GIE Annual Conference Madrid, 22-23 November 2007

1. Investing in Europe‘s Future – the Role of Regulators David Halldearn Senior Adviser, European Affairs OFGEM GIE Annual Conference Madrid, 22-23 November 2007

2. Networks have Public Interest Functions • Fair network access is central to competitive markets • Secure supplies consumers based on reliable networks • Diverse energy supplies requires investment in network infrastructure • Networks are a significant cost to energy users – efficiency is therefore important • Networks tend to be monopolies – where competition doesn’t work easily • Network companies have significant public interest responsibilities – more than most other energy companies

3. What Do We Want From Network Companies? • A European Grid • Efficient Investment • Security of network operation • Networks which provide the basis for competitive markets These things do not yet exist across the Union – there is a ‘regulatory gap’

4. What is the ‘regulatory gap’? • Despite developing regional markets and current EU legislation, existing national markets, and market designs, create a “regulatory gap” • National regulatory systems foster investment and fair trade: • Regulatory certainty over the rules for investment and cost recovery • Strong independent regulators to oversee the market • These things do not exist for cross border investments • Reliance on contracts – no framework for regulated investments • Contract based investments subject to uncertainty – Government involvement, competition law, and A22 exemptions in some cases • And many regulators do not have the necessary tools to do the job

5. How does the 3rd Package Measure Up? ACER advises Commission Commission ‘invites’ ENTSO to draft 11 codes ENTSO seeks agreement of ACER to draft codes ACER agrees ACER disagrees ACER advises Commission Comitology Voluntary codes Binding ‘Guidelines’

6. Is the relationship between ACER and ENTSO right? This? Or this? ENTSO ENTSO ACER ACER

7. TSOs may not get what they need for investment • How can ACER give investors regulatory certainty if it just advises the Commission? • National Regulators will be given powers and have European duties • But can they take account of voluntary codes when making regulatory decisions – e.g on investments? • If one regulator allows such investments and another does not, what will be the decision when they are taken to Court? • How does this lead to regulatory certainty? • Not good for TSOs, or regulators, or customers • This problems must be addressed by Council and Parliament

8. What would work? ACER advises Commission Commission makes ‘framework’ proposals to comitology ENTSO drafts codes to meet ‘framework’ requirements Acer disagrees ACER agrees ENTSO revise codes Binding Codes

9. What happens in the interim? ERGEG and GIE will have close discussions to prepare • Regulator and regulated are two sides of the same coin: ERGEG are developing ‘mandate’ for the list of 11 codes • Opinion on content, scope and purpose • How ACER will assess codes when drafted • Basis of ACER approval and advice to Commission Structures of ACER will be developed Regional Initiative will be reinforced • To make practical progress in the interim

10. Conclusion • TSOs and Regulators have a common interest in a predictable regulatory framework for investment • Amendments to the current Proposals are needed to get the balance right • Contracts as the basis for investment will continue to be very important • clarity is needed on the rules of the game here too • Efforts must be increased to make progress in the interim through the Regional Initiatives • We cannot wait for legislation!

11. Thank You David Halldearn – Director, European Affairs