7 reasons for non-functioning of the Gas Network Code

by Dumitru Chisalita

The gas network code was designed as a set of rules leading to market development, increase in transactions and discipline of market participants. 9 years from the commencement of this process there were no important steps in market development or the discipline of participants, in fact we don’t have any unitary document of the Code, but an endless series of additions and alterations of the old document, most realized “overnight”. Within the campaign Starting over in the gas market I will start an analysis of the current stage of the gas market. I will begin with an analysis of the causes that make the Gas Transmission Network Code non-functional. I believe there are 7 causes that determine the non-functioning of the Network Code, which I will present in order of importance:

1. Legislative framework antagonistic to the Network Code
2. Incomplete text of the Network Code (lack of principles and manner of carrying out activities)
3. Physical configuration of the current NTS and adjacent systems
4. Nonexistence of flexibility mechanisms in the Romanian gas market
5. Lack of IT platforms and modality for data transmission
6. Sabotage of the Network Code implementation process
7. Incompetence

1. Legislative framework antagonistic to the Network Code

1. Lack of equitable, fair, non-discriminatory mechanisms in line with the provisions of the Civil Code (art. 1674 and art. 1678), for the allocation of the delivered quantities, for:
   • individualizing the quantities sold,
   • allowing suppliers to monitor their own commodity on the procurement-transmission-storage-transmission circuit, and being able to request them to be disciplined in the market and in the transmission activity,
   • having an alignment with the allocation modality in the Transmission Network Code and allowing the matching of quantities,
   • having an alignment with the modality of allocation of distributed or stored quantities
2. Lack of Distribution Network Codes, as a set of rules, determining the responsibilities and rights of the parties, as well as the manner in which gas flow continuity must be ensured in the transmission system to the end-consumer, penalties charged or from which the user of the distribution system benefits,
3. Lack of Underground Storage Facilities Codes, as a set of rules to determine the responsibilities and rights of the parties, but also the way in which gas takeover/handover and storage/extraction from storage facilities should take place. Lack of detailed rules on the process of injection/extraction from storage facilities often leads to inequality in taking over own gas from the storage facilities,
4. Lack of the Gas Market Codes (market model), containing clear rules, procedures and instructions in terms of gas trading and interaction of suppliers with shippers (allowing the monitoring of the flow in real time throughout the source-consumer circuit). Among the many elements that should be defined by this document, mechanisms for ensuring the flexibility and instruments for quick access of all participants thereto and the development of cheap systems to guarantee commercial operations are primary,
5. Lack of policies against energy poverty and for supporting vulnerable customers by real methods, but also allowing the elimination of preferential prices and of the regulated market,
6. Lack of a Competent Authority at the level of the entire energy system (not only in the gas sector), which would define preventive/reactive plans for emergency situations, monitor and intervene according to principles that would not affect the commercial activity,
7. Direct or indirect manipulation of the gas market using the primary or secondary legislation, an approach entirely incompatible with the idea of MARKET RULE (gas basket, the producers’ obligation to make available gas for regulated consumers regardless of circumstances/of contracts, state intervention in setting the price for the domestic producer etc.).

1. Lack of the following principles from the text of the Network Code

1. Trade mechanisms that facilitate capacity trading through transparent, flexible, fair and easy to apply mechanisms, including intraday.

1. Only the one who makes a mistake pays and only for its act in relation to responsibilities undertaken under contracts with the transmission operator,
2. The price of the mistake is the one set by the Romanian market at the time of making the mistake (not before or after the deed).
3. Speculative lawful purpose, allowing the apparition of counterparties in the market to punish indolence of certain users
4. Commercial balancing, seconded by physical and hydraulic balancing.
5. The way in which the transmission operator will pay for its mistakes (failure to meet contractual conditions in terms of making available the booked capacity and ensuring the continuity in supply, if it is due to other network users), in relation to those who make mistakes, the price of the transmission operator’s mistake being also necessary to be determined by the Romanian market at the time of the mistake.
6. Equitable, fair, non-discriminatory allocation of quantities transported, in compliance with the Civil Code (art. 1674 and art. 1678), for both entry and exit points in/from the transmission system.

