – otherwise high regulatory effort due to individual CAPEX agreements
19

Example UK: Incentives & Funds DPCR 5
Promote and reward
•Care of the Environment,
•Customer Service,
•Cost Efficiency,
•Innovation
Losses
Business Carbon Footprint
NEW
NEW
Low Carbon Network Fund
NEW
Distributed Generation
Transmission Exit Charges
IQI and Equalised Cost Incentives
Network Performance
AONB
Customer Satisfaction
Guaranteed Standards
Worst Served Customer
Unregulated Margins in Connections
New
Formula
Bigger
Innovation Funding
Bigger
NEW
More
20
NEW

Contents
1. Corporate Profile
2. European Electricity Markets
3. Regulatory systems for networks tariffs
4. End consumer prices within the EU
5. EU challenges

3rd package does not prescribe regulated tariffs
•Member States are given the possibility by the directive to impose
obligations on undertakings which may relate to price of supplies (Art. 3 (2)
Dir 2007/0195 and 2007/0196).
•The provision within the electricity directive demands that prices for
household customers and small enterprises shall be universal, transparent
and non-discriminatory (Art. 3 Dir 2007/0195).
•Against energy poverty and to protect vulnerable customers a national
action plan, or other appropriate frameworks, such as social policy actions
should be developed by Member States (Art. 3 Dir 2007/0195 and 2007/0196)
•But European regulator group ‘ERGEG’ stated in its position paper in 2007
that protecting vulnerable customers should not be mistaken with
regulated tariffs for all or certain categories of customers.

Contents
1. Corporate Profile
2. European Electricity Markets
3. Regulatory systems for networks tariffs
4. End consumer prices within the EU
5. EU challenges

There is not one market, but a multitude of them
With a rise of regulatory diversity also a rise of complexity comes along the
potential increase of regulatory risks.
Particularly for investors and multinational energy companies
UK
DE
…
ES
FR
A
Harmonization
A single
European
Regulation
Framework
P Therefore more harmonization is needed but …

Regional markets to facilitate market integration
National
energy market
European Energy Regulators (ERGEG)
Regional
energy market
(REM)
Single
energy market
(SEM)
• Different initial conditions
in Member States
• Facilitate the development
of regional markets
• Remove barriers to trade
and competition
• Working in cooperation
with stakeholders
• Price convergence
• Full transparency
• Central regulatory oversight
• Unique market design and
harmonized rules related to
• Reliable and efficient grids
7 REMs as part of Electricity Regional Initiatives (ERI)
3 REMs as part of Gas Regional Initiatives (GRI)
Internet: http://www.energy-regulators.eu/portal/page/portal/EER_HOME/EER_INITIATIVES

Europe faces significant challenges to find the right
balance
Climate targets
Consumer Rights/
Competition
Security of Supply/
Integration