EU Energy Law [1 ed.] 0199665249, 9780199665242

Table of contents :
Foreword
Contents
Table of Cases
Table of Legislation
Table of International Treaties and Conventions
List of Abbreviations
Part I: Background
1 Introduction and the General Context of the EU and Its Treaties
2 The Evolution of the EU’s Energy Legislation: An Outline
Part II: State of EU Law on the Liberalization of Energy Markets after the Third Package
3 Unbundling
4 Third Party Access
5 Regulatory Authorities and European Cooperation
6 Trans-European Energy Networks
7 Consumer Protection and Public Service Obligations
8 Liberalization and Energy Contracts
Part III: ‘Energy Security’ and ‘Security of Supply’
9 Introduction to Energy Security and Security of Supply
10 EU Legislation on Security of Supply
11 Cross-European Initiatives
Part IV: Energy Sources
12 Renewables
13 Coal
14 Nuclear
15 Oil
Part V: Energy Efficiency in the European Union
16 Introduction to Energy Efficiency in the European Union
17 EU Energy Efficiency: Legislation, Policy Instruments, and Proposals
Index

Citation preview

EU ENERGY LAW

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EU ENERGY LAW Angus Johnston Senior Law Fellow and Praelector in Law, University College, Oxford CUF Lecturer, Faculty of Law, University of Oxford ([email protected])

Guy Block Partner and Head of Energy, Janson Baugniet law firm, Brussels Member of the Brussels and Paris Bars ([email protected])

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Great Clarendon Street, Oxford, OX2 6DP, United Kingdom Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries © Angus Johnston and Guy Block, 2012 The moral rights of the authors have been asserted First Edition published in 2012 Impression: 1 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by licence, or under terms agreed with the appropriate reprographics rights organization. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this work in any other form and you must impose this same condition on any acquirer Crown copyright material is reproduced under Class Licence Number C01P0000148 with the permission of OPSI and the Queen’s Printer for Scotland British Library Cataloguing in Publication Data Data available ISBN 978–0–19–966524–2 Printed in Great Britain by CPI Group (UK) Ltd, Croydon, CR0 4YY Links to third party websites are provided by Oxford in good faith and for information only. Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work.

FOREWORD

This Monograph is an important addition to the EU law literature making accessible in a single work a very demanding and complex area of legal practice. It has been authored by acknowledged experts Angus Johnston, Senior Law Fellow and Praelector in Law, University College, Oxford, and CUF Lecturer, Faculty of Law, University of Oxford as well as by Guy Block, Partner and Head of Energy, Janson Baugniet, Brussels, member of the Brussels and Paris Bars. They bring to this book extensive academic and practical experience. This book introduces the general context of EU energy policy and gives a short history of its evolution. It is noteworthy that the first explicit mention of energy as a policy came with the Treaty of Lisbon and Article 4(2)(i) TFEU. It offers a detailed account of the history and current content after the recent Third Energy Package, the Directives of which were due to have been implemented by 3 March 2011. The work focuses on specific issues of great complexity of the law of energy markets. Detailed coverage involves unbundling, third party access, national regulatory authorities, trans-European energy networks, consumer protection, and energy contracts. It then turns its attention to security of supply and particular energy sources, such as renewables, coal, nuclear, and oil. Where relevant it draws upon examples from national law. Covering a great deal of ground, this book touches on relevant issues of environmental law, the law of the internal market, State aid, consumer law, and many other matters. This formidable book will no doubt prove invaluable to all those involved in the energy market, from the point of view of advising and carrying out transactions as well as litigating in this field of critical importance. David Vaughan CBE QC Brick Court Chambers

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CONTENTS

Table of Cases Table of Legislation Table of International Treaties and Conventions List of Abbreviations

xi xv xxxv xxxvii

I BACKGROUND 1. Introduction and the General Context of the EU and its Treaties A. Introduction

1.01

B. The Rules of the EU Treaty and their Relevance for the Energy Sector

1.04

2. The Evolution of the EU’s Energy Legislation: An Outline A. Background

2.01

B. A Changing Political Climate in the Member States

2.06

C. The Single Market Programme

2.10

D. The Commission Working Document on the Internal Energy Market of 1988

2.11

E. An Increasingly Receptive Political Climate

2.14

F. The Three-phased Approach (with the Benefit of Hindsight)

2.17

G. The Negotiation of the Directive Concerning Common Rules for the Internal Market for Electricity

2.19

H. The Second Generation of Directives

2.31

I. The Third Energy Package and the Climate & Environment Package

2.40

II STATE OF EU LAW ON THE LIBERALIZATION OF ENERGY MARKETS AFTER THE THIRD PACKAGE 3. Unbundling A. Introduction

3.01

B. Unbundling in the Electricity and Gas Directives After the Third Package

3.09

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Contents C. Certification of the Transmission System Operator

3.99

D. Unbundling Derogations

3.106

E. Towards Full Ownership Unbundling?

3.117

4. Third Party Access A. Introduction

4.01

B. Third Party Access in EU Energy Legislation

4.06

C. Derogations and Specific Cases

4.56

5. Regulatory Authorities and European Cooperation A. Introduction

5.01

B. National Regulatory Authorities

5.02

C. European Bodies (Florence and Madrid Fora, and ACER)

5.48

6. Trans-European Energy Networks A. TEN-E: Treaty and Legislative Bases

6.02

B. The TEN-E Decision: Projects and Priorities

6.05

C. The TEN-E Regulation: EU Financial Aid

6.11

D. Possible Future Reforms

6.19

E. Links Between TEN-Es and Other Areas of EU Energy Law

6.21

F. European Energy Programme for Recovery

6.22

7. Consumer Protection and Public Service Obligations A. Introduction

7.01

B. Definition of PSOs

7.07

C. Description of PSOs

7.13

8. Liberalization and Energy Contracts A. Introduction

8.01

B. Analysis of the Contracts

8.25

III ‘ENERGY SECURITY’ AND ‘SECURITY OF SUPPLY’ 9. Introduction to Energy Security and Security of Supply A. Definitional Difficulties: a Multifaceted and Amorphous Concept

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9.01

Contents B. Definitional Attempts

9.16

C. A Recent Return to the Top of the EU Energy Policy Agenda

9.21

D. Security of Supply as a Justification under EU Law

9.24

10. EU Legislation on Security of Supply A. Minimum Oil Stocks

10.01

B. Security of Supply in the Third IEM Electricity and Gas Directives

10.12

C. Specific EU Security of Supply Legislation

10.29

D. Trans-European Energy Networks and Investment in Energy Infrastructure

10.79

11. Cross-European Initiatives A. The European Energy Charter and the Energy Charter Treaty

11.01

B. The INOGATE Process

11.56

IV ENERGY SOURCES 12. Renewables A. Introduction

12.01

B. Overview of EU Renewables Legislation and Policy

12.18

C. Support for Renewable Energy

12.118

13. Coal A. General

13.01

B. Directive 2009/31/EC on the Geological Storage of Carbon Dioxide

13.12

14. Nuclear A. Introduction

14.01

B. The Euratom Treaty

14.03

C. TFEU and Euratom Competition Law

14.14

15. Oil A. Introduction

15.01

B. The Hydrocarbons Licensing Directive

15.03

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Contents V ENERGY EFFICIENCY IN THE EUROPEAN UNION 16. Introduction to Energy Efficiency in the European Union 17. EU Energy Efficiency: Legislation, Policy Instruments, and Proposals A. Overview of Recently Adopted EU Energy Efficiency Instruments

17.02

B. The New Proposal for a Directive on Energy Efficiency

17.32

C. Conclusion

17.62

Index

415

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TABLE OF CASES

EU COURTS AITEC v Commission (Cases T-447/93 and T-448/93) [1995] ECR II-1971 . . . . . . . . . . 12.173 AKZO v Commission (Case C-62/86) [1991] ECR I-3359 . . . . . . . . . . . . . . . . . . . . . . . . . . .8.47 Alrosa v Commission (Case C-441/07 P) [2010] ECR I-5949 . . . . . . . . . . . . . . . . . . . . . . . . 3.128 Alrosa v Commission (Case T-170/06) [2007] ECR II-2601 . . . . . . . . . . . . . . . . . . . . . . . . . 3.128 Altmark Trans GmbH and Regierungspräsidium Magdeburg v Naherkehrgesellschaft Altmark GmbH (Case C-280/00) [2003] ECR I-7747 . . . . . . . . . . . . . . . . . . . . 9.38, 10.25 Bosphorus v Minister of Transport (C-84/95) [1996] ECR I-3953 . . . . . . . . . . . . . . . . . . . . 3.122 Budapesti, Erömü v Commission (Cases T-80/06 and T-182/09), 13 February 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4.161, 9.41 Campus Oil v Ministry for Industry and Energy (Case 72/83) [1984] ECR 2727. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.121, 9.26, 9.27, 9.28, 9.29, 12.158 Citiworks AG v Flughafen Leipzig/Halle GmbH (Case C-439/06) [2008] ECR I-3913 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.43, 4.01, 4.125 Commission v Austria (Case C-205/06) [2009] ECR I-1301 . . . . . . . . . . . . . . . . . . . . . . . . 11.55 Commission v Belgium (Case 503/99) [2002] ECR I-4809 . . . . . . . . . . . . . . . .1.11, 3.118, 4.22, 9.31, 9.32, 9.33 Commission v Belgium (Walloon Waste) (Case C-2/90) [1992] ECR I-4431 . . . . . . . . . . . 12.157 Commission v Council (Case C-29/99) [2002] ECR I-11221 . . . . . . . . . . . . . . . . . . 14.06, 14.09 Commission v Denmark (Case 302/86) [1988] ECR 4607 . . . . . . . . . . . . . . . . . . . . . . . . . 12.157 Commission v Finland (Case C-118/07) [2009] ECR I-10889 . . . . . . . . . . . . . . . . . . . . . . . 11.55 Commission v France (Case 160/94) [1997] ECR I-5851 . . . . . . . . . . . . . . . . . . . . . . . 1.11, 9.28 Commission v France (Case 483/99) [2002] ECR I-4781 . . . . . . . . . . . . . . 1.11, 3.118, 9.30, 9.31 Commission v Germany (Case 70/72) [1973] ECR 813 . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.175 Commission v Greece (Case C-347/88) [1990] ECR I-4747 . . . . . . . . . . . . . . . . . . . . . . . . . . 9.25 Commission v Greece (Case C-398/98) [2001] ECR I-7915 . . . . . . . . . . . . 9.25, 9.26, 9.28, 9.29 Commission v Italy (Case 158/94) [1997] ECR I-5789 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.11 Commission v Italy (Case 159/94) [1997] ECR I-5815 . . . . . . . . . . . . . . . . . . . . . . . . . 1.11, 9.28 Commission v Italy (Case C-174/04) [2005] ECR I-4933 . . . . . . . . . . . . . . . . . . . . . . . 1.11, 3.118 Commission v Italy (Case C-326/07) [2009] ECR I-2291 . . . . . . . . . . . . . . . . . 1.11, 3.118, 9.33 Commission v Netherlands (Case 157/94) [1997] ECR I-5699 . . . . . . . . . . . . . . . 1.11, 9.28, 9.37 Commission v Netherlands (Case C-299/02) [2004] ECR I-9761 . . . . . . . . . . . . . . . . . . . . 15.12 Commission v Portugal (Case 367/98) [2002] ECR I-4731. . . . . . . . . . . . . . . . . 1.11, 3.118, 9.30 Commission v Slovakia (Case C-264/09), 15 March 2011 . . . . . . . . . . . . . . . . . . . . 4.143, 4.152, 4.160, 4.164, 4.177, 11.55 Commission v Spain (Case C-274/06) [2008] ECR I-165 . . . . . . . . . . . . . . 1.11, 3.118, 9.28, 9.33 Commission v Spain (Case C-463/00) [2003] ECR I-4581 . . . . . . . . . . . . . . . . . . . . . 9.32, 9.33 Commission v Sweden (Case C-249/06) [2009] ECR I-1335 . . . . . . . . . . . . . . . . . . . . . . . . 11.55 Commission v United Kingdom (Case C-61/03) [2005] ECR I-2477 . . . . . . . . . . . . . . . . . . 14.13 Commission v United Kingdom (Case C-65/04) [2006] ECR I-2239 . . . . . . . . . . . . . . . . . 14.13 Commission v United Kingdom (Case C-246/89) [1991] ECR I-4585 . . . . . . . . . . . . . . . . . 15.12 Corbeau (Case C-320/91) [1993] ECR I-2533 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.37 Costa v ENEL (Case 6/64) [1964] ECR 585 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.151

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Table of Cases Decker v Caisse de Maladie des Employés Privés (Case C-120/95) [1998] ECR I-1831 . . . 12.157 Déménagements-Manutention Transport SA (DMT) (Case C-256/97) [1999] ECR I-3913 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.175 Église de Scientology (Case C-54/99) [2000] ECR I-1335 . . . . . . . . . . . . . . . . . . . . . . . . . . .9.28 ENU v Commission (Case C-357/95 P) [1997] ECR I-1329 . . . . . . . . . . . . . . . . . . . . . . . . . 14.15 ENU v Commission (Cases T-458 and T-523/93) [1995] ECR II-2459 . . . . . . . . . . . . . . . . 14.15 ERT v DEP (Case C-260/89) [1991] ECR I-2925 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.35 Essent Netwerk Noord v Aluminium Delfzijl (Case C-206/06) [2008] ECR I-5497 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.11, 2.44, 12.177 Federutility v Autoritá per l’energia elettrica e il gas (Case C-265/08), 20 April 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.12, 7.21, 7.99, 9.43 Fluxys v Commission de Régulation de l’Electricité et du Gaz (CREG), 9 December 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.150, 4.160 Foster v British Gas (Case C-188/89) [1990] ECR I-3313 . . . . . . . . . . . . . . . . . . . . . . . . . . . .5.27 France, Italy and the United Kingdom v Commission (Cases 188-190/80) [1982] ECR 2545 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.17 France v Commission (Brewery Loan) (Case 102/87) [1988] ECR 4067. . . . . . . . . . . . . . . 12.175 Gemeente Almelo v Energiebedrijf Ijsselmij (Case C-393/92) [1994] ECR I-1477 . . . . . . . . .9.36 Hauer v Land Rheinland-Pfalz (Case 44/79) [1979] ECR 3727 . . . . . . . . . . . . . . . . . . . . . . 3.122 ICI and Commercial Solvents v Commission (Joined Cases 6 and 7/73) [1974] ECR 223 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.01 Internationale Handelsgesellschaft v Einfuhr und Vorratsstelle für Getreide und Futtermittel (Case 11/70) [1970] ECR 1125 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.122 Kernkraftwerke Lippe-Ems v Commission (Cases T-149 and 181/94) [1997] ECR II-161 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.12 Kwekerij Gebroeders Van der Kooy BV v Commission (Cases 67, 69, and 70/85) [1988] ECR 219 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.175 Meroni & Co, Industrie Metallurgische v High Authority (Case 9/56) [1957–1958] ECR 133 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5.68 Netherlands and Leeuwarder Papierwarenfabriek v Commission (Cases 296 and 381/82) [1985] ECR 809 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.175 Netherlands v Parliament & Council (Case C-377/98) [2001] ECR I-7079 . . . . . . . . . . . . . 8.20 Nold v Commission (Case 4/73) [1974] ECR 4918 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.122 Officier Justitie v de Peijper (Case 104/75) [1976] ECR 613 . . . . . . . . . . . . . . . . . . . . . . . . . 2.27 Outokumpu (Case C-213/96) [1998] ECR I-1777 . . . . . . . . . . . . . . 1.11, 12.152, 12.153, 12.168 Philip Morris Holland BV v Commission (Case 730/79) [1980] ECR 2671 . . . . . . . . . . . . 12.175 PreussenElektra v Schleswag (Case C-379/98) [2001] ECR I-2099 . . . . . . . . . .1.11, 9.28, 12.139, 12.154, 12.168, 12.177 Procurateur de la République v Association de Défense des Bruleurs d’Huiles Usagées (Case 240/83) [1985] ECR 531 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.157 Rewe-Zentral AG v Bundesmonopol für Branntwein (‘Cassis de Dijon’) (Case 120/78) [1979] ECR 649 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.25 RTT v GB-Inno (Case C-18/88) [1991] ECR I-5941 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9.26 Sabatauskas (Case C-239/07) [2008] ECR I-7523 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.44, 4.09 Stadtwerke Schwäbisch Hall GmbH v Commission (Case T-92/02) [2002] ECR II-11 . . . . 14.17 Tetra Pak International v Commission (Case C-333/94) [1996] ECR I-5951 . . . . . . . . . . . . . 3.01 TFI v Commission (Case T-354/05) [2009] ECR II-471 . . . . . . . . . . . . . . . . . . . . . . . 9.38, 9.42 Van Der Kooy v Commission (Case 67/85) [1988] ECR 219 . . . . . . . . . . . . . . . . . . . . . . . . 12.175 Vereniging voor Energie, Milieu en Water, Amsterdam Power Exchange Spotmarket BV, Eneco NV v Directeur van de Dienst uitvoering en toezicht energie Nederlands Elektriciteit Administratiekantoor BV (case C-17/03) [2005] ECR I-4983 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.44, 4.143, 4.144, 4.152, 9.37

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Table of Cases OTHER TRIBUNALS AES Summit Generation Limited and AES-Tisza Erömü Kft v Republic of Hungary, ICSID Case No ARB/07/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.28 Azinian Davitian & Baca v Mexico, Case No ARB/97/2, 1 November 1999 . . . . . . . . . . . . 11.24 Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania, ICSID Case No ARB/05/22, 24 July 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.46 Brunner v European Union Treaty [1994] 1 CMLR 57 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.124 CMS Gas Transmission Company v Argentina (2005), ICSID Case No ARB/01/8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.17, 11.24 Electrabel SA v Republic of Hungary, Case No ARB/07/19 . . . . . . . . . . . . . . . . . . . . 4.175, 9.46 Essent, Delta and Eneco v Dutch State (22 June 2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.121 Eureko BV v Republic of Poland, 15 September 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.21 Industrias Nucleares do Brasil and Siemens v UBS and Texas Utilities Electric Corporation (Cases C-123 and 124/04) [2006] ECR I-7861 . . . . . . . . 14.07, 14.11 Lisbon Treaty judgment, BVerfG, 2BvE 2/08, 30 June 2009 . . . . . . . . . . . . . . . . . . . . . . . . 3.124 Maffezini v Kingdom of Spain, ICSID Case No ARB/97/7, 25 January 2000 . . . . . . . . . . . 11.46 Metalclad Corporation v Mexico, Case No ARB/97/1, 30 August 2000 . . . . . . . . . . . . . . . 11.24 MTD, Equity Sdn Bhd & MTD Chile SA v Chile, ICSID Case No ARB/01/7, 25 May 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.24 Nykomb Synergetics Technology Holding AB v Latvia, 16 December 2003 . . . . . . . . . . . 4.176, 11.14, 11.15, 11.31 Petrobart Ltd (Gibraltar) v Kyrgyzstan, Case No ARB/126/2003 . . . . . . . . . . . . . . 11.16, 11.26 Plama Consortium Limited v Bulgaria, ICSID Case No ARB/03/24 . . . . . . . . . . . 11.07, 11.18, 11.27, 11.29, 11.46 Tecnicas Medioambientales Tecmed SA v Mexico, Case No ARB/00/2, 29 May 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.24 Waste Management Inc v Mexico, Case No ARB/00/3, 30 April 2004 . . . . . . . . . . . . . . . . 11.24

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TABLE OF LEGISLATION

TR E ATIES AND CHARTERS

Art 67 . . . . . . . . . . . . . . . . . . . 14.11, 14.16 Art 73 . . . . . . . . . . . . . . . . . . . . . . . . 14.11 Art 75 . . . . . . . . . . . . . . . . . . . 14.11, 14.13 Art 197 . . . . . . . . . . . . . . . . . . . . . . . 14.11 Arts 199–201 . . . . . . . . . . . . . . . . . . 14.06 Art 206 . . . . . . . . . . . . . . . . . . . . . . . 14.06 Annex IV . . . . . . . . . . . . . . . . . . . . . . 14.07 Single European Act 1986 . . . . . . . . . . . . 2.10 Treaty of Amsterdam . . . . . . . . . . . . . . . 6.02 Treaty on European Union (TEU) . . . . . . . . . . . . . . . . . 13.02, 14.05 Art 3 . . . . . . . . . . . . . . . . . . . . . . . . 12.162 Art 4 . . . . . . . . . . . . . . . . . . . . . . . . . . 9.34 Art 5 . . . . . . . . . . . 1.08, 2.13, 8.20, 10.64 Art 14 . . . . . . . . . . . . . . . . . . . . . . . . . 9.34 Treaty on the Functioning of the European Union (TFEU) . . . . 1.10, 1.11, 1.12, 9.24, 13.02, 14.05, 14.16, 14.17, 14.20 Title XX . . . . . . . . . . . . . . . . . . . . . 12.170 Title XXI . . . . . . . . . . . . . . . . . . . . . . . 9.22 Art 4(2)(i) . . . . . . . . . . . . . . . . . . . . . . 1.05 Art 5(3) . . . . . . . . . . . . . . . . . . . . . . . . 3.17 Art 11 . . . . . . . 6.01, 10.68, 12.159, 12.161, 12.162, 12.163, 12.166, 12.167 Art 14 . . . . . . . . . . . . . . . . . . . . . . . . . 7.04 Art 15 . . . . . . . . . . . . . . . . . . . . . . . . . 5.17 Art 30 . . . . . . . . . . . . . . . . . . . . . . . . . 1.11 Art 34 . . . . . . . . . 2.26, 9.26, 9.29, 12.154, 12.155, 12.158, 12.160, 12.161, 12.162, 12.164, 12.165, 12.166, 12.167, 12.171 Art 36 . . . . . . . . . . . 9.25, 9.26, 9.28, 9.29, 12.157, 12.161, 12.162, 12.166, 12.167 Art 37 . . . . . . . . . . . . . . . . . . . . 2.20, 9.37 Art 49 . . . . . . . . . . . . . . . . . . . . . . . . 15.12 Art 52 . . . . . . . . . . . . . . . . . . . . . . . . . 9.25 Art 62 . . . . . . . . . . . . . . . . . . . . . . . . . 9.25 Art 63 . . . . . . . . . . . . . . . . . . . . 3.121, 9.30 Art 65(1)(b) . . . . . . . . . . . . . . . . . . . . . 9.25 Art 93 . . . . . . . . . . . . . . . . . . . . . . . . . 9.34 Art 101 . . . . . . . . 1.12, 8.123, 13.43, 14.14 Art 101(1) . . . . . . . . . . . . 8.151, 9.44, 9.45, 9.47

Agreement on the European Economic Area (EEA Agreement) Annex IV . . . . . . . . . . . . . . . . . . . . . . 2.55 Charter of Fundamental Rights of the European Union . . . . . . . . . . . . . . 3.124 Art 36 . . . . . . . . . . . . . . . . . . . . . 7.04, 9.34 Art 37 . . . . . . . . . . . . . . . . . . . . . . . 12.162 EC Treaty (Treaty of Rome, as amended) . . . . . . . . . . . . . . . . . . . 13.02 Art 3b(2) . . . . . . . . . . . . . . . . . . . . . . . 2.13 Art 30 . . . . . . . . . . . . . . . . . . . . 2.26, 2.27 Art 31 . . . . . . . . . . . . . . . . . . . . . . . . . 2.20 Art 81(3) . . . . . . . . . . . . . . . . . . . . . . 8.151 Art 90 . . . . . . . . . . . . . . . . . . . . . . . 12.153 Art 95 . . . . . . . . . . . . . . . . . . . . . . . . . 1.05 Art 174(2) . . . . . . . . . . . . . . . . . . . . 12.159 Art 175 . . . . . . . . . . . . . . . . . . . . . . . . 1.05 Art 305(2) . . . . . . . . . . . . . . . . 14.05, 14.17 Art 308 . . . . . . . . . . . . . . . . . . . . . . . . 1.05 Euratom Treaty 1957 . . . . . . . . 14.02, 14.03, 14.14, 14.18, 14.20 Title II . . . . . . . . . . . . . . . . . . . 14.07, 14.16 Title III . . . . . . . . . . . . . . . . . . . . . . . 14.05 Art 1 . . . . . . . . . . . . . . . . . . . . . . . . . 14.06 Art 2 . . . . . . . . . . . . . . . . . . . . 14.06, 14.16 Art 4 . . . . . . . . . . . . . . . . . . . . . . . . . 14.16 Art 5 . . . . . . . . . . . . . . . . . . . . . . . . . 14.16 Art 6 . . . . . . . . . . . . . . . . . . . . . . . . . 14.16 Art 12 . . . . . . . . . . . . . . . . . . . . . . . . 14.07 Arts 17–23 . . . . . . . . . . . . . . . . . . . . . 14.07 Art 30 . . . . . . . . . . . . . . . . . . . . . . . . 14.09 Art 31 . . . . . . . . . . . . . . . . . . . . . . . . 14.05 Art 34 . . . . . . . . . . . . . . . . . . . 14.13, 14.16 Art 35 . . . . . . . . . . . . . . . . . . . 14.09, 14.13 Art 36 . . . . . . . . . . . . . . . . . . . . . . . . 14.09 Art 37 . . . . . . . . . . . . . . . . . . . 14.13, 14.16 Art 40 . . . . . . . . . . . . . . . . . . . . . . . . 14.16 Art 44 . . . . . . . . . . . . . . . . . . . . . . . . 14.16 Art 52 . . . . . . . . . . . . . . . . . . . . . . . . 14.11 Art 52(1) . . . . . . . . . . . . . . . . . . . . . . 14.11 Art 52(2)(a) . . . . . . . . . . . . . . . . . . . . 14.11 Art 57 . . . . . . . . . . . . . . . . . . . . . . . . 14.11 Art 64 . . . . . . . . . . . . . . . . . . . . . . . . 14.11

