E A S T - W E S T E L E C T R I C I T Y I N T E R C O N N E C T O R Memo to CER Regarding: Interconnector Capacity Allocation and ESB / Market Dominance ~ 9th May 2007 ~ At our meeting on May 3rd, we spoke at length about the issue of dominance and the availability of capacity on our planned East-West Interconnection. At that meeting we outlined our position in relation to ESB as the dominant market player and our views on dominance. For the sake of clarity we have prepared this memo to again outline our position and it examine the issue in a little more detail. We do recognise that there is a dominance issue that is already being addressed in the market, the introduction of interconnector capacity in to the market may assist in solving the dominance issue but it is a wider market problem. Imera Powers East West Interconnector is as you know a merchant project taking on full market risk. We are seeking EU exemptions to ensure that there is an adequate risk/reward balance for the investment and to ensure that we can operate the assets on a commercially viable basis. Given the risks that are already present in the development of this project, we do feel that any unnecessarily onerous restrictions placed upon us could undermine the project. There are other market mechanisms being put in place to address ESB dominance that will be far more effective than placing restrictions on the use of capacity on our interconnector. As we have already demonstrated we intend to allocate capacity in an open and transparent way fully compliant with the draft congestion management guidelines and to implement effective ‘Use it or Lose it’ mechanisms to prevent capacity hoarding, we are also committed to facilitating secondary trading of capacity. The introduction of interconnector capacity in the short-term will Increase competitive pressure and Interconnection will help to rectify problems of the ESB setting prices outside the competitive range. At our meeting we discussed the existing arrangements for the North/South and Moyle interconnectors, as we understood it there was a notional threshold of 40% of total capacity could be acquired by any one party should that party wish to access more capacity above this threshold it would trigger a competitive review by the Northern Ireland Regulator. It is unclear if this also applies to the North South Link. As we pointed out, it is possible under the existing arrangements for ESB to acquire up to 40% of Moyle capacity without any restriction and as no additional capacity is being brought in to the market this could be used to increase its dominant position. On May 4th Moyle Interconnector Limited published a public consultation paper on its Post SEM Trading arrangements. From November 1st 2007, all Moyle Interconnector capacity will become available to the market. The proposed Moyle access arrangements Post SEM are as follows:1 Paragraph 2.3. There is no set fixed level of maximum capacity which any bidder may acquire. However in the event of an over subscribed annual auction (held for capacity for periods of one or more years) a notional 40% cap figure for capacity gained at auction does exist. If this 40% cap figure is reached by any bidder at the annual auctions then this is expected to trigger an analysis of the impact on the market environment of the auction outcomes in relation to proportions held by each bidder. This analysis will be carried out by Moyle in consultation with the Utility Regulator. This does not mean that any one participant’s holding would be limited to 40%. The Utility Regulator did not need to place caps on capacity sold at the last annual auctions. It is proposed that the Utility Regulator will not restrict the total level of capacity allocated to one bidder at any monthly or weekly auctions. 1 Moyle Interconnector Trading From - 1 November 2007 : A Consultation Paper by Moyle Interconnector Limited May 2007 http://www.nienergyholdings.com/Download/consultation/Post%20SEM%20proposed%20trading%20arrangements%20consultation% 20070504.pdf 1 As with the current arrangements there does not appear to be any restrictions going forward on ESB accessing significant amounts of capacity on Moyle. Our Proposal Our proposal which we consider to be fair and balanced is that in the case of ESB should they wish to consider accessing capacity on the East West Interconnector they would be limited to a maximum of 40% of total capacity on contracts longer than one months duration. We think that this is sensible as 60% of the capacity would be available to other market participants in the event that ESB fully subscribed to the 40% cap, even in that scenario with the additional capacity being introduced by the interconnector ESB’s market share would still be incrementally reduced. However, we feel that this mechanism for reducing ESB’s ability to procure capacity would be better served through other