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GDF SUEZ and the new regulation of the gas

market in France

Energy Community gas distribution Conference, Zagreb, 25th of September 2008

Jean-Louis MARTINAUD, Senior Adviser, GDF SUEZ, European International Energy Branch

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GDF SUEZ presentation

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In July 2008,

&

became

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Group position in Europe

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A Major Natural Gas OperatorGaz de France datas for 2007

N° of customers15 million customers

Gas sales730 billion kWh

Electricity sales21 billion kWh

Transmission 35,000 km

Distribution210,000 km

Regasification17 bn m3 of capacity

Storage Facilities12 bn m3 of working capacity

2007 Revenues €27.5 bn

Headcount ≈ 47,500 employees

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Gas Distribution Market in France

Network

Gas Volume

Customers

GRDF

180,000 Km

30 Bcm

11,00,000

Gaz de Bordeaux

3300 Km

460 Mm3

2,11,000

Gaz électricité de

Grenoble

210 Km

90Mm3

47,500

Gaz de Strasbourg

1610 Km

0.5Bcm

1,19,000

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GrDF Network: Industrial tools of a distribution

185 000 km of distribution network

19 300 city gate stations

7 020 000 individual and collective connections

11 million customer connections

12 active suppliers having transmission contract

30 Bcm distributed annually

9 100 municipalities served covering 75% of the French population.

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GDF SUEZ and the regulation of the gas market in France

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GDF SUEZ and the regulation of the gas market in France

Legal framework

Overview of the French gas market

Policy and regulation adopted and consequences for Gaz de France

• The regulator – CRE

• Minister in charge of Energy

• Gaz de France relationships with the regulator and other national public bodies

• Implementation of the main aspects arising from the European directives

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Legal framework

Directive 98/30/EC (06/22/1998) came into force on 10 August 2000. As soon as the 1st Directive came into effect, and despite the delay in transposition in French law, GDF SUEZ implemented a Third parties access to transmission network.

The law of 3 January 2003 : has transposed into French legislation this directive, relating to the gas and electricity markets and to the public service in energy.

The second Gas Directive 2003/55/EC of 26 June 2003 came into force on 1st july 2004

The law of 13 July 2005 relative to the orientation of the energy policy in France

The law of 7 December 2006 prepares the fully opening of the French gas market on 1st july 2007

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Overview of the French gas market - organization

Before 10th August 2000 :

• 3 upstream operators (GSO, CFM and TSGF),

• 1 up/down-stream integrated operator (Gaz de France)

• 16 Independent Distribution Companies and some other new LDCs

Since 1st January 2005 - an increase in the number of players :

• Infrastructure operators : TPA, legal or managerial independence, compliance program

Transmission : 2 operators, GRTgaz (100 % GDF SUEZ) and TIGF (Total)

LNG terminals : Gaz de France GDF SUEZ next year STMFC (Gaz de France and Total) and maybe others later…

Storage : 2 operators, GDF SUEZ and TIGF

Distribution : Gaz de France Réseau Distribution and 23 LDCs (3%)

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Overview of the French gas market - organization

• Suppliers : Authorisation to supply gas delivered by public authorities

Gas and oil producers (majors and other)

Traditional gas suppliers

Others (electricity suppliers, new retailers…)

• New players - traders : « Gas Exchange Points » (PEG) like hubs

Since 1st July 2007 the french energy market is fully opened

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Policy and regulation adopted and consequences for GDF SUEZ

The regulator – CRE

Minister in charge of Energy

Gaz de France relationships with the regulator and other national public bodies

Implementation of the main aspects arising from the directive

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The Energy Regulation Commission (CRE)

The law of 3 january 2003 gives the power to regulate gas sector to the « CRE », an independent body previously created to regulate the electricity.

Independent administrative body

The law of 7 december 2006 changes the organization – The CRE is consequently a two-headed body :

• The Commission with 9 members (including the chairman, and 2 vice Presidents) appointed for a non-renewable term of 6 years : 2 of these members are consumers representatives

• The Committee for settlement of disputes and sanctions : composed of 4 magistrates

• Operational resources :126 persons (annual report july 2007), 15,5 M€ for annual credits.

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CRE main powers in gas sectorAccess to the network :

• Proposes tariffs for the use of public electricity and natural gas systems and LNG plants, which are then confirmed jointly by the Ministers in charge of energy and economy.

• Grants temporary dispensations for third parties access under strict requirements

• Complement when necessary the regulation rules within the respect of laws and decrees

• Settles disputes on network access (Committee for settlement of disputes and sanctions)

Gives an opinion to the minister on sales tariffs applied to non-eligible consumers

Approves the accounting principles used for unbundling the different activities between production, transmission and distribution, and other activities, in close co-operation with the « Conseil de la Concurrence » (Competition Commission)

Monitors the market operation

Sanctioning powers (Committee for settlement of disputes and sanctions)

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Missions of the Minister in charge of EnergyApproves the network access tariffs, based on the CRE

proposal

• « Loi de programme fixant les orientations de la politique énergétique », adopted on 13 july 2005, implement a quicker procedure of approval : if the minister is silent during 2 months, CRE proposal is automatically applicable

Approves the evolution of sales tariffs applied to non-eligible consumers, after the opinion of the CRE was given

Grants authorisations to build and/or operate natural gas facilities and authorisations to supply gas (transparent criteria)

