The energy markets, at outset frequently organised nationally under the guiding influence of the Government, are and are increasingly becoming liberalised and harmonised within the European Union, with the Netherlands being no exception. GasTerra is an advocate of a free energy market and stands behind regulation that encourages trade. However, excessive regulation is at odds with free market operations. It is necessary to strike a balance here.
Within the European Union, hard work is underway to promote cross-border gas trade, inter alia by harmonising access to international transmission systems. To accomplish this, the European regulators and transmission companies are working on new regulations: the so-called European network codes. The European Commission establishes these codes. In 2013, several steps were taken in this field. It looks as if the new network codes for the gas market will be implemented in the Netherlands in 2014. Notwithstanding all efforts, it seems the ambitious objective of the European Union to function as a single European energy market by 2014 will unfortunately not be achieved.
Transmission Capacity Allocation
In 2013, the European Commission adopted the Network Code on Capacity Allocation Mechanism (CAM). Based on these network codes, entry and exit transmission capacity is offered at auction via the central platform (PRISMA), as a single bundled product rather than as two separate products. As a result, the gas can no longer be supplied at the border points, unless the necessary transmission capacity is already contracted. The bundling of free capacity is mandatory. 'Unbundled' capacity is only offered if there is a mismatch between the available capacity on both sides of the border. The transmission system operators must comply with the code by 1 November 2015. The Dutch national transmission system operator, GTS, has implemented the new rules ahead of schedule (as from 1 January 2014).
Congestion at interconnection points
Parties must pre-book the transmission capacity they anticipate using with transmission system operators. Sometimes one party will have a shortage of booked capacity whereas other parties are not making full use of their booked capacity. The Congestion Management Procedures (CMP) Guidelines are intended to resolve these contractual congestion problems at interconnection points (which, in the Netherlands, correspond with border points). The CMP entered into force on 1 October 2013. When carrying out these regulations, European Member States can opt to restrict renomination (the so-called short-term 'use-it-or-lose-it') and/or a transfer and repurchase arrangement. The Dutch regulator ACM and GTS have chosen the latter option. GasTerra backs this decision. In practice, this means that at certain border points, GTS can offer more capacity than is technically available, on the assumption that not all parties are simultaneously using the full one hundred per cent of their booked capacity. The system provides a benefit to all users who want to book capacity, but it is of great importance here for GTS to have a good estimate. This mechanism came into operation on 1 January 2014.
The network code for balancing has also been adopted in the meantime. The balancing system used by GTS in the Netherlands fits well with these European regulations. Only a few changes are needed to comply with the network code. The biggest change is the cancellation of the bid price ladder (BPL). With the BPL, GTS would make arrangements every day with parties who committed themselves, in case of imbalance on demand from GTS, to supply extra gas or conversely to withdraw gas from the network. From now on, where there is imbalance in the network during the day, GTS will directly buy or sell gas on the (ICE-ENDEX) exchange until the balance in the network has been restored. GTS will be bringing forward implementation of the regulations to 3 June 2014.
Furthermore, the European regulators and transmission companies are working, inter alia, on new rules for harmonising the methods by which the tariffs are set and on adjustments to the CAM network code which will relate to new capacity.
Europe is currently revising its financial regulations as a result of the global financial crisis. A sector-specific regulation (Regulation in Energy Markets Integrity and Transparency, REMIT) had already been adopted in 2011 especially for the energy sector. This includes a ban on insider trading and market manipulation. GasTerra has established a compliance programme to prevent insider trading and market manipulation. The regulation also contains a requirement for market participants to report their deals to the European regulators. The European Commission is currently working on giving effect to these regulations. Reporting requirements are expected to come into force in the second half of 2014.
