COMPETITION IN ELECTRICITY MARKET ACCORDING TO THE REGULATION OF DIRECTIVE 2003/54/ EC


                                            JUDIT BŐHM


                               Faculty of Law, University of Miskolc



Energy policy is a kind of a subject in the European Community, which is generally not in the field
of common legislation. The main element of European energy policy is the creation of internal gas
and electricity markets. From 1^st of July 2007 all consumers can choose their electricity and gas
services free. It sounds very simple, but it is not so simple legislative task for member states.
Common market for gas and electricity promotes the use of renewable energy sources, increases the
safety of gas and electricity supply and competitiveness of the European Community.


Key words: Energy supply - Electricity market – Competition - Public service


I. Problems of energy supply and internal market of electricity


European energy policy’s three aims are: energy supply’s sustainability, safety and
competitiveness. The main instrument of European energy policy is creation of internal gas and
electricity markets, because a European energy market promotes the use of renewable energy sources,
increases the safety of gas and electricity supply and competitiveness of the European Community.
The idea to liberalise energy sector appeared late (only in the 1980^th) at Community level due to
resistance of member states and the specialities of the sector. Electricity is mostly produced in
the Community, it is not depends on import and it can be generated using different technologies and
raw material. But electricity can’t be stored, so supply has to follow consumers’ and electricity
supply is fixed to network, so all actors of the market need access to the network-system. [1]
Member states want to protect their competence above market regulation and especially above energy
sectors. Electricity supply is a public service, while safety and continuousness of supply is very
important for whole or for biggest part of society. The task of states is to guarantee
continuousness and safety for everyone, even if the suppliers are reluctant to satisfy consumers’
demand. A state generally restricts competition in these sectors to fulfil high social
expectations. Some undertakings are obliged by the state to supply energy for all consumers, who
have a demand for electricity or gas. To recompense this obligation, suppliers can get special or
exclusive rights, and state compensations. The results of this process are the appearance of
monopolies. Monopolies can be owed also for the mechanism of electricity and gas sector. The
European Community would like to abolish unwanted monopolies and liberalise national gas and
electricity markets to create an internal energy market and to guarantee the best conceivable level
of competition in these sectors.


According to the specialities of electricity market the general competition rules of the EC are not
enough to create an internal electricity market. Special regulation was needed, which comes before
and completes general rules. [2] The liberalisation of electricity markets started with directive
1996/92/EC, which was expired by directive 2003/54/EC concerning common rules for the internal
market in electricity. The difficulty of task, to fit up the market for the new requirements, is
the reason, why these directives have determined the principle of progressivity. It means that the
requirements of competition have to be stricter step by step. Common regulation, liberalisation
until now has not resulted free competition, because in some fields of electricity sector
restrictions still has to be preserved. In my work I would like to introduce these fields and their
awarding at European-level.


II. Discrimination


„Member States shall ensure, on the basis of their institutional organisation and with due regard
to the principle of subsidiarity, …………… and shall not discriminate between these undertakings as
regards either rights or obligations.”[3]


Electricity directive’s main principle is prohibition of discrimination. The prohibition of
discrimination, which is one of the fundamental principles of Community law, requires that
comparable situations are not treated differently unless such difference in treatment is
objectively justified. [4] This prohibition must be interpreted to all kind of discrimination
(fairly proceed network access, technical conditions, refusal of access.) Infringement of
prohibition can not occur if member states determine objective, transparent and non-discriminatory
conditions of access.


Discrimination can come from legal relations originated before and also after opening-up market.
Before community regulation some member states have made long-term contracts to secure their
energy-supply. These contracts infringe rules of directive, because they give priority access
rights, or because their content doesn’t fulfil requirements of directive. Member states can excuse
themselves that these long-term contracts guarantee the continuous and safe supply of an important
sector of economy, and these infringements must be maintained until the end of contracts. European
Commission generally accepts these arguments, while liberalisation of electricity sector can not be
fulfilled one day to another, but member states must abolish discriminations after a transition
period. Some cases of discrimination are determined in directive, these are public service
obligations. The directive correctly specifies the cases when member states have the right or they
are obliged to regulate public service obligations and they can give special or exclusive right to
undertakings.


II. 1. Public Service Obligations


„The respect of the public service requirements is a fundamental requirement of this Directive.”[5]


In spite of principle of competition electricity supply is still a public service (or in European
terminology one of services of general interests). Member states still have the right to determine
public service obligations (PSO) but in a common legal frame. The rules of public service
obligations have two groups: when member states shall determine public service obligation, and when
it is possible for member states to regulate these types of services. [6] For security of PSO
member states can still give special, exclusive rights, compensations for appointed undertakings.
All national rules - which determines public service obligations, or exclusive, special rights or
compensations – must be reported to European Commission and their compatibility with Community
rules must be examined.