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Table of Legislation Treaty on the Functioning of the European Union (TFEU) (cont.) Art 101(3) . . . . . . . . . . 8.151, 8.152, 8.170, 9.44, 9.45, 9.48, 10.32, 12.173 Art 102 . . . . . . . . . . . . . . 1.12, 3.01, 3.127, 8.123, 9.44, 9.47, 9.48, 10.32, 13.42, 14.14 Art 106 . . . . . . . . . . . . . . . 7.04, 7.12, 9.34 Art 106(2) . . . . . . . . 9.25, 9.34, 9.36, 9.37, 9.38, 9.39, 9.42, 9.44, 10.14 Art 107 . . . . . . . . . 1.12, 4.161, 9.34, 9.38, 10.25, 10.74, 12.154, 12.173, 13.09, 14.18 Art 107(1) . . . . . . . . . . . . . . . . 9.41, 12.174 Art 107(3)(b) . . . . . . . . . . . . . . . . . . . . 6.21 Art 107(3)(c) . . . . . . . 12.185, 13.09, 14.17, 14.19 Art 108 . . . . . . . . . . . . . 1.12, 10.25, 10.74, 12.173, 13.09 Art 108(3) . . . . . . . . . . . . . . . . . . . . 12.179 Art 110 . . . . . . . . . . . . 1.11, 12.152, 12.153 Art 114 . . . . . . . . . . . . . . . . . . . . 1.05, 1.08 Art 122(1) . . . . . . . . . . . . . . . . . . . . . . 9.22 Art 170 . . . . . . . . . . . . . . . . . . . 6.02, 6.06 Art 170(1) . . . . . . . . . . . . . . . . . . . . . . 6.02 Art 170(2) . . . . . . . . . . . . . . . . . . . . . . 6.02 Art 171 . . . . . . . . . . . . . . . . . . . . . . . . 6.02 Art 171(3) . . . . . . . . . . . . . . . . . . . . . . 6.03 Art 172 . . . . . . . . . . . . . . . . . . . 6.02, 6.03 Art 191 . . . . . . . . . . . . . . . . . . . . . . 12.164 Art 191(1) . . . . . . . . . . . . . . . . . . . . . 14.06 Art 191(2) . . . . . . . . 12.159, 12.168, 14.06 Art 192 . . . . . . . . . . . . . . . . . . . . . . . . 1.05 Art 192(1) . . . . . . . . . . . . . . . . . . . . . . 1.05 Art 192(2)(c) . . . . . . . . . . . . . . 1.05, 12.150 Art 194 . . . . . . . . . . . . . . . . . . . 1.05, 17.66 Art 194(1)(b) . . . . . . . . . . . . . . . . . . . . 9.22 Art 194(2) . . . . . . . . . . 1.06, 10.23, 12.150, 12.170 Art 194(3) . . . . . . . . . . . . . . . . . . . . . . 1.06 Art 258 . . . . . . . . . . . . . . . . . . . . . . . . 2.20 Art 259 . . . . . . . . . . . . . . . . . . . . . . . . 9.37 Art 263 . . . . . . . . . . . . . . . . . . . . . . . . 5.62 Art 265 . . . . . . . . . . . . . . . . . . . . . . . . 5.62 Art 351 . . . . . . . . . . . . . . . . . . 4.152, 4.164 Art 352 . . . . . . . . . . . . . . . . . . . . . . . . 1.05 Treaty of Lisbon . . . 1.05, 9.22, 12.170, 14.05 R EGUL ATIONS Commission Regulation 770/90/EEC of 22 March 1990 on the conditions governing imports of agricultural products originating in third

countries following the accident at the Chernobyl nuclear power station . . . 14.09 Regulation 2677/75/EEC of the Commission of 6 October 1975 applying Council Regulation (EEC) No 3254/74 of 17 December 1974 applying Regulation (EEC) No 1055/72 on notifying the Commission of imports of crude oil and natural gas, to petroleum products falling within subheadings 27.10 A, B, C I and C II of the Common Customs Tariff . . . . . . . 15.02 Council Regulation 1893/79/EEC of 28 August 1979 introducing registration for crude oil and/or petroleum product imports in the Community . . . . . . . . . . . . . . . . . 15.02 Regulation 2592/79/EEC of 4 December 1979 implementing Regulation (EEC) No 2592/79 laying down rules for the registration of crude oil imports in the European Community in accordance with Regulation (EEC) No 1893/79 . . . 15.02 Council Regulation 3954/87 Euratom of December 1987 laying down maximum permitted levels of radioactive contamination of foodstuffs and of feedingstuffs following a nuclear accident or any other case of radiological emergency . . . . . . . . . . . . . 14.09 Council Regulation 4152/88/EEC of 21 December 1988 extending Regulations (EEC) No 1893/79 and (EEC) No 2592/79 concerning registration for crude oil imports in the Community . . . . . . . . . . . . . . 15.02 Regulation 944/89/Euratom of 12 April 1989 laying down maximum permitted levels of radioactive contamination in minor foodstuffs following a nuclear accident or any other case of radiological emergency . . . . . . . . 14.09 Commission Regulation 737/90/ EEC of 22 March 1990 on the conditions governing imports of agricultural products originating in third countries following the accident at the Chernobyl nuclear power-station . . . . . . . . . . . . . . . . . 14.09 Council Regulation 1370/90/EEC of 21 May 1990 amending Regulation (EEC) No 2592/79 laying down rules for carrying out the

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Table of Legislation registration of crude oil imports in the Community provided for in Regulation (EEC) No 1893/79 . . . . 15.02 Regulation 2236/95/EC of the European Parliament and of the Council of 18 September 1995 laying down general rules for the granting of Community Financial aid in the field of trans-European networks . . . 6.04 Art 5(3)(b) . . . . . . . . . . . . . . . . . . . . . . 6.15 Council Regulation 2964/95/EC of 20 December 1995 introducing registration for crude oil imports and deliveries in the Community . . . . . 15.02 Regulation 659/1999/EC of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty . . . . . . . . . . . . . . . . . . . 13.07 Regulation 1655/1999/EC of the European Parliament and of the Council of 19 July 1999 amending Regulation 2236/95/EC laying down general rules for the granting of Community financial aid in the field of trans-European networks . . . . . . . 6.04 Council Regulation 1407/2002/EC of the 23 July 2002 on state aid to the coal industry Chap. 2 . . . . . . . . . . . . . . . . . . . . . . . 13.05 Recital 2 . . . . . . . . . . . . . . . . . . . . . . 13.09 Recital 3 . . . . . . . . . . . . . . . . . . . . . . 13.09 Recitals 3–12 . . . . . . . . . . . . . . . . . . . 13.04 Recital 6 . . . . . . . . . . . . . . . . . . . . . . 13.09 Recital 11 . . . . . . . . . . . . . . . . . . . . . 13.04 Art 2(a) . . . . . . . . . . . . . . . . . . . . . . . 13.09 Art 3(1) . . . . . . . . . . . . . . . . . . 13.05, 13.09 Art 3(1)(a) . . . . . . . . . . . . . . . . 13.09, 13.10 Art 3(1)(f) . . . . . . . . . . . . . . . . 13.09, 13.10 Art 3(2) . . . . . . . . . . . . . . . . . . 13.05, 13.09 Art 4 . . . . . . . . . 13.05, 13.06, 13.07, 13.09 Art 4(c) . . . . . . . . . . . . . . . . . . . . . . . 13.09 Arts 4(c)–(e) . . . . . . . . . . . . . . . . . . . 13.06 Art 5 . . . . . . . . . 13.05, 13.06, 13.07, 13.08 Art 5(1) . . . . . . . . . . . . . . . . . . . . . . . 13.05 Art 5(2) . . . . . . . . . . . . . . . . . . 13.05, 13.06 Art 5(3) . . . . . . . . . . . . . . . . . . 13.05, 13.06 Art 6(1) . . . . . . . . . . . . . . . . . . . . . . . 13.06 Art 6(2) . . . . . . . . . . . . . . . . . . . . . . . 13.06 Art 7 . . . . . . . . . . . . . . . . . . . . 13.05, 13.09 Art 9 . . . . . . . . . . . . . . . . . . . . . . . . . 13.07 Art 9(4) . . . . . . . . . . . . . . . . . . . . . . . 13.07 Art 9(5) . . . . . . . . . . . . . . . . . . . . . . . 13.07 Art 9(6) . . . . . . . . . . . . . . . . . . . . . . . 13.07 Art 11 . . . . . . . . . . . . . . . . . . . . . . . . 13.08 Art 13(1) . . . . . . . . . . . . . . . . . . . . . . 13.08

Art 14(3) . . . . . . . . . . . . . . . . . . . . . . 13.09 Council Regulation 1/2003/EC of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty . . . . . . . . . . . . . . . . 13.03 Art 3 . . . . . . . . . . . . . . . . . . . . . . . . . 13.03 Art 9 . . . . . . . . . . . . . . . . . . . . . . . . . 3.128 Art 17 . . . . . . . . . . . . . . . . . . . . . . . . 8.121 Annex . . . . . . . . . . . . . . . . . . . . . . . . 8.123 Regulation 45/2003/EC of 10 January 2003 correcting Regulation 1274/91/EC . . . . . . . . . . . . . . . . . . 13.11 Recital 9 . . . . . . . . . . . . . . . . . . . . . . 13.11 Recital 12 . . . . . . . . . . . . . . . . . . . . . 13.11 Art 2 . . . . . . . . . . . . . . . . . . . . . . . . . 13.11 Art 4 . . . . . . . . . . . . . . . . . . . . . . . . . 13.11 Art 5 . . . . . . . . . . . . . . . . . . . . . . . . . 13.11 Art 6 . . . . . . . . . . . . . . . . . . . . . . . . . 13.11 Art 7 . . . . . . . . . . . . . . . . . . . . . . . . . 13.11 Art 9 . . . . . . . . . . . . . . . . . . . . . . . . . 13.11 Regulation 1228/2003/EC of the European Parliament and of the Council on conditions for access to the network for cross-border exchanges in electricity (Electricity Regulation) . . . . . . . . . . . . . 3.106, 4.112 Art 7 . . . . . . . . . . . . . . . . . . . . . 4.98, 4.152 Annex para 2 . . . . . . . . . . . . . . . . . . . . . . 4.151 Council Regulation 139/2004/EC of 20 January 2004 on the control of concentrations between undertakings (EC Merger Regulation) . . . . . 1.12, 3.125 Art 9 . . . . . . . . . . . . . . . . . . . . . . . . . 3.126 Art 22(3) . . . . . . . . . . . . . . . . . . . . . . 3.126 Regulation 139/2004/EC, Merger Regulation . . . . . . . . . . . . . . . . . . . 13.03 Regulation 788/2004/EC of the European Parliament and of the Council of 21 April 2004 amending Council Regulation2236/95 and Regulations (EC) No 1655/2000, (EC) No 1382/2003 and (EC) No 2152/2003 with a view to adapting the reference amounts to take account of the enlargement of the European Union . . . . . . . . . . . . . . . 6.04 Commission Regulation 794/2004/EC of 21 April 2004 implementing Council Regulation (EC) 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty (Chap. V—Interest rate for the recovery of unlawful aid) . . . . 13.07

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Table of Legislation Regulation 807/2004/EC of the European Parliament and of the Council amending Council Regulation 2236/95/EC laying down general rules for the granting of Community financial aid in the field of trans-European networks/nl . . . . . . . . . . . . . . . . . . 6.04 Art 1(1) . . . . . . . . . . . . . . . . . . . . . . . . 6.15 Council Regulation 1223/2004/ EC of 28 June 2004 amending Regulation (EC) 1228/2003 of the European Parliament and of the Council as regards the date of application of certain provisions to Slovenia . . . . . . . . . . . . . . . . . . . . 3.106 Regulation 1159/2005/EC of the European Parliament and of the Council amending Council Regulation 2236/95/EC laying down general rules for the granting of Community fi nancial aid in the field of trans-European networks . . . . . . . . . . . . . . . . . . . 6.04 Regulation 1775/2005/EC of the European Parliament and of the Council of 28 September 2005 on conditions for access to the natural gas transmission networks . . . . . . . 4.150, 8.23, 8.132, 8.139 Art 5 . . . . . . . . . . . . . . 4.148, 4.149, 4.162 Art 5(3) . . . . . . . 4.147, 4.148, 4.149, 4.154 Art 5(3)(a) . . . . . . . . . . . . . . . . 4.148, 4.149 Art 5(3)(b) . . . . . . . . . . . . . . . . 4.148, 4.149 Art 5(4) . . . . . . . 4.147, 4.148, 4.149, 4.154 Art 13(1) . . . . . . . . . . . . . . . . . . . . . . . 4.19 Art 14(3) . . . . . . . . . . . . . . . . . . . . . . . 4.16 Art 15(4) . . . . . . . . . . . . . . . . . . . . . . . 4.16 Annex . . . . . . . . . . . . . . . . . . . 4.148, 4.162 Regulation 1013/2006/EC of 14 June 2006 on shipments of waste . . . . . 13.15 Regulation 1013/2006/EC of the European Parliament and of the Council of 14 June 2006 on shipments of waste . . . . . . . . 12.39, 13.11 Regulation 1080/2006/EC of the European Parliament and of the Council of 5 July 2006 on the European Regional Development Fund and repealing Regulation (EC) No 1783/1999 . . . . . . . . . . . . . 6.17 Art 4(9) . . . . . . . . . . . . . . . . . . . . . . . . 6.17 Regulation 1083/2006/EC of 11 July 2006 laying down general provisions on the European Regional

Development Fund, the European Social Fund and the Cohesion Fund and repealing Regulation (EC) No 1260/1999 . . . . . . . . . . . . . . . . . . . . 6.17 Art 4(9) . . . . . . . . . . . . . . . . . . . . . . . . 6.17 Art 17 . . . . . . . . . . . . . . . . . . . . . . . . . 6.19 Regulation 1084/2006/EC of 11 July 2006 establishing a Cohesion Fund and repealing Regulation (EC) No 1164/94 . . . . . . . . . . . . . . . . . . . 6.17 Regulation 680/2007/EC of the European Parliament and of the Council of 20 June 2007 laying down general rules for the granting of Community financial aid in the field of the trans-European transport and energy networks (TEN-E Regulation) . . . . . . . . . . . . . . . . . . . 6.04 Recital 12 . . . . . . . . . . . . . . . . . . . . . . 6.15 Art 2(8) . . . . . . . . . . . . . . . . . . . . . . . . 6.15 Art 3 . . . . . . . . . . . . . . . . . . . . . . . . . . 6.11 Art 5(1) . . . . . . . . . . . . . . . . . . . . . . . . 6.12 Art 5(3) . . . . . . . . . . . . . . . . . . . . . . . . 6.13 Art 5(4) . . . . . . . . . . . . . . . . . . . . . . . . 6.14 Art 6 . . . . . . . . . . . . . . . . . . . . . . . . . . 6.15 Art 6(1)(a) . . . . . . . . . . . . . . . . . . . . . . 6.15 Art 6(1)(c) . . . . . . . . . . . . . . . . . . . . . . 6.15 Art 6(1)(d) . . . . . . . . . . . . . . . . . . . . . . 6.15 Art 6(2) . . . . . . . . . . . . . . . . . . . . . . . . 6.12 Art 6(2)(a) . . . . . . . . . . . . . . . . . . . . . . 6.15 Art 6(2)(b)(ii) . . . . . . . . . . . . . . . . . . . 6.15 Art 11 . . . . . . . . . . . . . . . . . . . . . . . . . 6.18 Art 12 . . . . . . . . . . . . . . . . . . . . . . . . . 6.11 Art 13 . . . . . . . . . . . . . . . . . . . . . . . . . 6.18 Art 18 . . . . . . . . . . . . . . . . . . . . . . . . . 6.16 Art 20 . . . . . . . . . . . . . . . . . . . . . . . . . 6.04 Regulation 593/2008/EC of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (‘Rome I’) Recital 19 . . . . . . . . . . . . . . . . . . . . . . 8.09 Art 3 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.07 Art 3(2) . . . . . . . . . . . . . . . . . . . . . . . . 8.08 Art 4 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.86 Art 5 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.10 Art 6(1) . . . . . . . . . . . . . . . . . . . . . . . . 8.10 Art 7 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.10 Regulation 800/2008/EC declaring certain categories of aid compatible with the common market in application of Articles 107 and 108 of the Treaty (General Block Exemption Regulation) . . . . . . . . 12.179 Art 6 . . . . . . . . . . . . . . . . . . . . . . . . 12.184

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Table of Legislation Art 6(1)(b) . . . . . . . . . . . . . . . . . . . . 12.184 Arts 18–25 . . . . . . . . . . . . . . . . . . . 12.182 Art 21 . . . . . . . . . . . . . . . . . . . . . . . 12.182 Art 23 . . . . . . . . . . . . . . . . . . . . . . . 12.182 Art 25 . . . . . . . . . . . . . . . . . . . . . . . 12.182 Regulation 663/2009/EC of the European Parliament and of the Council of 13 July 2009 establishing a programme to aid economic recovery by granting Community financial assistance to projects in the field of energy Chap. II s 1 . . . . . . . . . . . . . . . . . . . . . . . . . . 6.23 Art 1 . . . . . . . . . . . . . . . . . . . . . . . . . . 6.22 Art 8 . . . . . . . . . . . . . . . . . . . . . . . . . . 6.23 Art 8(2) . . . . . . . . . . . . . . . . . . . . . . . . 6.23 Art 9(2) . . . . . . . . . . . . . . . . . . . . . . . . 6.23 Annex Pt. A . . . . . . . . . . . . . . . . . . . . . . . . 6.23 Regulation 713/2009/EC of the European Council and of the Parliament of 13 July 2009 establishing an Agency for the Co-operation of Energy Regulators (ACER Regulation) . . . . . . . . . 5.43, 5.58 Recital 14 . . . . . . . . . . . . . . . . . . . . . . 5.64 Recital 15 . . . . . . . . . . . . . . . . . . . . . . 5.64 Art 5 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.63 Art 6 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.73 Art 7 . . . . . . . . . . . . . . . . . 5.60, 5.62, 8.22 Art 8 . . . . . . . . . . . . . . . . . . . . . . 5.61, 5.62 Art 8(2) . . . . . . . . . . . . . . . . . . . . . . . . 5.61 Art 9 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.62 Art 9(1) . . . . . . . . . . . . . . . . . . . . . . . . 5.61 Art 11 . . . . . . . . . . . . . . . . . . . . . . . . . 5.63 Art 11(1) . . . . . . . . . . . . . . . . . . . . . . . 5.63 Art 12 . . . . . . . . . . . . . . . . . . . . . . . . . 5.62 Art 18 . . . . . . . . . . . . . . . . . . . . . . . . . 5.62 Art 19 . . . . . . . . . . . . . . . . . . . . . . . . . 5.62 Art 19(1) . . . . . . . . . . . . . . . . . . . . . . . 5.62 Art 20 . . . . . . . . . . . . . . . . . . . . . . . . . 5.62 Art 34 . . . . . . . . . . . . . . . . . . . . . . . . . 5.66 Art 34(1) . . . . . . . . . . . . . . . . . . . . . . . 5.66 Art 34(2) . . . . . . . . . . . . . . . . . . . . . . . 5.66 Art 34(3) . . . . . . . . . . . . . . . . . . . . . . . 5.66 Regulation 714/2009/EC of the European Parliament and of the Council of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity and repealing Regulation (EC) No 1228/2003 . . . 4.18, 4.61, 4.154, 5.59, 5.67 Art 1(a) . . . . . . . . . . . . . . . . . . . . . . . . 4.18 Art 1(b) . . . . . . . . . . . . . . . . . . . . . . . . 4.18

Art 3 . . . . . . . . . . . . . . . . . . . . . . . . . 3.102 Art 3(1) . . . . . . . . . . . . . . . . . . . . . . . . 5.60 Art 6 . . . . . . . . . . . . . . . . . 5.68, 5.70, 8.23 Art 7 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.70 Art 8(3) . . . . . . . . . . . . . . . . . . . . . . . . 5.73 Art 8(6) . . . . . . . . . . . . . . . . . . . . . . . 10.28 Art 8(10) . . . . . . . . . . . . . . . . . . . . . . 10.28 Art 14 . . . . . . . . . . . . . . . . . . . . . . . . . 4.18 Art 14(1) . . . . . . . . . . . . . . . . . . . . . . . 4.18 Art 14(2) . . . . . . . . . . . . . . . . . . . . . . . 4.18 Art 14(3) . . . . . . . . . . . . . . . . . . . . . . . 4.18 Art 14(5) . . . . . . . . . . . . . . . . . . . . . . . 4.18 Art 15(3) . . . . . . . . . . . . . . . . . . . . . . . 4.61 Art 15(4) . . . . . . . . . . . . . . . . . . . . . . . 4.61 Art 16(6) . . . . . . . . . . . . . . . . . . . . . . . 3.39 Art 17 . . . . . . . . . . . . . . . . . . . . 4.98, 10.27 Art 17(1) . . . . . . . . . . . . . . . . . . . . . . 4.100 Art 17(1)(a) . . . . . . . . . . . . . . . 4.102, 10.27 Art 17(1)(b) . . . . . . . . . . . . . . . . . . . . 4.103 Art 17(1)(c) . . . . . . . . . . . . . . . . . . . . 4.104 Art 17(1)(d) . . . . . . . . . . . . . . . . . . . . 4.105 Art 17(1)(e) . . . . . . . . . . . . . . . . . . . . 4.107 Art 17(1)(f) . . . . . . . . . . . . . . . . . . . . 4.102 Art 17(2) . . . . . . . . . . . . . . . . . . . . . . 4.100 Art 17(3) . . . . . . . . . . . . . . . . . . . . . . 4.100 Art 17(4) . . . . . . . . . . . . . . . . . 4.109, 4.110 Art 17(5) . . . . . . . . . . . . . . . . . . . . . . . 5.61 Art 17(7) . . . . . . . . . . . . . . . . . . . . . . 4.111 Art 17(8) . . . . . . . . . . . . . . . . . 4.111, 4.112 Art 17(9) . . . . . . . . . . . . . . . . . . . . . . 4.112 Art 18 . . . . . . . . . . . . . . . . . . . . . . . . . 8.23 Annex 1 . . . . . . . . . . . . . . . . . . . . . . . . 4.61 Regulation 715/2009/EC of the European Parliament and of the Council of 13 July 2009 on conditions for access to the natural gas transmission networks and repealing Regulation (EC) 1775/2005 . . . 4.12, 4.19, 4.46, 5.59, 7.62 Recital 21 . . . . . . . . . . . . . . . . . . . . . 4.154 Art 1(4) . . . . . . . . . . . . . . . . . . . . . . . . 4.46 Art 3 . . . . . . . . . . . . . . . . . . . . . . . . . 3.102 Art 3(1) . . . . . . . . . . . . . . . . . . . . . . . . 5.60 Art 6 . . . . . . . . . . . . . . . . . 5.67, 5.68, 5.70 Art 7 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.70 Art 8 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.23 Art 8(3) . . . . . . . . . . . . . . . . . . . . . . . . 5.73 Art 8(6) . . . . . . . . . . . . . . . . . . . . . . . 10.28 Art 8(10) . . . . . . . . . . . . . . . . . . . . . . 10.28 Art 13(1) . . . . . . . . . . . . . . . . . . . . . . . 4.13 Art 14 . . . . . . . . . . . . . . . . . . . . . . . . . 4.27 Art 14(1) . . . . . . . . . . . . . . . . . . . . . . . 4.15 Art 14(1)(a) . . . . . . . . . . . . . . . . . . . . . 4.27 Art 14(1)(b) . . . . . . . . . . . . . . . . . . . . . 4.27 Art 15 . . . . . . . . . . . . . . . . . . . . . . . . . 4.27

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Table of Legislation Art 6(5)(a) . . . . . . . . . . . . . . . . . . . . . 10.52 Art 6(5)(b) . . . . . . . . . . . . . . . . . . . . . 10.52 Art 6(8) . . . . . . . . . . . . . . . . . . . . . . . 10.53 Art 6(9) . . . . . . . . . . . . . . . . . . . . . . . 10.51 Art 6(10) . . . . . . . . . . . . . . . . . 10.51, 10.65 Art 7 . . . . . . . . . . . . . . 10.52, 10.65, 10.66 Art 7(5) . . . . . . . . . . . . . . . . . . . . . . . 10.66 Art 8 . . . . . . . . . . . . . . . . . . . . . . . . . 10.54 Art 8(1)(a) . . . . . . . . . . . . . . . . . . . . . 10.54 Art 8(1)(b) . . . . . . . . . . . . . . . . . . . . . 10.54 Art 8(1)(c) . . . . . . . . . . . . . . . . . . . . . 10.54 Art 8(2) . . . . . . . . . . . . . . . . . . . . . . . 10.54 Art 8(4) . . . . . . . . . . . . . . . . . . . . . . . 10.56 Art 8(6) . . . . . . . . . . . . . . . . . . . . . . . 10.56 Art 9 . . . . . . . . . . . . . . . . . . . . 10.44, 10.47 Art 10 . . . . . . . . . . . . . . . . . . . . . . . . 10.47 Art 10(4) . . . . . . . . . . . . . . . . . . . . . . 10.42 Art 10(7) . . . . . . . . . . . . . . . . . . . . . . 10.42 Art 10(8) . . . . . . . . . . . . . . . . . . . . . . 10.58 Art 11 . . . . . . . . . . . . . . . . . . . . . . . . 10.58 Art 11(1) . . . . . . . . . . . . . . . . . . . . . . 10.43 Art 11(3) . . . . . . . . . . . . . . . . . . . . . . 10.58 Art 11(4) . . . . . . . . . . . . . . . . . . . . . . 10.43 Art 11(5) . . . . . . . . . . . . . . . . . . . . . . 10.58 Art 11(6) . . . . . . . . . . . . . . . . . . . . . . 10.58 Art 12 . . . . . . . . . . . . . . . . . . . 10.38, 10.57 Art 12(2) . . . . . . . . . . . . . . . . . . . . . . 10.57 Art 13(1) . . . . . . . . . . . . . . . . . . . . . . 10.48 Art 13(2) . . . . . . . . . . . . . . . . . 10.46, 10.59 Art 13(3) . . . . . . . . . . . . . . . . . . . . . . 10.59 Art 13(4) . . . . . . . . . . . . . . . . . . . . . . 10.59 Art 13(5) . . . . . . . . . . . . . . . . . . . . . . 10.46 Art 13(6) . . . . . . . . . . . . . . . . . . . . . . 10.60 Arts 13(6)(b)(i)–(iv) . . . . . . . . . . . . . . 10.60 Art 14 . . . . . . . . . . . . . . . . . . . . . . . . 10.61 Art 15 . . . . . . . . . . . . . . . . . . . 10.16, 10.41 Art 16 . . . . . . . . . . . . . . . . . . . . . . . . 10.40 Annex I . . . . . . . . . . . . . . . . . . . . . . . 10.50 Annex II . . . . . . . . . . . . . . . . . . 9.47, 10.50 Annex III . . . . . . . . . . . . . . . . . . . . . . 10.50 Regulation No 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency (REMIT) . . . . . . . . . . . . . . . . . 2.49, 5.42 Recital 13 . . . . . . . . . . . . . . . . . . . . . . 5.43 Recital 19 . . . . . . . . . . . . . . . . . . . . . . 5.44 Recital 21 . . . . . . . . . . . . . . . . . . . . . . 5.45 Art 1(1) . . . . . . . . . . . . . . . . . . . . . . . . 5.43 Art 1(3) . . . . . . . . . . . . . . . . . . . . . . . . 5.43 Art 2(1) . . . . . . . . . . . . . . . . . . . . . . . . 5.44 Art 2(2) . . . . . . . . . . . . . . . . . . . . . . . . 5.44 Art 2(3) . . . . . . . . . . . . . . . . . . . . . . . . 5.44 Art 2(9) . . . . . . . . . . . . . . . . . . . . . . . . 5.43 Art 3 . . . . . . . . . . . . . . . . . . . . . . 2.49, 2.50

