ENERGY NEWS #01/2017
Even though the „Konni Gas“ ruling of the Bundesnetzagentur is now in its fifth year of existence, cross-quality gas trading in Germany is still not working seamlessly. It is uncertain whether the amendment to the ruling recently decided by the Bundesnetzagentur will bring the improvements desired, as is the question of whether a court would potentially uphold or annul the amendment.
Summary
- The “Konni Gas” ruling issued by the Bundesnetzagentur to facilitate cross-quality gas trade in Germany is suffering from practical problems. The Bundesnetzagentur intends to overcome these difficulties by continuing to levy the conversion fee beyond the 31 March 2017 and consequently, on 21 December 2016, decided to adjust the “Konni Gas” ruling accordingly.
- In its decision it needed to factor in the interests of the various market participants, and particularly those of the balancing group managers (Bilanzkreisverantwortliche). Whether or not the Bundesnetzagentur’s amendment ruling has managed to do so may ultimately be up to the courts to clarify.
Conversion system according to the original “Konni Gas” ruling
In Germany, gas is balanced cross-quality regardless of its energy content. This means that a supplier required to deliver L gas or H gas may also meet this obligation by feeding gas of the other quality into the network. The conversion that may be necessary was regulated by the Bundesnetzagentur (“BNetzA”) in its “Konni Gas” ruling of 27 March 2012 (BK7-11-002). A conversion fee (Konvertierungsentgelt) and a conversion surcharge (Konvertierungsumlage) are the key elements of this system.
The conversion fee is levied from the balancing group managers (“BGM”) by the market area managers (Marktgebietsverantwortliche – “MAM”). In their capacity as natural or legal persons, the BGM are responsible vis-à-vis the MAM for managing the balancing groups and may be provided by various market participants. The conversion fee is only payable by those BGM who balance cross-quality, i.e. feed in a certain gas quality and withdraw the other. The conversion fee is currently fixed by the MAM ex ante on the basis of a forecast; it may not exceed the maximum cap stipulated by the BNetzA. In practice, the conversion fee is generally passed on to final customers. Under the original “Konni Gas” ruling, the conversion fee was to be gradually reduced and discontinued entirely by 1 October 2016, thereby allowing unhindered, cross-quality gas trading.
Over and above that, the MAM may levy a conversion surcharge where they expect the conversion fee alone to be insufficient to cover the costs of conversion. The conversion surcharge is levied on all BGM even if they do not balance cross-quality.
Problems of the original “Konni Gas” ruling
In practice, the “Konni Gas” ruling failed to promote cross-quality gas trade to the extent expected.
One reason for this is that the production of L gas in the Netherlands and Germany is dropping rapidly whereas demand is only falling very slowly owing to the expense of adapting consumption equipment to H gas. Suppliers owing L gas are therefore increasingly supplying H gas, thereby causing high conversion costs. Added to that, it would appear that the lowered conversion fee hardly provides any effective incentive for the quality-based supply of L gas. As from the spring of 2016, for example, NetConnect Germany (“NCG”), as MAM, was forced to buy in considerable amounts of expensive balancing energy to compensate for the lack of L gas. NGC soon realised that it was unable to cover the resulting costs any longer.
Accordingly, in January 2016 the MAM of the two German balancing areas notified the BNetzA of their intention to continue levying the conversion fee for converting H gas to L gas beyond 1 October 2016 until 31 March 2017. The BNetzA raised no objection. On the contrary, it issued a temporary order permitting NGC to exceed the fixed cap on the conversion fee as well. However, the BNetzA subsequently lifted that order.
Proceedings to amend the “Konni Gas” ruling
At the request of the two MAM however, on 19 February 2016 the BNetzA commenced proceedings to amend the “Konni Gas” ruling (case no. BK7-16-050). The parties to these proceedings were the two applicants, but the BNetzA had also summoned interested third parties, at their request, to appear at the proceedings. In the course of these proceedings, the BNetzA held two consultations with the market participants in July and August 2016.
The subject matter of the latest BNetzA consultation was a BNetzA draft ruling presenting two variants to amend the “Konni Gas” ruling. Both were based on the assumption that the conversion fee would be continued but was only to be levied for converting H gas to L gas. In contrast to the present regulatory regime, the conversion fee was no longer required to be phased out. The conversion surcharge was to remain in place, as originally foreseen in the “Konni Gas” ruling.
The first alternative provided for the MAM to determine the conversion fee ex ante by forecasting as hitherto. The fixed conversion fee was to apply for a period of twelve months in each case (apart from the first period of applicability) and was not to exceed the cap of 0,045 ct/kWh.
The second alternative provided for the conversion fee to be calculated ex post. The MAM were to determine an individual conversion fee for each day on which extra costs were incurred for requiring balancing energy to compensate for imbalances caused by cross-quality balancing. To that end, the costs of conversion were to be split between the conversion volumes of the individual balancing groups. In the case of this variant, the BNetzA had not provided for a cap on the fee.
Unlike in the present situation, if a surplus were generated that was not required, both variants provided for the possibility of distributing revenues that were generated from the conversion system to the BGM.
On 21 December 2016, the BNetzA decided to follow the first of its proposed alternatives and maintain the conversion fee in its existing ex ante form without any limit in time. The BNetzA has not published the (full) decision as yet but merely provided the operative provisions and the necessary amendments to the standard agreement for conversion in cross-quality balancing areas on its homepage. Accordingly, the conversion fee will in future only be levied for converting H gas to L gas and will be determined ex ante by forecast. As from 1 October 2017, the conversion fee is to be determined for a 12-month period of application in each case (except for the first period of application). It may only exceed the cap of 0.045 ct/kWh in exceptional cases.
Interests of the parties and their realisation
The parties involved on the German gas market have naturally reacted to this amendment in different ways.
The MAM see the retention of the conversion fee in a positive light. In their view, the conversion fee provides incentives for quality-based balancing group management, that being the only way to ensure the security of supply despite declining L gas volumes.
Most BGM and transport customers, however, reject any continuation of the conversion fee. They take the view that this would give new providers with L gas procurement contracts preferential treatment. It would impair cross-quality trade and hence competition as well. The majority of BGM and transport customers prefer a conversion fee determined ex post since in that way the costs would be fully covered and hence source-based. Only a minority stressed the aspect of predictability and preferred a conversion fee fixed ex ante.
Market participants who wish to resist continuation of the conversion fee may contest the BNetzA’s amendment ruling in court within one month of service of the full decision, this period not having been triggered by publication of the operative provisions. For that purpose they should, if possible, have already been involved in the ruling proceedings. It is highly likely that court complaints will be lodged against the amendment ruling of the BNetzA.
They could potentially be based on the fact that the amendment ruling impairs the protection of the legitimate expectations of those BGM who relied on the fact that provision had been made for the discontinuation of the conversion fee, and for that reason had refrained from passing it on to their customers by contract. It also needs to be borne in mind that for dealers and suppliers, who do not already have L gas procurement contracts, the conversion fee may have the effect of a market entry fee and hence does not promote, but rather hampers, the aim of cross-quality competition on the gas market as pursued by the BNetzA.
Above and beyond all these specific considerations, in its decison the BNetzA was required to take due account of the interests of the market participants, and in particular those of the BGM. The parts of the decision on the amendment of the “Konni Gas” ruling that have been published to date fail to reveal whether or not the BNetzA has met this obligation in an appropriate manner. Once the full decision has been published, however, this question is likely to be for the courts to decide.
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