The epos of the gas network code
- Written by Dumitru Chisalita, Judicial Technical Expert in Oil & Gas
The history of the Natural Gas Transmission Network System Code is similar to a situation experienced by many Romanians: they wanted a car, had fulfilled their dreams, but subsequently discovered that the car has many shortcomings and that Romania has no roads suitable for that motor car.
It is good that after so many years the protagonists who have drawn the transmission network code have understood that the code can only exist if the daily balance sheet of gas entering/outgoing from National Transmission System is done (even if ignoring the hours, as it normally works worldwide).
Yet, what was not understood is that the code is a set of rules, which are not only meant to discipline and that’s all.
The transmission network code should have the purpose to exclusively discipline the transport network users, not the gas market. Disciplining the gas market is not done by the transport network code (even if it has an important role, indirectly, for the gas market discipline).
The transmission network code should have disciplined the network users, relying solely on the following trade principles:
- only the one who errs pays and only for his deed according to the assumed responsibilities by contracts with the carrier;
- the price of the err is set by the Romanian market at the time of error (not ante, nor post deed, for exceeding the capacity reserved by the network user and for the actual unbalancing of the National Transmission System due to differences between the daily amounts introduced and the ones extracted from the system).
The transmission network code should have also a licit speculative purpose, allowing the emergence of counterparties on the market by which to sanction the indolence of some transport network users and act only in the margins which prevent the National Transmission System’s slipping out of use.
The transmission network code should have limited the carrier’s intervention exclusively to the moment when the market’s (non)reaction determines reaching the early limit of system failure, again using exclusively only the same trade principles: only the one who errs pays, the price of the err is set by the Romanian market at the time of error.
The transmission network code should set the way the carrier will pay for its mistakes (failure to comply with the contract in terms of the provision of reserved capacity and of ensuring the continuity of supply, even if this obligation applies to other network users); the price of the carrier’s error must also be the one established for the Romanian market at the time of error.
The transmission network code should contain, first and foremost, trade mechanisms that facilitate the trading capacity on the principles of a free market, both on a primary market and on a secondary market, with transparent, flexible, fair and very easy to apply mechanisms, including intraday.
The transmission network code should have included a fair allocation model, non-discriminatory and in compliance with the Civil Code (art. 1674 and art. 1678), both for entries, as well as for exit points to/from the transmission system. This allocation should not be confused, but should be aligned with the allocation method of the supply contracts (not covered by the transmission network code, being a rule that should result in a future gas market code) and to be complementary to the allocation of distributed or stored quantities (also not covered by the transmission network code, codes of distribution and storage networks are needed).
One can ask for market discipline only if it offers an example and appropriate means of tracking, error correction flexible mechanisms, if it carries out extensive prevention work and it is ruthless with those who relapse endlessly.
Like a car that needs roads to prove its usefulness for which it was created, along with the effective shortcomings of the transmission network code, important changes are required in the gas market philosophy, with legislative, procedural and behavioural amendments:
- introducing the concept of daily reserved capacity in the existing points throughout the production-storage-transport-distribution chain, in order to enable a unified approach to this concept and to allow the actual functioning of the transmission network code;
- equitable, fair, non-discriminatory mechanisms and in compliance with the Civil Code (art. 1674 and art. 1678), the allocation of quantities supplied in order to:
o individualize the quantities sold;
o to allow suppliers to trace their own cargo during the acquisition-transport-storage-transport circuit and to request them discipline on the market and in the transport activity;
o an alignment should exist with the manner of allocation of the transmission network code and to allow the matching of quantities;
o a method should be in place to allocate the quantities distributed or stored.
