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Distribution

In Portugal, natural gas distribution is provided by six natural gas distributors - five of which are Galp Energia subsidiaries - that operate under concession contracts and four so-called autonomous natural gas distribution units, where Galp Energia also has equity holdings and which operate under licence

Each natural gas distributor holds an exclusive long-term concession for its operation area. The distribution network is connected to the high-pressure network. The autonomous natural gas distribution units were created in the areas where the construction of the high-pressure network was not economically viable.

The autonomous natural gas distribution units are supplied by tank trucks from the LNG terminal and have regional distribution networks to supply customers.

The regulation of natural gas distribution in Portugal became effective in 2008, which was made possible by the renegotiation of the concession agreements between the Portuguese state and Galp Energia's gas-distributing subsidiaries.

Following the adoption of the European Union directive on the deregulation of the natural gas market, marketing activities were separated from the activities for operating distribution infrastructure.

Regulation model

ERSE, the Portuguese energy market regulator, sets the rules for the level of return allowed from the energy sector’s regulated activities. So-called ‘permitted revenues’ provide the basis for calculating tariffs, equating to the sum of the cost of capital, operating expenses and the tariff gap. The cost of capital is calculated as the product of the regulatory asset base and the rate of return set by ERSE (9% until June 2013) plus depreciation charges. The tariff gap is defined as the difference between estimated permitted revenues and actual revenues for year n-2.

The concession contracts between the Portuguese state and Galp Energia's gas distributors were signed in April 2008. These contracts set out the rules applicable to the distribution and marketing of natural gas and provided for the extension of the concession period to 40 years from 1 January 2008. Under these new contracts, in order to achieve a financially balanced concession, the Portuguese state guarantees the concession holder the remuneration of the activities covered by the concession as well as the reassessment of the concession assets at the inflation rate at the start of each regulatory period.

The distributors are granted the right to seek the restoration of balanced financial terms if, for the four regulatory periods following the first one, the compensation set by ERSE does not consider the implicit risk premium in the rate of return which has been set for the first regulatory period and if, after the mentioned period, i.e. after the first 15 years, the rate of return set by ERSE does not consider the rates of return of other comparable assets, namely those allocated to the distribution of electricity or the high-pressure transportation of natural gas.

Galp Energia's distributors transported around 1.5 bcm of natural gas per year by their infrastructure. The distributor network has around 12,000 km.