• Introduction of New Market Structure
  • Restrictions to Third-Party Access?
  • Far-Reaching Unbundling Requirements with Peculiar Effects?

On July 1 2005 the Natural Gas Act1 was replaced by a revised act2 which implements the Natural Gas Directive.3 The implementation was thus exactly one year late since the directive should have been implemented on July 1 2004.

Introduction of New Market Structure

The directive's requirement to designate transmission and distribution system operators - which need to be legally and functionally unbundled4 - is implemented by the act under the following principles:

  • The act introduces a 'system responsible authority', which has a general responsibility for maintaining the short-term balance between input and offtake in the national gas system. The state utility Svenska Kraftnät has been appointed as system responsible authority under the act.
  • There must be a 'balancing responsible entity' in each offtake point of the natural gas system. The balancing responsible entity has a financial responsibility towards the system responsible authority: the national natural gas system must be supplied with the same volume of gas as is taken out of the system at a certain delivery point. Such a commitment shall be made in an agreement with the system responsible authority and suppliers may deliver gas in delivery points only where the responsibility for balancing has been endorsed. The terms of such an agreement must be transparent and non-discriminatory, and need to be approved by the supervisory authority before the agreement is entered into. The system responsible authority shall publish its terms for balancing agreements.
  • The system responsible authority will be allowed to order holders of storages or regasification terminals to increase or decrease input or offtake of gas. If these measures are insufficient, the authority may order holders of transmission lines to limit or terminate transmission for customers. The authority shall also be given information on planned input and offtake in the natural gas system in order to perform its responsibilities.
  • The role of the system responsible authority also includes cooperating with connecting system operators and participating in international work to promote an efficient natural gas market. Since there is only one input point to the national grid, this means that Svenska Kraftnät will cooperate with the Danish transmission grid owner Gastra A/S.
  • The system responsible authority shall also be in charge of settlement between the entities responsible for balancing.

In order to fulfil the directive's concept of system operatorship, the act also establishes the day-to-day operation of the natural gas system. Each holder of a natural gas pipeline is responsible for the operation, maintenance and, if needed, development of the system and connections to other systems. Holders must also ensure that their respective pipeline systems are secure, reliable and efficient, and that the systems meet reasonable demands for gas transmission in the long term.

Therefore, the division of powers and responsibilities for the performance of system operatorship under the act differs from what may be described as the main principle under the directive - namely, that system operators must endorse all the powers and responsibilities of a system operator.

Restrictions to Third-Party Access?

Over the past few years the gas market players have discussed whether the market for transmission and distribution allows supply undertakings to enter into transmission/distribution agreements independently, or whether such services should be conducted only by network holders. The latter system is used in the electricity market. In the electricity market, transmission and distribution services are agreed only between customers and network holders, and downstream pipeline holders enter into transmission agreements with upstream pipeline holders. Whether this system should also be used in the gas market was clarified by a commission of inquiry in a white paper on the act.5

The commission explained that, under the valid regime, only downstream network holders can enter into contracts on third-party access to the transmission system. Consequently, there is no second-hand market for surplus capacity in the transmission network, which can be considered as an inefficient use of the grid. Moreover, as most other EU countries permit second-hand trade with capacity in the transmission networks and also allow other entities than distribution network holders to book capacity in the transmission networks, the commission recommended that this issue be further examined to create better conditions for the gas market to be integrated into the EU internal market.

Another reason why the system on capacity booking ought to be further examined relates to whether this system is compatible with the directive. The directive states that third-party access to transmission and distribution systems shall be "based on published tariffs, applicable to all eligible customers, including supply undertakings".6 The right to have total and unimpeded access to networks is also emphasized in one of the directive's preambles, which states that the freedoms of the EC treaty "are only possible in a fully open market, which enables all customers to choose their suppliers freely and all suppliers to deliver to their customers freely".7.

Is a system where only network holders are allowed to enter into agreements on the use of the grid fully compatible with the principles on freedom of choice and access under the directive? It is not, and this should be taken into account in the forthcoming overhaul of Swedish legislation.

Far-Reaching Unbundling Requirements with Peculiar Effects?

The directive's requirements on legal and functional unbundling are limited to transmission and distribution system operators.8.However, the act requires legal unbundling for all network undertakings. Therefore, any undertaking conducting transmission or distribution may not conduct gas supply business. The prohibited business area is thus limited to supply and does not cover generation as expressed under the directive, since there is no Swedish generation of natural gas. However, as the Swedish market for natural gas is very limited 9 whether these requirements are necessary and proportional could be questioned.

The directive's requirements on functional unbundling have been implemented only for concession holders, which in practice means that the requirements apply only for holders of transmission networks. The right under the directive not to apply the unbundling requirements to integrated natural gas undertakings serving less than 100,000 connected customers has therefore been used. Thus, the distribution undertakings (which are mostly owned by local municipalities) do not have to comply with the requirement not to have a board member, managing director or signatory for the company who is also a board member, managing director or signatory for a gas supply undertaking.

However, the impact of this exception to the main rule on unbundling may be more significant than expected. An important factor is the fact that only downstream (ie, distribution) network holders can enter into agreements on use of the transmission grid. This exclusivity, combined with the knowledge on supplies obtained in a legally unbundled supply undertaking within the same group of companies as the network undertaking, may constitute a risk for misuse of information where the two undertakings share the same board, managing director or signatory. However, these risks do not seem to have been considered by the legislature when it decided to allow functional bundling. These risks are difficult to measure or even anticipate. The legislature should thus consider imposing a requirement on functional unbundling in the near future.

Footnotes

1. Naturgaslag SFS 2000:599.

2. Naturgaslag SFS 2005:403.

3. Directive 2003/55/EC.

4. Articles 7(9) and 11(13) of the directive.

5. El-och gasmarknadsutredningen SOU 2004:129.

6. Article 18(1) of the directive.

7. Preamble 4 to the directive.

8. Articles 9 and 13 of the directive.

9. For instance, Sweden does not have any domestic generation of natural gas and the use of natural gas was not introduced until 1985. There is only one input pipeline to the national grid and the use of natural gas accounts for less than 2% of the total energy use.

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