Regulation 715/2009/EC of the European Parliament (cont.) Art 15(1)(a) . . . . . . . . . . . . . . . . . . . . . 4.27 Art 16 . . . . . . . . . . . . . . . . . . . . . . . . 4.154 Art 18(3) . . . . . . . . . . . . . . . . . . . . . . . 4.62 Art 18(6) . . . . . . . . . . . . . . . . . . . . . . . 4.62 Art 19(2) . . . . . . . . . . . . . . . . . . . . . . . 4.62 Art 19(4) . . . . . . . . . . . . . . . . . . . . . . . 4.62 Art 21 . . . . . . . . . . . . . . . . . . . . . . . . . 4.27 Art 21(3) . . . . . . . . . . . . . . . . . . . . . . . 4.17 Art 23 . . . . . . . . . . . . . . . . . . . . . . . . . 8.23 Arts 23(1) . . . . . . . . . . . . . . . . . . . . . . 8.23 Regulation 330/2010/EU, Vertical Agreements Block Exemption Regulation Art 4(b) . . . . . . . . . . . . . . . . . . . . . . . 8.170 Regulation 617/2010/EU of 24 June 2010 concerning notification to the Commission of investment projects in energy infrastructure within the European Union and repealing Regulation 736/96/EC . . . . . . . . . . 6.20 Art 3 . . . . . . . . . . . . . . . . . . . . . . . . . 10.81 Art 5 . . . . . . . . . . . . . . . . . . . . . . . . . 10.81 Art 10 . . . . . . . . . . . . . . . . . . . . . . . . 10.81 Art 11 . . . . . . . . . . . . . . . . . . . . . . . . 10.82 Regulation 994/2010/EU of the European Parliament and of the Council of 20 October 2010 concerning measures to safeguard security of gas supply and repealing Council Directive 2004/67/EC . . . . . . . . . . . . . 4.108, 9.47 Art 2(1) . . . . . . . . . . . . . . . . . . . . . . . 10.54 Art 2(2) . . . . . . . . . . . . . . . . . . . . . . . 10.43 Art 3(2) . . . . . . . . . . . . . . . . . . . . . . . 10.43 Art 3(4) . . . . . . . . . . . . . . . . . . . . . . . 10.43 Art 3(6) . . . . . . . . . . . . . . . . . . . . . . . 10.42 Art 4 . . . . . . . . . . . . . . . . . . . 10.44, 10.66 Art 4(2) . . . . . . . . . . . . . . . . . . . . . . . 10.44 Art 4(3) . . . . . . . . . . . . . . . . . . . . . . . 10.44 Art 4(5) . . . . . . . . . . . . . . . . . . . . . . . 10.44 Arts 4(6)–(8) . . . . . . . . . . . . . . . . . . . 10.44 Art 4(6)(b)(i) . . . . . . . . . . . . . . . . . . . 10.44 Art 4(6)(b)(ii) . . . . . . . . . . . . . . . . . . 10.44 Art 4(6)(b)(iii) . . . . . . . . . . . . . 10.44, 10.45 Art 5 . . . . . . . . . . . . . . . . . . . . . . . . . 10.47 Art 5(3) . . . . . . . . . . . . . . . . . . 10.42, 10.48 Art 5(4) . . . . . . . . . . . . . . . . . . . . . . . 10.48 Art 6 . . . . . . . . . . . . . . . . . . . . 10.50, 10.51 Art 6(1) . . . . . . . . . . . . . . . . . . 10.51, 10.53 Art 6(2) . . . . . . . . . . . . . . . . . . . . . . . 10.51 Art 6(3) . . . . . . . . . . . . . . . . . . 10.51, 10.55 Art 6(4) . . . . . . . . . . . . . . . . . . . . . . . 10.51 Art 6(5) . . . . . . . . . . . . . . . . . . . . . . . 10.52

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Table of Legislation Art 4 . . . . . . . . . . . . . . . . . . . . . . 2.49, 2.50 Art 5 . . . . . . . . . . . . . . . . . . . . . . 2.49, 2.50 Art 6 . . . . . . . . . . . . . . . . . . . . . 5.43, 5.46 Art 7 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.43 Arts 7-10 . . . . . . . . . . . . . . . . . . . . . . . 5.43 Art 7(2) . . . . . . . . . . . . . . . . . . . . . . . . 5.43 Art 7(3) . . . . . . . . . . . . . . . . . . . . . . . . 5.43 Art 8 . . . . . . . . . . . . . . . . . . . . . . . . . . 2.49 Art 8(2) . . . . . . . . . . . . . . . . . . . . . . . . 5.46 Art 8(2)(a) . . . . . . . . . . . . . . . . . . . . . . 5.46 Art 8(6) . . . . . . . . . . . . . . . . . . . . . . . . 5.46 Art 8(6)(a) . . . . . . . . . . . . . . . . . . . . . . 5.46 Art 9 . . . . . . . . . . . . . . . . . . . . . . . . . . 2.49 Art 10 . . . . . . . . . . . . . . . . . . . . 2.50, 5.44 Art 10(1) . . . . . . . . . . . . . . . . . . . . . . . 5.43 Art 11 . . . . . . . . . . . . . . . . . . . . . . . . . 5.43 Art 12(1) . . . . . . . . . . . . . . . . . . . . . . . 5.43 Art 13 . . . . . . . . . . . . . . . . . . . . 2.50, 5.44 Art 13(2) . . . . . . . . . . . . . . . . . . . . . . . 5.44 Art 16 . . . . . . . . . . . . . . . . . . . . 2.50, 5.43 Art 16(1) . . . . . . . . . . . . . . . . . . . . . . . 5.43 Art 16(3) . . . . . . . . . . . . . . . . . . . . . . . 5.43 Art 16(4) . . . . . . . . . . . . . . . . . . . . . . . 5.43 Art 18 . . . . . . . . . . . . . . . . . . . . . . . . . 2.50 Art 20 . . . . . . . . . . . . . . . . . . . . . . . . . 5.46 Art 22 . . . . . . . . . . . . . . . . . . . . . . . . . 5.42 DIR ECTIV ES Directive 59/221/Euratom on The Protection of Workers Against Ionizing Radiation . . . . . . . . . . . . 14.09 Council Directive 68/414/EEC of 20 December 1968 imposing an obligation on Member States of the EEC to maintain minimum stocks of crude oil and/or petroleum products Art 1 . . . . . . . . . . . . . . . . . . . . . . . . . 10.01 Art 1(1) . . . . . . . . . . . . . . . . . . . . . . . 10.02 Art 1(2) . . . . . . . . . . . . . . . . . . . . . . . 10.01 Art 2 . . . . . . . . . . . . . . . . . . . . . . . . . 10.02 Art 3 . . . . . . . . . . . . . . . . . . . . . . . . . 10.01 Art 4 . . . . . . . . . . . . . . . . . . . . . . . . . 10.01 Art 5 . . . . . . . . . . . . . . . . . . . . . . . . . 10.01 Art 6 . . . . . . . . . . . . . . . . . . . . . . . . . 10.01 Art 6(2) . . . . . . . . . . . . . . . . . . . . . . . 10.01 Art 7 . . . . . . . . . . . . . . . . . . . . . . . . . 10.01 Council Directive 72/425/EEC of 19 December 1972 amending the Council Directive of 20 December 1968 imposing an obligation on Member States of the EEC to maintain minimum stocks of crude oil and/or petroleum products . . . . . . . . . . . . . . . . . . . . 10.01

Directive 73/238/EEC of the 24 July 1973 on measures to mitigate the effects of difficulties in the supply of crude oil and petroleum products . . . . . . . . . 10.02 Art 1 . . . . . . . . . . . . . . . . . . . . . . . . . 10.02 Council Directive 80/386/Euratom laying down the basic safety standards for the health protection of the general public and workers against the dangers of ionising radiation as regards prior authorization of shipment of radioactive waste . . . . . . . 14.09 Council Directive 84/467/Euratom of 3 September 1984 amending Directive 80/836/Euratom as regards the basic safety standards for the health protection of the general public and workers against the dangers of ionizing radiation (BSS Directive) . . . . . . . . . . . . . . . . . . . 14.09 Directive 85/337/EEC of 27 June 1985 on the assessment of the effects of certain private and public projects on the environment . . . . . . . . . . . . 13.15 Council Directive 89/618/Euratom of 27 November 1989 on informing the general public about health protection measures to be applied and steps to be taken in the event of a radiological emergency . . . . . . . . 14.09 Council Directive 90/377/EEC of 29 June 1990 concerning a Community procedure to improve the transparency of gas and electricity prices charged to industrial end-users (Price Transparency Directive) . . . . 2.17 Council Directive 90/547/EEC of 29 October 1990 on the transit of electricity through transmission grids (Electricity Transit Directive) . . . 2.17, 4.02 Art 3(1) . . . . . . . . . . . . . . . . . . . 4.02, 4.146 Art 3(2) . . . . . . . . . . . . . . . . . . . . . . . . 4.02 Council Directive 90/641/Euratom of 4 December 1990 on the operational protection of outside workers exposed to the risk of ionizing radiation during their activities in controlled areas . . . . 14.09 Council Directive 91/296/EEC of 31 May 1991 on the transit of natural gas through grids (Gas Transit Directive) . . . . . . . . . 4.02, 4.146, 4.153, 8.126, 8.130, 8.132 Art 3(1) . . . . . . . . . . . . . . 4.02, 4.157, 4.158 Art 3(2) . . . . . . . . . . . . . . . . . . . . . . . . 4.02

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Table of Legislation Directive 92/42/EEC of 21 May 1992 on efficiency requirements for new hot-water boilers fired with liquid or gaseous fuels . . . . . . . . . . . . . . 16.02, 16.03 Directive 92/75/EEC of 22 September 1992 on the indication by labelling and standard product information of the consumption of energy . . . . 16.02, 17.02 , 17.03 Directive 92/81/EC on the structures and rates of excise duties on mineral oils . . . . . . . . . . . . . . . . . . . . . . . 15.01 Directive 92/82/EC on the structures and rates of excise duties on mineral oils . . . . . . . . . . . . . . . . . . . . . . . . 15.01 Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts . . . . . . . . . . . . . . . . . . . . . 7.59 Art 3(1) . . . . . . . . . . . . . . . . . . . . . . . . 8.14 Art 3(2) . . . . . . . . . . . . . . . . . . . . . . . . 8.14 Directive 93/76/EEC of 13 September 1993 to limit carbon dioxide emmissions by improving energy efficiency (SAVE) . . . . . . . . 16.02, 16.03 Directive 94/22/EC of the European Parliament and of the Council of 30 May 1994 on the conditions for granting and using authorisations for the prospection, exploration and production of hydrocarbons (Hydrocarbons Licensing Directive) . . . . . . . . . . . . . 2.18 Recital 4 . . . . . . . . . . . . . . . . . 15.03, 15.05 Art 1(3) . . . . . . . . . . . . . . . . . . . . . . . 15.06 Art 2(1) . . . . . . . . . . . . . . . . . . . . . . . 15.05 Art 2(2) . . . . . . . . . . . . . . . . . . . . . . . 15.05 Art 3 . . . . . . . . . . . . . . . . . . . . 15.05, 15.13 Art 3(1) . . . . . . . . . . . . . . . . . . . . . . . 15.07 Art 3(2) . . . . . . . . . . . . . . . . . . . . . . . 15.07 Art 3(2)(a) . . . . . . . . . . . . . . . . . . . . . 15.07 Art 3(2)(b) . . . . . . . . . . . . . . . . . . . . . 15.07 Art 3(3) . . . . . . . . . . . . . . . . . . . . . . . 15.07 Art 3(3)(a) . . . . . . . . . . . . . . . . . . . . . 15.07 Art 3(3)(b) . . . . . . . . . . . . . . . . . . . . . 15.07 Art 3(3)(c) . . . . . . . . . . . . . . . . . . . . . 15.07 Art 3(4) . . . . . . . . . . . . . . . . . . . . . . . 15.07 Art 3(5) . . . . . . . . . . . . . . . . . . . . . . . 15.06 Art 3(6) . . . . . . . . . . . . . . . . . . . . . . . 15.05 Art 4 . . . . . . . . . . . . . . . . . . . . . . . . . 15.08 Art 5 . . . . . . . . . . . . . . . . . . . . 15.05, 15.09 Art 5(1) . . . . . . . . . . . . . . . . . . . . . . . 15.09 Art 5(2) . . . . . . . . . . . . . . . . . . . . . . . 15.05 Art 5(5) . . . . . . . . . . . . . . . . . . . . . . . 15.09 Art 6(1) . . . . . . . . . . . . . . . . . . . . . . . 15.05 Art 6(2) . . . . . . . . . . . . . . . . . . 15.05, 15.11 Art 6(3) . . . . . . . . . . . . . . . . . . 15.05, 15.12

Art 7 . . . . . . . . . . . . . . . . . . . . . . . . . 15.10 Art 8 . . . . . . . . . . . . . . . . . . . . . . . . . 15.04 Art 9 . . . . . . . . . . . . . . . . . . . . . . . . . 15.04 Art 10 . . . . . . . . . . . . . . . . . . . . . . . . 15.06 Art 12 . . . . . . . . . . . . . . . . . . . . . . . . 15.13 Directive 96/29/Euratom of 13 May 1996 laying down basic safety standards for the protection of the health of workers and the general public against the dangers arising from ionizing radiation . . . . . . . . . . . . . . . . . . . . . 14.09 Directive 96/29/Euratom of 13 May 1996 on laying down basic safety standards for the protection of the health of workers and the general public against the dangers of ionizing radiation . . . . . . . . . . . . . 14.09 Art 1 . . . . . . . . . . . . . . . . . . . . . . . . . 14.10 Art 2 . . . . . . . . . . . . . . . . . . . . . . . . . 14.10 Art 3 . . . . . . . . . . . . . . . . . . . . . . . . . 14.10 Art 3(1) . . . . . . . . . . . . . . . . . . . . . . . 14.10 Art 3(2) . . . . . . . . . . . . . . . . . . . . . . . 14.10 Art 5 . . . . . . . . . . . . . . . . . . . . . . . . . 14.10 Art 6 . . . . . . . . . . . . . . . . . . . . . . . . . 14.10 Art 7 . . . . . . . . . . . . . . . . . . . . . . . . . 14.10 Art 8 . . . . . . . . . . . . . . . . . . . . . . . . . 14.10 Art 9 . . . . . . . . . . . . . . . . . . . . . . . . . 14.10 Directive 96/61/EC of 24 September 1996 concerning intergrated pollution prevention and control . . . . . . . . . . . . . . . . . 13.15, 15.02 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 (First Electricity Directive) . . . . . . . . . . . 2.17, 2.18, 4.68, 4.107, 4.140, 4.142, 8.127, 8.128, 8.129, 9.46, 12.154, 12.161 Chap. IV . . . . . . . . . . . . . . . . . . . . . . 4.139 Chap. VI . . . . . . . . . . . . . . . . . . . . . . 4.139 Chap. VII . . . . . . . . . . . . . . . . . . . . . 4.139 Art 17(1)–(3) . . . . . . . . . . . . . . . . . . . . 4.03 Art 17(4) . . . . . . . . . . . . . . . . . . . . . . . 4.03 Art 18 . . . . . . . . . . . . . . . . . . . . . . . . . 4.03 Art 19(1) . . . . . . . . . . . . . . . . . . . . . . . 2.29 Art 19(2) . . . . . . . . . . . . . . . . . . . . . . . 2.29 Art 19(3) . . . . . . . . . . . . . . . . . . . . . . . 2.30 Art 19(5) . . . . . . . . . . . . . . . . . . . . . . . 2.30 Art 19(5)(a) . . . . . . . . . . . . . . . . . . . . . 2.30 Art 19(5)(b) . . . . . . . . . . . . . . . . . . . . . 2.30 Art 24 . . . . . . . . . . . . . . . . . . . . . . . . 4.139, 4.141, 4.142, 4.143, 4.144, 4.151 Art 24(3) . . . . . . . . . . . . . . . . . . 3.110, 4.68

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Table of Legislation Directive 97/7/EC of the European Parliament and of the Council of 20 May 1997 on the protection of consumers in respect of distance contracts . . . . . . . . . . . . . . . . . 7.59, 8.16 Art 4 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.16 Council Directive 97/43/Euratom of 30 June 1997 on health protection of individuals against the dangers of ionizing radiation in relation to medical exposure, and repealing Directive 84/466/Euratom . . . . . . 14.09 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 (First Gas Directive) . . . . . . . . . . . . . . . 2.18, 2.30, 4.81, 4.87, 4.92, 4.139, 8.127, 8.128, 8.129, 8.130, 9.33 Art 15 . . . . . . . . . . . . . . . . . . . . . . . . . 4.03 Art 16 . . . . . . . . . . . . . . . . . . . . . . . . . 4.03 Art 25 . . . . . . . . . . . . . . . . . . . . . . . . . 4.82 Directive 98/44/EC on the legal protection of the biotechnological inventions . . . . . . . . . . . . . . . . . . . . 8.20 Directive 98/70/EC of the European Parliament and of the Council of 13 October 1998 relating to the quality of petrol and diesel fuels and amending Council Directive 93/12/ EEC . . . . . . . . . . . . . . . . . . . . . . . 15.02 Directive 98/93/EC of the 14 December 1998 amending Directive 68/414/ EEC imposing an obligation on Member States of the EEC to maintain minimum stocks of crude oil and/or petroleum products Recital 2 . . . . . . . . . . . . . . . . . . . . . . 10.01 Art 1 . . . . . . . . . . . . . . . . . . . . . . . . . 10.01 Directive 2000/60/EC of the European Parliament and of the Council of 23 October 2000 establishing a framework for Community action in the field of water policy . . . . . . . 12.39, 13.12, 13.15 Directive 2001/77/EC of the European Parliament and of the Council of 27 September 2001 on the promotion of electricity from renewable sources in the internal electricity market (First Renewables Directive) . . . . . . 1.09, 12.06, 12.16, 12.23, 12.43, 12.118, 12.120, 12.182 Art 3 . . . . . . . . . . . . . . . . . . . 12.04, 12.09

Art 3(4) . . . . . . . . . . . . . . . . . . . . . . . 12.06 Art 5 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.33 Art 5(1) . . . . . . . . . . . . . . . . . . . . . . 12.153 Art 6 . . . . . . . . . . . . . . . . . . . . . . . . . 12.74 Art 7 . . . . . . . . . . . . . . . . . . . . . . . . . 12.84 Art 7(1) . . . . . . . . . . . . . . . . . . . . . . . 12.84 Directive 2001/80/EC of 23 October 2001 on the limitation of emmissions of certain pollutants into the air from large combustion plants . . . . . . . . . . . . . . . . . . 13.15, 13.22 Directive 2002/91/EC of the European Parliament and of the Council of 16 December 2002 on the energy performance of buildings . . . . . . . . 16.03, 17.07, 17.09 Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (Market Abuse Directive) . . . . . . . . . . . . . . . 5.45 Directive 2003/17/EC of the European Parliament and of the Council of 3 March 2003 amending Directive 98/70/EC relating to the quality of petrol and diesel fuels . . . . . . . . . . 15.02 Directive 2003/30/EC of the European Parliament and of the Council of 8 May 2003 on the promotion of the use of biofuels or other renewable fuels for transport Art 3(1) . . . . . . . . . . . . . . . . . . 12.07, 12.43 Art 4(2) . . . . . . . . . . . . . . . . . 12.04, 12.09 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 (Second Electricity Directive) . . . . . . . . . . . . . . . 3.09, 3.17, 3.117, 4.09, 4.68, 4.151, 4.152, 8.141 Recital 2 . . . . . . . . . . . . . . . . . . . . . . . 4.09 Recital 12 . . . . . . . . . . . . . . . . . . . . . 4.143 Recital 13 . . . . . . . . . . . . . . . . . . . . . . 4.09 Recital 50 . . . . . . . . . . . . . . . . . . . . . . 7.11 Art 3 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.02 Art 3(2) . . . . . . . . . . . 7.06, 7.08, 7.11, 7.12 Art 3(3) . . . . . . . . . . . . . . . . . . . . . . . . 2.37 Art 3(5) . . . . . . . . . . . . . . . . . . . . . . . . 2.38 Art 3(14) . . . . . . . . . . . . . . . . . . . 7.06, 7.08 Art 3(15) . . . . . . . . . . . . . . . . . . . . . . . 7.05 Art 4 . . . . . . . . . . . . . . . . . . . . . . . . . . 2.39 Art 7 . . . . . . . . . . . . . . . . . . . . 2.34, 10.22 Art 7(5) . . . . . . . . . . . . . . . . . . . . . . . 4.144

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Table of Legislation Directive 2003/54/EC of the European Parliament (cont.) Art 8 . . . . . . . . . . . . . . . . . . . . . . . . . 10.22 Art 8(2) . . . . . . . . . . . . . . . . . . . . . . . 10.23 Art 10 . . . . . . . . . . . . . . . . . . . . . . . . . 2.33 Art 10(2) . . . . . . . . . . . . . . . . . . . . . . . 2.33 Art 12 . . . . . . . . . . . . . . . . . . . . . . . . . 2.33 Art 15 . . . . . . . . . . . . . . . . . . . . . . . . . 2.33 Art 16 . . . . . . . . . . . . . . . . . . . . . . . . 4.144 Art 20 . . . . . . . . . . . . . . . . . . . . 2.34, 4.152 Art 20(1) . . . . . . . . . . . . . . . . . . 4.04, 4.125 Art 21 . . . . . . . . . . . . . . . . . . . . . . . . . 2.32 Art 21(2)(b) . . . . . . . . . . . . . . . . . . . . . 2.32 Art 22c(1)(n) . . . . . . . . . . . . . . . . . . . 8.140 Art 23 . . . . . . . . . . . . . . . . . . . . . . . . . 2.35 Art 23(3) . . . . . . . . . . . . . . . . . . . . . . . 4.23 Art 26(1) . . . . . . . . . . . . . . . . . . . . . . . 4.68 Art 28(8) . . . . . . . . . . . . . . . . . . . . . . . 4.81 Annex A . . . . . . . . . . . . . . . . . . . . . . . 2.38 Annex I . . . . . . . . . . . . . . . . . . . . . . . . 7.11 Appendix I . . . . . . . . . . . . . . . . . . . . . 7.05 Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in natural gas and repealing Directive 98/30/EC (Second Gas Directive) . . . . . . . . . . . . . . . 3.09, 3.17, 3.117, 4.97, 4.112, 4.159, 8.127, 8.137, 8.139, 8.141 Recital 5 . . . . . . . . . . . . . . . . . . . . . . 10.20 Recital 25 . . . . . . . . . . . . . . . . . . . . . 8.124 Art 3 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.02 Art 3(2) . . . . . . . 2.37, 7.06, 7.08, 7.11, 7.12 Art 3(3) . . . . . . . . . . . . . . . . . . . 2.38, 8.50 Art 3(10) . . . . . . . . . . . . . . . . . . . 7.06, 7.08 Art 3(11) . . . . . . . . . . . . . . . . . . . . . . . 7.05 Art 5 . . . . . . . . . . . . . . . . . . . . . . . . . . 2.39 Art 9 . . . . . . . . . . . . . . . . . . . . . . . . . . 2.33 Art 9(1) . . . . . . . . . . . . . . . . . . . . . . . 3.107 Art 9(2) . . . . . . . . . . . . . . . . . . . . . . . . 2.33 Art 10 . . . . . . . . . . . . . . . . . . . . . . . . . 2.33 Art 13 . . . . . . . . . . . . . . . . . . . . . . . . . 2.33 Art 18 . . . . . . . . . . . . . . . . . . . . . . . . . 2.34 Art 18(1) . . . . . . . . . . . . . . . . . . . . . . . 4.04 Art 18(3) . . . . . . . . . . . . . . . . . . . . . . 8.125 Art 19 . . . . . . . . . . . . . . . . . . . . 2.34, 4.04 Art 19(3) . . . . . . . . . . . . . . . . . . . . . . . 4.42 Art 20 . . . . . . . . . . . . . . . . . . . . 2.34, 4.04 Art 21(1) . . . . . . . . . . . . . . . . . . . . . . . 4.83 Art 22 . . . . . . . . . . . . . . . 2.34, 4.98, 4.113 Art 23 . . . . . . . . . . . . . . . . . . . . . . . . . 2.32 Art 23(2)(b) . . . . . . . . . . . . . . . . . . . . . 2.32 Art 23(3) . . . . . . . . . . . . . . . . . . . . . . . 2.36 Art 24 . . . . . . . . . . . . . . . . . . . . . . . . 4.113

Art 24c(1)(l) . . . . . . . . . . . . . . . . . . . 8.140 Art 25 . . . . . . . . . . . . . . . . . . . . . . . . . 2.35 Art 25(3) . . . . . . . . . . . . . . . . . . 2.36, 4.23 Art 27 . . . . . . . . . . . . . . . . . . . . . . . . . 4.83 Art 28(2) . . . . . . . . . . . . . . . . . . . . . . . 4.71 Art 28(4) . . . . . . . . . . . . . . . . . . . . . . . 4.76 Art 28(5) . . . . . . . . . . . . . . . . . . . . . . . 4.76 Art 32(1) . . . . . . . . . . . 4.146, 4.150, 4.153, 4.154, 4.157, 4.158, 8.126 Annex A . . . . . . . . . . . . . . . . . . . . . . . 2.38 Annex I . . . . . . . . . . . . . . . . . . . . 7.09, 7.11 Directive 2003/96/EC on the taxation of energy products and electricity . . . . . . . . . . . . . . . . . . . . 15.01 Council Directive 2003/122/Euratom of 22 December 2003 on the control of high-activity sealed radioactive sources and orphan sources . . . . . . 14.09 Directive 2004/8/EC, Cogeneration Directive . . . . . . . . . . . . . . 12.08, 12.83, 12.95, 12.109, 12.111, 16.03, 16.08, 17.21, 17.32, 17.40 Art 1 . . . . . . . . . . . . . . . . . . . . . . . . . 12.98 Art 4 . . . . . . . . . . . . . . . . . . . . . . . . . 12.99 Art 5(1) . . . . . . . . . . . . . . . . . . . . . . 12.100 Art 5(5) . . . . . . . . . . . . . . . . . . . . . . 12.101 Art 6 . . . . . . . . . . . . . . . . . . . . . . . . 12.102 Art 7 . . . . . . . . . . . . . . . . . . . . . . . . 12.103 Art 7(1) . . . . . . . . . . . . . . . . . . . . . . . 10.23 Art 8 . . . . . . . . . . . . . . . . . . . . . . . . . 12.99 Art 8(3) . . . . . . . . . . . . . . . . . . . . . . 12.104 Art 9 . . . . . . . . . . . . . . . . . . . . . . . . 12.105 Art 10 . . . . . . . . . . . . . . . . . . . . . . . 12.106 Art 11 . . . . . . . . . . . . . . . . . . . . . . . 12.107 Art 14(2) . . . . . . . . . . . . . . . . . . . . . . 12.99 Directive 2004/17/EC of the European Parliament and of the Council of 31 March 2004 coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors Recital 38 . . . . . . . . . . . . . . . . . . . . . 15.13 Recital 41 . . . . . . . . . . . . . . . . . . . . . 15.03 Art 27 . . . . . . . . . . . . . . . . . . . . . . . . 15.13 Art 30 . . . . . . . . . . . . . . . . . . . . . . . . 15.13 Art 30(3) . . . . . . . . . . . . . . . . . . . . . . 15.13 Directive 2004/18/EC on the coordination of procedures for the award of public works contracts, public supply contracts and public services contracts . . . . . . . . . . . . . . . . . . . . 17.36 Directive 2004/35/EC of 21 April 2004 of the European Parliament and the Council on environmental liability . . . . . . . . . . . . . . . . 13.15