EMIR (The Regulation on OTC Derivatives, Central Counterparties and Trade Repositories – also known as the European Market Infrastructure Regulation) came into force in 2012. Whether or not these financial regulations apply to GasTerra depends on the definition of the financial instrument. This definition is contained in another directive for the financial markets, MiFID (Markets in Financial Instruments Directive), which is also being revised at the present time. It is uncertain whether (part of) GasTerra's gas supply contracts come under these regulations. These are contracts concluded on exchanges and broker platforms. Further clarification about this is expected by no later than 12 February 2014. If these contracts fall within the scope of EMIR, GasTerra must apply certain risk mitigation techniques (such as timely confirmation of deals, portfolio reconciliation). In addition, GasTerra must report relevant deals to Trade Repositories. GasTerra, like the vast majority of energy companies, believes that the gas supply contracts are not financial instruments.
GasTerra B.V. is a private limited company with registered offices in Groningen, The Netherlands. The company was founded on 1 July 2005 when N.V. Nederlandse Gasunie was legally split into a Transmission System Operator (TSO) and a trading company. In doing so, the infrastructure (the gas pipelines) and all transmission-related activities remained with Gasunie while the newly formed GasTerra continued with all gas trading activities.
GasTerra B.V.'s authorised share capital is €180 million, split into 40,000 shares of €4,500 each. All shares have been subscribed, fully paid up and registered, and can only be transferred by unanimous approval of the Shareholders' AGM. The shares are held by the State (10%), EBN B.V. (40%), Shell Nederland B.V. (25%) and Esso Nederland B.V. (25%). No share certificates are issued.
GasTerra is not a listed company, as a result of which the Corporate Governance Code does not apply to the organisation. However, where possible and relevant, GasTerra is guided by the principles of the code and takes the best practice provisions as a guide. In this chapter, we report on the appropriate principles of the Code.
These are to be implemented in the main when it comes to the principles and provisions included under the task and manner of working of the Board of Directors. The tools that the Board of Directors uses for this consist specifically of the annual activity plan, the budget, monthly and quarterly reports and the Business Risk Analysis (BRA) tailored to the organisation. The structure and operation of risk management at GasTerra is described herein (see also elsewhere in this Annual Report, Chapter Results and the market, containing a description of the principal risks). Risk management has been delegated to the line management. Reports are made to the Board of Directors concerning implementation. Via the BRA, the Board of Directors reports at least once a year to the Audit Committee. The external auditor assesses the compliance of this system to the extent relevant in the context of the audit of the accounts.
The Board of Directors of GasTerra consists of a Managing Director, nominated on the recommendation of the Supervisory Board, approved by the Minister of Economic Affairs. The Managing Director is appointed for an indefinite period. In addition to the Managing Director, the Board of Directors also consists of three further Directors / holders of a general power of attorney: the Financial Director, the Commercial Director and the Director of Strategy and Optimisation. The remuneration of the Managing Director is determined by the Supervisory Board and in addition to a fixed remuneration, it also has a variable component that is dependent on the performance of the organisation. The Supervisory Board decides whether the Managing Director is eligible for a variable remuneration and the amount thereof. The size of the variable remuneration shall not exceed 30 per cent of the fixed salary. The amount of the remuneration of the Managing Director is given elsewhere in the Annual Report (see Annual Accounts). With regard to the Managing Director, the provisions relating to the maximum number of allowable supervisory board memberships in the Management and Supervision Act shall be observed.
Supervision of the Board of Directors of GasTerra is exercised by the Supervisory Board. The Supervisory Board consists of eight people, of which one position is currently vacant. One member is appointed directly by the Minister of Economic Affairs, the remaining members are appointed by the Annual General Meeting of Shareholders on the recommendation of the individual shareholders. The number of supervisory board memberships that one person may hold is limited to ensure the proper performance of the duties. The Supervisory Board has appointed its own secretary, who is supported, where necessary, by the Company Secretary.
The duty and manner of working of the Supervisory Board are in accordance with the Code set out in its own regulations. By default, the Annual Report contains a report from the Supervisory Board. A (brief) profile of the members of the Supervisory Board is included in the Annual Report. The provisions relating to the supervision of the Board of Directors by the Supervisory Board are effected at the regular meetings of the Supervisory Board. Furthermore, at least once a year (in the absence of the Board of Directors), the Supervisory Board discusses its own performance (and desired competencies) as well as that of its individual members and the Board of Directors.