II. 2. Universal service as public service obligation


The most important public service obligations are universal services. For consumers liberalisation
of electricity markets means a right to choose their suppliers. According to the principle of
progressivity opening up energy market had three steps:

1.                 until 1^st July 2004 only consumers those, who were determined in the 1996^th
directives, mainly large consumers,

2.                 after 1^st July 2004 all non-household consumers,

3.                 from 1^st July 2007 all consumers can choose their services free.


Today all consumers have the right to decide on energy supply, but member states have to ensure
minimum level of supply for some consumers. This is so called universal service. “Universal service
is the right to be supplied with electricity of a specified quality within their territory at
reasonable, easily and clearly comparable and transparent prices.” Universal service provides a
security that the most uninformed consumers, household consumers have never been closed out of
service by reason of economic interests of undertakings. To protect household consumers’ supply,
even if universal supplier has gone into bankruptcy or become insolvent, member states may apply a
supplier of last resort. It means that an undertaking takes over the task to provide service for
these consumers until appearance of a new universal supplier.


II. 3. Promotion of alternative technologies as public service obligation and common aim


„Member States shall implement appropriate measures to achieve the objectives of social and
economic cohesion, environmental protection, which may include energy efficiency/demand-side
management measures and means to combat climate change, and security of supply. Such measures may
include …………….. adequate economic incentives.”

„A Member State may require the system operator, when dispatching generating installations, to give
priority to generating installations using renewable energy sources or waste or producing combined
heat and power.” [7]


Public service obligations can be determined for environmental reasons and for safety of energy
supply. European directives have determined obligations to increase the use of some alternative
technologies. In 2001 the European Community has accepted a directive about the use of renewable
energy sources in electricity. [8] Member states have to accept legal rules to reach this common
aim. The use of alternative technologies and energy sources, like renewable energy sources, (waste
and combined heat and power) can promote environmental protection and safety of supply. Some member
states give subventions to increase use of non-traditional energy sources and technologies. The
reasons of subventions and special rights are very simple: costs of these alternative technologies
are very high. This subvention can appear in charges paid for the use of networks or in obligatory
feed-in of electricity generated from renewable energy sources. Obligatory feed-in means a special
priority by access to network, because some actors of the market have to take over electricity
produced from renewable energy sources in a fixed quantity and price.


Institution of obligatory feed-in was examined by European Court in several cases. In Case
“Preussen Elektra” the facts were the following. German law regulated that electricity supply
undertakings which operate a general supply network have to purchase electricity produced from
renewable sources of energy and have to pay compensation. The subject of examination was the
question: if this German law has realized infringement of EC Treaty or not. Although these
compensations are state subventions the European Commission and the European Court has found them
compatible with community law, because they do not fulfil requirements of community prohibition.
National rules are the basic of discrimination and surplus receipts of some producer, but this
surplus is not guaranteed from national budget, it is worth in legal relations of private
undertakings. Of course European Court and Commission are not so compliant in all cases. Slovene
system of obligatory feed-in was valued differently by the European Commission. In Slovenia
electricity produced from renewable energy sources had to be purchased only from three favoured
power plant in a fixed price, but obligants can sell electricity in a lower price. This loss was
compensated by the state from network access tariffs, which are paid by users of network
(consumers, producers, suppliers), so it is a kind of taxation and it is part of national budget.
There are two differences between German and Slovene cases: in Germany all producers, who produce
electricity from renewable energy sources are favoured, in Slovenia only three plants had this
priority. The other difference is in the source of subventions, in German law there wasn’t any duty
for national budget, but in Slovenia obliged undertakings could get compensation from the state. In
these cases the possibility for member states to give special rights, subventions for undertakings
using non-traditional technologies on the bases of special directive and European obligation, are
not enough reasons to be excused. National regulations have to fulfil requirements of general
competition rules and they can be allowed after strict examination by European institutions.


III. Legal conditions of production and transmission


III. 1. Unbundling


„In order to ensure efficient and non-discriminatory network access it is appropriate that the
distribution and transmission systems are operated through legally separate entities where
vertically integrated undertakings exist.” [9]


Unbundling is mainly in connection with transmission and distribution system operator. If system
operator is part of a vertically integrated undertaking, the rules of unbundling come to the front.
Unbundling has four forms: ownership-, legal-, and management unbundling and unbundling of
accounts. [10]

Ownership unbundling means, that undertaking is independent in ownership of assets. It is the
highest level of unbundling, but the 2003^rd directive hasn’t determined it compulsory.


Legal unbundling: „the distribution and transmission systems are operated through legally separate
entities where vertically integrated undertakings exist.” Undertakings must be independent in legal
form, in its organisation and in decision making from other activities. These rules don’t contain
the necessity to separate the ownership of assets of the transmission system from the vertically
integrated undertaking.


Management or functional unbundling is related to the work of management. This is the minimum
obligatory level of unbundling. It means, that persons, who takes part in management of the
transmission system operator, can’t participate in the decisions of the integrated electricity
undertaking, which directly or indirectly provide generation, and supply of electricity. These
persons make their decision independently and have effective decision-making rights, independent
from the integrated electricity undertaking.


