8th SIMONE Congress

April 23 – 25 2007, Antwerp, Belgium

Regulatory and Legal Framework

for the European Gas Industry

Dr.-Ing. Joachim Müller-Kirchenbauer

CONSENTEC GmbH, Aachen
 1
Overview

Legal Development in the European Union

First Directives 1996 / 1998
Lisbon Strategy
Current Status – Framework and Main Actors
Directive 2003/55/EC
Council of European Energy Regulators (CEER) and
European Regulators' Group for Electricity and Gas
(ERGEG)
Outlook and Perspectives
Assessment
Proposals by the European Commission
 2
Legal Development in the European Union (1)

First Directives 1996 / 1998 (1)

Opening up of the Energy Sector
Single Market in Europe
Gradual Opening
EU Electricity and Gas Directives (96/92/EC and 98/30/EC)
Entry into force 19 February 1997 and 10 August 1998
20% of domestic gas consumption in 2000
28% in 2003
 3
Legal Development in the European Union (2)

First Directives 1996 / 1998 (2)

– Consideration Natural Monopoly
– Regulated third party access
– Negotiated third party access
– Adoption by all Member States
– Infringement Procedures (France, Germany, Luxemburg)
– Structural Measures
– Different Degree of Market Opening
– Further Development
 4
Lisbon Strategy

Objective set in 1985

to create, by 1992,
a single market in Europe
without internal frontiers
European Council of Lisbon of 23-24 March 2000
Rapid completion of the internal energy market
Key element of the strategy of the European Union
“to become the most competitive and dynamic knowledge-based
economy in the world”
 5
Current Status (1)

Directive 2003/55/EC (1)

Benefits
– efficiency gains
– price reductions
– higher standards of service
– increased competitiveness
Shortcomings
– Imperfect functioning of the market
– Not yet level playing field
– Risks of market dominance
– Predatory behaviour
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Current Status (2)

Directive 2003/55/EC (2)

Emphasis on Lisbon Strategy
Main Orientation
– access to the network
– access to storage
– tarification issues
– interoperability between systems
– different degrees of market opening
For competition to function, network access must be non-
discriminatory, transparent and fairly priced.
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Current Status (3)

Directive 2003/55/EC (3)

Common rules for the transmission, distribution, supply and storage
of natural gas
Member States designate System Operators (direct/indirect)
Operate, maintain and develop
Secure, reliable and efficient transmission, storage and/or LNG
facilities
Refrain from discriminating
Provide system users with Information
 8
Current Status (4)

Directive 2003/55/EC (4)

Rules for Balancing
– objective, transparent and non-discriminatory
Terms and conditions, including rules and tariffs
– non-discriminatory and cost-reflective
Unbundling
– Legally separate entities
– Effective decision making right
 9
Current Status (5)

Directive 2003/55/EC (5)

Right of access to accounts
– Member States or regulatory authorities
– Accounts of natural gas undertakings
– Confidentiality of commercially sensitive information
Unbundling of accounts
– draw up, submit to audit and publish annual accounts
– publish annual accounts / keep at disposal
 10
Current Status (6)

Directive 2003/55/EC (6)

Separate accounts (internal accounting)
– transmission, distribution, LNG and storage activities
– other gas activities
– Revenue from ownership of the network
– balance sheet and profit and loss account for each activity.
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Current Status (7)

Directive 2003/55/EC (7)

Separate accounts (internal accounting)
– Allocation rules
– Amendments only in exceptions
– Indication and Reasons
– Transactions with related undertakings
No ownership unbundling
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Current Status (8)

Directive 2003/55/EC (8)

Grid Access
– RTPA to the transmission and distribution system and LNG
– published tariffs,
– applicable to all eligible customers, including supply
undertakings
– no discrimination between system users.
Tariffs or methodologies shall be approved and published ex ante
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Current Status (9)

Directive 2003/55/EC (9)

Access to storage
– Storage facilities and linepack
– negotiated access or
– regulated access
– Criteria
– objective, transparent and non-discriminatory
 14
Current Status (10)

Directive 2003/55/EC (10)

Regulation
– One or more authorities
– Guarantee non-discriminatory access
– Fix or approve tariffs
– Tariffs published before entry into force
 15
Current Status (11)

Directive 2003/55/EC (11)

Regulatory authorities
– Member States one or more competent bodies
– Wholly independent
– Responsible for
» ensuring non-discrimination
» effective competition
» efficient functioning of the market.
– monitoring obligations, amongst others:
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Current Status (12)

Directive 2003/55/EC (12)

Regulatory authorities
– monitoring obligations:
» rules management / allocation of interconnection capacity
» National congestion management
» publication of appropriate information
» the effective unbundling of accounts
» the access conditions
» the level of transparency and competition
 17
Current Status (13)

Directive 2003/55/EC (13)