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Table of Legislation Directive 2004/67/EC of 26 April 2004 concerning measures to safeguard security of natural gas supply . . . . . . . 10.30, 10.62 Recital 7 . . . . . . . . . . . . . . . . . . . . . . 10.33 Recital 10 . . . . . . . . . . . . . . . . . . . . . . 9.10 Recital 11 . . . . . . . . . . . . . . . . . 9.07, 10.31 Recital 17 . . . . . . . . . . . . . . . . . . . . . 10.38 Art 1 . . . . . . . . . . . . . . . . . . . . . . . . . 10.30 Art 2(2) . . . . . . . . . . . . . . . . . . . . . . . 10.38 Art 3 . . . . . . . . . . . . . . . . . . . . . . . . . 10.37 Art 3(1) . . . . . . . . . . . . . . . . . . 10.33, 10.41 Art 3(2) . . . . . . . . . . . . . . . . . . . . . . . 10.33 Art 4 . . . . . . . . . . . . . . . . . . . . . . . . . 10.37 Art 4(1) . . . . . . . . . . . . . . . . . . . . . . . 10.34 Art 4(2) . . . . . . . . . . . . . . . . . . . . . . . 10.34 Art 4(6) . . . . . . . . . . . . . . . . . . . . . . . 10.33 Art 5 . . . . . . . . . . . . . . . . . . . . 10.36, 10.37 Art 6 . . . . . . . . . . . . . . . . . . . . . . . . . 10.37 Art 6(a) . . . . . . . . . . . . . . . . . . . . . . . 10.32 Art 7 . . . . . . . . . . . . . . . . . . . . 10.37, 10.38 Art 8(1) . . . . . . . . . . . . . . . . . . . . . . . 10.39 Art 8(2) . . . . . . . . . . . . . . . . . . . . . . . 10.39 Art 8(3) . . . . . . . . . . . . . . . . . . . . . . . 10.38 Art 9 . . . . . . . . . . . . . . . . . . . . . . . . . 10.38 Art 9(1) . . . . . . . . . . . . . . . . . . . . . . . 10.38 Art 9(2) . . . . . . . . . . . . . . . . . . . . . . . 10.38 Art 9(3) . . . . . . . . . . . . . . . . . . . . . . . 10.38 Art 9(4) . . . . . . . . . . . . . . . . . . . . . . . 10.38 Art 9(5) . . . . . . . . . . . . . . . . . . . . . . . 10.38 Art 9(6) . . . . . . . . . . . . . . . . . . . . . . . 10.38 Art 10(1) . . . . . . . . . . . . . . . . . . . . . . 10.37 Council Directive 2004/85/EC of 28 June 2004 amending Directive 2003/54/EC of the European Parliament and of the Council as regards the application of certain provisions to Estonia . . . . . . . . . . . 3.106 Directive 2005/89/EC of the European Parliament and the Council of 18 January 2006 concerning measures to safeguard security of electricity supply and infrastructure investment Recital 3 . . . . . . . . . . . . . . . . . . . . . . 10.67 Recital 7 . . . . . . . . . . . . . . . . . . . . . . 10.67 Recital 12 . . . . . . . . . . . . . . . . . . . . . 10.67 Art 1 . . . . . . . . . . . . . . . . . . . . . . . . . 10.69 Art 1(1) . . . . . . . . . . . . . . . . . . 10.69, 10.77 Art 2(b) . . . . . . . . . . . . . . . . . . . . . . . 10.68 Art 3(1) . . . . . . . . . . . . . . . . . . . . . . . 10.67 Art 3(2) . . . . . . . . . . . . . . . . . . . . . . . 10.69 Art 3(3) . . . . . . . . . . . . . . . . . . . . . . . 10.70 Art 3(4) . . . . . . . . . . . . . . . . . . . . . . . 10.71 Art 3(5) . . . . . . . . . . . . . . . . . . . . . . . 10.69 Art 4 . . . . . . . . . . . . . . . . . . . . 10.72, 10.76 Art 4(1)(a) . . . . . . . . . . . . . . . . . . . . . 10.72

Art 4(1)(b) . . . . . . . . . . . . . . . . . . . . . 10.72 Art 4(1)(c) . . . . . . . . . . . . . . . . . . . . . 10.72 Art 4(1)(d) . . . . . . . . . . . . . . . . . . . . . 10.72 Art 4(1)(e) . . . . . . . . . . . . . . . . . . . . . 10.72 Art 4(2) . . . . . . . . . . . . . . . . . . . . . . . 10.72 Art 4(3) . . . . . . . . . . . . . . . . . . . . . . . 10.72 Art 4(4) . . . . . . . . . . . . . . . . . . . . . . . 10.72 Art 5(1) . . . . . . . . . . . . . . . . . . . . . . . 10.73 Art 5(2) . . . . . . . . . . . . . . . . . . . . . . . 10.73 Art 5(3) . . . . . . . . . . . . . . . . . . . . . . . 10.73 Art 6(1) . . . . . . . . . . . . . . . . . . . . . . . 10.75 Art 7 . . . . . . . . . . . . . . . . . . . . . . . . . 10.76 Art 7(2) . . . . . . . . . . . . . . . . . . . . . . . 10.76 Art 7(3) . . . . . . . . . . . . . . . . . . . . . . . 10.76 Art 7(4) . . . . . . . . . . . . . . . . . . . . . . . 10.77 Art 7(5) . . . . . . . . . . . . . . . . . . . . . . . 10.77 Art 8 . . . . . . . . . . . . . . . . . . . . . . . . . 10.77 Art 8(1) . . . . . . . . . . . . . . . . . . . . . . . 10.68 Art 8(2) . . . . . . . . . . . . . . . . . . . . . . . 10.68 Directive 2006/32/EC of the European Parliament and of the Council of 5 April 2006 on energy end-use efficiency and energy services . . . . 12.109, 12.110, 13.15, 16.03, 16.08, 17.32, 17.33, 17.40, 17.42 Directive 2006/67/EC of 26 July 2006 imposing an obligation on Member States to maintain minimum stocks of crude oil and/or petroleum products . . . . . . . . . . . . . . . . . . . . 10.01, 10.04, 10.05 Recital 4 . . . . . . . . . . . . . . . . . . . . . . 10.07 Recital 10 . . . . . . . . . . . . . . . . . . . . . 10.07 Recital 28 . . . . . . . . . . . . . . . . . . . . . 10.07 Art 1 . . . . . . . . . . . . . . . . . . . . . . . . . 10.05 Art 2 . . . . . . . . . . . . . . . . . . . . . . . . . 10.07 Art 3(1) . . . . . . . . . . . . . . . . . . 10.04, 10.08 Art 3(2) . . . . . . . . . . . . . . . . . . . . . . . 10.05 Art 3(3) . . . . . . . . . . . . . . . . . . . . . . . 10.05 Art 6 . . . . . . . . . . . . . . . . . . . . . . . . . 10.10 Art 7 . . . . . . . . . . . . . . 10.05, 10.06, 10.09 Art 7(4) . . . . . . . . . . . . . . . . . . . . . . . 10.09 Art 8 . . . . . . . . . . . . . . . . . . . . . . . . . 10.05 Art 8(2) . . . . . . . . . . . . . . . . . . . . . . . 10.09 Art 9 . . . . . . . . . . . . . . . . . . . . . . . . . 10.05 Art 12 . . . . . . . . . . . . . . . . . . . . . . . . 10.10 Art 13 . . . . . . . . . . . . . . . . . . . . . . . . 10.10 Art 14 . . . . . . . . . . . . . . . . . . . . . . . . 10.10 Art 18 . . . . . . . . . . . . . . . . . . . 10.10, 10.11 Art 18(1) . . . . . . . . . . . . . . . . . 10.10, 10.11 Art 18(2) . . . . . . . . . . . . . . . . . . . . . . 10.11 Art 18(3) . . . . . . . . . . . . . . . . . . . . . . 10.10 Art 18(5) . . . . . . . . . . . . . . . . . . . . . . 10.10 Art 18(6) . . . . . . . . . . . . . . . . . . . . . . 10.10 Art 18(7) . . . . . . . . . . . . . . . . . . . . . . 10.10

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Table of Legislation Directive 2006/67/EC of 26 July 2006 imposing an obligation (cont.) Art 20 . . . . . . . . . . . . . . . . . . . . . . . . 10.11 Art 20(3) . . . . . . . . . . . . . . . . . . . . . . 10.11 Art 20(4) . . . . . . . . . . . . . . . . . . . . . . 10.11 Art 20(5) . . . . . . . . . . . . . . . . . . . . . . 10.11 Art 20(6) . . . . . . . . . . . . . . . . . . . . . . 10.11 Art 24(1) . . . . . . . . . . . . . . . . . . . . . . 10.04 Annex I . . . . . . . . . . . . . . . . . . . . . . . 10.08 Annex II . . . . . . . . . . . . . . . . . . . . . . 10.08 Annex III . . . . . . . . . . . . . . . . . . . . . . 10.08 Directive 2008/1/EC of the European Parliament and the Council of 15 January 2008 concerning intergrated pollution prevention and control . . . . . . . . . . . . . . . . . . . . . . 13.49 Directive 2008/114/EC on the identification and designation of European Critical Infrastructure and the assessment of the need to improve their protection . . . . . . . . . . . . . . . . 9.04 Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC (Second Renewables Directive) . . . 12.18 Recital 25 . . . . . . . . . . . . . . 12.149, 12.170 Recitals 37–39 . . . . . . . . . . . . . . . . . . 12.34 Recital 55 . . . . . . . . . . . . . . . . . . . . . 12.83 Recital 95 . . . . . . . . . . . . . . . . . . . . . 12.90 Art 2(a) . . . . . . . . . . . . . . . . . . . . . . . 12.21 Art 2(h) . . . . . . . . . . . . . . . . . . . . . . . 12.90 Art 3(1) . . . . . . . . . . . . . . . . . 12.24, 12.94 Art 3(2) . . . . . . . . . . . . . . . . . . . . . . . 12.25 Art 3(3) . . . . . . . . . . . . . . . . . . . . . . . 12.26 Art 3(3)(b) . . . . . . . . . . . . . . . . . . . . . 12.44 Art 3(4) . . . . . . . . . . . . . . . . . . 12.27, 12.90 Art 4 . . . . . . . . . . . . . . . . . . . . . . . . . 12.32 Art 4(1) . . . . . . . . . . . . . . . . . . . . . . . 12.28 Art 4(2) . . . . . . . . . . . . . . . . . . . . . . . 12.29 Art 4(3) . . . . . . . . . . . . . . . . . . . . . . . 12.30 Art 4(4) . . . . . . . . . . . . . . . . . . . . . . . 12.31 Art 4(6) . . . . . . . . . . . . . . . . . . . . . . . 12.32 Art 5 . . . . . . . . . . . . . . . . . . . . . . . . . 12.32 Arts 5–11 . . . . . . . . . . . . . . . . . . . . 12.145 Art 5(3) . . . . . . . . . . . . . . . . . . . . . . . 12.22 Art 5(9) . . . . . . . . . . . . . . . . . . . . . . . 12.37 Art 6 . . . . . . . . 12.33, 12.47, 12.49, 12.52, 12.71, 12.73, 12.89 Art 6(2) . . . . . . . . . . . . . . . . . . . . . . . 12.52 Art 7 . . . . . . . . . . . . . . 12.33, 12.53, 12.55, 12.71, 12.89

Art 7(3) . . . . . . . . . . . . . . . . . . . . . . . 12.57 Art 7(4) . . . . . . . . . . . . . . . . . . . . . . . 12.57 Art 7(5) . . . . . . . . . . . . . . . . . . . . . . . 12.58 Art 8 . . . . . . . . . 12.33, 12.53, 12.59, 12.71 Art 9 . . . . . . . . . . . . . 12.33, 12.38, 12.60, 12.70, 12.89 Art 9(2) . . . . . . 12.44, 12.61, 12.63, 12.66 Art 9(3) . . . . . . . . . . . . . . . . . 12.44, 12.63 Art 9(4) . . . . . . . . . . . . . . . . . . . . . . . 12.65 Art 9(5) . . . . . . . . . . . . . . . . . 12.44, 12.65 Art 10 . . . . . . . . . . . . 12.33, 12.44, 12.60, 12.66, 12.70 Art 11 . . . . . . . . . . . . . . . . . . 12.33, 12.72 Art 11(1) . . . . . . . . . . . . . . . . . . . . . . 12.69 Art 11(2) . . . . . . . . . . . . . . . . . . . . . . 12.73 Art 12 . . . . . . . . . . . . . . . . . . . . . . . . 12.69 Art 13 . . . . . . . . . . . . . . . . . . . . . . . . 12.75 Art 13(1) . . . . . . . . . . . . . . . . . . . . . . 12.75 Art 14 . . . . . . . . . . . . . . . . . . . . . . . . 12.75 Art 15 . . . . . . . . . . . . . . . . . . . 7.33, 12.153 Art 15(1) . . . . . . . . . . . . . . . . . . . . . . 12.77 Art 15(2) . . . . . . . . . . . . . . . . . . . . . . 12.77 Art 15(3) . . . . . . . . . . . . . . . . . . . . . . 12.78 Art 15(4) . . . . . . . . . . . . . . . . . . . . . . 12.79 Art 15(5) . . . . . . . . . . . . . . . . . . . . . . 12.79 Art 15(6) . . . . . . . . . . . . . . . . . . . . . . 12.80 Art 15(7) . . . . . . . . . . . . . . . . . . . . . . 12.80 Art 15(9) . . . . . . . . . . . . . . . . . . . . . . 12.81 Art 15(10) . . . . . . . . . . . . . . . . . . . . . 12.81 Art 15(11) . . . . . . . . . . . . . . . . . . . . . 12.80 Art 15(12) . . . . . . . . . . . . . . . . . . . . . 12.82 Art 16 . . . . . . . . . . . . . . . . . . . . . . . . 12.86 Art 16(1) . . . . . . . . . . . . . . . . . . . . . . 12.86 Art 16(2) . . . . . . . . . . . . . . . . . . . . . . 12.86 Art 16(2)(a) . . . . . . . . . . . . . . . . . . . . . 7.35 Art 16(2)(b) . . . . . . . . . . . . . . . . . 4.28, 7.35 Art 16(2)(c) . . . . . . . . . . . . . . . . . 4.28, 7.35 Art 16(3) . . . . . . . . . . . . . . . . . . . . . . 12.87 Art 16(4) . . . . . . . . . . . . . . . . . . . . . . 12.87 Art 16(6) . . . . . . . . . . . . . . . . . . . . . . 12.87 Art 16(7) . . . . . . . . . . . . . . . . . . . . . . 12.88 Art 16(8) . . . . . . . . . . . . . . . . . . . . . . 12.88 Art 17(1) . . . . . . . . . . . . . . . . . . . . . . 12.90 Art 17(2) . . . . . . . . . . . . . . . . . . . . . . 12.91 Arts 17(3)–(5) . . . . . . . . . . . . . . . . . . 12.92 Art 17(6) . . . . . . . . . . . . . . . . . . . . . . 12.92 Art 17(8) . . . . . . . . . . . . . . . . . . . . . . 12.90 Art 21(2) . . . . . . . . . . . . . . . . . . . . . . 12.90 Art 23 . . . . . . . . . . . . . . . . . 12.150, 12.170 Art 24 . . . . . . . . . . . . . . . . . . . . . . . . 12.89 Art 25 . . . . . . . . . . . . . . . . . . . . . . . . 12.37 Arts 27–28 . . . . . . . . . . . . . . . . . . . . 12.38 Art 27(1) . . . . . . . . . . . . . . . . . . . . . . 12.18 Directive 2009/29/EC of the European Parliament and of the Council of

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Table of Legislation 23 April 2009 amending Directive 2003/87/EC to improve and extend greenhouse gas emmission allowance trading scheme Recital 19 . . . . . . . . . . . . . . . . . . . . . 13.50 Art 10a(6) . . . . . . . . . . . . . . . . . . . . . 13.51 Art 10a(8) . . . . . . . . . . . . . . . . 13.51, 13.52 Art 12(3a) . . . . . . . . . . . . . . . . . . . . . 13.51 Directive 2009/31/EC of the European Parliament and of the Council of 23 April 2009 on the geological storage of carbon dioxide and amending Council Directive 85/337/EEC, European Parliament and Council Directives 2000/60/ EC, 2001/80/EC, 2004/35/EC, 2006/12/EC, 2008/1/EC and Regulation 1013/2006 (CCS Directive) . . . . . . . . . . . . . . . . . . . 13.12 Recitals 1–4 . . . . . . . . . . . . . . . . . . . . 13.17 Recital 3 . . . . . . . . . . . . . . . . . . . . . . 13.12 Recital 23 . . . . . . . . . . . . . . . . . . . . . 13.25 Recital 24 . . . . . . . . . . . . . . . . . . . . . 13.26 Recital 25 . . . . . . . . . . . . . . . . . . . . . 13.27 Recital 26 . . . . . . . . . . . . . . . . . . . . . 13.34 Recital 27 . . . . . . . . . . . . . . . . . . . . . 13.49 Recital 33 . . . . . . . . . . . . . . . . . . . . . 13.34 Recital 38 . . . . . . . . . . . . . . . . . . . . . 13.40 Recital 46 . . . . . . . . . . . . . . . . . . . . . 13.22 Recital 51 . . . . . . . . . . . . . . . . . . . . . 13.43 Art 4 . . . . . . . . . . . . . . . . . . . . 13.21, 13.41 Art 5(2) . . . . . . . . . . . . . . . . . . . . . . . 13.25 Art 5(3) . . . . . . . . . . . . . . . . . . . . . . . 13.25 Art 6 . . . . . . . . . . . . . . . . . . . . . . . . . 13.26 Art 6(3) . . . . . . . . . . . . . . . . . . . . . . . 13.26 Art 9(3) . . . . . . . . . . . . . . . . . . . . . . . 13.31 Art 10 . . . . . . . . . . . . . . . . . . . . . . . . 13.27 Art 11 . . . . . . . . . . . . . . . . . . . . . . . . 13.27 Art 11(1) . . . . . . . . . . . . . . . . . . . . . . 13.28 Art 11(3) . . . . . . . . . . . 13.28, 13.31, 13.37 Art 12 . . . . . . . . . . . . . . . . . . . . . . . . 13.49 Arts 12(1)(a)–(c) . . . . . . . . . . . . . . . . 13.49 Art 12(2) . . . . . . . . . . . . . . . . . . . . . . 13.49 Art 13 . . . . . . . . . . . . . . . . . . . . . . . . 13.30 Art 14 . . . . . . . . . . . . . . . . . . . . . . . . 13.30 Art 15 . . . . . . . . . . . . . . . . . . . . . . . . 13.30 Art 16 . . . . . . . . . . . . . . . . . . . . . . . . 13.30 Art 17(1) . . . . . . . . . . . . . . . . . . . . . . 13.31 Art 17(1)(a) . . . . . . . . . . . . . . . 13.32, 13.35 Art 17(1)(b) . . . . . . . . . . . . . . . 13.32, 13.35 Art 17(1)(c) . . . . . . . . . 13.33, 13.36, 13.37 Art 17(2) . . . . . . . . . . . . . . . . . . . . . . 13.32 Art 17(3) . . . . . . . . . . . . . . . . . 13.32, 13.33 Art 18 . . . . . . . . . . . . . 13.30, 13.32, 13.35 Art 18(1) . . . . . . . . . . . . . . . . . . . . . . 13.35

Art 18(2) . . . . . . . . . . . . . . . . . . . . . . 13.36 Arts 18(3)–(5) . . . . . . . . . . . . . . . . . . 13.36 Art 18(6) . . . . . . . . . . . . . . . . . . . . . . 13.36 Art 18(7) . . . . . . . . . . . . . . . . . . . . . . 13.38 Art 18(8) . . . . . . . . . . . . . . . . . . . . . . 13.36 Art 20 . . . . . . . . . . . . . . . . . . . 13.33, 13.35 Art 20(1) . . . . . . . . . . . . . . . . . . . . . . 13.37 Art 20(2) . . . . . . . . . . . . . . . . . . . . . . 13.37 Art 21 . . . . . . . . . . . . . . . . . . . 13.40, 13.41 Art 21(1) . . . . . . . . . . . . . . . . . . . . . . 13.41 Art 21(2) . . . . . . . . . . . . . . . . . . . . . . 13.41 Art 21(2)(d) . . . . . . . . . . . . . . . . . . . . 13.44 Art 21(3) . . . . . . . . . . . . . . . . . . . . . . 13.42 Art 21(4) . . . . . . . . . . . . . . . . . . . . . . 13.42 Art 22 . . . . . . . . . . . . . . . . . . . . . . . . 13.46 Art 22(2) . . . . . . . . . . . . . . . . . . . . . . 13.46 Art 23 . . . . . . . . . . . . . . . . . . . . . . . . 13.39 Art 24 . . . . . . . . . . . . . . . . . . . . . . . . 13.47 Art 34 . . . . . . . . . . . . . . . . . . . . . . . . 13.22 Art 38(3) . . . . . . . . . . . . . . . . . . . . . . 13.23 Art 39 . . . . . . . . . . . . . . . . . . . . . . . . 13.15 Directive 2009/71/Euratom of 25 June 2009 establishing a community framework for the nuclear safety of nuclear installations . . . . . . . . . . . 14.09 Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC (Th ird Electricity IEM Directive) . . . . . . . . . . . . . . 3.05, 3.13, 3.14, 3.98, 3.100, 3.105, 4.14, 4.63, 4.66, 4.130, 4.154, 5.19, 7.16, 7.101, 8.134, 11.70, 12.86 Preamble . . . . . . . . . . . . . . . . . . . 3.18, 3.22 Recital 11 . . . . . . . . . . . . . . . . . 3.20, 3.22 Recital 13 . . . . . . . . . . . . . . . . . . . . . 4.128 Recital 14 . . . . . . . . . . . . . . . . . . . . . . 3.21 Recital 18 . . . . . . . . . . . . . . . . . . . . . . 3.29 Recital 20 . . . . . . . . . . . . . . . . . . . . . . 8.02 Recital 25 . . . . . . . . . . 3.118, 10.13, 10.20 Recital 34 . . . . . . . . . . . . . . . . . . . . . . 5.07 Recital 35 . . . . . . . . . . . . . . . . . . . . . . 4.17 Recital 36 . . . . . . . . . . . . . 4.12, 4.13, 5.25 Recital 37 . . . . . . . . . . . . . 5.32, 5.34, 7.96 Recital 38 . . . . . . . . . . . . . . . . . . . . . 8.116 Recital 42 . . . . . . . . . . . . . . . . . . . . . 8.116 Recital 44 . . . . . . . . . . . . . . . . . . . . . 10.15 Recital 45 . . . . . . . . . . . . . . . . . . 7.15, 7.89 Recital 48 . . . . . . . . . . . . . . . . . . . . . . 9.38 Recital 49 . . . . . . . . . . . . . . . . . . . . . . 7.36 Recital 50 . . . . . . . . . . . . . . . . . . . . . . 7.22 Recital 54 . . . . . . . . . . . . . . . . . . . . . 8.116

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Table of Legislation Directive 2009/72/EC of the European Parliament (cont.) Art 2(15) . . . . . . . . . . . . . . . . . . . . . . 4.114 Art 2(23) . . . . . . . . . . . . . . . . . . . . . . . 4.38 Art 2(26) . . . . . . . . . . . . . . . . . . 3.109, 4.66 Art 2(27) . . . . . . . . . . . . . 3.109, 4.67, 4.68 Art 3 . . . . . . . . . 5.07, 7.24, 7.27, 7.50, 7.59, 7.117, 8.69, 10.14 Art 3(2) . . . . . . . . . . 4.121, 7.12, 7.20, 7.26, 7.31, 7.42, 10.14 Art 3(3) . . . . . . . 7.13, 7.18, 7.19, 7.20, 7.21, 7.25, 10.14 Art 3(3)(c) . . . . . . . . . . . . . . . . . . . . . 10.23 Art 3(4) . . . . . . . . . . . . . . . . . . . . . . . 7.107 Art 3(5) . . . . . . . . . . . . . . . . . . . . . . . . 7.49 Art 3(5)(a) . . . . . . . . . . . . . . . . . . . . . . 7.53 Art 3(5)(b) . . . . . . . . . . . . . . . . . . . . . . 7.58 Art 3(6) . . . . . . . . . . . . . . . . . . . . . . . 12.80 Art 3(7) . . . . . . . . . . . . . . . 7.36, 7.46, 7.76, 7.82, 7.90, 7.95, 7.97, 7.100 Art 3(8) . . . . . . . . . . . . . . . . . . . . 7.79, 9.37 Art 3(9) . . . . . . . . . . . . . . . . . . . . 7.33, 7.34 Art 3(9)(c) . . . . . . . . . . . . . . . . . . . . . 7.105 Art 3(10) . . . . . . . . . 7.36, 7.93, 9.38, 10.14 Art 3(11) . . . . . . . . . . . . . . . . . . . 7.37, 7.72 Art 3(12) . . . . . . . . . . . . . . . . . . . . . . 7.102 Art 3(14) . . . . . . . . . . . . . . . . . . . . . . 4.122 Art 3(15) . . . . . . . . . . . . . . . . . . . . . . . 7.41 Art 3(16) . . . . . . . . . . . . . . . . . . . . . . . 7.63 Art 4 . . . . . . . . . . . . . . . . . . . . . . . . . 10.15 Art 5 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.60 Art 5(2)(d) . . . . . . . . . . . . . . . . . . . . . 10.23 Art 5(2)(e) . . . . . . . . . . . . . . . . . . . . . 10.23 Art 6 . . . . . . . . . . . . . . . . . . . . . . . . . 10.26 Art 6(2) . . . . . . . . . . . . . . . . . . . . . . . 10.26 Art 6(3) . . . . . . . . . . . . . . . . . . . . . . . 10.17 Art 6(4) . . . . . . . . . . . . . . . . . . . . . . . 10.26 Art 7 . . . . . . . . . . . . . . . . . . . . . . . . . 10.22 Art 8 . . . . . . . . . . . . . . . . . . . . 10.23, 10.25 Art 8(1) . . . . . . . . . . . . . . . . . . 10.23, 10.73 Arts 8(3)–(5) . . . . . . . . . . . . . . . . . . . 10.25 Art 8(10)(a) . . . . . . . . . . . . . . . . . . . . 10.26 Art 8(10)(c) . . . . . . . . . . . . . . . . . . . . 10.26 Art 9 . . . . . . . . . . . 3.20, 3.24, 3.96, 3.102, 3.112, 10.25 Art 9(1) . . . . . . . . . . . . . . . . . . . 3.20, 3.24 Art 9(1)(b) . . . . . . . . . . . . . . . . . 3.21, 3.112 Art 9(1)(b)(ii) . . . . . . . . . . . . . . . . . . . . 3.23 Art 9(3) . . . . . . . . . . . . . . . . . . . . . . . . 3.21 Art 9(4) . . . . . . . . . . . . . . . . . . . . . . . 3.115 Art 9(7) . . . . . . . . . . . . . . . . . . . . . . . . 3.68 Art 10 . . . . . . . . . 3.31, 3.101, 3.102, 3.118 Art 10(2) . . . . . . . . . . . . . . . . . . . . . . 3.102 Art 10(3) . . . . . . . . . . . . . . . . . . . . . . 3.102 Art 10(4) . . . . . . . . . . . . . . . . . . . . . . 3.102

