The new EU Energy Regulator

The Original Proposals by the Commission
The European Commission originally proposed creating two bodies, the European Network of Transmission System Operators for electricity (ENTSOE) and for gas (ENTSOG), with a view to these overseeing and combining the work of the various energy providers. Both were to have the power to adopt:

• Network codes on:
  1. security rules, including interoperability rules and procedures for emergency situations;
  2. grid connection and access rules;
  3. cross-border capacity allocation and congestion management rules;
  4. network-related transparency rules;
  5. energy efficiency rules;
• a 10 year investment plan; 
• an annual work programme; 
• research plans.

The European Regulatory Energy Agency/Agency for the Cooperation of Energy Regulators would itself then only have monitored and reviewed these two bodies in an advisory capacity.

Alterations proposed by MEPs
The European Parliament's Industry Committee's opinion differed from that of the European Commission in that they felt that the Agency should have regulatory powers. MEPs agreed with the motion on regulatory powers by a large majority, 575 in favour, and only 34 against. Parliament believes that the Agency should be handed decision-making powers over the investment plans and network codes developed by the ENTSOs.

Further to this, the European Parliament proposes that the Agency should be subject to a vote of approval by and be accountable to the Parliament and that the Agency should have its seat in Brussels. It should also have a greater say in determining important issues to the development of the internal Energy market.

The main tasks of the proposed Agency would be:

1. Providing a framework for national regulators to cooperate
   The framework is intended to improve the handling of cross-border situations. The Agency will lay down procedures for cooperation between national regulators, for example when more than one Member State is involved the Agency will ensure the appropriate exchange of information and apportionment of competences. The framework structure should also promote regional cooperation between national regulators;
2. Regulatory oversight of the cooperation between transmission system operators
   The Agency will have responsibility for monitoring and reviewing the activities of ENTSOE and ENTSOG. In particular, it will be involved in the setting of priorities through the Networks' work programme, in the review of their 10-year investment plan, and in the preparation of technical and market codes. The review of the investment plan is without prejudice to the transmission system operators’ liability for technical failures as defined under national law. As regards the technical and market codes, the Agency will require transmission system operators to modify their drafts or to tackle more specific issues in detail. It will also be able to recommend that the Commission make these codes legally binding where voluntary implementation by transmission system operators proves to be insufficient or not suited to certain circumstances. The Agency may recommend modifying the transmission operators' draft or recommend additional provisions to the Commission; in practice, this mechanism will take the form of a constructive and continuous dialogue between the Agency, Transmission System Operators and the European Commission. The involvement of the Agency will be the key to ensuring that cooperation among Transmission System Operators proceeds in an efficient and transparent way to the benefit of the internal market;
3. Individual decision making powers
   With regard to specific cross-border issues, the Agency would have powers relating to Exemption 5 requests, to decide on the regulatory regime applicable to infrastructure within the territory of more than one Member State where the matter concerns infrastructure assets of European interest. The Agency would also be able to take specific decisions on individual technical issues, but only when they have been granted these decision making powers under specific Guidelines adopted pursuant to the Gas and Electricity Directives; and
4. General advisory role
   The Agency would have a general advisory role, along with the Commission, regarding market regulation issues. It would have the power to issue good practice guidelines to national regulators. It would also have the power to review, on a case-by-case basis, any decisions taken by a national regulatory authority regarding implementation of the EU gas and electricity Directives as directly impact on the internal market. The Agency would then provide an opinion on this to the Commission.

The Commission would be able to adopt Guidelines to further specify and define the role of Agency, and have three main methods for ensuring it's power over the Agency:

• any decision taken by the Agency would only be binding for specific technical circumstances that were explicitly foreseen in the Regulations and Directives or provided for by binding Guidelines on a case by case scenario – outside of this, the Agency would have no political discretion; 
• the Commission may take any necessary action to solve a situation whereby it is informed by the Agency that National Regulatory Agencies' decisions or cooperation by Transmission System Operators jeopardises the effective competition and the effective running of the market – the Commission may also choose to act on its own initiative; and
• the Agency may not make substantive decisions, it may prepare and advise the Commission only, with the decision being taken by the Commission.