- achieving the distribution network code, as a set of rules that sets the responsibilities and the parties rights, but also the means to ensure continuity of gas flow in the transmission system to the final consumer, the penalties levied or of which the user of the distribution system benefits;
- achieving the storage facilities code, as a set of rules that sets the parties responsibilities and rights, but also how to ensure the takeover/handover and storage/retrieval of gas into/from storage; the lack of detailed rules concerning the injection/extraction from the storage facilities leads to inequities in taking own gas from the storage facilities;
- achieving the gas market code (the market model), containing rules, procedures and clear instructions regarding the gas trading and the suppliers interaction with the ‘carriers’ (allowing traceability throughout the source-consumer circuit); among the many factors to be defined by this document come first the flexibility providing mechanisms and the tools for quick access of all participants to them and the development of cheap systems to guarantee trade operations;
- supporting the vulnerable customers through real methods, which are to allow the elimination of the regulated market preferential prices;
- computerization of the operations on the gas market by developing the systems of information storage and transmission between operators, suppliers, balancing market operator, gas stock exchange, competent authority, etc.; the lack of information systems regarding the market players, allowing continuous tracing, at least daily, will make impossible the proper functioning of the gas market and of the gas transmission network code;
- the defining of a competent authority for the entire energy system (not only in the natural gas field), to draw up preventive/reactive emergency plans, to monitor and to intervene according to principles that do not affect the carrying out of the trade activity;
- eliminating all legal restrictions that allow the direct or indirect ‘manipulation’ of the price: the gas basket, the manufacturers obligation to provide, under any circumstances, gas to regulated consumers, state intervention in the pricing of the domestic producer, etc.;
- reengineering the transport system, currently inadequate in terms of construction for a liberalized market and for applying the transmission network code;
- reengineering the natural gas storage in Romania in order to meet the current and future requirements of the liberalized market.
I believe that after nine years of transport network code, Romania hasn’t understood the philosophy of a transmission network code. In the past five years, by September to October, a major consumer of gas in Romania, a friend of mine, asks me every time: “do you think this winter the network code will be applied?” The answer was always the same: no. Not because I don’t consider it necessary, but because a code in the absence of rules based on the above mentioned principles and in the absence of a normal framework for market functioning, also above mentioned, it can’t work.
Irresponsibility, coupled with the stubbornness to apply the network code anyway will lead to waste of money, money that will be charged to the final consumer.
Seven causes for gas network code’s inoperability
The gas network code was designed to be a set of rules leading to the market development, to increase transactions and to discipline the market participants. Nine years since the commencement of this process no important steps have been made for market development or in disciplining the participants, in fact we do not have a single code, but an endless series of additions, amendments and changes to the old document, most of them achieved ‘overnight’ and ‘unexpectedly’.
During the campaign ‘Stop and start again on the gas market’, I will begin an analysis of the current state of the gas market. I will start by analysing the causes that make the gas transmission network code inoperable.
I believe that there are seven causes for the network code’s inoperability, which I present hereinafter in order of importance.
• Legal framework - antagonistic to the network code
• The incomplete text of the network code (lack of principles and of a way of carrying on operations)
• The physical configuration of the current national transmission system and of the adjacent systems
• Lack of flexibility mechanisms on the gas market in Romania
• Lack of IT platforms and of data transmission
• The sabotaging of the process of implementing the network code
Legal framework - antagonistic to the network code
A) The lack of fair, accurate, non-discriminatory mechanisms, which observe the Civil Code (art. 1674 and art. 1678) for the allocation of quantities supplied in order to:
- individualize the quantities sold;
- to allow suppliers to trace their own goods on the acquisition-transport-storage-transport circuit and ask them to be disciplined on the market and during the transport operation;
- to have an alignment with the manner of allocation of the transmission network code and to allow the matching of quantities;
- to have an alignment with the method of allotting the distributed or stored quantities.
B) The lack of distribution network codes, as set of rules that establish the responsibilities and rights of the parties, also the way to ensure the continuity of gas flow in the transmission system to the final consumer, penalties levied or those the user of the distribution system is benefiting from;
C) The lack of storage facilities codes, as set of rules that establish the responsibilities and rights of the parties, but also how to ensure the takeover/handover and storage/retrieval of gas into/from the storage facilities. The lack of detailed rules on the injection/extraction from the storage facilities, often leads to inequities in taking over own gas from the storage facilities;
D) The lack of gas market codes (the market model), containing rules, procedures and clear instructions regarding gas trading and the suppliers’ interaction with the ‘carriers’ (allowing traceability throughout the real flow on the source-consumer circuit). Among the many items to be defined by this document first come the flexibility providing mechanisms and the tools for quick access of all participants and the development of cheap systems to guarantee trade operations;
E) The lack of policies for energy anti-poverty and of supporting vulnerable customers through real methods, but which allow the elimination of preferential prices and the elimination of the regulated market;
F) The lack of a competent authority for the entire energy system (not only in the natural gas sector) to define preventive/reactive emergency plans, to monitor and intervene according to principles that do not affect the commercial activity;
G) The direct or indirect manipulation of the gas market using primary or secondary legislation, an approach is utterly inconsistent with the idea of market rules (the gas basket, the requirement for manufacturers to provide, under any circumstances, gas to the regulated consumers, the state intervention in pricing the domestic manufacturer, etc.).