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Art 10(6) . . . . . . . . . . . . . . . . . . . . . . . 5.60 Art 11 . . . . . . . . . . . . . . 3.103, 3.118, 10.13 Art 11(1) . . . . . . . . . . . . . . . . . . . . . . 3.104 Art 11(3) . . . . . . . . . . . . . . . . . . . . . . 3.118 Art 11(3)(b) . . . . . . . . . . . . . . . . . . . . 3.104 Art 11(4) . . . . . . . . . . . . . . . . . . . . . . 3.104 Art 11(6) . . . . . . . . . . . . . . . . . . . . . . 3.104 Art 11(8) . . . . . . . . . . . . . . . . . 3.104, 10.13 Art 12 . . . . . . . . . . . . . . . . . . . . 3.71, 10.21 Art 12(a) . . . . . . . . . . . . . . . . . . 4.27, 10.16 Art 12(c) . . . . . . . . . . . . . . . . . . . . . . 10.16 Art 12(d) . . . . . . . . . . . . . . . . . . . . . . . 4.27 Art 12(f) . . . . . . . . . . . . . . . . . . . . . . . 4.27 Art 12(g) . . . . . . . . . . . . . . . . . . . . . . . 4.27 Art 12(h) . . . . . . . . . . . . . . . . . . . . . . . 4.27 Art 13 . . . . . . . . . . . . . . . . . . . . 3.34, 3.35 Art 13(5) . . . . . . . . . . . . . . . . . . . . . . . 3.35 Art 14 . . . . . . . . . . . . . . . . . . . . . . . . . 3.36 Art 15(1) . . . . . . . . . . . . . . . . . . . . . . . 4.28 Art 15(2) . . . . . . . . . . . . . . . . . . . . . . . 4.61 Art 15(3) . . . . . . . . . . . . . . . . . . . . . . . 4.28 Art 15(4) . . . . . . . . . . . . . . . . . . . . . . . 4.28 Art 15(6) . . . . . . . . . . . . . . . . . . . . . . . 4.27 Art 15(7) . . . . . . . . . . . . . . . . . . . 4.17, 4.27 Art 16(1) . . . . . . . . . . . . . . . . . . . . . . . 4.27 Art 16(2) . . . . . . . . . . . . . . . . . . . . . . . 4.27 Art 16(3) . . . . . . . . . . . . . . . . . . . . . . . 4.27 Art 17 . . . . . . . . . . . . . . . . . . . . . 3.54, 3.55 Arts 17–23 . . . . . . . . . . . . . . . . . . . . . . 3.44 Art 17(1) . . . . . . . . . . . . . . . . . . . . . . . 3.45 Art 17(1)(b) . . . . . . . . . . . . . . . . . 3.67, 3.70 Art 17(1)(c) . . . . . . . . 3.69, 3.70, 3.72, 3.81 Art 17(1)(d) . . . . . . . . . . . . . . . . . . . . . 3.50 Art 17(2) . . . . . . . . . . . . . . . . . . . . . . . 3.71 Art 17(4) . . . . . . . . . . . . . . . . . . . . . . . 3.46 Art 17(5) . . . . . . . . . . . . . . . . . . 3.72, 3.79 Art 17(6) . . . . . . . . . . . . . . . . . . . . . . . 3.72 Art 18 . . . . . . . . . . . . . . . . . . . . . . . . . 3.47 Art 18(4) . . . . . . . . . . . . . . . . . . . . . . . 3.52 Art 19 . . . . . . . . . . . . . . . . . . . . 3.48, 5.09 Art 19(1) . . . . . . . . . . . . . . . . . . . . . . . 3.64 Art 19(3) . . . . . . . . . . 3.57, 3.58, 3.60, 3.61 Art 19(4) . . . . . . . . . . . . . . . . . . 3.60, 3.65 Art 19(8) . . . . . . . . . . . . . . . . . . . . . . . 3.58 Art 20 . . . . . . . . . . . . . . . . . . . . . . . . . 3.82 Art 21 . . . . . . . . . . . . . . . . 3.82, 3.84, 3.85 Art 22 . . . . . . . . . . . . . . . . . . . . . 3.48, 3.51 Art 22(7) . . . . . . . . . . . . . . . . . . . . . . . 3.53 Art 23 . . . . . . . . . . . . . . . . . . . . . . . . . 5.02 Art 24(4) . . . . . . . . . . . . . . . . . . . . . . 4.129 Art 25 . . . . . . . . . . . . . . . . . . . . . . . . 10.21 Art 25(1) . . . . . . . . . . . . . . . . . . . . . . . 4.27 Art 25(3) . . . . . . . . . . . . . . . . . . . . . . . 4.27 Art 25(4) . . . . . . . . . . . . . . . . . . . . . . . 4.29 Art 25(5) . . . . . . . . . . . . . . . . . . . . . . . 4.27

Table of Legislation Art 25(6) . . . . . . . . . . . . . . . . . . . 4.17, 4.27 Art 26 . . . . . . . . . . . . . . . 3.88, 3.89, 3.112 Art 26(2) . . . . . . . . . . . . . . . . . . . 3.87, 3.88 Art 27 . . . . . . . . . . . . . . . . . . . . . . . . . 4.27 Art 28 . . . . . . . . . . . . . . . . . . . . . . . . 4.127 Art 28(1) . . . . . . . . . . . . . . . . . . . . . . 4.127 Art 28(2) . . . . . . . . . . . . . . . . . . . . . . 4.131 Art 28(2)(a) . . . . . . . . . . . . . . . . . . . . 4.132 Art 28(3) . . . . . . . . . . . . . . . . . . . . . . 4.131 Art 29 . . . . . . . . . . . . . . . . 3.87, 3.88, 3.89 Art 31(1)(o) . . . . . . . . . . . . . . . . . . . . 7.117 Art 32 . . . . . . . . . . . . . . 3.112, 4.118, 4.119 Art 32(1) . . . . . . . . . . . . . . . . . . 4.08, 4.12 Art 32(2) . . . . . . . . . . . . . . . . . . . 4.57, 4.63 Art 33 . . . . . . . . . . . . . . . . . . . . . . . . 3.112 Art 33(1)(b) . . . . . . . . . . . . . . . . . . . . 3.106 Art 33(1)(c) . . . . . . . . . . . . . . . . . . . . 3.106 Art 34 . . . . . . . . . . . . . . . . . . . . . . . . 4.113 Art 34(1) . . . . . . . . . . . . . . . . . . . . . . 4.116 Art 34(2) . . . . . . . . . . . . . . . . . . . . . . 4.117 Art 34(3) . . . . . . . . . . . . . . . . . . . . . . 4.118 Art 34(4) . . . . . . . . . . . . . . . . . . . . . . 4.119 Art 34(5) . . . . . . . . . . . . . . . . . . . . . . 4.120 Art 35(1) . . . . . . . . . . . . . . . . . . . . . . . 5.03 Art 35(2) . . . . . . . . . . . . . . . . . . . . . . . 5.04 Art 35(3) . . . . . . . . . . . . . . . . . . . . . . . 5.04 Art 35(4) . . . . . . . . . . . . . . 5.07, 5.09, 5.16 Art 35(5) . . . . . . . . . . . . . . . . . . . . . . . 5.11 Art 36 . . . . . . . . . . . . . . . . . . . . . . . . . 5.18 Art 36(1)(g) . . . . . . . . . . . . . . . . . . . . 7.112 Art 36(a) . . . . . . . . . . . . . . . . . . . . . . . 4.30 Art 36(e) . . . . . . . . . . . . . . . . . . . . . . . 4.30 Art 37 . . . . . . . . . . . . . . . . 5.21, 5.27, 8.68 Art 37(1) . . . . . . . . . . . . . . . . . . 5.23, 5.29 Art 37(1)(a) . . . . . . . . . . . . . . . . 4.20, 5.25 Art 37(1)(d) . . . . . . . . . . . . . . . . . . . . . 5.24 Art 37(1)(e) . . . . . . . . . . . . . . . . . 5.17, 5.38 Art 37(1)(f) . . . . . . . . . . . . . . . . . . . . . 5.29 Art 37(1)(j) . . . . . . . . . . . 7.23, 7.105, 7.114 Art 37(1)(l) . . . . . . . . . . . . . . . . . . . . 8.136 Art 37(1)(o) . . . . . . . . . . . . . . . . . . . . . 7.24 Art 37(2) . . . . . . . . . . . . . . 5.27, 5.28, 7.115 Art 37(3) . . . . . . . . . . . . . . . . . . . 3.39, 5.22 Art 37(3)(c) . . . . . . . . . . . . . . . . . . . . . 3.40 Art 37(4) . . . . . . . . . . . . . . . . . . . . . . . 5.32 Art 37(5) . . . . . . . . . . . . . . . . . . . . . . . 5.22 Art 37(6) . . . . . . . . . . 4.05, 4.17, 4.20, 7.18 Arts 37(6)–(8) . . . . . . . . . . . . . . . . . . . 5.25 Art 37(6)(a) . . . . . . . . . . . . . . . . . . . . . 4.13 Art 37(6)(b) . . . . . . . . . . . . . . . . . . . . . 4.17 Art 37(8) . . . . . . . . . . . . . . 4.14, 4.17, 5.26 Art 37(10) . . . . . . . . . . . . . . . . . 5.25, 8.116 Art 37(11) . . . . . . . . . . . . . 5.32, 5.33, 5.40 Art 37(12) . . . . . . . . . . . . . 5.32, 5.39, 5.40 Arts 37(15)–(17) . . . . . . . . . . . . . 5.33, 5.40

Art 37(16) . . . . . . . . . . . . . . . . . . . . . . 5.37 Art 37(j) . . . . . . . . . . . . . . . . . . . . . . . 4.30 Art 37(k) . . . . . . . . . . . . . . . . . . . . . . . 4.30 Art 37(p) . . . . . . . . . . . . . . . . . . . . . . . 4.30 Art 38 . . . . . . . . . . . . . . . . . . . . . . . . . 5.30 Art 39 . . . . . . . . . . . . . . . . . . . . . . . . . 5.60 Art 39(1) . . . . . . . . . . . . . . . . . . . . . . . 5.41 Art 40 . . . . . . . . . . . . . . . . 5.35, 8.02, 8.24 Art 40(1) . . . . . . . . . . . . . . . . . . . . . . . 5.35 Art 41 . . . . . . . . . 7.106, 7.109, 7.110, 7.116 Art 42 . . . . . . . . . . . . . . . . . . . . . . . . 10.18 Art 44(1) . . . . . . . . . . . . . 3.108, 4.65, 4.69 Art 44(2) . . . . . . . . . . . . . . . . . . 3.112, 4.69 Art 46(2) . . . . . . . . . . . . . . . . . . . . . . . 5.31 Art 47 . . . . . . . . . . . . . . . . . . . . 7.42, 10.19 Art 47(1)(c) . . . . . . . . . . . . . . . . . . . . 10.19 Art 47(1)(d) . . . . . . . . . . . . . . . . . . . . 10.19 Art 47(3) . . . . . . . . . . . . . . . . . . . . . . . 3.49 Annex I . . . . . . . . . . . 7.31, 7.44, 7.50, 7.59, 7.76, 8.13, 8.32 para 1(a) . . . . . . . . . . . . . 7.65, 8.32, 8.80 para 1(b) . . . . . . . . . . . . . . . . . . . . . 8.70 para 1(e) . . . . . . . . . . . . . . . . . . . . . . 8.71 para 1(f) . . . . . . . . . . . . . . . . 7.102, 8.116 para 1(g) . . . . . . . . . . . . . . . . . . . . 7.103 para 1(i) . . . . . . . . . . . . . . . . . . 7.62, 7.66 para 1(j) . . . . . . . . . . . . . . . . . . . . . . 7.54 para 2 . . . . . . . . . . . . . . . . . . . . . . . . 7.68 Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC (Third Gas IEM Directive) 4, . . . . . . . . . . . . . 3.05, 3.13, 3.14, 3.98, 3.100, 3.105, 4.14, 4.63, 4.64, 4.70, 4.75, 4.77, 4.92, 4.130, 4.154, 5.19, 8.134, 11.70 Preamble . . . . . . . . . . . . . . . . . . . . . . . 3.18 Recital 8 . . . . . . . . . . . . . . . . . . . . . . . 3.20 Recital 11 . . . . . . . . . . . . . . . . . . . . . . 3.21 Recital 15 . . . . . . . . . . . . . . . . . . . . . . 3.29 Recital 17 . . . . . . . . . . . . . . . . . 7.109, 8.02 Recital 22 . . . . . . . . . . 3.118, 10.13, 10.20 Recital 24 . . . . . . . . . . . . . . . . . . . . . . 4.32 Recital 28 . . . . . . . . . . . . . . . . . . . . . 4.128 Recital 30 . . . . . . . . . . . . . . . . . . . . . . 5.07 Recital 31 . . . . . . . . . . . . . . . . . . . . . . 4.17 Recital 32 . . . . . . . . . . . . . . . . . . 4.12, 4.13 Recital 33 . . . . . . . . . . . . . . . . . 5.32, 5.34 Recital 40 . . . . . . . . . . . . . . . . . . . . . 10.15 Recital 45 . . . . . . . . . . . . . . . . . . . . . . 9.38 Recital 46 . . . . . . . . . . . . . . . . . . . . . . 7.36 Art 2(2) . . . . . . . . . . . . . . . . . . . . . . . . 4.50 Art 2(9) . . . . . . . . . . . . . . . . . . . . 4.33, 4.35

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Table of Legislation Directive 2009/73/EC of the European Parliament (cont.) Art 2(14) . . . . . . . . . . . . . . . . . . . . . . . 4.47 Art 2(15) . . . . . . . . . . . . . . . . . . . . . . . 4.37 Art 2(18) . . . . . . . . . . . . . . . . . . . . . . 4.114 Art 2(31) . . . . . . . . . . . . . 3.113, 4.72, 4.74 Art 3 . . . . . . . . . . . . 5.07, 7.50, 7.59, 7.117, 8.69, 10.14 Art 3(1) . . . . . . . . . . . . . . . . . . . . . . . 10.21 Art 3(2) . . . . . . . . . . . . . . 4.121, 7.31, 7.42, 7.99, 7.100, 10.13 Art 3(3) . . . . . . . . . . . 7.46, 7.76, 7.95, 7.97, 7.100, 7.103, 8.51, 10.14 Art 3(4) . . . . . . . . . . . . . . . . . . . . . . . . 7.79 Art 3(5) . . . . . . . . . . . . . . . . . . . . . . . 7.107 Art 3(6) . . . . . . . . . . . . . . . . . . . . . . . . 7.49 Art 3(6)(a) . . . . . . . . . . . . . . . . . . . . . . 7.53 Art 3(7) . . . . . . . . . . . . . . . . . . . . . . . . 9.38 Art 3(8) . . . . . . . . . . . . . . . . 7.37, 7.72, 9.37 Art 3(9) . . . . . . . . . . . . . . . . . . . . . . . 7.102 Art 3(10) . . . . . . . . . . . . . . . . . . . . . . 10.14 Art 3(11) . . . . . . . . . . . . . . . . . . . . . . . 7.41 Art 3(12) . . . . . . . . . . . . . . . . . . . . . . . 7.63 Art 4 . . . . . . . 3.113, 3.114, 4.70, 4.71, 4.81 Art 5 . . . . . . . . . . . . . . . . . . . . 10.15, 10.16 Art 7 . . . . . . . . . . . . . . . . . . . . . . . . . 10.57 Art 7(3) . . . . . . . . . . . . . . . . . . 3.113, 10.17 Art 9 . . . . . . . . . . . 3.20, 3.24, 3.96, 3.102, 3.113, 3.114, 4.70, 4.71, 10.27 Art 9(1) . . . . . . . . . . . . . . . . . . . 3.20, 3.24 Art 9(1)(b) . . . . . . . . . . . . . . . . . . . . . . 3.21 Art 9(1)(b)(ii) . . . . . . . . . . . . . . . . . . . . 3.23 Art 9(3) . . . . . . . . . . . . . . . . . . . . . . . . 3.21 Art 10 . . . . . . . . . 3.31, 3.101, 3.102, 3.118 Art 10(2) . . . . . . . . . . . . . . . . . . . . . . 3.102 Art 10(3) . . . . . . . . . . . . . . . . . . . . . . 3.102 Art 10(4) . . . . . . . . . . . . . . . . . . . . . . 3.102 Art 10(6) . . . . . . . . . . . . . . . . . . . . . . . 5.60 Art 11 . . . . . . . . . . . . . . 3.103, 3.118, 10.13 Art 11(1) . . . . . . . . . . . . . . . . . . . . . . 3.104 Art 11(3) . . . . . . . . . . . . . . . . . . . . . . 3.118 Art 11(3)(b) . . . . . . . . . . . . . . . . . . . . 3.104 Art 11(4) . . . . . . . . . . . . . . . . . . . . . . 3.104 Art 11(6) . . . . . . . . . . . . . . . . . . . . . . 3.104 Art 11(8) . . . . . . . . . . . . . . . . . . . . . . 3.104 Art 12 . . . . . . . . . . . . . . . . . . . . . . . . . 4.38 Art 12(g) . . . . . . . . . . . . . . . . . . . . . . . 4.60 Art 13 . . . . . . . . . . . . . . . . . . . . 3.71, 10.21 Art 13(1) . . . . . . . . . . . . . 3.113, 4.39, 4.71 Art 13(1)(a) . . . . . . . . . . . . . . . . 4.27, 10.16 Art 13(1)(b) . . . . . . . . . . . . . . . . . . . . . 4.27 Art 13(1)(d) . . . . . . . . . . . . . . . . . . . . . 4.60 Art 13(2) . . . . . . . . . . . . . . . . . . . . . . 10.16 Art 13(3) . . . . . . . . . 3.113, 4.17, 4.27, 4.71 Art 13(5) . . . . . . . . . . . . . . . . . . . . . . 4.27

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Art 13(d) . . . . . . . . . . . . . . . . . . . . . . . 4.27 Art 14 . . . . . . . . . . . . . . . . 3.34, 3.35, 4.71 Art 15 . . . . . . . . . . . . . . . . . . . . 3.34, 3.36 Art 15(1) . . . . . . . . . . . . . . . . . . . . . . . 4.38 Art 16(1) . . . . . . . . . . . . . . . . . . . . . . . 4.27 Art 16(2) . . . . . . . . . . . . . . . . . . . . . . . 4.27 Art 16(3) . . . . . . . . . . . . . . . . . . . . . . . 4.27 Arts 17–23 . . . . . . . . . . . . . . . . . . . . . . 3.44 Art 17(1)(b) . . . . . . . . . . . . . . . . . 3.67, 3.70 Art 17(1)(c) . . . . . . . . 3.69, 3.70, 3.72, 3.81 Art 17(2) . . . . . . . . . . . . . . . . . . . . . . . 3.71 Art 17(5) . . . . . . . . . . . . . . . . . . 3.72, 3.79 Art 17(6) . . . . . . . . . . . . . . . . . . . . . . . 3.72 Art 19 . . . . . . . . . . . . . . . . . . . . . . . . . 5.09 Art 19(1) . . . . . . . . . . . . . . . . . . . . . . . 3.64 Art 19(3) . . . . . . . . . . 3.57, 3.59, 3.60, 3.61 Art 19(4) . . . . . . . . . . . . . . . . . . 3.60, 3.65 Art 19(5) . . . . . . . . . . . . . . . . . . . . . . . 3.58 Art 19(8) . . . . . . . . . . . . . . . . . . . . . . . 3.58 Art 20 . . . . . . . . . . . . . . . . . . . . . . . . . 3.82 Art 21 . . . . . . . . . . . . . . . . 3.82, 3.84, 3.85 Art 24 . . . . . . . . . . . . . . . 3.113, 4.71, 4.81 Art 24(4) . . . . . . . . . . . . . . . . . . . . . . 4.129 Art 25 . . . . . . . . . . . . . . . 4.81, 5.02, 10.21 Art 25(1) . . . . . . . . . . . . . . . . . . . 4.27, 4.71 Art 25(2) . . . . . . . . . . . . . . . . . . . . . . . 4.27 Art 25(3) . . . . . . . . . . . . . . . . . . . 4.27, 4.60 Art 25(4) . . . . . . . . . . . . . . . . . . . . . . . 4.60 Art 25(5) . . . . . . . . . . . . . . 3.113, 4.17, 4.27 Art 26 . . . . . . 3.88, 3.89, 3.113, 4.71, 4.81 Art 26(2) . . . . . . . . . . . . . . . . . . . 3.87, 3.88 Art 27 . . . . . . . . . . . . . . . . . . . . . . . . . 4.27 Art 28 . . . . . . . . . . . . . . 3.87, 3.116, 4.127 Art 28(1) . . . . . . . . . . . . . . . . . . . . . . 4.127 Art 28(2) . . . . . . . . . . . . . . . . . . . . . . 4.131 Art 28(3) . . . . . . . . . . . . . . . . . . . . . . 4.131 Art 29 . . . . . . . . . . . . . . . . 3.87, 3.88, 3.89 Art 31 . . . . . . . . . . . . . . . . . . . . 3.113, 4.71 Art 32 . . . . . . 3.113, 4.71, 4.81, 5.25, 10.27 Art 32(1) . . . . . . . . . . . . . . 4.08, 4.12, 4.83 Art 32(3) . . . . . . . . . . . . . . . . . . . . . . 8.135 Art 33 . . . . . . . . . . . . . . . . . . . 4.40, 10.27 Art 33(1) . . . . . . . . . . . . . . 4.05, 4.40, 4.49 Art 33(2) . . . . . . . . . . . . . . . . . . 4.36, 4.48 Art 33(3) . . . . . . . . . . . . . . . . . . . . . . . 4.42 Art 33(4) . . . . . . . . . . . . . . . . . . . . . . . 4.43 Art 34 . . . . . . . . . . . . . . . 4.51, 4.55, 10.27 Art 34(1) . . . . . . . . . . . . . . . . . . . 4.51, 4.52 Art 34(2) . . . . . . . . . . . . . . . . . . . . . . . 4.53 Art 34(2)(a)–(d) . . . . . . . . . . . . . . . . . . 4.54 Art 34(3) . . . . . . . . . . . . . . . . . . . . . . . 4.55 Art 34(4) . . . . . . . . . . . . . . . . . . . . . . . 4.55 Art 35(1) . . . . . . . . . . . . . . . . . . 4.57, 4.123 Art 35(2) . . . . . . . . . . . . . . . . . . . . . . . 4.64 Art 36 . . . . . . . . . . . . . . . . . . . . 9.47, 10.27

Table of Legislation Art 36(1) . . . . . . . . . . . . . . . . . . . . . . 4.101 Art 36(1)(a) . . . . . . . . . . . . . . . 4.102, 4.108 Art 36(1)(b) . . . . . . . . . . . . . . . . . . . . 4.103 Art 36(1)(c) . . . . . . . . . . . . . . . . . . . . 4.104 Art 36(1)(e) . . . . . . . . . . . . . . . . . . . . 4.102 Art 36(2) . . . . . . . . . . . . . . . . . . . . . . 4.101 Art 36(3) . . . . . . . . . . . . . . . . . . . . . . 4.109 Art 36(4) . . . . . . . . . . . . . . . . . . 4.110, 5.61 Art 36(6) . . . . . . . . . . . . . . . . . . . . . . 4.109 Art 36(8) . . . . . . . . . . . . . . . . . . . . . . 4.111 Art 36(9) . . . . . . . . . . . . . . . . . 4.111, 4.112 Art 36(10) . . . . . . . . . . . . . . . . . . . . . 4.112 Art 36(d) . . . . . . . . . . . . . . . . . . . . . . 4.105 Art 36(i) . . . . . . . . . . . . . . . . . . . . . . 4.106 Art 37 . . . . . . . . . . 3.113, 3.114, 4.70, 4.81 Art 37(1) . . . . . . . . . . . . . . . . . . 3.113, 4.71 Art 38 . . . . . . . . . . 3.113, 3.114, 4.70, 4.71, 4.81, 4.113 Art 38(1) . . . . . . . . . . . . . . . . . . . . . . 4.116 Art 38(2) . . . . . . . . . . . . . . . . . . . . . . 4.117 Art 38(3) . . . . . . . . . . . . . . . . . . . . . . 4.119 Art 39(1) . . . . . . . . . . . . . . . . . . . . . . . 5.03 Art 39(2) . . . . . . . . . . . . . . . . . . . . . . . 5.04 Art 39(3) . . . . . . . . . . . . . . . . . . . . . . . 5.04 Art 39(4) . . . . . . . . . . . . . . . 5.07, 5.11, 5.16 Art 39(5) . . . . . . . . . . . . . . . . . . . . . . . 5.11 Art 40 . . . . . . . . . . . . . . . . . . . . . . . . . 5.18 Art 40(1) . . . . . . . . . . . . . . . . . . . . . . . 4.30 Art 40(1)(g) . . . . . . . . . . . . . . . . . . . . 7.112 Art 40(e) . . . . . . . . . . . . . . . . . . . . . . . 4.30 Art 41 . . . . . . . . . . . . 5.21, 5.27, 8.02, 8.68 Art 41(1) . . . . . . . . . . . . . . 5.17, 5.23, 5.29 Art 41(1)(a) . . . . . . . . . . . . . . . . 4.20, 5.25 Art 41(1)(d) . . . . . . . . . . . . . . . . . . . . . 5.24 Art 41(1)(e) . . . . . . . . . . . . . . . . . . . . . 5.38 Art 41(1)(f) . . . . . . . . . . . . . . . . . . . . . 5.29 Art 41(1)(j) . . . . . . . . . . . . . . . 7.105, 7.114 Art 41(1)(l) . . . . . . . . . . . . . . . . . . . . 8.135 Art 41(1)(p) . . . . . . . . . . . . . . . . . . . . 7.117 Art 41(2) . . . . . . . . . . . . . . 5.27, 5.28, 7.115 Art 41(3) . . . . . . . . . . . . . . . . . . . . . . . 5.22 Art 41(3)(c) . . . . . . . . . . . . . . . . . . . . . 3.40 Art 41(4) . . . . . . . . . . . . . . . . . . . . . . . 5.32 Art 41(5) . . . . . . . . . . . . . . . . . . . . . . . 5.22 Art 41(6) . . . . . . . . . 4.05, 4.17, 4.20, 10.27 Arts 41(6)–(8) . . . . . . . . . . . . . . . . . . . 5.25 Art 41(6)(a) . . . . . . . . . . . . . . . . . . . . . 4.13 Art 41(6)(b) . . . . . . . . . . . . . . . . . . . . . 4.17 Art 41(8) . . . . 4.14, 4.17, 5.26, 10.27, 10.53 Art 41(10) . . . . . . . . . . . . . . . . . 5.25, 10.27 Art 41(11) . . . . . . . . . . . . . 5.32, 5.33, 5.40 Art 41(12) . . . . . . . . . . . . . 5.32, 5.39, 5.40 Arts 41(15)–(17) . . . . . . . . . . . . . 5.33, 5.40 Art 41(16) . . . . . . . . . . . . . . . . . . . . . . 5.37 Art 41(j) . . . . . . . . . . . . . . . . . . . . . . . 4.30

