Development of Energy Infrastructure in the European Union

1
Development of Energy Infrastructure in the
European Union

• Towards a single European energy market
• Thursday 11 October 2002

2
Object of Presentation

• Outline the main recent developments in EU law
  and policy affecting energy infrastructure
  projects
• special attention to role of competition law in
  infrastructure projects
• Case study cross-border electricity
  interconnector

3
Traditional provision of energy services in EU
Member States

• Vertically integrated
• State-owned entities (central and/or local
  governments)
• Legal monopolies
• Central planning
• Import and export - exclusive rights
• International organisation of transmissionj
  system operators (e.g. UCTE)
• Examples British Gas EdF GdF Gasunie.

4
Single Electricity and Gas Markets

• EC Treaty
• four freedoms (movement of goods, persons,
  capital, establishment)
• single market
• competition (articles 81, 82, 86 State aids)
• Import/export exclusivity - under increased
  scrutiny in 1980s - 1990s.
• Essential facilities cases (article 86 - now
  article 82) in 1990s
• Article 90 (now Article 86) cases States must
  not grant rights or privileges that have effect
  of distorting competition
• First phase directives - transparency and
  harmonisation (1980s)
• Electricity (1996) and gas (1998) Directives

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Electricity Directive (92/96/EC)

• Key components
• universal service obligations - transparency and
  proportionality
• new production capacity - authorisation or public
  tendering systems
• unbundling (disaggregation)
• third party access (negotiated regulated single
  buyer)
• liberalisation of energy markets
• public service obligations
• review
• dispute resolution
• must be implemented in each Member State by 1998

6
Council of European Energy Regulators (CEER)

• Madrid Forum (gas)
• Florence Forum (electricity)
• Key issues
• cross-border tarification
• capacity/congestion management
• harmonisation of access prices and conditions
• ETSO (European Transmission System Operators)

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Trans European Energy Networks

• Key issues
• Identification of specific European projects
• Re-focusing Community financial support of
  projects
• Administrative facilitation of projects
• Improving the use of existing infrastructure
• ensuring a stable and favourable regulatory
  environment for new infrastructure
• ensuring political commitment at Community and
  national levels
• See EU Presentation slides

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Importance of interconnectors in the Single Market

• Physical connection capacity essential for
  creation of single market
• Congestion in a number of main interconnectors
• Interconnectors between some countries
  non-existent

9
Proposed amendment of the Electricity Directive

• Amendments proposed by Commission - June 2002
• clarification role of TSOs and independent
  regulators
• full market (retail) contestibility required by
  2004
• regulated access required - published terms and
  conditions

10
Proposed Regulation on cross-border tariffs and
congestion management

• Allocation of capacity on a non-discriminatory
  basis
• transparency regarding available capacity
• allocation according to market-based methods
• profits not to accrue to TSOs
• application of lose-it-or-use-it principle

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Role of EC Competition law in relation to energy
infrastructure (1)

• Network issues (articles 81 and 82 EC Treaty)
• Refusal of access
• essential facilities doctrine not yet applied
  in energy sector
• examples at national level (eg Marathon)
• Transmission pricing -
• must not be excessive (exceed costs and
  reasonable return)
• must not be discriminatory (as between customers)
  unless justified
• benchmarking
• Capacity allocation -
• first-come-first-served is a no-no
• auctions preferred but depends on methodology
• use-it-or-lose-it likely to be required
• Long term capacity reservations
• analysis depends on perceived potential
  foreclosure effects
• 100 for 15 years acceptable? (Viking)

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Role of EC Competition law in relation to energy
infrastructure (2)

• Competition between suppliers
• agreements between suppliers within the same
  market/s
• horizontal restrictions prohibited if purpose or
  effect of limiting competition
• joint marketing/sales?
• agreements between suppliers in different
  geographical market/s
• provisions having the effect of restricting
  cross-border trade will be prohibited

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Role of EC Competition law in relation to energy
infrastructure (3)

• Competition between customers
• long term supply agreements restrict freedom of
  off-taker to change supplier
• eg Gasnatural/Endesa - 20 year take-or-pay
  contract

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Role of EC Competition law in relation to energy
infrastructure (4)

• Merger Control
• change of ownership prohibited if it may create
  or reinforce a dominant position in a relevant
  market
• prior notification required
• European-scale mergers only (otherwise national
  merger control)
• mergers of competitors problematic
• eg VEBA/VIAG (E.On) E.On/RuhrGas.

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Role of EC Competition law in relation to energy
infrastructure (5)

• State Aids
• under article 90 EC Treaty aids by governments
  prohibited if restrict or distort competition,
  without authorisation of Commission
• aids to counter-balance adverse effects of
  liberalisation
• compensation for stranded costs eg Dutch
  producers
• must be real cost (not just risk), and must be
  causal link between the cost and liberalisation
• development of renewable energy (wind, solar, )
• allowable where necessary to bridge gap between
  production costs and market prices, until new
  investments are amortised.

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BritNed Interconnector (1)

• The project
• 250 km under-sea cable UK/Netherlands
• development costs approx euro 350 million
• TENs funding
• in operation 2007
• D/C cable
• entrepeneurial link
• price differential UK and NL markets
• market risk
• long term capacity arrangements
• being developed jointly by National Grid (UK) and
  TenneT (NL)
• to be project financed
• project structure and financing still under
  discussion

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BritNed Interconnector (2)

• Multi-jurisdictional legal issues
• ownership/control
• status of the cable on the continental shelf
• operational liabilities
• interface of UK and NL regulatory regimes and
  institutions
• access terms and conditions
• capacity management
• cross-border transportation tariffs
• EU and national competition law

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BritNed Interconnector (3)

• Dutch regulatory issues
• political uncertainty regarding private provision
  of public infrastructure
• connection with the Dutch national grid
• capacity reservations
• duration and conditions
• capacity allocation methods
• existing interconnectors (Belgium and Germany)
• ownership (legal? economic?)
• TenneTs management role
• security rights/interests

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BritNed Interconnector (4)

• Current status
• focus on capacity management system that will
  satisfy regulators and competition authorities,
  but provide sufficient certainty for investors
• initial market testing
• negotiations with Dutch government - lack of
  clear process
• discussions/negotiations with regulators (DTe and
  Ofgem)
• implications of EU developments
• potentially competing projects

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The end