Tariff Regulation
– prior to their entry into force
– Tariffs or methodologies
– Terms and conditions for
» connection and access to national networks
» transmission and distribution tariffs
» tariffs, or methodologies allow necessary investments
» balancing services.
– Modification of tariffs
 18
Current Status (14)

Directive 2003/55/EC (14)

Complaints
– Any party
– Decision within two months
– Extension for additional Information
– Decision binding unless and until overruled on appeal.
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Current Status (15)

Directive 2003/55/EC (15)

Authorities' Co-operation
– Member States ensure that authorities can carry out their
duties
– avoid abuse of a dominant position and predatory behaviour
– Authorities contribute to internal market
– Co-operating with each other
– and with the Commission
– Commission shall be assisted by a Committee
– European Regulators' Group for Electricity and Gas
 20
Current Status (16)

Directive 2003/55/EC (16)

Balancing mechanisms
– Non-discriminatory
– Cost-reflective
– sufficient liquidity Æ transparent market-based mechanisms
– In absence of liquid markets, authorities play active role
» ensure non-discriminatory and cost-reflective
– Appropriate incentives
Supply/demand balance in Member States monitored
 21
Current Status (17)

Directive 2003/55/EC (17)

Implementation by Member States
– Most Member States missed the deadline of 1 July
2004 for the transposition of the new Electricity and
Gas Directives. In most Member States the legislation
implementing the directives came into force more than
a year after deadlines had passed.
Structural measures came into effect later than provided
for in the directives. Particularly important in this respect
were the rules on regulatory oversight and the unbundling
provisions
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Outlook and Perspectives (1)

Assessment (1)
Since 1999, regular annual “benchmarking” reports
In 2006, additional country reviews and the sector inquiry

Basic concepts of internal energy market embedded in legal

framework, institutional arrangements and physical infrastructure
Lack of competition in many Member States
Not yet high degree of confidence in the internal market
 23
Outlook and Perspectives (2)

Assessment (2)
Positive results of competition – Efficiency
– Efficiency improvements in energy supply
– Savings to customers
– Recent increases in wholesale electricity and gas prices
– Questionable competitive process

Causes for higher price levels

– Higher primary fuel costs
– Ongoing need for investment
– Extension of environmental obligations
» emissions trading scheme
» renewable energy sources.
 24
Outlook and Perspectives (3)

Assessment (3)
Positive results of competition – Security of supply
– Contributions to security of supply
– Large EU market incentive for new investment
– New investment responding to the price signals
– Problems in Member States with tightly controlled prices
– Competitive markets encourage diversification
Investment underway or being planned
Not considered only a national issue,
beyond powers of any individual country
Lack of co-ordination
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Outlook and Perspectives (4)

Assessment (4)
Positive results of competition – Sustainability
– renders supply of energy efficient
– eliminates undue monopoly profits
– fair access to customers
– efficient application of policy instruments
» emission trading scheme
» energy taxation
– clearer signals energy efficiency.
 26
Outlook and Perspectives (5)

Assessment (5)
improper implementation of the current legal framework
– 34 infringement procedures against 20 Member States (April
2006)
– 26 reasoned opinions to 16 Member States (12 December
2006)
– all the biggest Member States included
Main deficiencies:
– Regulated prices preventing entry from new market players
– Insufficient unbundling
– Discriminatory third party access
– Insufficient competences of the regulators
– No information given to the Commission on public service
obligations
– Insufficient indication of the origin of electricity
 27
Outlook and Perspectives (6)

Assessment (6)
Obstacles to competition
– Large and/or vertically integrated companies at advantage in terms of
the information
– Remaining confusion within the vertically integrated group about
responsibilities
– TSOs failed to create conditions conducive to liquid competitive
markets
– TSOs and regulators tend to be oriented to short term national
concerns
– Certain regulators constrained in their relations with the industry
– Regulators under direct or indirect influence from national
governments
– Concentrated national markets
– Smaller Member States often struggled to introduce meaningful
competition
– Preparation of DSOs for the opening of
competition to households
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Outlook and Perspectives (7)

Proposals by the European Commission

Ensuring non-discriminatory access to well developed networks,
– fully (ownership) unbundled TSOs
– separate system operators without ownership unbundling
Improving regulation of network access at national and EU level,
– Enhancing the role of national regulators
– Co-ordination of regulators at EU level
– Gradually evolving the current approach
– A European network of independent regulators (“ERGEG+”)
– A new, single body at Community level
Reducing the scope for unfair competition,
Co-ordination between transmission system operators
Thank You for Your Attention!

Dr.-Ing. Joachim Müller-Kirchenbauer

Dr.-Ing.Consulting
Joachim Müller-Kirchenbauer
für Energiewirtschaft
und -technik GmbH
CONSENTEC GmbH, Aachen
Grüner Weg 1
D-52070 Aachen
Tel: +49.241.93836-24
E-mail: jmk@consentec.de