Art 41(k) . . . . . . . . . . . . . . . . . . . . . . . 4.30 Art 41(q) . . . . . . . . . . . . . . . . . . . . . . . 4.30 Art 42 . . . . . . . . . . . . . . . . . . . . . . . . . 5.30 Art 43 . . . . . . . . . . . . . . . . . . . . . . . . . 5.60 Art 43(1) . . . . . . . . . . . . . . . . . . . . . . . 5.41 Art 44 . . . . . . . . . . . . . . . . . . . . . . . . . 5.35 Art 44(1) . . . . . . . . . . . . . . . . . . . . . . . 5.35 Art 45 . . . . . . . . . . . . . . . . . . . 7.106, 7.116 Art 46 . . . . . . . . . . . . . . . . . . . . . . . . 10.18 Art 48 . . . . . . . . . . . . . . . . . . . . 4.83, 4.98 Art 48(1) . . . . . . . . . . . . . . . . . . . . . . . 4.84 Art 49 . . . . . . . . . . . . . . . . . . . 3.113, 3.114 Art 49(1) . . . . . . . 3.108, 3.113, 3.114, 4.70 Art 49(2) . . . . . . . . . . . . . 3.113, 4.71, 4.75 Art 49(3) . . . . . . . . . . . . . . . . . . . . . . . 4.73 Art 49(4) . . . . . . . . . . . . . . . . . . 4.76, 4.77 Art 49(5) . . . . . . . . . . 4.76, 4.78, 4.79, 4.80 Art 49(7) . . . . . . . . . . . . . . . . . . . . . . . 4.75 Art 49(8) . . . . . . . . . . . . . . . . . . . . . . . 4.81 Art 51(3) . . . . . . . . . . . . . . . . . . . . . . . 5.31 Art 52 . . . . . . . . . . . . . . . . . . . . 7.42, 10.19 Art 52(1)(d) . . . . . . . . . . . . . . . . . . . . 10.19 Art 52(1)(e) . . . . . . . . . . . . . . . . . . . . 10.19 Annex I . . . . . . . . . . . 7.31, 7.44, 7.50, 7.59, 7.60, 7.69, 8.32 para 1(a) . . . . . . . . . . . . . 7.65, 8.32, 8.80 para 1(b) . . . . . . . . . . . . . . . . . . . . . 8.70 para 1(e) . . . . . . . . . . . . . . . . . . . . . . 8.71 para 1(i) . . . . . . . . . . . . . . . . . . 7.62, 7.66 para 1(j) . . . . . . . . . . . . . . . . . . . . . . 7.54 para 2 . . . . . . . . . . . . . . . . . . . . . . . . 7.68 Directive 2009/119/EC replacing Directive 73/238/EEC and Decision 68/416/EEC . . . . . . 10.03, 10.04, 10.07 Directive 2010/30/EU on the indication by labelling and standard product information of the consumption of energy and resources by energyrelated products . . . . . . . . . 16.07, 17.02, 17.32, 17.63 Art 1(2) . . . . . . . . . . . . . . . . . . . . . . . 17.03 Arts 3–7 . . . . . . . . . . . . . . . . . . . . . . 17.05 Art 9 . . . . . . . . . . . . . . . . . . . . . . . . . 17.05 Art 10 . . . . . . . . . . . . . . . . . . . . . . . . 17.04 Art 15 . . . . . . . . . . . . . . . . . . . . . . . . 17.06 Directive 2010/31/EU of the European Parliament and of the Council of 19 May 2010 on the energy performance of buildings . . . . . . . . . 16.07, 17.07, 17.14, 17.64 Recital 7 . . . . . . . . . . . . . . . . . . . . . . 16.08 Recital 8 . . . . . . . . . . . . . . . . . . . . . . 16.08 Art 2(2) . . . . . . . . . . . . . . . . . . . . . . . 17.12 Art 2(3) . . . . . . . . . . . . . . . . . . . . . . . 17.08 Art 2(5) . . . . . . . . . . . . . . . . . . . . . . . 17.42

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Table of Legislation Directive 2010/31/EU of the European Parliament (cont.) Art 2(7) . . . . . . . . . . . . . . . . . . . . . . . 17.38 Art 2(8) . . . . . . . . . . . . . . . . . . . . . . . 17.08 Art 2(9) . . . . . . . . . . . . . . . . . . . . . . . 17.38 Art 2(12) . . . . . . . . . . . . . . . . . . . . . . 17.42 Art 4 . . . . . . . . . . . . . . . . . . . . 17.10, 17.36 Art 5 . . . . . . . . . . . . . . . . . . . . 17.10, 17.37 Arts 6–8 . . . . . . . . . . . . . . . . . . . . . . 17.47 Art 6(1) . . . . . . . . . . . . . . . . . . . . . . . 17.38 Art 6(2) . . . . . . . . . . . . . . . . . . . . . . . 17.41 Art 6(3) . . . . . . . . . . . . . . . . . . . . . . . 17.41 Art 6(8) . . . . . . . . . . . . . . . . . . . . . . . 17.39 Art 7(1) . . . . . . . . . . . . . . . . . . . . . . . 17.42 Art 7(2) . . . . . . . . . . . . . . . . . . . . . . . 17.42 Art 7(4) . . . . . . . . . . . . . . . . . . . . . . . 17.43 Art 8 . . . . . . . . . . . . . . . . . . . . . . . . . 17.11 Art 8(1) . . . . . . . . . . . . . . . . . . . . . . . 17.44 Art 8(2) . . . . . . . . . . . . . . . . . . . . . . . 17.45 Art 9(1) . . . . . . . . . . . . . . . . . . . . . . . 17.12 Art 10(1) . . . . . . . . . . . . . . . . . . . . . . 17.48 Art 10(2) . . . . . . . . . . . . . . . . . . . . . . 17.49 Art 10(10) . . . . . . . . . . . . . . . . . . . . . 17.52 Art 11 . . . . . . . . . . . . . . . . . . . . . . . . 17.53 Art 11(9) . . . . . . . . . . . . . . . . . . . . . . 17.09 Art 12 . . . . . . . . . . . . . . . . . . . . . . . . 17.54 Art 13 . . . . . . . . . . . . . . . . . . . . . . . . 17.56 Art 18(1) . . . . . . . . . . . . . . . . . . . . . . 17.13 Art 19 . . . . . . . . . . . . . . . . . . . . . . . . 17.14 Art 26 . . . . . . . . . . . . . . . . . . . . . . . . 17.14 Annex II . . . . . . . . . . . . . . . . . . . . . . 17.13 Directive 2010/75/EU on industrial emissions (Integrated pollution prevention and control) . . . . . . . . 12.113 DECISIONS Council Decisions, etc Decision 68/416/EEC, in facilitating agreements between Member State governments Art 1 . . . . . . . . . . . . . . . . . . . . . . . . . 10.01 Decision 77/186/EEC of 14 February 1977 on the exporting of crude oil and petroleum products from one Member State to another in the event of supply difficulties . . . . . . . 10.02 Decision 77/706/EEC of 7 November 1977 on the setting of a Community target for a reduction in the consumption of primary sources of energy in the event of difficulties in the supply of crude oil and petroleum products . . . . . . . . . . . . 10.02, 13.11 Decision 77/706/EEC . . . . . . . . . . . . . . 10.02

Decision 79/879/EEC of 22 October 1979 amending Decision 77/186/ EEC on the exporting of crude oil and petroleum products from one Member State to another in the event of supply difficulties . . . . . . . 10.02 Decision 85/161/ECSC of the representatives of the Governments of the Member States of the European Coal and Steel Community, meeting within the Council of 26 February 1985 amending Decision 77/707/ECSC concerning Community surveillance of imports of hard coal originating in third countries . . . . . . . . . . . . . . . . . . . . 13.11 Decision 87/600/Euratom of 14 December 1987 on Community arrangements for the early exchange of information in the event of a radiological emergency . . . . . . . . . 14.09 Decision 1999/280/EC of 22 April 1999 regarding a Community procedure for information and consultation on crude oil supply costs and the consumer prices of petroleum products . . . . . . . . . . . . . . . . . . . . 15.02 Decision 1999/468/EC of 28 June 1999 laying down the procedures for the exercise of implementing powers conferred on the Commission Arts 5a(1)–(4) . . . . . . . . . . . . . . . . . . 12.99 Art 7 . . . . . . . . . . . . . . . . . . . . . . . . . 12.99 Decision 2006/512/EC of 17 July 2006 amending Decision 1999/468/EC laying down the procedures for the exercise of implementing powers conferred on the Commission . . . . . . . . . . . . . . . . . 12.99 Decision 2010/787/EU of 21 December 2010 on state aid to facilitate the closure of uncompetitive coal mines . . . . . . . . . . . . . . . . . . . . . . . 13.10 Commission Decisions, etc Decision 3/65 of 17 February 1965 on the Community system of interventions by Member States in aid of the coal industry . . . . . . . . . . . . . . . . . 13.01 Decision 79/639/EEC of 15 June 1979 laying down detailed rules for the implementation of Decision 91/329/EEC of 30 April 1991 relating to a proceeding under Article 85 of the EEC Treaty

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Table of Legislation (IV/33.473 —Scottish Nuclear) . . . . . . . . . . . . . . 8.146 , 14.14 Sealink/B&I Holyhead (IV/34.174) [1992] 5 CMLR 255 . . . . . . . . . . . . 3.01 Electricidade de Portugal/Pego, Case No IV/34.598, [1993] OJ C265/3 . . . . 8.147 Sea Containers v Stena Sealink [1993] OJ L15/8 . . . . . . . . . . . . . . . . . . . . . . . . 3.01 Decision 93/3632/ECSC of 28 December 1993 on rules for state aid to the coal industry . . . . . . . . . 13.04 REN/Turbogás, Case No IV/E-3/ . . . . 8.145, 8.148 Decision 97/367/EC of 30 May 1997 establishing that the exploitation of geographical areas for the purpose of exploring for or extracting oil or gas does not constitute in the United Kingdom an activity defined by Article 2(2)(b)(i) of Council Directive 93/38/EEC and that entities carrying on such an activity are not to be considered in the United Kingdom as operating under special or exclusive rights within the meaning of Article 2(3)(b) of the Directive . . . . . . . . . . . . . . . . . . . . 15.13 Decision 1999/566/EC of 26 July 1999 implementing Council Decision 1999/280/EC regarding a Community procedure for information and consultation on crude oil supply costs and the consumer prices of petroleum products . . . . . . . . . . . . . . . . . 15.02 Decision 1999/819/Euratom of 16 November 1999 concerning the accession to the 1994 Convention on Nuclear Safety by the European Atomic Energy Community (Euratom) . . . . . . . . . . . . . . . . . . . 14.09 EDF/EnBW, Case No COMP/M.1853 (7 February 2001) . . . . . . . 3.125, 4.175, 8.154, 8.165 Decision C(2001) 3967 final of 11 December 2001 on German tax treatment of reserves for nuclear power plant decommissioning . . . . 14.17 Decision C31/2002 on the transitional regime for Belgian electricity market . . . . . . . . . . . . . . . . . . . . . . 14.17 Decision E-3/02 State aid—France— Invitation to submit comments pursuant to Article 88(2) of the EC Treaty concerning aid to Electricité

de France in the form of the unlimited State guarantee associated with its public enterprise status . . . . . . . 14.18 Synergen, Case No IP/02/792, 31 May 2002 . . . . . . . . . . . . 8.145, 8.149 Decision 2003/17/EC of 7 June 2005 on Preferential Access to Transport Networks under the Electricity and Gas Internal Market decisions . . . . . . . . . . . . . 4.152 British Energy [2003] OJ L142/26 . . . . 14.18 Decision N475/2003 of 16 December 2003 on Ireland, Public Service Obligation in respect of new electricity generation capacity for security of supply . . . . . . . . 10.22 , 10.23 Decision 2004/73/EC on a request from Germany to apply the special procedure laid down in Article 3 of Directive 93/38/EEC . . . . . . . . . . 15.13 Exxon/Mobil (Case COMP/M.1383) [2004] OJ L103/1 . . . . . . . . . . . . . 15.01 GDF/ENEL and EDF/ENI, Case No Comp/38.662, 26 October 2004 . . . 8.170 Decision 2004/920/EC of 20 December 2004 on a derogation from certain provisions of Directive 2003/54/EC of the European Parliament and of the Council concerning the archipelago of the Azores . . . . . . . . . . 3.112 Decision C14/04 of 21 December 2005 restructuring Plan of the Spanish coal industry and State aid for the years 2003–2005 . . . . . . . . . . . . . . 13.09 Decision 2006/643/EC of 4 April 2006 on the State Aid which the United Kingdom is planning to implement for the establishment of the Nuclear Decommissioning Authority . . . . . . . . . . . . . . . . . . . 14.19 Decision 2006/702/EC of 6 October 2006 on Community strategic guidelines on cohesion . . . . . . . . . . 6.17 Decision 2006/791/EC of 7 November 2006 establishing the composition of the Gas Coordination Group . . . . . . . . . . . . . . . . . . . . . . 10.38 Decision 2006/859/EC of 28 November 2006 granting Malta a derogation from certain provisions of Directive 2003/54/EC of the European Parliament and of the Council . . . 3.112 Decision 2007/74/EC of 21 December 2006 . . . . . . . . . . . . . . . . . . . . . . . 12.99

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Table of Legislation Distrigaz, Case No COMP/B-1/37966, 11 October 2007 . . . . . . . . 8.145, 8.150, 8.154, 8.155, 8.156, 8.157, 8.158 German Electricity Wholesale Market (Case COMP/ 39.388) [2009] OJ C36/8. . . . . . . . . . . . . . . . . . . . . 3.127 RWE Gas Foreclosure [2010] OJ C310/23 (5 December 2008) . . . . 3.127 ENI (Case COMP B-1/39.315) . . . . . . . 3.127 EDF—Long-term contracts France (Case COMP/39.386), decision of 17 March 2010 . . . . . . . . . . 8.154, 8.158 Other EU Decisions Council and Commission Decision 98/181/EC, ECSC of 23 September 1997 on the conclusion, by the European Communities, of the Energy Charter Treaty and Energy Charter Protocol on energy efficiency and related environmental aspects . . . . . . . . . . . . . . . . . . . . . . 11.01 Decision 2006/1364/EC of the European Parliament and of the Council of 6 September 2006 laying down guidelines for trans-European energy networks and repealing Decision 96/391/EC and Decision No 1229/2003/EC (TEN-E Decision) . . . . . . . . . . . . . . . . . . . . . 6.04 Recital 2 . . . . . . . . . . . . . . . . . . . . . . . 6.01 Recital 3 . . . . . . . . . . . . . . . . . . . . . . . 6.01 Recital 4 . . . . . . . . . . . . . . . . . . . . . . . 6.10 Recital 7 . . . . . . . . . . . . . . . . . . . . . . . 6.01 Recital 8 . . . . . . . . . . . . . . . . . . . . . . . 6.01 Art 2 . . . . . . . . . . . . . . . . . 6.05, 6.07, 6.08 Art 3 . . . . . . . . . . . . . . . . . 6.01, 6.06, 6.07 Arts 3(a)–(c) . . . . . . . . . . . . . . . . . . . . 6.06 Art 3(d) . . . . . . . . . . . . . . . . . . . . . . . . 6.06 Art 4 . . . . . . . . . . . . . . . . . . . . . 6.06, 6.07 Art 6 . . . . . . . . . . . . . . . . . . . . . . . . . . 6.07 Art 7(4) . . . . . . . . . . . . . . . . . . . . . . . . 6.08 Art 8(6) . . . . . . . . . . . . . . . . . . . . . . . . 6.08 Art 9(2) . . . . . . . . . . . . . . . . . . . . . . . . 6.19 Art 10 . . . . . . . . . . . . . . . . . . . . . . . . . 6.08 Art 11 . . . . . . . . . . . . . . . . . . . . . . . . . 6.09 Art 12 . . . . . . . . . . . . . . . . . . . . . . . . . 6.10 Art 14 . . . . . . . . . . . . . . . . . . . . . . . . . 6.09 Art 15 . . . . . . . . . . . . . . . . . . . . . . . . . 6.19

Annex I . . . . . . . . . . . . . . . . . . . . . . . . 6.08 Annex III . . . . . . . . . . . . . . . . . . . . . . . 6.07 R ECOMMENDATIONS Commission Recommendation 98/257/ EC of 30 March 1998 on the principles applicable to the bodies responsible for out-of-court settlement of consumer disputes . . . . . . . 7.59 Commission Recommendation 1999/29/ EC of 14 December 1998 concerning the improvement of authorisation procedures for trans-European energy networks . . . . . . . . . . . . . . . 6.19 Commission Recommendation 2000/473/Euratom of 8 June 2000 on the application of Article 36 of the Euratom Treaty concerning the monitoring of the levels of radioactivity in the environment for the purpose of assessing the exposure of the population as a whole . . . . . . . 14.09 Commission Recommendation 2004/2/ Euratom of 18 December 2003 on standardised information on radioactive airborne and liquid discharges into the environment from nuclear power reactors and reprocessing plants in normal operation . . . . . . . . . . . . . . 14.09 MEMOR ANDA Memorandum of Understanding on co-operation in the field of energy between the European Union and Egypt (2 December 2008) . . . . . . . . Memorandum of Understanding on co-operation in the field of energy between the European Union and Jordan . . . . . . . . . . . . . . . . . . . . . . . Memorandum of Understanding on co-operation in the field of energy between the European Union and Morocco . . . . . . . . . . . . . . . . . . . . . Memorandum of Understanding on co-operation in the field of energy between the European Union and Ukraine (1 December 2005) . . . . . .

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2.55

2.55

2.55

2.55

TABLE OF INTERNATIONAL TREATIES AND CONVENTIONS

Agreement on partnership and cooperation establishing a partnership between the European Communities and their Member States, of one part and the Russian Federation, of the other part (1994) Art 65 . . . . . . . . . . . . . . . . . . . . . . . . . 2.55 Convention on Nuclear Safety 1994 . . . 14.06 Convention for the Protection of the Marine Environment of the NorthEast Atlantic . . . . . . . . . . . . . . . . . 13.48 Energy Charter Treaty (ECT) 1994 . . . . 2.53, 4.164, 4.170, 11.01 Pt. III . . . . . . . . . . . . . . . . . . . 4.173, 4.176 Art 1(6) . . . . . . . . . . . . . . . . . . 4.172, 11.06 Arts 1(6)(a)–(f) . . . . . . . . . . . . . . . . . 11.05 Art 6 . . . . . . . . . . . . . . . . . . . . . . . . . 11.50 Art 6(7) . . . . . . . . . . . . . . . . . . . . . . . 11.42 Art 7 . . . . . . . . . .11.38, 11.40, 11.41, 11.43 Art 7(1) . . . . . . . . . . . . . . . . . . . . . . . 11.37 Arts 7(2)(a)–(d) . . . . . . . . . . . . . . . . . 11.37 Art 7(7) . . . . . . . . . . . . . . . . . . 11.39, 11.43 Art 10(1) . . . . . . . . . . . . . . . . .4.173, 11.20, 11.22, 11.49, 11.50 Art 13 . . . . . . . . . . . . . . . . . . . 4.174, 11.14 Arts 13(1)(a)–(d) . . . . . . . . . . . . . . . . .11.11 Art 18(3) . . . . . . . . . . . . . . . . . 15.05, 15.12 Art 19 . . . . . . . . . . . . . . . . . . . 11.50, 11.52 Art 19(2) . . . . . . . . . . . . . . . . . . . . . . 11.42

Art 26 . . . 4.176, 11.42, 11.45, 11.47, 11.50 Art 26(1) . . . . . . . . . . . . . . . . . . . . . . 11.46 Art 26(2) . . . . . . . . . . . . . . . . . . . . . . 11.47 Art 26(3) . . . . . . . . . . . . . . . . . . . . . . 11.49 Art 27 . . . . . . . . . . . . . . 11.42, 11.50, 11.51 Art 29 . . . . . . . . . . . . . . . . . . . . . . . . 11.43 Annex IA . . . . . . . . . . . . . . . . . . . . . 11.50 Energy Community Treaty 2006 . . . . . . 2.54 European Coal and Steel Community Treaty 1952 . . . . . . . . . . . . . 13.02, 14.03 Art 4 . . . . . . . . . . . . . . . . . . . . . . . . . 13.01 Art 5 . . . . . . . . . . . . . . . . . . . . . . . . . 13.01 Arts 58–60 . . . . . . . . . . . . . . . . . . . . 13.01 Art 65 . . . . . . . . . . . . . . . . . . . . . . . . 13.01 Art 66 . . . . . . . . . . . . . . . . . . . . . . . . 13.01 European Convention for the Protection of Human Rights and Fundamental Freedoms 1950 (ECHR) . . . . . . . . 3.122 First Protocol . . . . . . . . . . . . . . . . . . 4.165 Art 1 . . . . 3.105, 3.122, 4.164, 4.165, 4.166 Kyoto Protocol . . . . . . 12.69, 12.166, 12.170, 13.17, 13.53, 13.56 Art 12 . . . . . . . . . . . . . . . . . . . . . . . . 12.69 London Convention 1972 . . . . . . . . . . . 13.48 Partnership and Cooperation Agreement between the European Communities and their Member States and Ukraine (1998) . . . . . . . 2.55 United Nations Framework Convention on Climate Change . . . . . . . . . . . . 13.53

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LIST OF ABBREVIATIONS

ACER AIB ANRE BAT BITs BTC CADA CCS CDM CEE CERM CERs CESR CHP CIP CRE CREG CSEs DG COMP DSO EAN

EC ECHR ECJ ECOSOC ECSC ECT ECtHR EDF EEA EEC EECS EEPR EIB ENTSO-E ENTSO-G ERGEG

Agency for the Cooperation of Energy Regulators Association of Issuing Bodies Romanian national energy regulator Best Available Techniques Bilateral Investment Treaties Baku-Tbilisi-Ceyhan Capacity and Differences Agreement Carbon Capture and Storage Clean Development Mechanism Central and Eastern Europe(an) Co-ordinated Emergency Response Mechanism Certified Emission Reduction units Committee of European Securities Regulators Combined Heat and Power Competitiveness and Innovation Framework Programme Commission de Régulation de l’Energie Commission de Régulation de l’Electricité et du Gaz Central Stockholding Entities Commission Directorate General for Competition Distribution System Operator European Article Number (now known as International Article Number, although still retaining the ‘EAN’ acronym; a 13-digit barcode providing a product identification number) European Community European Convention for the protection of Human Rights and Fundamental Freedoms European Court of Justice Economic and Social Committee European Coal and Steel Community Energy Charter Treaty European Court of Human Rights Electricité de France European Economic Area European Economic Community European Energy Certificate System European Energy Programme for Recovery European Investment Bank European Network of Transmission System Operators for Electricity European Network of Transmission System Operators for Gas European Regulators’ Group for Electricity and Gas

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List of Abbreviations ESA EU GATT GBER GO GWh IAEA ICSID IEA IEE IEM INOGATE ISCC ISO ITO LNG LTC MAD MCR MFN NDA NRAs NREAPs NT OU PAP PEEREA PPAs PSOs R&D RECS RES RES-E RTPA SBSTA SGEI SMEs StrEG TEN-E TENs TEU TFEU TGCs TOP TPA TSO UCPTE

Euratom Supply Agency European Union General Agreement on Tariffs and Trade General Block Exemption Regulation Guarantees of Origin GigaWatt Hours International Atomic Energy Agency International Center for Settlement of Investment Disputes International Energy Agency Intelligent Energy—Europe Internal Energy Market Interstate Oil and Gas Transport to Europe Integrated Solar Combined Cycle Independent System Operator Independent Transmission Operator Liquefied Natural Gas Long-term Contract(s) Market Abuse Directive Merger Control Regulation Most-Favoured Nation Nuclear Decommissioning Agency National Regulatory Authorities National Renewable Energy Action Plans National Treatment Ownership Unbundling Preventive Action Plan Protocol on Energy Efficiency and Related Environmental Aspects Power Purchase Agreements Public Service Obligations Research and Development Renewable Energy Certificates Renewable Energy Sources Electricity from Renewable Energy Sources Regulated Third Party Access Subsidiary Body for Scientific and Technological Advice Services of General Economic Interest Small and Medium-sized Enterprises Stromeinspeisungsgesetz Trans-European Energy Networks Trans-European Networks Treaty on European Union Treaty on the Functioning of the European Union Tradable Green Certificates Take-or-Pay Third Party Access Transmission System Operator Union pour la Coordination de la production et du transport de l’électricité

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List of Abbreviations UNCITRAL UNFCCC UNMIK USO VREG WTO

United Nations Commission on International Trade Law United Nations Framework Convention on Climate Change United Nations Interim Administration Mission in Kosovo Universal Service Obligation Belgian regional regulatory authority for the Flemish energy market World Trade Organization

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Part I BACKGROUND

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1 INTRODUCTION AND THE GENER AL CONTEXT OF THE EU AND ITS TREATIES

A. Introduction 1.01 B. The Rules of the EU Treaty and their Relevance for the Energy 1.04 Sector

(1) EU competence and energy law and policy (2) Harmonization (3) Outline of substantive EU law

1.05 1.08 1.10

A. Introduction This book has been written on the basis of the position after the adoption of the 1.01 EU’s Third Energy Package, the Directives of which were required to have been implemented by 3 March 2011. Developments in the environmental and supply security areas have also been taken into account, some of which took place before, and some after, the 2009 adoption of the Third Package. As a result, the interaction between these various provisions is often difficult to appreciate at this stage, where little practical experience yet exists with Member State implementation of such rules. Where possible, we have included examples from national law and practice to illustrate the operation of, and some of the difficulties raised by, the EU legislation and Treaty provisions in the energy field. This volume is thus written primarily from an EU law perspective. While the Euro- 1.02 pean Atomic Energy Community remains closely connected to the new Treaty structure, it retains its separate Treaty status. As a result, we have not endeavoured to provide full coverage of its provisions and legislation here, but have rather given an outline of its structure and considered its interaction with certain core EU law rules (such as those on competition). With regard to EU law itself, our focus is on the core of internal market issues 1.03 in energy and related rules and developments. Detailed analysis of the general substantive rules of EU law (eg competition law, the free movement rules), its institutional provisions (decision-making, legislative process), and constitutional 3

Introduction principles (like direct effect, supremacy, subsidiarity, proportionality, etc) can be found in both general works on EU law and in more specialized treatises covering specific elements. Where crucial to our discussion of energy-specific EU law issues, we have of course referred to these general substantive rules (often in some detail); but constraints of space have precluded detailed analysis of, for example, the vast decisional practice of the Commission in applying the EU competition rules to the energy sector. This, like Euratom, would need a book of its own to cover the details properly.

