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Development of the IEM
Filip Černoch
cernoch@mail.muni.cz
Traditional paradigm
•Model of government-energy industry relations that
emphasizes stability, reliability of supply, and public
service; a model of technical organization involving the
central control over a synchronized network.
•The certain way of organizing government relations
with electricity and gas industries, a set of ideas about
the scope of competition and the appropriate legal and
institutional methods to achieve public policy aims.
Traditional paradigm
•Essential characteristics:
•Exclusive rights to build and operate
networks
•Closure to competition
•Detailed regulation
•Remuneration based on historical costs
•Centralized control over planing
•Limited participation of consumers.
Incentives for change
•European economic downturn in the 80s, free market
atmosphere of the UK under PM Thather.
•Fall in energy prices of commodities in the mid-80s
not followed by prices of energy (electricity) – local or
national obligations. Questioning of the realisation of
political goals via state-controlled industries.
•Over-investments in production capacities due to the
expected demand. High costs of new plants = the
performance of the (state-runned) industry was
suffering.
Internal Energy Market
- trade area with common policies on product
regulation and free movement of energy, where
the maximum competition between suppliers and
providers of different types of energy is
essential. The barriers among the MSs are
removed to maximum.
Prerequisites for the IEM
•Liberalisation and competition – withdrawal of
the state from the energy sector, removing the
barriers.
•But also regulation – to limit the power of
(natural) monopolies and to remove the legacy
of pre-liberal paradigm – regulation to
competition.
•Interconnectors.
Liberal paradigm
• Liberal paradigm stresses a greater reliance on markets. It
sought to introduce competition whenever possible,
encouraging openness, decentralized production with
network access, and profit based on the market prices, not
costs (regulation for competition)
• Some basic characteristic:
• Separation of activities to facilitate the competition (unbundling)
• Freedom of entry and investment into competitive activities,
instead of a centrally-planned approach
• Freedom of contract and competitive formation of prices
• Access to the network and infrastructure
• Supervision of the model by an independent regulator
Initial goals of the EC
•Since 1988, the Commission focused on:
•Harmonization of indirect taxation
•Price and investment transparency
•Competition for public procurement
•TPA
•Integration of electricity and gas grids
•Application of competition legislation to the
upstream part of oil and gas exploration and
production.
First legal acts
•1988 Working Document on the Internal Energy
Market.
•First activities of the Commission date from 1989:
• Communication from the Commission: Transparency of
consumer energy prices. COM (89)123, 1989.
• Towards completion of the internal market for natural gas.
Communication from the Commission. Proposal for a
Council Directive on the transit of natural gas through the
major systems. COM (89) 334, 1989
• Increased intra-Community electricity exchanges: a
fundamental step towards completing the internal energy
market. Proposal for a Council Directive on the transit of
electricity through transmission grids. COM (89) 336, 1989.
• And the others …
First liberalization package
• Directive 96/92/EC of the European Parliament and of the
Council of 19 December 1996 concerning common rules for the
internal market in electricity
• Directive 98/30/EC of the European Parliament and of the
Council of 22 June 1998 concerning common rules for the
internal market in natural gas
Unbundling
of networks
Access to
networks
Market opening National
regulation
First
legislative
package
Separate
management
and accounts
Negotiate
d or
regulated
terms of
access
Power: 35% open
by 2003
Gas: 33% open by
2018
Mechanism
for
regulation
EU regulatory framework: basic principles
• Differentiation between competitive parts of the
industry (= supply) and non-competitive parts (=
operation of the networks).
• Obligation on operators of the non-competitive parts
of the industry to allow third parties to have access to
the infrastructure.
• Free up the supply side of the market – removing
barriers preventing alternative suppliers from importing
or producing energy.
• Free choice of consumers to choose their supplier and
removal of restrictions on customers from changing
their supplier.
• Creation of independent regulators to monitor the
sector and enforce TPA.
Second liberalization package
•Unsatisfactory pace as well as targets, new legislation
introduced in 2003.
• „European national gas markets are characterized by high
prices and tariff differentials, a high degree of market
concentration, insufficient unbundling, a lack of market based
balancing regimes, and ex ante regulation ... The prices of gas
and electricity are especially of concern. In some European
countries, natural gas increases its share in electricity
generation. During the 1990’s the European industry was
paying 40% more for its electricity than its American
competitors“ (2001 common market report).
