safeguarding investments in natural gas infrastructure

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of energy networks. 11 While energy regulatory authorities currently appear to focus mainly on efficiency when setting tariffs for the transport of natural gas, this is remarkable given the broader policy agenda that looms in the background. It is worth investigating to what extent the other policy goals just described are considered when designing tariff structures. Fourth, relations between national legislators and regulatory authorities are not always clear. At the request of the European Parliament, 12 the Dutch regulatory authority (and its colleagues in other member states) was granted the judicial status of an autonomous administrative authority in 2005. 13 In short, the goal of creating this status was to confirm the importance of having an independent regulatory authority in the energy sector and thus depoliticize the work of the national competition authority. In 2010, this status caused remarkable friction when the Dutch Trade and Industry Appeals Tribunal (CBb) annulled the tariff regulation that the Dutch transmission system operator GTS had designed in accordance with Dutch government policy. The minister of economic affairs laid down several conditions that GTS had to apply when designing tariff structures, such as the value of the national infrastructure system, the terms of depreciation, and the remuneration of the cost of capital. However, the Council for the Judiciary stated this was unlawful since the minister was meddling 11 As laid down in for instance the Lisbon Treaty, 2007/C, 306/01, article 176 A. 12 Report of the European Parliament following the proposed regulation 1/2003 A5-0229/2001, June 21, 2001, page 22. 13 Staatsblad 327, June 30, 2005. with the competences of the regulator. 14 Under these circumstances, in 2010 the Dutch regulator proposed a new method of regulation for the period starting in 2006. 15 While these tariffs have been published and a “settlement deal” of €400 million has been proposed by the regulator, 16 both GTS and the joint major industrial consumers have indicated they are not satisfied and have announced a new tug-of-war in court. This has created insecurity for the infrastructure company and negatively affected the development of new similar business ventures in the Netherlands. 17 Fifth, in the Netherlands there is an ongoing political debate about whether gas networks should be (partly) privatized. GTS’s limited financial means to make necessary investments are said to have fuelled this debate. The unbundling of vertically integrated energy companies, driven by the European Commission from the late 1980s, has always been answered by the argument that networks should always be in public hands in the Netherlands, since the secure and stable access to energy is a major public concern. Hence, in a liberalized European energy market, the only 14 To be more precise, in 2006 CBb ruled that regulatory format and existing legal framework did not fit. Then Minister of Economic Affairs Van der Hoeven issued a new policy rule, setting concrete parameters regarding GTS’s capital expenditures. Then in 2010, CBb argued that the minister had impinged on the independent decision-making process of the Dutch regulator NMa. See also http://www. nma.nl/en/documents_and_publications/press_releases/ news/2011/11_21_nma_makes_draft_method_decisions_gts_ available_for_perusal.aspx 15 LJN: BM9470, June 29, 2010. Comparable verdicts were published on the regulations for electricity TSO and DSO’s in that same period. 16 http://www.nma.nl/en/documents_and_publications/press_ releases/news/2011/11_49_nma__dutch_gas_transmission_ system_operator_is_to_return_eur_400_million_to_its_ customers.aspx 17 The announcement of new court quarrels published on November 21 2011 is at http://www.energiekeuze.nl/nieuws. aspx?id=864 Safeguarding Investments in Natural Gas Infrastructure 3
Several years later, the unbundled system operator GTS itself appears to be one of the advocates of the privatization of a minority share of the Dutch transmission system, allegedly because it needs additional funds to make required investments. reasonable thing to do was unbundle the integrated companies. Several years later, the unbundled system operator GTS itself appears to be one of the advocates of the privatization of a minority share of the Dutch transmission system, allegedly because it needs additional funds to make required investments. In addition, in June 2011, a European Commission staff working paper stated that “... Investors, such as public banks or investment funds, confirmed that transmission system operators have largely exploited their ability to raise debt capital and that future investments will require large equity injections by private investors or the State (in case of publicly owned transmission system operators).” 18 Examples like these demonstrate the need to examine privately funded energy networks, by for instance looking at the United States or Great Britain. Sixth, investments in gas infrastructure are both costly and time consuming. Assuming that the current operating framework is in need of improvement, it should be changed soon, if only because errors are not easily fixed and because investors need something to go by to make large and long-term investment decisions. The examples above suggest that the debate on gas market regulation requires more than a regulatory economic approach. Methodology and Limitations This study comprises a comparative analysis between regulatory regimes in the United States and the European Union. While there is not a single regulatory approach within the EU, most member state regulatory authorities seem to follow the examples set by Great Britain and the Netherlands (Jamasb, Pollitt & Triebs, 2008), and therefore this study focuses on these two examples. It describes the relation between legislature and 18 Commission staff working document SEC (2011) 755 final, page 5. 4 Transatlantic Academy regulatory authorities and their mandates in the EU, the individual member states and in the United States. Next the criteria that regulatory authorities apply when determining gas transport tariffs are analyzed. Hereto the broad energy policy goals as laid down in the Lisbon Treaty are used, i.e. security of supply, efficiency/affordability and sustainability. These criteria apply to the U.S. case as well. In an attempt to quantify these policy goals, efficiency/affordability is examined by looking at what rates of return regulatory authorities allow gas infrastructure operators to make, together with transport tariffs that operators charge for gas transmission. Quantification of the other policy goals is more challenging. Security of supply/ reliability could be measured by collecting data on interruptions in gas flows, but those are not always available and interruptions can have multiple causes. Sustainability through regulation could, for instance, be measured in terms of net CO 2 reductions, but no such studies have been carried out thus far. After examining the criteria used by regulatory authorities to determine transport tariffs, this study focuses on the role of both private and public funds used in gas infrastructure and what lessons can be derived from differing existing practices. Both primary and secondary data will be used in this analysis; the former is qualitative and derived from interviews with representatives of regulatory authorities and infrastructure companies, while the latter consists mainly of academic contributions, policy papers, and legal documents. 19 19 Most academic literature on regulation focuses on electricity and not on natural gas. This probably has to do with some special characteristics of electricity and the dynamics this brings for regulation, see for instance Kwoka & Madjarov who mention non-storability, low demand elasticity, and high capital intensity and argue that market clearing is the key characteristic that makes electricity unique (2007, p.27).
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safeguarding investments in natural gas infrastructure

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