In its service provision, GTS focuses on selling the available capacity in a reliable network with competitive conditions. Customers enter into contracts which allow them to book capacity at certain entry or exit points in the network, for a certain period (year, month or day). Customers can feed gas into the network at entry points, and they can retrieve gas from the network at exit points.
For all services, customers pay an all-in tariff for the capacity booked. This capacity tariff entitles customers to feed gas into and retrieve gas from the relevant network point for the period that has been agreed. There is no tariff for actual usage of the network point. Customers can trade gas amongst themselves at a virtual market place called TTF. A liquid and competitive capacity market is important to GTS, because it makes the GTS infrastructure more attractive to its customers.
The GTS network forms part of the European gas network. It competes with other networks with regard to transport of international gas flows.
The variable costs that GTS makes for using the capacity booked by its customers consist mainly of energy costs, i.e., gas and electricity for compressors to transport the gas, and electricity for producing nitrogen to blend the gas to the right quality. These variable costs, also referred to as uncontrollable costs, form part of the all-in capacity tariff.
In a year with an unusually cold winter, it can happen that GTS’s revenues do not actually increase significantly, because customers have already booked their winter capacity. However, the actual energy costs of transporting larger volumes of gas in a cold winter do increase, leading to a lower operating result. Conversely, an unusually mild winter leads to lower energy costs.
These energy costs are subject to a system of retroactive settlement, with a limited risk for GTS, allowing these uncontrollable fluctuations in the operating result to be corrected in a later year. In compliance with current IFRS rules, in the annual accounts of GTS, no accounts payable or receivable have been included for these settlements with regard to energy costs (which may be either positive or negative depending on whether the winter is unusually mild or extremely cold).
The tariffs that GTS charges its customers are regulated. They are determined according to the ACM calculation rules. As of 2014, a system of income regulation will be applicable: the tariffs are calculated by dividing the permitted revenues by the estimated capacity bookings. If the actual revenues deviate from this, the difference will be settled in later years. The permitted revenues are based on ‘cost-plus regulation’: GTS is allowed to earn back the efficiently incurred capital costs and operational costs, including a return that is in line with the market. The permitted capital costs are derived from the ‘regulated asset value’, which is also referred to as ‘regulated asset base’ (RAB), while the permitted operational costs consist mainly of costs for planning, metering and billing, management and maintenance, and the uncontrollable energy costs mentioned above.
Investments and return
The design and use of the network determine the total available capacity. GTS is legally bound to invest efficiently in sufficient transport capacity in order to be able to satisfy the total market needs. To this end, the legal point of departure is that the gas supply for small-scale users in the Netherlands is guaranteed for a day with an average effective temperature over 24 hours as measured at the Royal Netherlands Meteorological Institute in De Bilt of minus 17°C.
New investments – if they are deemed to be efficient by ACM – are added to the RAB, and contribute to the revenues as of the year after becoming operational.
In 2013, ACM laid down for a period of three years (2014–2016) the method by which GTS is to be regulated. The main parameters defining this method of regulation are:
- CPI: the tariffs may be indexed annually on the basis of inflation, in line with the Consumer Price Index.
- The WACC: the allowed return on the regulated asset value. For the years 2014–2016, ACM has set the real pre-tax WACC at 3.6%. This is based on a 50/50 equity to debt ratio, a nominal cost base for loans of 3.85%, and a nominal return on equity of 5.6%.
- The productivity improvement to be realised during the regulation period on the total operational and capital costs, excluding uncontrollable costs. For the years 2014–2016, this productivity improvement (or frontier shift) has been set at 1.3% per year. For the current regulation period, ACM has not conducted an individual efficiency benchmark survey for GTS, but it intends to do so in the next regulation period.
In practice, GTS can achieve a higher or lower return compared to the return on efficiently incurred costs determined by ACM. This depends on the level of the actual costs.