B. The Rules of the EU Treaty and their Relevance for the Energy Sector 1.04 Other works address the EU’s Treaty and institutional framework in detail1 and

these matters will not be repeated here.2 However, certain elements of the EU legal order should be highlighted, given their particular significance for EU energy law and its application. (1) EU competence and energy law and policy 1.05 After the reforms made by the Treaty of Lisbon, for the first time the EU’s founding

Treaties include ‘energy’ policy as an area of EU competence: Article 4(2)(i) TFEU. Previously, European legislation in the energy field had typically relied upon the internal market legal basis (under what is now Article 114 TFEU, ex 95 EC) or, where appropriate, what is now Article 192 TFEU (ex 175 EC) on the environment, and Article 352 TFEU (ex 308 EC, concerning implied EU powers). The TFEU now contains its own legal base for legislation in the field of energy, although it should be noted that its potential scope is subject to limitations. Article 194 TFEU provides: (1) In the context of the establishment and functioning of the internal market and with regard for the need to preserve and improve the environment, Union policy on energy shall aim, in a spirit of solidarity between Member States, to: (a) ensure the functioning of the energy market; (b) ensure security of energy supply in the Union; (c) promote energy efficiency and energy saving and the development of new and renewable forms of energy; and (d) promote the interconnection of energy networks.

1 See, eg, A Dashwood et al, Wyatt & Dashwood’s European Union Law (6th edn, Oxford: Hart Publishing, 2011). 2 See also PD Cameron, Competition and Energy Markets: Law and Regulation in the European Union (2nd edn, OUP, 2007), ch 2 for a helpful outline of the position prior to the Treaty of Lisbon, much of which remains applicable today.

4

B. The Rules of the EU Treaty and their Relevance for the Energy Sector (2) Without prejudice to the application of other provisions of the Treaties, the European Parliament and the Council, acting in accordance with the ordinary legislative procedure, shall establish the measures necessary to achieve the objectives in paragraph 1. Such measures shall be adopted after consultation of the Economic and Social Committee and the Committee of the Regions. Such measures shall not affect a Member State’s right to determine the conditions for exploiting its energy resources, its choice between different energy sources and the general structure of its energy supply, without prejudice to Article 192(2)(c).3 (3) By way of derogation from paragraph 2, the Council, acting in accordance with a special legislative procedure, shall unanimously and after consulting the European Parliament, establish the measures referred to therein when they are primarily of a fiscal nature. The precise implications of this new provision remain to be seen in practice: eg 1.06 it is unclear exactly what the difference is between the effective veto with regard to fiscal matters offered to Member States by the unanimous Council voting requirement in Article 194(3), and the position under the second paragraph of Article 194(2), where it is merely stated that such measures adopted under the ordinary legislative procedure (ie co-decision with the European Parliament and qualified majority vote by the Council) ‘shall not affect a Member State’s right’. It may be argued that under Article 194(2) a Member State may opt out of the national application of an EU legislative measure passed according to the procedure specified, but it may not veto the very adoption of that measure as EU law in the first place. In spite of this, the inclusion of a specific provision empowering the EU to legislate 1.07 in the energy field is an important development, and one which may assist in the future development of EU law and policy, taking into account the wide range of interests inherent in any modern energy regulatory system. (2) Harmonization EU legislative developments in the energy sector have, until now, largely been pur- 1.08 sued via growing levels of harmonization of Member State laws through the medium of the directive (Article 114 TFEU). Often, this technique has met with resistance from Member States during the process of negotiating such EU legislative measures, leading to a variety of options being provided for Member States when implementing

3 Art 192(2)(c) TFEU derogates from the ordinary co-decision procedure (laid down in Art 192(1) TFEU for EU legislation in the environmental sphere), requiring that the Council act unanimously after consulting (inter alia) the European Parliament, where they seek to adopt ‘measures significantly affecting a Member State’s choice between different energy sources and the general structure of its energy supply’.

5

Introduction such harmonization measures. Further, EU measures should only be adopted if they satisfy the requirements of subsidiarity and proportionality (Article 5 TEU). 1.09 On the one hand, the development of the three energy legislative packages can be

seen as a strong indication of increasing EU-level specification of measures, responsibilities, institutions, and detailed rules. This evolution will be evident from the detailed discussions below. On the other hand, the ongoing discussions at EU level still seem, at present, not to favour the harmonization of national support schemes for the promotion of electricity generated from renewable sources. Prior to the adoption of the First Renewables Directive, in the reports on the operation of that Directive and in the Commission’s proposal for, and the final adoption of, the Second Renewables Directive, these issues of harmonization loomed large. They eventually led, after extensive debate, to the legislative rejection of proposals to establish the possibility of inter-private party trade in Guarantees of Origin, while at the same time establishing a much more detailed EU regime for assessing the sustainability of biofuels under the same Directive. These issues are examined in substance in our discussion of renewables (Chapter 12).4 (3) Outline of substantive EU law 1.10 Again, other works address the overall legal framework under EU law concerning

freedom of movement and competition,5 and we will not seek to re-create this framework here. However, detailed consideration of many of these provisions has been incorporated in the specific chapters, where the application of the substantive provisions of the TFEU is crucial to understanding particular issues, such as: unbundling, security of supply, third party access (TPA), and long-term contracts. It is nevertheless important to remind the reader that these provisions of the TFEU remain applicable to national measures and to the activities of energy companies, unless covered fully by harmonizing legislation. 1.11 (a) Internal market: The application of the European Court of Justice’s (ECJ)

caselaw on the free movement provisions of the TFEU has made significant contributions in the energy sector. Cases like PreussenElektra,6 Outokumpu,7 the 1997 Energy Import-Export cases, 8 and the various Golden Shares (and related) judgments9 are all discussed below in specific chapters (eg security of supply, renewables, and 4 See, further, Commission, ‘Proposal for a Directive on the Promotion of the Use of Energy from Renewable Sources’ COM(2008) 19 (23 January 2008), 14 ff, and ‘Communication: The Renewable Energy Progress Report’, COM(2009) 192 (24 April 2009). 5 See, eg, A Dashwood et al (n 1) for general coverage and references to more specific materials. 6 Case C-379/98 PreussenElektra v Schleswag [2001] ECR I-2099. 7 Case C-213/96 Outokumpu [1998] ECR I-1777. 8 Cases C-157/94 Commission v Netherlands, 158/94 Commission v Italy, 159/94 Commission v France, and 160/94 Commission v Spain [1997] ECR I-5699, I-5789, I-5815, and I-5851 (respectively). 9 See Cases C-367/98 Commission v Portugal [2002] ECR I-4731, C-483/99 Commission v France [2002] ECR I-4781, C-503/99 Commission v Belgium [2002] ECR I-4809, discussed by H Fleischer,

6

B. The Rules of the EU Treaty and their Relevance for the Energy Sector unbundling). As an illustration of the potential significance of these provisions, we should highlight here the Essent Netwerk Noord case,10 where one perhaps unsuspected issue which arose from the practical operation of the Dutch scheme (aimed at compensating utilities companies for stranded costs on liberalization) was the possibility that the scheme amounted to a charge having equivalent effect to a customs duty under Article 30 TFEU. A price surcharge was levied on all transmitted electricity by transmission system operators and it was at least arguable on the facts that the recipients of the revenue generated by the surcharge were domestic electricity generating undertakings. If it could be shown that those revenues wholly offset the burden of the surcharge borne by domestic electricity generated, then it would amount to a charge having equivalent effect; if the offsetting only operated in part, the measure could still fall foul of Article 110 TFEU concerning discriminatory internal taxation. Within the context of a national scheme ostensibly set up to address stranded costs issues (thus prima facie indicating the relevance of the State aid rules), it is worth remembering that these other provisions may still apply. (b) EU competition law: As the liberalization of energy markets in the EU has 1.12 advanced under the three legislative packages, it has become clear that EU competition law11 plays a strong role in many key aspects in the energy sector. From modest beginnings, where the Commission seemed cautious and even reluctant to attempt to apply the competition rules to the sector,12 competition enforcement at EU level by the Commission and by private parties (by virtue of the direct effect of the relevant rules of the TFEU) has become ever more frequent and farreaching. A volume specifically devoted to EU energy law is not the place for an in-depth analysis of the EU competition rules and their application and the reader is referred to other works13 for discussion of the framework, the Commission’s role and decisional practice, and the judgments of the EU judiciary. In particular, the Commission has developed an extensive network of Decisions in the merger field, where there have been bursts of acquisitive and consolidating activity as the energy markets have developed.14 Competition law has been considered where there are specific issues in this work which depend upon its interpretation and application (see, in particular, the Chapters on unbundling (Chapter 3), third party access ‘Annotation’ (2003) 40 CMLRev 493; more recent cases include Cases C-174/04 Commission v Italy [2005] ECR I-4933, C-274/06 Commission v Spain [2008] ECR I-165, and C-326/07 Commission v Italy [2009] ECR I-2291. 10 Case C-206/06 Essent Netwerk Noord v Aluminium Delfzijl [2008] ECR I-5497. 11 Broadly conceived under EU law as including ‘antitrust law’ (Arts 101 and 102 TFEU), ‘mergers and concentrations’ (largely under the European Merger Regulation 139/2004/EC [2004] OJ L24/1) and ‘State aids’ (Arts 107 and 108 TFEU). 12 See, eg, PJ Slot, ‘Energy and Competition’ (1994) 31 CMLRev 511. 13 See, eg, R Whish & D Bailey, Competition Law (7th edn, Oxford: OUP, 2012); and M Heidenhain (ed), European State Aid Law Handbook (Munich: CH Beck, 2010). 14 For detailed discussion, see: C Jones and V Landes, ‘Part 4—Merger Control’, in C Jones (gen ed), EU Energy Law—Volume II: EU Competition Law and Energy Markets (3rd edn, Leuven, Claeys & Casteels, 2011), 433–598 and Cameron (n 2), ch 14.

7

Introduction (TPA) (Chapter 4), energy contracts (Chapter 8) and renewables (Chapter 12)). One general issue raised by these developments concerns the extent to which such competition law enforcement is (and should be) affected by the increase in breadth and depth of EU sector-specific legislation in the energy field. It might be questioned whether legislative ‘package deals’, achieved after extensive and difficult negotiations, should (legitimately) be affected by the application of EU competition law to situations that they specifically address. This matter is touched upon in some of those sections that address the impact of competition law, and its interaction with EU legislative provisions, in the various sections referred to above.

8

2 THE EVOLUTION OF THE EU’S ENERGY LEGISLATION: AN OUTLINE

A. Background 2.01 B. A Changing Political Climate in the 2.06 Member States C. The Single Market Programme 2.10 D. The Commission Working Document on the Internal Energy Market 2.11 of 1988 E. An Increasingly Receptive Political 2.14 Climate F. The Th ree-phased Approach (with the 2.17 Benefit of Hindsight) G. The Negotiation of the Directive Concerning Common Rules for the 2.19 Internal Market for Electricity (1) (2) (3) (4)

The original proposal The amended proposal The single buyer concept The final text

H. The Second Generation of Directives 2.31 (1) (2) (3) (4) (5) (6)

Principles 2.31 Market opening 2.32 Unbundling 2.33 Th ird party access 2.34 Regulatory authorities 2.35 Public service obligations and consumer protection 2.37 (7) Security of supply 2.39

I. The Th ird Energy Package and the Climate & Environment Package (1) Key drivers behind development of the Th ird Package (2) Overview of key themes (3) Environmental and security of supply contexts (4) EU external relations dimension (5) Basic E(E)C and EU energy chronology

2.20 2.22 2.24 2.29

2.40 2.41 2.45 2.51 2.52 2.56

A. Background Given the vital role played by energy in general, and by electricity in particular, 2.01 in the modern globalizing and competitive world, it is quite surprising in many ways that it took so long for the EC to turn its attention to the functioning of the electricity industry. After all, many of the benefits identified by the Commission in its 1988 Working Document on the Internal Energy Market1 were not unknown to policy-makers. Energy has always been an important factor in industrial production costs, as well as forming a significant proportion of the expenditure of the average household in the industrialized world. More specifically, the production of 1 Commission, ‘Working Document on the Internal Energy Market’, COM(88) 238 (2 May 1988).

9

The Evolution of the EU’s Energy Legislation electricity is the major factor in determining the levels of primary energy use, given that resources such as coal, oil, and gas remain the principal means of electricity production in much of Europe. Indeed, the Spaak Report of 1956 had identified the electricity industry as a priority sector.2 2.02 Many different considerations played their part in keeping energy issues off the

general EC agenda until the mid-1980s. Politically, energy has always been a highly sensitive subject for the Member States: first, in the aftermath of the Second World War and the economic reconstruction of which the EC has been an important part; second, in the debate of the 1970s on questions of security and diversity of supply in light of the oil crises of that period. This being so, it is not so surprising that the Community, beset by many internal difficulties throughout the 1960s and 1970s in agreeing on even the most basic provisions,3 made no real headway in such a politically charged area as energy. This political ‘no-go’ area was reinforced by the existence of a relatively stable consensus among Member States on the desired structure of the electricity industry. The original economics of creating a national system tended towards monopoly in the sphere of network construction, given the substantial economies of scale involved, as well as the benefits to be gained in coordinating the functions of production, transmission, and distribution. After all, since electricity is, in general, not something which can be stored for any period of time, available supply and thus production capacities must be matched to the fluctuations of demand, which was usually best achieved by coordination between these functions, or often integration of them in a single, usually state-owned entity. 2.03 Of course, these factors alone did not make the eventual integrated structure of the

industry a foregone conclusion: it is not immediately obvious why the generation and final supply functions could not be opened to competition. However, the fact of a rapidly growing demand for electricity led to, and was fed by, improvements in technology, and created what McGowan has called a ‘virtuous circle’.4 Plant size and efficiency increased and, as a result, the cost of electricity fell. To exploit these technical developments, large investments and guaranteed outlets were necessary, which encouraged consolidation and concentration in the structure of the industry. In many countries, this process tended to be accompanied by a greater incidence of public ownership.5 Thus, there seemed no reason to break the circle. In light of the multifaceted political importance of electricity, this increase in the involvement of the State in the electricity sector allowed governments to pursue a variety of goals through the medium of the electricity industry, such as national security (in terms of securing a 2

Comité Intergouvernemental Créé par la Conférence de Messina, Rapport des Chefs de Délégation aux Ministres des Affaires Etrangères, Brussels, 1956 (‘the Spaak Report’). 3 See JH Weiler, ‘The Transformation of Europe’ (1991) 100 Yale Law Journal 2403, for a useful politico-legal account of EU decision-making throughout its history. 4 F McGowan, The Struggle for Power in Europe: Competition and Regulation in the EC Electricity Industry (Royal Institute of International Affairs, 1993), 3 ff (hereafter, The Struggle for Power in Europe). 5 F McGowan, The Struggle for Power in Europe, 4; the exact time frame of this process varied from country to country.

10

B. A Changing Political Climate in the Member States reliable and constant supply of energy), consumer protection, and the promotion of the competitiveness of national industry through the control of electricity prices. In addition to this wide scope of different interests served in and by the electricity 2.04 sector, we must also consider the diversity which developed in the choices made on fuel sources for electricity production. This responds both to geographical–geological and politico-economic factors. Some countries have their own resources of particular fuels (e.g. coal, oil, and natural gas), while others choose to import alternative sources to reduce their reliance on one particular energy source (eg importing coal to prevent dependence on oil, especially after the 1970s). Nuclear energy has been the subject of intense political debate, and is simply no longer an option in some countries. Similarly, environmental considerations have led some countries to seek the development of renewable energy sources, particularly in recent history. This diversity is reflected in significant price variations across Europe for the supply of electricity,6 which has been a factor in persuading states to keep their borders largely closed to foreign power, lest cheap foreign electricity imports endanger the stability of the national supply structure. The similarity in approach in many countries also fostered relatively good relations 2.05 between utilities in different countries. With secure positions on their home markets, organizations for cooperation such as the UCPTE7 were loosely set up to organize swaps of electricity between utilities in a framework of mutual assistance and efficiency. With this solidarity, combined with the other factors which we have briefly discussed, it became clear that any EC incursions into the realm of the electricity sector would face serious obstacles and a relatively united front against them.

B. A Changing Political Climate in the Member States The change in political opinion vis-à-vis the electricity sector was the result of a 2.06 number of factors, and many of these elements are still reflected in the current EU policy towards the sector. First of all, the energy crises of the 1970s had caused unpredictable fluctuations in electricity demand and prices. When this was coupled with the gradual exhaustion of the scope for technical development in existing plants, and the unexpectedly high costs of the new plants of the previous years, it was clear that the performance of the industry was suffering.8 Furthermore, the utilities’ own policy for the construction of new capacity had of 2.07 course been based on the consensus that had existed in previous years on the inevitable march of increased demand, situated in a relatively benign political climate. 6 See EUROSTAT, Electricity Prices in Member States, 1993, and also the IEA’s Survey 1994, Question 4, and Energy Prices and Taxes (Paris: OECD/IEA, 1994), third quarter statistics. 7 Union pour la Co-ordination de la production et du transport de l’ électricité. 8 F McGowan, The Struggle for Power in Europe, 19.

11

The Evolution of the EU’s Energy Legislation As a result, countries such as France and Belgium found that they had over-invested in their nuclear programmes, and had significant excess production capacity. Also, local perception of new plants in many areas fell victim to the NIMBY (‘not in my back yard’) syndrome, especially where the new wave of environmental concern over nuclear power and non-renewable energy had gained in influence. The conflicts which ensued did little to foster the perceptions of politicians or the public that the industry was still acting in the public interest.9 2.08 Indeed, as previously adverted to, governments had long realized the potential

of the industry for achieving other political goals, and began to use their power to intervene in state-controlled industries to attempt to do just that. The UK experience of the 1970s and 1980s shows government schemes to use the public sector to control inflation though price levels, to subsidize other local services, and generally to meet social and regional policy goals.10 The utilities’ relationship with the government was put under serious strain by such interventionism, and even though the overall record of the industry was not so poor during this period, a public and political perception of a ‘more general malaise in the regime which underpinned the industry’s operations’ ascribed any shortcomings to faults in the structure of the system.11 That structure was further exposed by the fall in energy prices in the mid-1980s, when the local or national obligations of the utilities prevented them from taking advantage of such price reductions in raw materials. For example, problems were caused by the utilities’ long-term purchasing contracts or obligations for indigenous coal in the UK and Germany, where that national production could not achieve similar price reductions. To many industrialists, this pricing issue gave the impression that energy was just another commodity, for which price rather than security of supply was the paramount consideration; many felt that the existing structure was hampering a more efficient development of the supply of that commodity, which was so vital to almost any industrial process.12 2.09 On a more systemic political level, the approach based on nationalization and

public sector management had outstayed its welcome, particularly in the context of the European economic downturn of the late 1980s. Calls for privatization and deregulation became commonplace, particularly in the aggressively free market atmosphere of the UK under Mrs Thatcher, and while the electricity sector was not high on the list for such treatment, ‘in retrospect, it was perhaps inevitable that it

9

F McGowan, The Struggle for Power in Europe, 20. AJ Surrey, ‘The Nationalised Energy Industries’, in J Gretton and A Harrison (eds), Energy UK (Newbury: Policy Journals, 1986); see further the various annual reports of the International Energy Agency during this period: IEA, Energy Policies and Programmes of IEA Governments (Paris: OECD/IEA, various annual reports). 11 F McGowan, The Struggle for Power in Europe, 21. 12 F McGowan, The Struggle for Power in Europe, 21, and see A Kahane, ‘World Electricity and Gas Industries: Pressures for Structural Change’ (1990) 15 Annual Review of Energy 245. 10

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D. The Commission Working Document on the IEM of 1988 would become caught up in the process’.13 When this political trend was combined with the growth of an environmental consciousness among the public of Europe, calling for more responsible energy production choices, emissions control, and waste management policies, a broadly based movement for change in the electricity industry became identifiable. While this did lead in many countries to diverse and gradual but significant reforms of the sector,14 we will concentrate here on the development of the Community’s policy towards the issue.

C. The Single Market Programme This policy in its modern form can be traced back to the Single Market initiative, 2.10 launched by the Commission in its White Paper on 14 June 1985,15 with its clear emphasis on the removal of barriers to the freedom of movement provided for by the Treaty, and the building of an internal market without frontiers in the (then) EEC.16 This change in philosophy, shifting from trying to achieve free movement via total harmonization of all relevant rules, to trying to overcome the barriers in the way of free movement, marked a new way of examining the ‘familiar litany’ of the four freedoms,17 and was not lost on those concerned with energy in Europe. This was especially so since it was clear that a more effective internal market in the Community would benefit tremendously from reduced energy costs and the potential improvement in security of supply which a more integrated EC energy market was expected to bring. After the Single European Act of 1986 included a clear commitment by the Member States to the achievement of the Single Market within a specified time frame, the Commission felt it was time to deal more explicitly with the question of an Internal Energy Market: the White Paper had only covered it indirectly by its proposals on the harmonization of taxation and standards, and the liberalization of equipment procurement.

D. The Commission Working Document on the Internal Energy Market of 1988 In line with the general philosophy of the Single Market Programme, the key pre- 2.11 condition for progress in the energy industry was identified by the Commission as ‘the greatest possible transparency with regard to potential obstacles’.18 These could 13

F McGowan, The Struggle for Power in Europe, 23. The most often quoted example, of course, being that of the UK. 15 ‘Completing the Internal Market’, COM(85) 310 (Milan, 28–29 June 1985). 16 For an interesting account of the genesis of the Single Market Programme and progress towards its attainment, see Lord Cockfield, The European Union—Creating the Single Market (Chichester: Wiley, 1994). 17 Lord Cockfield, Th e European Union—Creating the Single Market (n 16), 38 – 41. 18 Commission, ‘Working Document on the Internal Energy Market’, COM(88) 238 (1988), para. 34. 14

13

The Evolution of the EU’s Energy Legislation only be tackled by undertaking adequate consultation with, and obtaining accurate information from, the various parties concerned. Once these preconditions were met, the Commission proposed to address the question of an Internal Energy Market (IEM) in four ways:19 (1) the application of the provisions of the Treaties and secondary legislation to ensure respect for competition; (2) the application of the provisions relating to energy in the White Paper; (3) the use of the new provisions introduced by the Single European Act concerning the environment; and (4) the possible pursuit of Commission initiatives in the specific domain of energy, after the necessary studies and investigations had been conducted. 2.12 With specific reference to electricity, the Commission identified a number of poten-

tial obstacles to the creation of an internal electricity market, although the major focus was clearly on how the industry was organized in Europe. Aspects which were highlighted were those of: unequal treatment of producer utilities as between Member States (such as fiscal and financial conditions; consent procedures for the authorization of new construction; the cost of production depending on the cost of fuels where fuel choice policy varied significantly between Member States); the compartmentalization of national markets due to the largely internal character of high-voltage interconnection systems; and supplies to users at the levels of distribution, large, and ordinary consumers. Also included on the list were taxation differences and the relative opacity of electricity costs and prices, without which any workable system of competition would be extremely difficult to achieve. 2.13 With hindsight, one can pick out most of the key elements of the current EU

energy policy from this early Working Document, and Klom has argued that four basic principles have been at work from the very beginning.20 For him, these are: (1) a gradual approach, to enable the industry to adjust to its new competitive environment; (2) a degree of subsidiarity to enable Member States to choose the system they feel fits their situation best; (3) the avoidance of excessive regulation; and (4) a continuing political dialogue with the Council, the Parliament, and the Economic and Social Committee (ECOSOC). The Commission made the same categorization in its 1998 ‘Report on the state of liberalisation of the energy markets’.21 While the subsidiarity element has only been a formal part of the programme since the Maastricht Treaty addition of the principle,22 it is submitted that in the energy sector this principle has been a pervasive one for many years. This can be seen in the 19 Commission, ‘Working Document on the Internal Energy Market’, COM(88) 238 (1988), para. 35. 20 AM Klom: ‘Liberalisation of Regulated Markets and its Consequences for Trade: the Internal Market for Electricity as a Case Study’ (1996) 14 Journal of Energy and Natural Resources Law 1 (hereafter, ‘Liberalisation’), 9; and ‘Effects of Deregulation Policies on Electricity Competition in the EU’ (1997) 15 Journal of Energy and Natural Resources Law 1, 5. 21 COM(98) 212 (7 April 1998). Given the sensitivity of Member States to change in the sector, these principles really reflect the most that the Commission could have hoped for, at least at that stage of liberalization. 22 See what was then Art 3b, second para, of the EC Treaty; see now Art 5 TEU.

