As from the end of the 1970s onwards, such forms of public intervention and market coordination were increasingly criticized, initially mainly in the Anglo-Saxon world. ‘Rolling back the state’ á la Margaret Thatcher and Ronald Reagan and the introduction of competition would allow for a more efficient provision of energy, water, public transport and other public services. The European Community, in 1985, adopted the Single European Market a general strategy for liberalization of the EU economy, followed in 1988 by ‘The Internal Energy Market’ , which advocated a similar restructuring in the energy markets. The primary argument was to dismantle the impediments to intra-communitarian trade in goods and services, but also the neo-liberal outlook on competition and efficiency and business interests played an important role .
On this basis, gradually, a perspective unfolded for a European gas market in which competition was to be created between gas producers and suppliers in the up-stream segment and between traders in the wholesale and retail segment. To this end, it was envisaged that the traditional long-term contracts would give way to short-term transactions. Scarcity conditions would determine the market price, thus balancing the supply and demand for gas. It was expected that liquid spot markets would arise in those places where different sources of supply would connect with demand. A precondition for this was that the competing traders would be given access to the essential facilities in transport, distribution and storage, to reach their customers. To this end, three basic regulatory principles were embraced in Europe.
Firstly, the essential facilities would have to be ‘unbundled’ from the production and trading activities, in the sense that the operators of such facilities would not have any commercial interest in manipulating the gas flows or in using the market insight that the operation of their systems would yield them in any trading activities. In respect of the transmission and distribution pipelines, over time, an increasingly stringent degree of legal and managerial unbundling was required. Most of the networks were separated from the former wholesale companies and local gas utilities, to be managed as either a transmission, or distribution, system operator (TSO or DSO). In respect of other facilities, for LNG, storage and conversion, depending on their position as a (local) monopoly in a ‘relevant’ market, different regimes were allowed with possible exemptions from third party access requirements, to be awarded on a case-by-case basis.
The second principle involved the provision of ‘un-discriminatory access’ for trading parties to these essential facilities. This, obviously, not only involved access to the transport systems but also to storage, LNG and quality conversion facilities when needed. Initially, this was arranged by means of relatively simple ‘first come–first served’ contracts, under which traders could book a specific amount of capacity for a specific time slot, at a specific tariff to be paid to the operator. Yet, over time, in several steps, an increasingly complex approach developed. Access to the transmission pipelines, generally, came to be organized as a so-called entry-exit model in which ‘shippers’ of gas book their entry and exit rights, for specific volumes of gas to be fed in or taken out of the transport system at specific locations .
The essence of this model is that it abstracts from the actual routes that the gas molecules take to their destination. Therewith, it provides maximal flexibility to shippers in buying and selling to market parties at no matter what location. Entry and exit tariffs at specific locations are equal for all shippers. In respect of the distribution networks, generally the so-called postage stamp tariffs are applied, in which a seller books his entry in a given zone, where his client is located, at a pre-specified tariff. Access conditions to other facilities depend on their status as being exempted or not; either their owners or operators have to provide access to any interested users at pre-specified conditions, or they are allowed to determine how they use their capacity themselves.
An important element in providing access, in combination with the tariff structure, is the allocation of the capacity available to the interested shippers. Starting out with simple first come–first serve rules, a complex set of mechanisms was developed in order, on the one hand, to maximally expand the use of the physically limited capacity available by as much shippers as possible, thus reducing so-called contractual congestion. On the other hand, the objective became to efficiently award scarce capacity to those shippers who put the highest value on that capacity. Therefore, a variety of procedures for the tendering and secondary trading capacity and the re-allocation of un-used capacities was developed. The underlying objective was to enable the shippers to match the commodity transactions they arranged in the gas market, with the appropriate handling arrangements to move it to their clients or storage facilities. This would enhance the functioning of the gas market and facilitate a maximally efficient allocating of volumes of gas at market prices, reflecting its value to producers and consumers.
A third principle, involved the notion that the gas infrastructure inherited from the traditional gas industry still reflected the consequences of its natural monopoly status. Main elements in this respect were ‘gold plated’ over-investment in assets, high operational costs, high tariffs that did not reflect the actual, economically efficient, costs of transport, and awkward practices in discriminating the different types of consumers and regions. To lower the cost of the infrastructure, tariff and/or revenue regulation would have to force the TSOs and DSOs to become more efficient in their operations and the use of their system. Eventually, this evolved into a wide variety of price cap, yardstick, or RPI-X regulation. To this end, each Member State had to establish a National Regulatory Authority (NRA) for the energy sector, with the responsibility to approve and control the tariffs (or methodologies) to ensure non-discriminatory access to the unbundled networks.