The Articles of Association stipulate that decisions which are important to GasTerra must be approved by the Supervisory Board or the College of Delegate Supervisory Directors. The College of Delegate Supervisory Directors is a statutory company body. The College is formed by members of the Supervisory Board and consists of five supervisory directors including the supervisory director who has been appointed by the Minister of Economic Affairs.
The Supervisory Board has established an Audit Committee. The Audit Committee is a non-statutory body composed of four members appointed by the Supervisory Board. The Supervisory Board or the College of Delegate Supervisory Directors may refer matters for the consideration of the Audit Committee. Whether solicited or unsolicited, the Audit Committee issues advice to the Supervisory Board or the College of Delegate Supervisory Directors on the matters within the remit of the Audit Committee and prepares the decisions of the Supervisory Board in relation to those matters. The Audit Committee generally meets four times a year, and did so in 2013.
The duty and method of working of the Audit Committee are set out in regulations that essentially follow best practice provisions mentioned in the Code. Thus, the duties of the Audit Committee include supervision regarding the financing of the company, operating expenses and capital expenditures in relation to the agreed budgets, the provision of financial information, the operation of the internal risk management and control systems, compliance with recommendations and observations of internal and external auditors, the role and functioning of the internal audit department, and maintaining the relationship with the external auditor. Matters covered in particular by this latter topic are the independence of the auditor, remuneration and the potential provision of work that is not audit-related.
The (system of) remuneration of the Supervisory Board has been approved by the Annual General Meeting of Shareholders (AGM). The total amount of remuneration of the Supervisory Board is stated in the Annual Report.
With regard to the powers of the Shareholders, the Articles of Association stipulate that decisions of Shareholders may only be taken by a majority of three-fourths of the votes cast. For a number of decisions, in particular the transfer of shares, suspension or dismissal of the Managing Director, amendment of the Articles of Association and dissolution of the Company, unanimity is required.
As regards disclosure of information to shareholders and the potential impact on the share price, it must be noted that the 'GasTerra share' is not traded on the financial markets.
With regard to financial reporting, several times a year (at regular meetings), the Supervisory Board, the College of Delegate Supervisory Directors and the Audit Committee supervise compliance with the internal procedures relating to the preparation and publication of the Annual Report, the Annual Accounts and the quarterly reports.
The Annual General Meeting of Shareholders appoints the external auditor. It is standard procedure for the Audit Commission to interrogate the external auditor with regard to his declaration on the accuracy of the financial statements. Furthermore, the Board of Directors and the Supervisory Board report to the Annual General Meeting of Shareholders on the independence of the external auditor and an informed recommendation is issued for the appointment of an external auditor. For this purpose, the Board of Directors and the Supervisory Board regularly, but at least once every four years, undertake a thorough assessment of the functioning of the external auditor. KPMG has been appointed to do the audit up to and including the year 2014. The (re)appointment of the external auditor is on the agenda of a regular AGM.
In connection with the audit of the financial statements, the external auditor is involved in the Internal Audits working plan. Findings concerning the internal audit function are included where necessary in the external auditor’s Management Letter. The Management Letter is discussed at a meeting of the Supervisory Board. The external auditor reports anything he wishes to bring to the attention of the Board of Directors and the Supervisory Board in relation to his audit of the financial statements and the related verifications. This gives effect to the provisions pertaining to the principle in the Code on the relationship and communication of the external auditor with the company's organs.
CSR and governance
CSR is an integral part of the strategy at GasTerra and has thus been embedded into our day-to-day operations. Since 2013, GasTerra has integrated the CSR matrix and associated objectives and activities into the Business Plan which is approved by the Supervisory Board, the governance body with the highest degree of responsibility. Monitoring of progress is included in the regular reporting cycle. The quarterly reports are discussed by the College of Delegate Supervisory Directors, the Advisory Committee of Shareholders and the Audit Committee.