Note: This allocation should not be mistaken, but aligned with the modality of allocation from supply contracts (which are not subject to the Network Code, being a rule that should result from a future Gas Market Code) and complementary to the allocation of quantities distributed or stored (which are not subject either to the Transmission Network Code, Distribution Network Code and Storage Code being necessary).

1. Physical configuration of the current NTS and adjacent systems

1. What is currently named NTS is in fact a mixture of transmission systems: closed (local, of source-consumption type), semi-closed (regional) systems and a “0” transmission system. Thus, rules suitable for the “0” system are not appropriate for the closed or semi-closed systems (differences of technical, hydraulic, operational, functional nature etc.). Moreover, the current code treats systems that do not communicate physically as if they would communicate physically, respectively there is a manipulation of the idea of physical balance in the NTS, but in reality it is only an arithmetic illusion. The Code will be applicable only on a homogeneous system.
2. Gas storage exclusively in seasonal systems, without multi-cycle storage facilities that would naturally meet market requirements, technological and strategic storage facilities.

1. Nonexistence of flexibility mechanisms

1. Lack of possibility to store gas throughout the year depending on supply and demand, in:
   • underground storage facilities (multi-cycle storage facilities),
   • transmission/distribution pipelines
   • systems placed at consumers
2. Lack of mechanisms for sale in interruptible regime
3. Lack of mechanisms for interruptible capacities
4. Lack of introduction of gas titles as exchange element, for gas sale by gas consumers or/and as guarantee element
5. Lack of introduction of receipt as exchange element or/and as guarantee element
6. Stimulating the development in the market of new products ensuring higher flexibility (loaning, parking)

1. IT Platforms

1. Lack of computerization of the activity in the gas market by developing systems for the storage and transmission of information between operators, suppliers, balancing market operator, gas exchanges, competent authority etc.
2. Lack of platforms for booking/trading in the main and secondary market of:
   • transmission capacity,
   • distribution capacity,
   • storage capacity.
3. Lack of sale/nomination/allocation platforms
   • Gas sale/purchase
   • Transmission services
   • Distribution services
   • Storage services
   • Pipeline storage services
   • Flexibility services (loaning, parking, limitation of price volatility by stop-limit etc.)
4. Lack of system balancing platforms with the existence of at least 5 sub-platforms:
   • Trade balancing by buy/sell orders ex-ante for the day ahead/intraday
   • Trade balancing by placing bonds (anticipative) for the day ahead/intraday
   • Ex-post trade balancing by buy/sell orders
   • Physical/hydraulic balancing of the system by placing orders (anticipative) for the day ahead/intraday
   • Physical/hydraulic balancing of the NTS by placing bonds (anticipative) for the day ahead/intraday
5. Lack of matching platforms, clearing platforms, platforms for tracking bad-payers, for trading gas titles and receipts etc.

1. Sabotage of the Network Code implementation process

In my opinion, the history of the 9 years of failure of the Network Code couldn’t be achieved without sabotaging this process. There were saboteurs inside the transmission operator (change depression, loss of power as sole owner of the information etc.) inside the regulatory authority (the fear that applying the code would affect a number of targets, such as keeping a constant price at the level of the regulated market) and among network of users, suppliers or consumers in the market (the reason being of financial nature, namely the reduction of profits with the installation of market discipline).

1. Incompetence

I believe that another important aspect of non-application of the Network Code is due to misunderstanding of the free market philosophy, rules and role of a Network Code, doubled by the incompetence of certain people asked to conduct and manage processes in the gas transmission activity, on the principle that “gas flows anyway”.

Romanian version: http://dumitruchisalita.ro/2016/02/14/7-cauze-de-nefunctionare-a-codului-retelei-de-gaze/

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