Lack of principles in the network code’s text
1. Trade mechanisms to facilitate commercial capacity through transparent, flexible, fair and easy to apply mechanisms, including intraday.
2. Only the one who makes mistakes pays and only for his deed against the responsibilities assumed by the contracts signed with the transporter.
3. The price of the fault is set by the Romanian market at the time of the error (not ante, nor post deed).
4. The speculative licit purpose, allowing the emergence of counterparties on the market to sanction the users’ indolence.
5. Trade balancing, followed by physical and hydraulic balancing.
6. The way the transporter will pay for his mistakes (failure to comply with the contractual terms in regard to providing the reserved capacity and to ensuring the continuity of supply, even if it is due to other network users) in relation to the ones making mistakes, the price of the transport operator’s error it is necessary to be set by the Romanian market at the time of the error.
7. Fair, correct, non-discriminatory allocation and in compliance with the Civil Code (art. 1674 and art. 1678) of the transported quantities, both for the entry points and for the exit points to/from the transmission system.
Note: this allocation should not be confused, but should be aligned with the method of allocation included in the supply contracts (not covered by the transmission network code, as it is a rule that should result from a future gas market code) and complementary to the allocation of quantities distributed or stored (also not covered by the transmission network code, as codes of distribution and storage are needed).
The physical configuration of the current national transmission system and of the adjacent systems
1. What we call today the national transmission system is in fact a mixture of transport systems: closed (local, of the source-consumer type), semi-closed systems (regional) and a ‘0’ transport system. Thus, the rules according to the ‘0’ system do not match the closed and semi-closed systems (technical, hydraulic, operational, functional differences, etc.). Moreover, the current code deals with systems that do not physically communicate, as if they communicate physically, the idea of a physical balance in the national transmission system is rumoured, in reality this is merely an arithmetic illusion. The code will be applicable only to a homogeneous system.
2. The natural gas storage is done exclusively in seasonal systems, without multi-cycle deposits, which would meet the natural requirements of the market, technological and strategic deposits.
Lack of flexibility mechanisms
1. That lack of gas storage throughout the year according to demand and supply in:
- underground deposits (multi-cycle deposits);
- transmission/distribution pipelines;
- systems located with the consumers.
2. Lack of sale mechanisms under interruptible conditions
3. Lack of mechanisms for discontinuous services (interruptible capacities)
4. Lack of introduction of gas bonds as trading issue, for gas sales to gas consumers and/or as guaranteeing element
5. Lack of introducing the receipt as trading element and/or as guaranteeing element
6. Stimulating new products on the market, that provide increased flexibility on the market (loaning, parking)
1. Lack of computerisation of operations on the gas market by developing storage systems and by transmitting information between operators, suppliers, balancing market operators, gas stock exchanges, the competent authority, etc.
2. Lack of booking/trading platforms on the primary and secondary markets of the following capacities:
- storage on the primary and on the secondary market.
3. Lack of sale/nomination/allocation platforms:
- buying/selling gas;
- transmission services;
- distribution services;
- storage services;
- pipeline storage services;
- flexibility services (loaning, parking, limiting of price volatility by stop-limit, etc.)
4. Lack of the system balancing platforms with at least five sub-platforms:
- trade balancing through ex-ante purchase/sale orders for the following day/intraday;
- trade balancing by placing looking bonds for the following day/intraday;
- ex-post trade balancing by purchase/sale orders;
- physical/hydraulic balancing of the system by placing looking orders for the following day/intraday;
- physical/hydraulic balancing of the national transmission system by placing looking bonds for the following day/intraday.
5. Lack of matching platforms, clearing platforms, tracing of bad payers, trading gas securities and receipts, etc.
Sabotaging the process of implementing the network code
I believe that the history of nine years of the network code’s failure could not be made without sabotaging this process. There were saboteurs inside the transmission operator (depression change, loss of power of unique information holders, etc.) inside the regulator authority (the fear that by applying the code would affect a number of targets, such as was keeping a constant price on the regulated market) and at the level of network users, suppliers or consumers on the market (the motivation is financial driven and includes profit cuts according to the market discipline).
I believe that another important aspect of applying the network code is due to the misunderstood free market philosophy, of the rules and of the network code’s role, coupled with the incompetence of some people expected to conduct and lead the processes in the business of gas transmission, based on the principle ‘gas is flowing anyway’.