This is presentation on tariff methodology in the gas market

1. Copyright © 2018 The Brattle Group, Inc.
The TAR Network Code and
Ukrainian Regulations
SUBHEAD GOES HERE
PRESENTED FOR
Ukrtransgaz
PRESENTED BY
Dr Serena Hesmondhalgh
16 August 2018

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Agenda
Main requirements of TAR Network Code
Consequential changes to the Ukrainian
methodology
–And other desirable changes

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TAR Network Code – key points
–Main elements come into force by mid-2019
–Tariffs for all entry and exit points must be determined using
same methodology
–Strong presumption of 50/50 split between entry and exit
–Fuel gas charge (commodity charge) must be the same at all
entry points and all exit points
–Allowed relationships between year-ahead tariffs and other
tariffs (shorter term or interruptible)
–Tariffs for entry to/exit from storage must be discounted at
least 50%

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TAR Network Code – key points
–Main elements must come into force by mid-2019
–Tariffs for all entry and exit points must be determined using
same methodology
–Requirement for 50/50 split between entry and exit
–Fuel gas charge (commodity charge) must be the same at all
entry points and all exit points
–Allowed relationships between year-ahead tariffs and other
tariffs (shorter term or interruptible)
–Tariffs for entry to/exit from storage must be discounted at
least 50%

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–Weights for all entry points and all exit points must be derived
using the same methodology
• The cross-border / domestic points split falls out of this calculation
–These weights can then be combined to set equal tariffs for
“homogenous groups” of points
• For example, all domestic entry points could have the same tariff,
as could all domestic exit points
–Approach not obligatory, it is the only one described
• And any other approach must be compared to it
TAR Network Code
Methodology
A capacity-weighted distance calculation must be
performed

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–The TAR does not allow for commodity charges to vary
between different exit points
–It must be calculated based on historic or forecast flows
TAR Network Code
Fuel gas
The fuel gas charge is an example of a commodity (flow-
based) charge

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Changes to the Ukrainian methodology
To comply with the TAR Network Code, several changes
need to be made
–Apply a uniform methodology for determining capacity tariffs
–Equalize fuel gas charges and apply to all exit points
–Change entry/exit split from 30/70 to 50/50
–Align discounts with those allowed in TAR
Changes to the calculation of the allowed revenues are also
required to reflect
–Changes in the taxation regime
–A realistic schedule of investments in the network
–Under-recovery of previous revenues (also for over-recovery)

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–At present, a version of the capacity-weighted distance
methodology is:
• First used to derive cross-border/domestic split; and
• Then used to derive cross-border exit charges
–Directly connected customers are charged on a separate basis
This needs to be replaced with a single capacity-weighted
distance calculation
Changes to the Ukrainian regulations
Methodology
The current regulations do not involve a uniform
methodology for all entry and exit points

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–The TAR requires commodity charges, like the fuel gas charge,
to be the same at all exit points and charged explicitly
A single percentage value for all exit points needs to be
calculated
Also, it makes sense for the price for fuel gas needs to be
more tightly defined by reference to a traded market price
Changes to the Ukrainian regulations
Fuel gas
The current regulations only explicitly charge for fuel gas at
cross-border exit points and the percentages vary, for
domestic points charge included in capacity charge

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At present the multipliers are between [this is from Dec-16
methodology but has it changed?]:
–0.5 and 1.5 for monthly and quarterly capacity
–0.2 and 1.5 for daily capacity
Over time these must move to:
–1 and 1.5 for monthly, quarterly and daily capacity
Tariffs for entry to/exit from storage cannot exceed 50% of
year-ahead tariffs
–Proposal is [unsure what was finally decided]
Changes to the Ukrainian regulations
Discounts
The TAR specifies the maximum multipliers that can be
applied for shorter-term and capacity and for entry to/exit
from storage

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Neither royalties nor non-reimbursed VAT costs are
applicable any longer
–References to them need to be removed
The assumption on investments is unrealistic
–The more standard approach is to agree an investment plan
with the regulator and this is what is proposed
Changes to the Ukrainian regulations
Allowed revenues
The current calculation of allowed revenues includes
royalties and non-reimbursed VAT. It also assumes
investments will at least equal depreciation

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Proposal is to allow recovery to take place over two
subsequent regulatory periods
–Applies to both capacity and commodity charges
–Interest added to keep TSO whole
Changes to the Ukrainian regulations
Under/over-recovery
If a TSO under- (or over-) recovers its allowed revenue in
one regulatory period, the TAR allows for these revenues to
be recovered/paid back in subsequent periods