Bernd Rajal Stefanie Orator-Saghy April 29 2019 Consultation on implementation of network code on harmonised transmission tariffs Schoenherr | Energy & Natural Resources - Austria Bernd Rajal, Stefanie Orator-Saghy Energy & Natural Resources IntroductionConsultation of E-Control AustriaProposed reference price methodologyDiscounts, multipliers and seasonal factorsCritical observations on the consultationCommentIntroductionEU Regulation 2017/460 (16 March 2017) has established a network code on harmonised transmission tariff structures (TAR NC). It defines, among other provisions, rules on reference price methodologies, publication and consultation requirements and the calculation of reserve prices for standardised-capacity products. Articles 26 and 28 require the national regulatory authority (NRA) or transmission system operators to carry out one or more consultations on the proposed reference price methodology and the resulting indicative reference prices as well as on the proposed discounts, multipliers and seasonal factors.NRAs must be open for consultation at least once (the final consultation) but have the option to consult multiple times. Consultations must be open for comments for at least two months after the consultation document is published. The whole consultation process must be concluded no later than 31 May 2019. Within two months after the end of the final consultation, the Agency for the Cooperation of Energy Regulators (ACER) must publish a conclusion of its analysis of the consultation document. According to Article 27(4), the NRA must make a motivated decision on reference price methodology within five months after the end of the final consultation.Consultation of E-Control AustriaOn 31 January 2019 the NRA E-Control published its consultation document on the implementation of the TAR NC. Anyone interested had the right to comment on the document until 31 March 2019.The document is structured in line with the ACER consultation template. First, the proposed reference price methodology is described. Second, the transmission tariff levels and estimated tariffs for the new regulatory period are stated; and third, the transmission service revenue is stipulated and the reference price methodology is assessed in more detail. The final chapter entails the proposed discounts, multipliers and seasonal factors.Proposed reference price methodologyThe proposed reference price methodology for the entry-exit system is a virtual point-based approach. This methodology has already been applied to the tariff period that started in 2016. E-Control claims that this methodology is "widely accepted and transparent". The principle behind a virtual point-based approach is to determine entry and exit reference prices for each point to which the tariff applies by weighting capacity at these points according to their distance to a virtual point. The virtual point is defined geographically and, according to the document, it is the Baumgarten interconnector point. E-Control states that a virtual point-based approach is appropriate for the Austrian market area, as Austria has a non-meshed network with a dominant node in Baumgarten where the main transmission systems connect. Further, most gas flows are dispatched and routed from there.In order to maintain tariff stability and avoid market distortion, the proposed reference price methodology uses clustering and equalisation of homogenous points. It also stipulates a maximum tariff increase of 10%. This 10% cap is applied to all entry and exit points. Moreover, at the Murfeld exit, a benchmark tariff (down 33% compared to the current tariff) has been created so that the resulting values meet the competitive level of reference prices on a competing route (eg, to the Croatian entry-exit system via Mosonmagyarovar). Capacity-based transmission tariffs for exits into storage facilities are discounted by 50% and entries from storage facilities are discounted by 100%. The breakdown between the revenue from capacity-based transmission tariffs at all entry points and the revenue from capacity-based transmission tariffs at all exit points results in an entry-exit split of 20 to 80.Discounts, multipliers and seasonal factorsAccording to Article 28, NRAs must conduct – at the same time as the final consultation – a consultation on the level of multipliers, seasonal factors and discounts. E-Control has proposed to set the level of multipliers at 1.00 for one year, 1.15 for one quarter, 1.30 for one month, 1.50 for one day and 2.00 for within one day. While the multipliers are within the range of the TAR NC, they are significantly higher than the multipliers currently defined under the Austrian Gas System Charges Ordinance and higher than multipliers proposed or applied in other member states. The document does not provide any explanation or justification for the increase of the multipliers.E-Control has proposed to introduce a seasonal factor at the Arnoldstein exit point, arguing that the usage and booking profile at this point shows a varying level of demand depending on consumption levels for each month.According to Article 16 of the TAR NC, the NRA may apply ex post or ex ante discounts for interruptions, depending on whether capacity has to be interrupted due to physical congestion in the preceding gas year. E-Control proposes an ex ante discount of 12% at the entry points Oberkappel and Überackern, as they did not fulfil the requirements for an ex post discount in the gas year 2017-2018. An ex post discount will apply to all other points. The discount will be compensation paid for each day on which interruption occurs and it is supposed to be equal to three times the reserve price for daily standard capacity products for firm capacity.Critical observations on the consultationE-Control decided to carry out one final consultation only, given that the whole consultation procedure must be completed by 31 May 2019. This is including the publication of ACER's analysis and the issuing of the motivated decision by the NRA. When taking into consideration the limited time between the end of the consultation (31 March 2019) and the completion date of the final consultation, it is obvious that ACER's two-month review period has been significantly shortened. This eliminates ACER's opportunity to assess the consultation responses submitted during the final consultation. Further, E-Control will not have the full five months that the NC TAR has granted the NRA to issue the motivated decision. This leaves E-Control with less time and less input compared to NRAs in other member states, in which consultations took place in 2017 or 2018 and were not limited to one final consultation.It appears that E-Control has not paid much attention to maximum transparency and traceability when setting transmission tariffs. This could be problematic insofar as the document refers to calculations, methods and guidelines that were laid down in the existing method approval in Section 82 of the Natural Gas Act. This method has not been subject to any public consultations. Moreover, the current method does not contain any information on or explanation of the virtual point-based approach. There is no mention of virtual point distances, capacity weightings, distance rations or clustering. Thus, it is not verifiable whether the current tariff uses a virtual point-based approach. E-Control's claim that the virtual point-based approach is "widely accepted and transparent" seems to be unfounded.According to the document, the tariffs are distinguished between effective tariffs (those applied from the beginning of the next tariff period) and theoretical tariffs (those which would result without the application of a 10% cap). Only the effective tariffs are set out in the document; the theoretical tariffs – which would supposedly be even higher than the effective tariffs – have not been disclosed. This is out of line with the transparency requirements of the TAR NC and is questionable with regard to the reflective costs of the proposed reference price methodology.CommentAccording to Article 26(3) of the TAR NC, E-Control must publish the consultation responses received and their summary within one month after the end of the consultation. Eight stakeholders, the Austrian Chamber of Labour and the Austrian Ministry of Finance have made use of their right to comment on the document. All of the stakeholders and the Ministry of Finance criticised the general lack of transparency and many pointed out that the proposed multipliers are unreasonably high. Only after E-Control issues its motivated decision will it be fully assessable whether it has taken stakeholders' and ACER's comments into account and addressed the lack of transparency in the document. In any event, the request for more transparency and traceability in E-Control's work remains as pressing as always.For further information on this topic please contact Bernd Rajal or Stefanie Orator-Saghy at Schoenherr by telephone (+43 1 534 37 50203 or +43 1 534 37 50725) or email ([email protected] or [email protected]). The Schoenherr website can be accessed at www.schoenherr.eu.