means rather than making it a condition imposed through the EU Exemption or licensing process. We also think that it is important to precisely define ESB so that other parts of the ESB Group such as ESBIE, Hibernian Wind and ESB International who may wish to access capacity for commercially sound reasons are not commercially disadvantaged by being unable to access it, Finally, as we have mentioned above we are proposing to implement a non-discriminatory, market-based and efficient methods of allocating transmission capacity, we do recognise the dominance issue and we think we have offered a fair proposal, as a merchant project we must ensure that we minimise any risk of restrictions on the use of capacity and are concerned that any restrictions could harm the commercial viability of the project. We think that it is import for the CER to examine the Moyle proposals as it would be grossly unfair to impose onerous restrictions on a merchant project that carries all the risk, when a competing interconnector that has a regulated revenue safety net does not have any cap on capacity held. Rory O’Neill - 9th May 2007 _____________________________________________________________________________________________ ***For your information*** We have been working very closely with Dr. Leonardo Meeus of Leuven University in Belgium, Leonard is also the scientific coordinator of the KU Leuven Energy Institute (EI) and the European Energy Institute (EEI). Since 2006, he is the chairman of the CIGRE Task Force C5-7.1 on generation and network capacity investment incentives in electricity markets. Leonardo has been assisting and advising on interconnection trading, capacity allocation and exemptions etc. He has recently prepared a paper for us examining Eu exemptions. This paper is attached below. _____________________________________________________________________________________________ 2 Exemptions based on the Gas and Electricity Directives Case Law Exemption track record Eight exemptions have been granted by national regulators and are accepted by the European Commission. Seven exemp- tions have been granted for gas infrastructure; only one exemption for electricity infrastructure has received authorization yet. One application (BritNed) is still under consideration. Name Sector Involved countries Type of infrastructure Date Gate Terminal Gas Netherlands LNG terminal 22-12-2006 Brindisi LNG Terminal Gas Italy LNG terminal 3-5-2005 BBL: Bacton-Balgzand Gas UK, Netherlands Pipeline 21-4-2005 Estlink Electricity Estland, Finland Interconnector 3-3-2005 Dragon LNG Terminal Gas UK LNG terminal 14-2-2005 South Hook LNG Ter- Gas UK LNG terminal 10-12-2004 minal Isle of Grain LNG Ter- Gas UK LNG terminal 10-12-2004 minal North Adriatic LNG Gas Italy LNG terminal 10-12-2004 Terminal BritNed Electricity UK, Netherlands Interconnector Pending Access regimes Basically, there are two systems to develop an exempted facility: negotiated Third Party Access (nTPA) and own use. These are in contrast with the regulated Third Party Access (rTPA) regime. In an nTPA system the owners don’t use the facility for their own activities, they just own it. In an own use system, the owners have primary capacity rights. However, a combination of systems within one exempted facility is possible. For instance, a facility can be owned by different parties. Some of them can have primary capacity rights (own use), while others don’t and only own a part of it (nTPA). Furthermore, it is possible that only a part of a facility is exempted. For instance, 80% of the capacity is exempted and the remaining 20% is developed in an rTPA regime. In case of own use infrastructure an exemption gives the possibility to reserve capacity for own use, which is not possible for regulated infrastructure. In an nTPA regime, the exemption allows long-term contracts to underpin the investment and thereby lower the risk. Note that the BritNed application is exceptional. The interconnector is not meant for own use and there is currently no aim for long-term contracts. The developers main concern is the regulatory risk associated with the project. They expect the income from the interconnector to be volatile with good and bad years. They fear regulatory actions to limit profits in the good years, thereby limiting the possibility to make up the bad years. This would detrimental to the life time profitability of the cable. An exemption guarantees the income to be unregulated. The developers believe that rTPA compliant access to the interconnector will enable them to recover the investment cost. LNG terminals are often constructed in phases. The timing of the capacity allocation often follows the construction schedule. It is therefore possible that not all the capacity has been allocated yet, like in the Grain project. For the Gate Terminal the final results of the open season have not been published yet.