Second liberalization package
• Directive 2003/54/EC concerning common rules for the internal
market in electricity
• Directive 2003/55/EC concerning common rules for the internal
market in natural gas
Unbundling of
networks
Access to
networks
Market opening National
regulation
First
legislative
package
Separate
management and
accounts
Negotiated or
regulated
terms of
access
Power: 35% open
by 2003
Gas: 33% open
by 2018
Mechanism for
regulation
Second
legislative
package
Separate
subsidiary
Regulated
terms of
access (but
TOP in gas)
Power and gas
markets 100%
open by July 2007
Specific regulator
for energy
Unbundling in the Second package
Accounting Unbundling: relevance for DSOs which are not
legally unbundled (given the new requirement of legal
unbundling); no derogation is possible from accounting
unbundling for smaller DSOs.
Functional Unbundling: where the network operator is part of
a vertically integrated undertaking, it shall be independent in
terms of its organization (management separation) and decision
making rights from the other activities not related to that
network.
Unbundling in the Second package
Legal Unbundling: the transmission and distribution activities
have to be done by a separate “network” company; the network
company must not necessarily own the network assets but must
have “effective decision making rights” in line with the
requirements of functional unbundling (no change of
ownership).
The following steps of the European
Commission
•EC sector inquiry (2005 - 2007) highlited some serious
shortages:
• The persistence of great market concentration (vertical
foreclosure, just a few interconection).
• Too little integration between MS markets (e.g. limited
common auctioning).
• Absence of transparent market information.
• Unsatisfactory level of unbundling.
•Solution = market transparency and caps on
incumbents’ market shares, closing the gaps between
the responsibilities and competences of national
regulators, structural (ownership) unbundling.
Non-functioning market: Utilities’ reactions
•Vertical foreclosure - the process where incumbent
wittingly or unwittingly foreclose, or close in advance,
the availability of crucial inputs or assets to potential
rivals. Long-term upstream, capacity and downstream
contracts.
•Market segmentation (LTC in gas, physical
interconnectors in electricity)
EC enforcing new rules
• Just in 2006 EC court proceedings against 17 states for
inadequate transposition of the 2003 directives.
• In 2007 anti-trust investigations against Eni, RWE
(underivestments, capacity hoarding, high prices for
access to network etc.).
• Unexpected inspections of 25 companies in Austria,
Belgium, France, Germany, Hungary, Italy.
• 2/2008 E.ON to sell-off its grid (€1bn/y) to settle EU
antitrust inquiries.
• 6/2008 RWE to sell off its gas grid to avoid anti-trust
actions by Commission.
Non-functioning market: Governments’
reactions
•Championing national companies – preventing foreign
companies to buy domestic ones.
•Hungary (Moll) vs OMV, Great Britain (Centrica)
vs Gazprom...
•Regulating the regulators.
Non-functioning market: Governments’
reactions
•Retail market - regulated vs. free pricing in case of
energy.
• EK objected in case of Slovakia, where PM Fico threatened
to renationalize Slovenske Elektrarne, if they did not stop
raising the prices.
• In 2006, EK went after Spain, France, Estonia and Latvia
for regulating tariffs.
• Then EK went after Italy and Ireland for granting on
discriminatory basis the right to an incumbent to supply
power at regulated price.
• And again it went after Germany, Czech Republic, Poland,
Slovakia, Lithuania and Italy for failing to provide sufficient
information on regulator tariffs. The same situation repeated
in 2007, in case of Commission against Spain and France.
Third liberalization package
Unbundling of
networks
Access to
networks
Market
opening
National
regulation
First
legislative
package
Separate
management and
accounts
Negotiated or
regulated terms
of access
Power: 35%
open by 2003
Gas: 33% open
by 2018
Mechanism for
regulation
Second
legislative
package
Separate
subsidiary
Regulated
terms of
access
Power and gas
markets 100%
open by July
2007
Specific regulator
for energy
Third
liberalisation
package
Ownership
unbundling, ISO,
ITO.
Regulated
terms of
access
Already
achieved
Upgraded and
harmonized
powers for
national energy
regulators
Unbundling
Ownership unbundling - OU means separating the ownership or
the operation of gas and power networks from other parts of the
energy business
ISO – energy supply companies may still formally own gas or
electricity transmission networks but must leave the entire
operation, maintenance, and investment in the grid to an
independent company.
ITO model – energy supply companies may still own and operate
gas or electricity networks but must do so through a subsidiary.
All important decisions must be taken independent of the parent
company.
Sources
Buchan, D. (2009): Energy and Climate Change: Europe at the
Crossroads.
Cameron, P.D.(2007): Competition in Energy Markets: Law and
Regulation in the European Union.