Prepares an indicative pluriannual planning of supply and capacity of gas natural undertakings on a long-term basis. This program is made to meet the demand for natural gas and an investment program for infrastructures

Ensures respect of the public service obligations, in particular security of supply

Sanctioning powers

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GDF SUEZ relationships with the regulator and other national public bodies

Relationships between CRE (national energy regulator) and GDF SUEZ

GDF SUEZ maintains regular relationships with other authorities :

• The Competition Commission : « Conseil de la Concurrence »

• The « Direction de la concurrence de la consommation et de la répression des fraudes » – DGCCRF – of the Ministry of Economy

• The Ministries in charge of Economy and Energy…

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As a large integrated player GDF SUEZ has significant legal and regulatory obligations

In the context of gas market deregulation, GDF SUEZ has to meet commitments arising from :

• TPA to networks, LNG terminals and storage

• Unbundled accounts or affiliates’ accounts for activities + eligible & non-eligible accounts

• Financial flows between the separate activities : protocols or contracts with the TPA conditions when these exist or business conditions

• Confidentiality of commercial information (separated locations and IT systems)

• Since January 2005, gas transmission system has been a subsidiary company of GDF SUEZ : GRTgaz

• Since January 2008, gas distribution system has been a subsidiary company of GDF SUEZ : GrDF

• Compliance programs and annual CRE review

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Access to the transmission network which balances availability to new entrants and security of supply

Transmission network tariff changes : 1st TPA system in mid 2000. Currently French territory is divided into 4 + 1 balancing areas for the transmission facility. There will be 2 +1 areas in the future.

Rules for capacity allocation published in 2004

The last TPA regime for the transmission network tariff has been adopted in november 2006 - the next with the 2 zones tariff in 2009

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Access to distribution network for third parties that complies with a full market opening

First TPA conditions published in mid 2000 for large customers

First “CRE tariff” applied in mid-2004

Allocation principles : “capacity follows the customer”

Information regularly updated on the website

Third tariff has been discussed with CRE and has been implemented since July 2008 : pluri-annual regulation (3 years) giving opportunity to share productivity benefits

Very large works conducted from 2003 with all stakeholders of the market under the CRE authority in order to prepare and improve market procedure (information, IT system, day to day quantities allocation, switching process…) at the different stage of market opening (mid 2004 and mid 2007)

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Implementation of the main aspects arising from the directive : Separated activities and unbundled accounts 1/2

Separate accounts for 7 activities : Transmission, LNG terminals, Storage, Distribution Network, Non gas Activities (LPG’s public distributions), Electricity (since 2004) and Other Activities, as part of principles approved by the national regulator (CRE)

Separated accounts are transmitted yearly to the regulator (CRE)

• Balance sheet and income statement for each activity

Unbundling grounded on general accounting

Financial flows between the separate activities : protocols or contracts with the TPA conditions when these exist

Sub rules approved by CRE and under its permanent control

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Implementation of the main aspects arising from the directive :Tariff building mechanism by CRE (cost plus)

Relevant net operating expenditures (OpEx) with a RPI – 1,3 % mechanism

Capital expenditures (CaPex): economic value for the regulatory asset base and rules for future annual revaluations

Evaluating the capital costs : annual economic depreciation linear during the economic lifetime of the infrastructure

Financial return : depending on the infrastructure. For distribution, RoR = 6,75 %

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TSO

DSO

CUSTOMER

TPA CONTRACT

SUPPLIERTPA CONTRACT

« DIRECT » TPA CONTRACT

SUPPLY CONTRACT

(including TPA conditions)

TPA and supply contracts system

STORAGE

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Distribution TPA Tariff

Tariff Customer Meter reading Structure

T1Less than

6 000 kWh/yHalf-yearly

Annual subscribtion (€/y)+ proportionnal price (€/kWh)

T26 000 kWh/y

to 300 000 kWh/yHalf-yearly

Annual subscribtion (€/y)+ proportionnal price (€/kWh)

T3300 000 kWh/y

to 5 GWh/yMonthly

Annual subscribtion (€/y)+ proportionnal price (€/kWh)

T4*More than5 GWh/an

Daily

Annual subscribtion (€/y)+ proportionnal price (€/kWh)+ proportionnal price to the subscribed daily flow ((€/(kWh/day))/y)

* For very big customers it is possible to have a special tariff with a term proportionnal to the distance from the network

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GrDF TPA Tariffs

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Implementation of the main aspects arising from the directive : Independence of the network operators

Transmission : legal unbundling ; status of the subsidiary company

Distribution : legal unbundling ; status of the subsidiary company

For these two activities, respect of the shareholders’s rights

Transmission network operator and distribution network operator have to publish a code of conduct with a number of values that form the basis of their corporate ethical code.

This code and an annual report of compliance are transmitted to the CRE, which publishes an annual report on the respect of the codes by the operators

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Consequences of the new regulation and

lessons to be drawn

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Consequences of the new regulation

Gas to gas competition

Probably more regulation ( TPA )

Variety of final price designs

New ways of supply : spot markets, hubs

Concentration of the major players of the European energy industry

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Lessons to be drawn

The opening up has to be progressive, with a long term view :

to allow the financing of infrastructures,

to ensure supply security,

to avoid an excessive concentration of operators

This is all the more true in a developing system

GDF SUEZ has chosen to develop in an integrated way

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Thank you for your attention