Unbundling of accounts: Member States shall ensure that undertakings keep separate accounts for
each of their activities, separately for transmission or distribution and separately for supply and
generation. National authorities have the right to access to the accounts of electricity markets.


The European Commission has examined the result of liberalization and found that the rules of
unbundling are not enough. Functional unbundling – as minimum requirement - can not achieve the
expected aims. The directive must be modified to create legal unbundling as basis of separating the
activities of undertakings. [11]


III. 2. State control over generation and transport


„For the construction of new generating capacity, Member States shall adopt an authorisation
procedure, which shall be conducted in accordance with objective, transparent and non
discriminatory criteria.”  [12]


Generation means production of electricity. According to the characteristic of electricity, that it
can’t be stored and supply and demand always have to be balanced, member states need control above
production to secure safety of supply. Producers are authorized by the state and this process has
to fulfil conditions determined in the directive (for example: protection of environment and public
health, land-use). To lighten this control the directive oblige member states, that if power plants
authorized by the state are not sufficient to satisfy the demands of consumers, new plants have to
be appointed through tendering procedure.


“Member States shall designate, or shall require undertakings which own transmission/distribution
systems to designate, for a period of time to be determined by Member States having regard to
considerations of efficiency and economic balance, one or more transmission/distribution system
operators.” [13]


Transport means two activities in electricity market: transmission and distribution. The
differences between the two activities are in the voltage of system and in the end of transport
(transmission in extra high-voltage and high-voltage system to final customers or to distributors,
distribution in high-voltage, medium voltage and low voltage distribution system to customers).
They are responsible for operation and development of the system; operators have to ensure the
„long term ability of system to meet reasonable demands for the transmission of electricity.” The
network system allows only one or a few system operators, whose are appointed by the state. The
directive still maintains monopolies in transport, but determines the principle of
non-discriminatory access to the system for all users of network. Conditions of non-discriminatory
access are regulated by the state and to balance this strict obligations and tasks of undertakings,
member states can give special or exclusive rights for system operators.


IV. Conclusions


Liberalisation of markets has accomplished, but its result is not a free competition in electricity
(and gas) market. Free competition in these sectors can’t be managed by reason of the high priority
of service and specialities of electricity supply (first of all fixity to networks). For several
years member states didn’t let European measures in their national regulation of energy markets.
But the problems of energy supply, the necessity to create more competitive common market put
internal electricity and gas market into the front. Competition in electricity sector is still
restricted but in a common legal frame. Some undertakings still have exclusive, special rights and
compensations, but these measures are necessary to ensure not only competition, but also safety of
supply in this market. The biggest result of opening up electricity sector is consumers’ right to
choose their services and supplier free. The process has not ended with directive 2003/54/EC the
European Commission urges stricter common measures in the field of legal unbundling, consumers’
protection and tasks of national authorities.


Literature


[1] P. D. Cameron, M. et al: Competition in energy markets – Law and regulation in the European
Union London: Oxford University Press 2007. 22-24.p. ISBN 13-978-0-19-928297-5

[2] P. J. Slot and A. Skudder: Common feauters of community law regulation in the network-bound
sectors In: Common Market Law Review Vol. 38. No. 187-129. p.

[3] Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning
common rules for the internal market in electricity and repealing Directive 96/92/EC Art. 3. Par. 1

[4] Case C-17/03 Vereniging voor Energie, Milieu en Water, Amsterdam Power Exchange Spotmarket BV,
Eneco NV v Directeur van de Dienst uitvoering en toezicht energie

[5] Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning
common rules for the internal market in electricity and repealing Directive 96/92/EC Par. 26. of
preamble

[6] P. D. Cameron, M. et al: Competition in energy markets – Law and regulation in the European
Union London: Oxford University Press 2007. 128-129. p. ISBN 13-978-0-19-928297-5

[7] Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning
common rules for the internal market in electricity and repealing Directive 96/92/EC Art. 3. Par.
7.

[8] Directive 2001/77/EC of the European Parliament and of the Council of 27 September 2001 on the
promotion of electricity produced from renewable energy sources in the internal electricity market

[9] Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning
common rules for the internal market in electricity and repealing Directive 96/92/EC Par. 8. of
preamble

[10] P. D. Cameron, M. et al: Competition in energy markets – Law and regulation in the European
Union London: Oxford University Press 2007. 138-141. p. ISBN 13-978-0-19-928297-5

[11] Sauter R. und Grashor K.: „Ein neuer Impuls für eine europäische Energiepolitik? Ergebnisse
des EU-Frühjahrsgipfels In: Integration 3/07: 264-280. p.

[12] Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning
common rules for the internal market in electricity and repealing Directive 96/92/EC Art. 6. Par.
1.

[13] Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning
common rules for the internal market in electricity and repealing Directive 96/92/EC Art. 8. & 13.


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