The View of the European Economic and Social Committee
The European Economic and Social Committee (EESC) supports swift implementation of the single Energy market. They say the proposed Agency should be given more power to act and national regulators should become more independent from their governments. They also promote the representation of businesses, consumers and workers on the board of the proposed Agency and better coordination of national network operators.

If you need further information, please contact Gordon Downie or Paul Connolly.

07 August 2008

Full ownership unbundling, no way or the third way?

The European Parliament’s decision
The European Parliament recently voted on the so-called “Third Energy Package” following a first reading of the proposed Directives relating to electricity and natural gas on 18 June and 9 July respectively. The Parliament was critical of the Commission’s compromise with the opponents of full ownership unbundling, arguing that they had “backtracked” on their own position as a result of pressure exerted by countries such as Germany and France. By an overwhelming majority, the Parliament rejected the independent system operator (ISO) compromise and their proposed amendment to the draft Directive provided for full ownership unbundling as the only option available.

In relation to gas, the Parliament rejected the ISO but endorsed an Independent Transmission System Operator (ITO) model, proposed by the opposition to ownership unbundling as an alternative to the ISO, which would allow gas supply companies to retain ownership of the pipelines but transfer management of the system to an independent body.

Unbundling re-visited
Unlike in the UK, which has embraced full ownership unbundling, many European countries have resisted the full ownership unbundling model advocated by the Commission and the Parliament. The most notable opponents include France and Germany who, backed by several other Member States, led staunch opposition to the original proposals by the Commission. The Commission had initially proposed that the only model for system operators should be full ownership unbundling but later agreed to introduce a compromise in the guise of the ISO as a result of pressure exerted by its opponents.

The Commission’s views on unbundling had been heavily influenced by the results of DG Comp Sectoral Inquiry , which found a worrying level of market concentration, poor integration between markets and barriers to entry for new entrants caused by vertical foreclosure. The report concluded that full ownership unbundling would be the most effective model in helping to address the deficiencies highlighted.

However Germany and France, whose markets are dominated by powerful vertically-integrated incumbent energy companies, were vocal in their defiance over the Commission’s plan. Facing the possibility of a veto, the Commission attempted a compromise model as an alternative choice to full ownership unbundling- the Independent System Operator, which would allow assets to be retained by the energy companies but transfer operation of the network to an entirely independent company. The ISO would also have the power to make investment decisions in relation to the network. This is designed to ensure that the networks will be operated independently rather than working in favour of the vertically integrated energy companies and creating barriers to entry by third parties.

Even this compromise has met opposition. France and German have argued that the ISO is simply another form of ownership unbundling and they have concerns regarding the powers that the independent companies would have in relation to the development and maintenance of the network. They have tabled a proposed “third option”, which would allow the assets to stay where they are but would transfer the management to an independent body, whose membership would include a trustee appointed by the regulatory authority but whose role would be to act in the interests of the owner company in relation to preserving the value of the assets.

Whether there would be any appreciable difference in practice between the ISO and ITO options remains to be seen but, curiously, as noted above, the Parliament has supported this “third option” in relation to gas while rejecting the ISO model. In relation to electricity however the Parliament remains firm in their convictions having rejected anything short of full ownership unbundling. It would seem in that regard, the Parliament’s current position is irreconcilable to that of France and Germany.

The future
The draft Directives will now go to the European Council for a first reading. It seems unlikely that the Council will support the Parliament’s stance in relation to electricity given the powerful opposition that full ownership unbundling faces. Germany and France could exercise their veto should the Council chose to back the parliament’s proposed amendments - both countries claim that full ownership unbundling is contrary to their national constitutions and they are unlikely to accept full ownership unbundling, even if the majority of the Council do. The real questions are: will the ISO model be the one that is supported or will the new ITO model be accepted in its place? And will either of these models be sufficient to address the continuing problem of vertical foreclosure?

If you need further information, please contact James Saunders or Lesley Gray.

07 August 2008