Network aspects of the new proposals to liberalise the energy markets

On 19 September 2007, the European Commission published the long awaited “Third Legislative Package” for the electricity and natural gas markets. This package is in line with the conclusions of the Energy Sector Inquiry, with the Commission’s document “Energy for a New Future” and with the conclusions of the European Council's Spring Summit.

After ten years of liberalisation of the energy markets, the European Commission is of the opinion that the process of developing real competitive markets is far from complete. In practice, too many of the EU's citizens and businesses lack a real choice of supplier. Market fragmentation along national borders, a high degree of vertical integration and high market concentration are at the root of the lack of a truly internal market.

Key elements in the liberalisation of the energy markets is the separation between energy production and the supply of energy to end consumers, on the one hand, and the network activities, on the other hand. Network operators are not allowed to produce or sell energy. Vice versa, producers and suppliers of energy cannot perform network activities.

Before liberalisation, network operators, suppliers and producers were part of the same unbundled companies. In the first two stages of liberalisation, functional and legal unbundling had to allow access for new entrants to the market. However, it appears that the network operators that still are part of integrated companies can be less keen in investing in the conveyor belt in order to avoid congestion and to give access to new entrants. The market share of historical operators remains high.

Where the network operator is a legal entity within an integrated company, three types of problems arise: (i) the operator may treat its affiliated companies better than competing third parties. (ii) non-discriminatory access to information cannot be guaranteed as there is no effective means of preventing operators releasing market sensitive information to the generation or supply branch of the integrated company and (iii) investment incentives within an integrated company are distorted. Consequently, the Commission proposes an effective separation of supply and production activities from network operations.

For the Commission, the main option is ownership unbundling: the same person or persons cannot exercise control over a supply undertaking and, at the same time, hold any interest in or exercise any right over a network operator or system. An alternative option is the "Independent System Operator". This option enables vertically integrated companies to retain the ownership of their network assets, but requires that the network itself is managed by an undertaking or entity entirely separate from the vertically integrated company, performing all the functions of a network operator.

A temporary derogation to ownership unbundling will remain possible for new projects (eg the construction of another LNG-terminal in Zeebrugge).

Responding to the alleged threats to the security of supply, the Commission also proposes to insert a “Gazprom” clause in the new legislation. No supply or production company active anywhere in the EU can own or operate a network in any Member State of the EU. This requirement applies equally to EU and non-EU companies. This reciprocity obligation obliges companies from third countries to demonstrably and unequivocally comply with the same unbundling requirements as EU companies.

In the Belgian context, the new legislative proposals would oblige the Suez-group either to divest its interests in Fluxys, the network operator for natural gas, and in Elia, the network operator for electricity, or to leave the management of the networks to an independent operator.

It remains to be seen whether the proposals of the European Commission will be acceptable for the Member States. Already before the publication of the Third Package, France and Germany made it clear that ownership unbundling and even an “Independent System Operator” would be a step too far. Although Belgium is part of the supporters of the Commission's proposals, in the last version of the draft coalition agreement for the formation of a new federal government, the parties did choose for the independence of the network operators, but did not adopt a clear ownership unbundling. The draft stated that independence had to be achieved “through a predominant public ownership and a public operation of the systems and by reducing the share of the producers/suppliers below 25%. Energy sector companies can acquire shares, but cannot have or use a blocking minority, for example by means of a shareholders agreement or special voting rights, nor can they appoint independent directors.”

Network aspects of the new proposals to liberalise the energy markets