GasTerra maintains a code of conduct laid down by the Board of Directors. It includes the standards intended to promote and safeguard the quality and integrity of the staff’s actions. These standards are based on two values: integrity and respect. All GasTerra staff subscribe to the code of conduct on joining the company. Attention is also regularly drawn to the code of conduct within the organisation. In addition, we have drawn up various supplementary rules and procedures designed to ensure compliance with external legislation and regulations. The most important of these are as follows:
Competition Law Compliance
The code of conduct explicitly states that staff adhere to Dutch and European competition regulations. In 2009, GasTerra elaborated these regulations into an integrated Competition Law Compliance Programme. A Compliance Officer has been appointed who is responsible for implementing the programme.
Forming part of the Compliance Programme is an annual obligatory compliance course for all staff. The objective of this is to make staff aware of the importance of the duty to adhere to legislative and other regulatory requirements applicable to GasTerra. The regulations and procedures discussed below are also addressed. During the course, potentially problematic situations are pinpointed and the staff learn what they ought and ought not to do in these situations. The compliance course is offered several times a year. In 2013, 96% of employees took the course.
GasTerra also holds regular internal audits to ensure compliance with legislation and regulations. All contracts are drawn up on the basis of pre-established standards and audited by an account manager, a department manager and the departments of Legal Affairs and Finance. In addition, the internal auditor regularly vets each department to check on whether they are complying with all procedures. Results of all audits are discussed with the auditor and the Audit Committee.
Ancillary activity regulation
GasTerra appreciates it when, alongside their work, staff are socially active. The ancillary activity regulation prevents conflicts of interest from arising.
Anti-bribery and anti-corruption procedure
The basic principles for giving and receiving gifts have also been incorporated into the code of conduct. These principles are set out in a supplementary regulation. This regulation serves as the guideline for staff when deciding whether they may give or receive a gift, what sort of gift this may be and how much it may cost.
REMIT Compliance Procedure
European regulations, specifically drawn up for the energy sector, prohibit market manipulation and insider trading and stipulate that information which might constitute insider information be made public as quickly as possible. If our organisation has information that may be regarded as insider information in the sense of the relevant regulations, for all safety’s sake, we immediately cease our trading activities. Only once the information is in the public domain, for example, publicised on our website, are trading activities resumed. In 2013, GasTerra placed such a publication on its website four times.
A whistleblower scheme has been in force at GasTerra since 2007. Employees who uncover severe abuses and whose reports fall on deaf ears within the organisation can report these in confidence to the Chair of the Board of Supervisory Directors. By doing so, they need not be apprehensive about repercussions or unfair treatment. In 2013, nobody made use of this scheme.
Violations and fines
In 2013, three fines amounting in total to €2,680 were imposed on the company in connection with violation of legislation and regulations. These were a fine imposed by the Employee Insurance Agency UWV (Uitvoeringsinstituut Werknemersverzekeringen) for overdue reporting of sickness and two fines imposed by the tax authorities for late submission of tax returns. There have been no reports of staff who have not complied with the code of conduct and/or supplementary procedures.
GasTerra continually assesses whether the code of conduct and procedures need to be adapted or supplemented. We anticipate that in the future adaptations will be needed to meet the coming changes in European financial regulations, such as the introduction of the MiFID and the EMIR. It is also anticipated that a further elaboration of the REMIT Compliance procedure will be needed, based on experience gained.
Market regulators maintain market rules and ensure a proper and fair operation of the market. In the Netherlands, this task is assigned to the Authority for Consumers and Markets (ACM; previously the Dutch Competition Authority – Nederlandse Mededingingsautoriteit or NMa). European competition law is enforced by the European Commission (EC). In addition, the ACER (Agency for the Cooperation of Energy Regulators) monitors the gas market on behalf of Europe. GasTerra attaches great value to maintaining an open and businesslike working relationship with the market regulators.