14

E. An Increasingly Receptive Political Climate Commission’s reluctance to get to grips with the industry in the earlier years of the Community, and is probably due to the intense political sensitivity of the sector, as described (paras 2.04–2.05 and 2.09). Commenting on this earlier hands-off approach, McGowan has suggested that ‘[i]n other words the approach was to leave Member States to determine the pace and nature of change in the industry as they thought fit’, and even the attempts by the Commission to influence the sector in the 1970s were concentrated on the issue of security of supply, not competition.23

E. An Increasingly Receptive Political Climate The response to the Commission’s proposals was one of heated debate throughout 2.14 the industry, and after the previous description of the characteristics of the industry, one could be forgiven for thinking that the proposals would make no headway at all. However, such an assessment would fail to appreciate the dynamics of the industry during the 1980s and early 1990s. Previously, the issue of inter-Member State trade in electricity was no more than one of balancing the efficiency of neighbouring systems in the short term, rather than trade in the traditional sense. This balance in trade did not persist. Different national policies on the industry, especially on the issue of the construction of new capacity, created a new environment in which countries with significant excess production capacity came to fulfil the requirements of their neighbours, where the planning policy of the latter had failed to fully cover national requirements. This was especially true of the relationship between France and Italy, in which the latter became a significant net importer of power from France, although Belgium and Germany had also built up a significant export capability by 1992.24 Overall trade rose from only 3 per cent of Member States’ requirements in 1970 to nearly 7 per cent in 1990.25 With new patterns of trade disputes are almost inevitable, and in the electricity 2.15 sector this meant a further knock to the previously cosy relations between national utilities. The root of these difficulties was the increasing electricity production surplus in France, due to massive investment in nuclear power in the 1970s and early 1980s. When capacity proved to have outstripped actual demand by some margin, Electricité de France (EDF) was forced to seek outlets for this surplus in foreign markets, to offset the huge capital charges it had to pay on the original financing of its generating plants. At the outset, this trade did not cause significant difficulties, since the French nuclear power plants had low operating costs, and thus produced electricity which EDF could offer to (for example) Italian importers at prices below those charged by Italian producers.

23 24 25

F McGowan, The Struggle for Power in Europe, 43. Eurostat, Energy Statistics (Luxembourg: 1992). International Energy Agency, Energy Statistics of IEA Countries (Paris: OECD, 1993).

15

The Evolution of the EU’s Energy Legislation 2.16 However, when non-neighbouring countries sought to purchase electricity for

import from France, the spectre of transmission across the immediate neighbouring Member State was raised. This was the problem experienced by Portugal when it sought to buy French power, and was faced with what it considered to be exorbitant charges demanded by Spain to act as the intermediary. Only the threat of EC intervention caused the three States to come to agreement.26 A further problem arose when large German consumers tried to purchase electricity from France. Local utilities in Germany were strongly opposed to this plan, as they saw a reliable customer defecting to another supplier to avoid the local utilities’ relatively high charges. In the event, EDF was not prepared to supply such foreign customers directly, but the protectionist attitude of the German local utilities clearly rankled.27 Ironically, both by initiating a more traditional form of trade in electricity and by providing the Commission with opportunities to get involved in the international workings of the industry, France had proved a major catalyst in creating a political reaction in the Member States to the Commission’s Internal Energy Market ambitions that turned out to be more favourable than might have been expected.

F. The Three-phased Approach (with the Benefit of Hindsight) 2.17 From the perspective of the period after Directive 96/92, it is possible to identify

three phases in the early development of the internal market for energy, as indeed the Commission did in its ‘Report on the State of liberalisation of the energy markets’ in 1998.28 The first phase consisted of the Directives on price transparency and transit through transmission grids,29 and both of these initiatives are clearly identifiable in the 1988 Working Paper.30 While the essential nature of the Price Transparency Directive is not disputed, the 1998 Report admitted that, despite the fact that the Transit Directive did mark some progress, ‘it has to be recognized that this trade has only been possible between monopolistic network and public utilities and not between consumers in one Member State and producers in another’.31 To address this difficulty, the question of third party access to the network would have to be tackled. 2.18 Phase two involved the adoption of the Hydrocarbons Licensing Directive, which

essentially fulfilled the function of allowing equal and non-discriminatory access to the activities of prospecting and exploring for, and the production of oil and natural gas within the territory of the EEA.32 These production elements in the 26

Power in Europe, No. 49, 11 May 1989. F McGowan, The Struggle for Power in Europe, 48. 28 COM(98) 212 (7 April 1998). 29 These are: Directives 90/377/EEC (price transparency) [1990] OJ L185/16, and, in the electricity sector, 90/547/EEC (transit) [1990] OJ L313/30. 30 COM(88) 232, 72 (para. 13) and 75 (para. 18). 31 COM(98) 212, 4. 32 COM(98) 212, 4. See our discussion at ch. 15. 27

16

G. The Negotiation of the Directive Concerning Common Rules electricity sector formed part of the First Directive on the internal market for electricity (adopted in 1996), which, along with the First Natural Gas IEM Directive in 199833 made up the third phase of the Commission’s approach. This incremental technique clearly aimed at a gradual infiltration of EU law into the sector, with its final goal as a fully integrated energy market in the EU. To achieve this, long and hard negotiations on the terms in which the Member States would accept an internal electricity market would first have to be undertaken.

G. The Negotiation of the Directive Concerning Common Rules for the Internal Market for Electricity It is not proposed to conduct an in-depth analysis of the entire, protracted proc- 2.19 ess of negotiation, as other authors have already provided a commentary to the progress of the draft proposals at their various stages of development.34 Instead, a brief summary of the process will be given. (1) The original proposal In 1992, the Commission presented its first proposal for the internal market for elec- 2.20 tricity. It was based on the three main elements of: (1) the creation of a transparent and non-discriminatory system for granting production licences; (2) the unbundling of the management and accounting of the production, transmission, and distribution functions of vertically integrated undertakings; and (3) the introduction of limited third party access (TPA) to the transmission and distribution networks. It is interesting to note that, shortly before these proposals were published, the Commission had announced that nine Member States would be receiving formal letters under the enforcement procedure (see now Article 258 TFEU) requiring them to adapt their electricity import and/or export monopolies to conform with the EC Treaty, in particular to what was then Article 37 EC (which then became Article 31 EC and is now Article 37 TFEU). This two-pronged attack on the present national organization of electricity supply may well have contributed to more general fears that the new proposals would not prove acceptable to the Member States. However, those formal letters were no more than another step in a long line of increasing Commission willingness to intervene in the energy sector in general35 where it felt that the requirements of the Treaty were being flouted, especially given its extreme reluctance for many years to do so.36 33

Adopted by the Council in Energy Council Meeting No. 2092 (11 May 1998). See, eg, P-A Trepte (1992) Utilities Law Review 18, and L Hancher (1992) Utilities Law Review 133, and (1993) Utilities Law Review 79, and (1994) Utilities Law Review 64, and (1996) Utilities Law Review 217 for summaries, comments, and criticisms of the various drafts and proposed amendments. 35 Th is was fi rst made clear by the Commission in its Working Document on the Internal Energy Market (n 19), 11 (para. 35). 36 See PJ Slot, ‘Energy and Competition’ (1994) 31 CMLRev 511 for a useful account of the Commission’s hesitant approach to applying the competition rules to the energy sector. 34

17

The Evolution of the EU’s Energy Legislation 2.21 The theory behind TPA was to enable producers and consumers to conclude con-

tracts directly with each other, thus furthering the objectives of competition and competitive pricing. This access is important to encourage competition on both the consumers’ and the generators’ side of the electricity market,37 by exposing both ends of the market to such pressures. The original proposal contained a form of obligatory or regulated TPA to electricity networks to facilitate such direct contractual relationships. However, both the ECOSOC38 and the Parliament39 were unhappy with the TPA proposal, and suggested amendments to the system. (2) The amended proposal 2.22 In 1993 the Commission introduced the idea of negotiated TPA to the networks

as a concession to these concerns.40 This would involve direct sales by producers to eligible customers, and would then require the producer to negotiate with the network operator to gain access to the network to transport these supplies. On the generation side, the introduction of competition required either the stimulation of imports through international interconnections or the establishment of other producers to compete within the system.41 The proposal covered the procedures necessary for achieving the latter by means of a tendering or an authorization procedure for the construction of new production capacity. 2.23 However, this new approach to TPA failed to win over all the Member States, and

during negotiations in Council in 1994, the French Government put forward an alternative scheme for the TPA concept: that of the single buyer. (3) The single buyer concept 2.24 Under this system, only one entity could purchase and sell electricity within the area

in question: the single buyer. As a result, all producers must sell their electricity to the single buyer, and at the other end of the scale all consumers would have to meet their requirements through purchases from the single buyer. Further, the single buyer would be given control over calls for tender, and would only grant certain consumers the possibility of concluding contracts for the supply of power from abroad. It is clear that this system did not leave much room for any significant opening up of the electricity market for new producers, any more than it was likely to provide consumers with increased choice and greater efficiency savings. It is equally clear 37

Klom, ‘Liberalisation’, 10. Opinion on the proposal for a Council Directive concerning common rules for the internal market in electricity [1993] OJ C73/10. 39 Opinion of the European Parliament on the proposal for a Council Directive concerning common rules for the internal market in electricity, delivered on 17 November 1993 (referred to in ‘Amended Proposal on common rules for the internal market in electricity’, COM(93) 643 final (7 December 1993), 4 (para. 6)). 40 ‘Amended Proposal on common rules for the internal market in electricity’, COM(93) 643 final (7 December 1993), 8 (para. 11(c)). 41 Klom, ‘Liberalisation’, 10. 38

18

G. The Negotiation of the Directive Concerning Common Rules that the aim of the single buyer proposal was to allow a planned economy approach to persist in those countries which were not yet ready to abandon it.42 Since the negotiations on the proposed Directive had stalled, the Council asked the 2.25 Commission to examine the single buyer proposal and the possible consequences for the market of the parallel existence of single buyer systems alongside more liberalized systems. This latter point raised for the first time the issue of reciprocity between the arrangements adopted in the different Member States, which the Commission recognized in its Working Paper on the Organisation of the Internal Electricity Market of 22 March 1995 (that dealt with the question of the single buyer).43 ‘In this context, it is necessary to verify that both approaches, in the spirit of reciprocity, lead to equivalent economic results and, therefore, to a directly comparable level in the opening of markets and to a directly comparable degree of access to electricity markets and that they conform with the provisions of the Treaty’.44 After its investigations, the Commission concluded that, as it stood, the single 2.26 buyer system could neither be considered equivalent to the proposed negotiated TPA system, nor could it be said to be in conformity with the provisions of the Treaty. The Commission stated45 that ‘reciprocity can only be assured between the systems if . . . [b]oth systems [are] based on a common and transparent definition as regards categories of eligible customers. The opening of the market is realised via the coverage of these eligible customers’. Indeed, in its discussion of the two systems, the Commission recalled that the French proposal did not include distributors among the eligible consumers.46 Since it was of the opinion that this would be contrary to what was then Article 30 EC (now Article 34 TFEU), the Commission made the assumption in its further analysis that the definition of eligible consumers under the two systems would be the same. Once implemented, it was clear that there were significant variations in this definition across the Member States. The Commission felt that the case law on Article 30 EC 47 led to the conclusion 2.27 that a system which resulted in imports being channelled so that only certain traders could affect them amounted to a measure having equivalent effect to a quantitative restriction on imports: eligible consumers would be excluded from direct imports, as they would never be anything but clients of the grid. Despite its misgivings about the single buyer concept, the Commission recog- 2.28 nized the need to get negotiations underway again, and thus proposed a number of amendments to the single buyer concept, ‘to ensure the maximum of reciprocity 42 See A Midttun, ‘Electricity Policy within the EU: One Step Forward, Two Steps Back’, ch. IX in A Midttun (ed), European Electricity Systems in Transition: A Comparative Analysis of Policy and Regulation in Western Europe (Oxford: Elsevier Science, 1997), 272. 43 SEC(95) 464 (22 March 1995), sec V. 44 SEC(95) 464 (22 March 1995), sec V, emphasis added. 45 SEC(95) 464 (22 March 1995), para. 7. 46 SEC(95) 464 (22 March 1995), para. 18. 47 Specifically, Case 104/75 Officier van Justitie v de Peijper [1976] ECR 613.

19

The Evolution of the EU’s Energy Legislation and compatibility with the Treaty’. These amendments concerned, inter alia, the degree of choice available for eligible consumers, the import and export regime, the full unbundling of the different functions of the single buyer to ensure transparency, and the encouragement of competition at the level of production. (4) The final text 2.29 The question of TPA and eligibility continued to dog negotiations throughout

1995 and 1996. The key issue boiled down to the extent of market opening that was to be required in the first phase of liberalization, and the definition of the consumers which were to be allowed to participate in that first phase. The complex compromise which was finally reached is embodied in Article 19 of the First Electricity Directive. The idea was to ensure that the single buyer and negotiated TPA systems would lead to an equivalent level of market access. This was to be achieved in the first phase by basing the calculation of market access levels on final consumers of over 40 GWh per year, 48 which according to the Commission’s calculations at the time amounted to an average Community share of electricity market opening of 25.37 per cent.49 This was to be opened progressively after three years to 20 GWh, and after six years to 9 GWh.50 Thus, after six years, approximately 33 per cent of the market would be required to be open to competition. 2.30 However, in meeting this market opening requirement, Member States were free

to specify which types of customers were to have access to the network, subject to the restriction that all those consuming more than 100 GWh had to be included.51 Similarly, even if distributors were not included as eligible in a given Member State, they had to be granted access to supply the electricity contracted by customers who were designated as eligible. Thus, the precondition for reciprocity identified by the Commission in its 1995 Working Paper of a common definition of eligible customers was not present in the final text of Directive 96/92. Indeed, if one examines Article 19(5), it is clear that these potentially differing definitions of eligibility were vital in distinguishing the strong obligation of Article 19(5)(a) from the possible discretionary application of Article 19(5)(b) to cross-border transactions for the supply of electricity.52 Thus, it is clear that this issue of the definition of eligibility was (one of) the main reason(s) for the inclusion of a reciprocity clause in the First Electricity Directive and, by logical extension, the First Gas Directive53 as well.

48

Directive 96/92/EC [1997] OJ L 27/20, Art 19(1), second para. [1997] OJ C330/18. 50 Directive 96/92/EC, Art 19(2). 51 Directive 96/92/EC, Art 19(3). 52 For an in-depth analysis of the reciprocity concept under the First Directives, see A Johnston, ‘Maintaining the Balance of Power: Liberalisation, Reciprocity and Electricity in the European Community’ (1999) 17 Journal of Energy and Natural Resources Law 121. 53 Directive 98/30/EC [1998] OJ L204/1 (21 July 1998). 49

20

H. The Second Generation of Directives

H. The Second Generation of Directives (1) Principles The main principles embodied in the Second Energy Package clearly derived 2.31 directly from the details already discussed. The key changes wrought by the Second Package are outlined in the following paragraphs. (2) Market opening The timetable according to which Member States were required to open their 2.32 energy markets to customer choice and competition was amended to accelerate the process. According to Article 21 of the Second Electricity Directive54 and Article 23 of the Second Gas Directive,55 from 1 July 2004 all non-household customers, and from 1 July all customers were required to be eligible to choose their own supplier. Closely connected with these market opening criteria, the Second Package also retained the provisions on reciprocity (see Articles 21(2)(b) (Elec) and 23(2)(b) (Gas)). (3) Unbundling The unbundling arrangements under the Second Package were also strengthened: 2.33 they now required legal, organizational, and managerial separation of activities (see Articles 10 and 15 (Elec) and 9 and 13 (Gas)). This was augmented by the introduction of a ‘Code of Conduct’ to be followed by energy companies in maintaining that separation (Articles 10(2) (Elec) and 9(2) (Gas)) and more detailed specification of confidentiality requirements with regard to information flows between those separated elements of energy businesses (Articles 12 (Elec) and 10 (Gas)). These developments have been continued into the Third Package and are discussed in detail in Chapter 3. (4) Third party access As discussed, TPA had been one of the key elements in the design of the First 2.34 Package of Energy Directives, and its central position was enhanced under the Second Package. In effect, a general shift was made to allow regulated TPA (RTPA) only (see Articles 20 (Elec) and 18 (Gas)) in almost all cases; only in liquefied natural gas (LNG) storage and upstream linepack (Articles 19 and 20 (Gas)) did scope remain for Member States to employ negotiated TPA. The possibility was also provided for Member States to exempt new infrastructure from certain (and not all) RTPA requirements (see Articles 7 (Electricity Regulation) and 22 (Gas)), albeit under fairly stringent conditions. The current incarnations of these provisions are 54 55

Directive 2003/54/EC [2003] OJ L176/37 (15 July 2003). Directive 2003/55/EC [2003] OJ L176/57 (15 July 2003).

21

The Evolution of the EU’s Energy Legislation discussed in Chapter 4 and reflect a desire to encourage merchant investment in new infrastructure and capacity where this will enhance competition in, and interconnections between, energy markets. (5) Regulatory authorities 2.35 Articles 23 (Elec) and 25 (Gas) introduced significant developments with

regard to national regulatory authorities (NRAs), when compared with the relatively sparse provisions of the First Electricity and Gas Directives. Th is was partly a result of the move to the more widespread use of RTPA (mentioned at para 2.34), but also reflected more generally a concern to ensure that there were strong and independent national regulators which were able to ensure respect for the complex market and regulatory compromise embodied by the new legislation. 2.36 Thus, Member States were required to establish a national energy regulatory

authority, and the Directives provided more detailed definition of their functions, powers, and responsibilities (for details under the current regime, see Chapter 5). At the same time, it remained possible for Member States to set some limits to the powers of NRAs: thus, under Article 23(3) (Elec) and 25(3) (Gas), national law could require that NRAs must submit their decisions on tariffs or methodologies for tariff-setting to another national body for approval. (6) Public service obligations and consumer protection 2.37 The Second Package saw significant developments in the fields of public service

obligations (PSOs) and consumer protection. In particular, a universal service obligation was introduced in the Second Electricity Directive (Article 3(3)), requiring the availability of electricity to all at reasonable, transparent, and comparable prices, and of a specified quality. 2.38 The fi rst specific references to consumer protection issues in any EU-level energy

legislation were made by the Second Package (see Articles 3(5) (Elec) and 3(3) (Gas)). Annex A of both Directives provided a list of key ‘Measures on consumer protection’ to be taken by Member States, including the establishment of certain consumer rights, especially to receive information. While some of this was undoubtedly directed at facilitating consumer choice and switching of suppliers, in the interest of developing market forces, this recognition that consumers might also need some protection in the new liberalized market was a trend which has been continued by the Th ird Package (see our discussion in Chapter 7).

22

I. The Third Energy Package and the Climate & Environment Package (7) Security of supply Under Articles 4 (Elec) and 5 (Gas), the Second Package introduced a strong focus 2.39 on the monitoring by Member States of security of supply issues, including the publication of a report every two years, forwarding this to the Commission, and developing and adopting national planning measures to guarantee security of supply.

I. The Third Energy Package and the Climate & Environment Package The bulk of this volume addresses the rules in force as a result of the most recent 2.40 EU-level legislative developments, and some chapters expressly discuss the background which led up to these recent changes, so this will not be repeated here. Rather, an outline is provided of some of the key drivers behind the Third Package and the associated rules on climate change and environmental aspects, also noting the growing political significance of the EU’s external relations in the development of its energy law and policy. (1) Key drivers behind development of the Third Package Regular Commission reporting on the state of play in the implementation of 2.41 the Second Package and the development of the Internal Energy Market led the Commission to draw a number of conclusions concerning the ineffectiveness of the pre-existing EU legislation in achieving the Internal Energy Market (IEM).56 In part, Member States’ failure to implement the Directives clearly, accurately, and in a timely manner were frequently cited as the cause of slow progress in this field, with a number of Member States being threatened with enforcement actions for failure to implement the legislation, some of which have been referred to the ECJ.57 The Commission also gained a great deal of information on the operation of the 2.42 energy sector from its conduct of the Energy Sector Inquiry under its competition law powers. Its final report58 highlighted a range of important areas where

56 See Commission, ‘Communication: An Energy Policy for Europe’, COM(2007) 1 (10 January 2007) and the ‘Explanatory Memoranda’ accompanying its proposals for the Third Package Directives in Electricity (COM(2007) 528) and Gas (COM(2007) 529) (both 19 September 2007). For access to the regular benchmarking reports since 2000 (which formed the basis for many of the Commission’s proposals over the years), see . 57 See for a full list, by year, of various proceedings opened by the Commission, and those referred to the ECJ. For a recent example, see Case C-264/09 Commission v Slovakia (Judgment of 15 September 2011). 58 Commission, ‘Communication: Inquiry pursuant to Article 17 of Regulation (EC) No. 1/2003 into European gas and electricity sectors (Final Report)’, COM(2006) 851 (10 January 2007).

23

The Evolution of the EU’s Energy Legislation competition did not yet function well in energy markets in the EU. In summary, these included: • •

•

•

•

market concentration and the national nature of energy markets; limited unbundling of network and supply interests, causing vertical foreclosure on energy markets and making TPA difficult, discouraging new entrants from fighting for market share on such markets in generation, supply, and retail; a lack of cross-Member State border market integration, which removed the potential competitive pressure that could be brought to bear upon national markets by imports; a lack of transparency in the provision of clear, accurate, and timely information on the markets, which made it difficult for non-vertically integrated network users to compete and plan effectively; and the development of competition on downstream markets (i.e. retail and supply contracts), which had been limited in scope, sometimes due to contractual restrictions with regard to contract duration and, in the gas market, restrictions on how customers could use or sell what they bought.59

2.43 In parallel with the report on the Sector Inquiry, a Communication on ‘Prospects

for the internal gas and electricity market’ was also published,60 laying out the positive results achieved from competition as well as obstacles to its development, and the key issues which still remained if the liberalization goals of the EU’s energy legislation were to be achieved. This provided an early illustration of the Commission’s coordinated use of competition law and legislative enforcement and proposals as twin tracks along which to pursue energy market liberalization in the EU.61 2.44 The ECJ had also begun to give judgments on various aspects in the energy sec-

tor, both interpreting the existing legislation and applying the general EU law rules (cases such as citiworks, 62 Sabatauskas, 63 VEMW, 64 and Essent Netwerk Noord 65 are discussed in Chapters 4, 7, and 12 respectively). These developments also reminded undertakings at national level of the concomitant potential role for national courts in the enforcement of the EU law rules within the national legal system (the example of the recent Dutch judgment concerning national rules on the ownership unbundling of distribution system operators and their relationship with the EU law rules on free movement of capital is discussed at paras 3.121 ff ). 59 60 61 62 63 64 65

Destination clauses are a key element here, and are discussed at paras 8.169 ff. COM(2006) 841 (10 January 2007). See, further, our discussion at paras 3.125 ff. Case C-439/06 [2008] ECR I-3913. Case C-239/07 [2008] ECR I-7523. Case C-17/03 [2005] ECR I-4983. Case C-206/06 Essent Netwerk Noord v Aluminium Delfzijl [2008] ECR I-5497.

24

I. The Third Energy Package and the Climate & Environment Package (2) Overview of key themes (a) Shifting focus: from competition and liberalization to environment, con- 2.45 sumer protection and security of supply? As can be seen from the evolution previously outlined, and from our detailed discussion in this volume, the relatively single-minded single market approach taken in earlier incarnations of EU energy liberalization seems to have developed into the pursuit of a wider range of goals, which sometimes are not mutually reinforcing. While many of the provisions in the Third Package Directives still pursue liberalization and competition strongly and directly (e.g. unbundling, TPA, stronger NRA powers to secure respect for such rules, some elements of consumer information provision), other provisions either provide greater scope for derogation from such market-based principles (e.g. PSOs, consumer protection) or acknowledge the policy in favour of pursuing other goals, whether generally (e.g. environmental policy) or in emergency situations (e.g. security of supply). In the future, the coherent pursuit of these goals will pose great challenges to the EU and its Member States under both EU and national energy and environmental law.66 (b) Key elements of the Third Energy Package: The new provisions on unbun- 2.46 dling in the Third Package Directives generated perhaps the most debate and conflict during their negotiation, which has led to a complex range of options being made available to Member States with regard to the vertical ownership and management structure of energy businesses. The growing significance of the rules on consumer protection that was witnessed 2.47 under the Second Package has been enhanced, with more detailed and far-reaching provisions in the new Directives. The regulatory function at both national and EU level has been strengthened, 2.48 with the advent of the Agency for the Co-operation of Energy Regulators (ACER) and the more extensive provisions on NRAs. These developments could be seen as crucial in encouraging greater liberalization and competition, and yet also as highly significant in increasing levels of consumer protection. These developments go hand-in-hand with various provisions which impose increasing reporting obligations over a wide range of activities and policies, both for Member States and undertakings (especially transmission system operators (TSOs)). In part, this seeks to ensure respect for the new rules of the Third Package, both formally and in developing a culture in which these rules are seen as the norm; but this new regime also aims to gather more information to assess the impact, successes, and difficulties of the latest EU legislation. With a clearer overview of the operation of markets under these rules, NRAs, ACER, and the Commission hope to evolve more effective 66 For discussion, see A Johnston, ‘The Future Shape of EU Energy Law and Policy’, in A Arnull, C Barnard, M Dougan, and E Spaventa (eds), A Constitutional Order of States? Essays in EU Law in Honour of Alan Dashwood (Oxford: Hart Publishing, 2011), ch 21.

25

The Evolution of the EU’s Energy Legislation regulation as time progresses, from a stronger and fuller knowledge base. All of these issues will be discussed in detail in the relevant chapters of this volume. 2.49 Even more recently, in October 2011, the new Regulation 1227/2011/EU on Wholesale

Energy Market Integrity and Transparency (often known as ‘REMIT’) was adopted.67 This measure aims to reinforce consumer confidence in the integrity of energy markets, on which market prices must be set competitively and without profiteering from ‘market abuse’. To that end, Article 3 establishes a prohibition on insider trading on energy wholesale markets, while Article 5 likewise prohibits any (attempts at) engagement in market manipulation on such markets. Duties to publish inside information in an effective and timely manner are established by Article 4, while Article 8 obliges market participants to provide ACER with a record of all wholesale energy market transactions. For the purposes of such reporting, Article 9 requires market participants to register with the NRA in their state of establishment or residence. 2.50 Member States are required, by Article 18, to lay down the rules on ‘effective,

dissuasive and proportionate’ penalties for infringement of any provisions of REMIT and Member States are specifically required to allow NRAs to disclose any penalties imposed thereunder, thereby expecting that ‘naming and shaming’ perpetrators (as well as penalizing) will play an important role in ensuring energy market integrity. REMIT also contains various provisions on the respective roles of ACER and the NRAs concerning information sharing (Article 10) and cooperation (Article 16), while emphasizing that NRAs must ensure that the rules laid down in Articles 3, 4, and 5 REMIT are applied (see Article 13). Insofar as REMIT affects the role and duties of NRAs, these matters are discussed at paras 5.42 ff, but it is also important to highlight the new obligations which it imposes upon energy market participants, in the interests of energy market integrity and transparency (although its impact is too early to assess as yet). (3) Environmental and security of supply contexts 2.51 The impact of significant environmental policy and security of supply considera-

tions has become crucial in the energy sector: witness the parallel development of liberalization legislative proposals alongside those concerning renewables, biofuels, the EU’s Emissions Trading System, and carbon capture and storage (all of which, saving the emissions regime, are discussed in Chapters 12 and 13). Indeed, the Commission often either contemporaneously released its proposals covering these various dimensions, or made great efforts explicitly to incorporate such considerations in its more specific proposals and general policy documents. Since 2007, it is clear that the EU has been trying to view the area in the round and in a more joined-up fashion, rather than as separate issues acting externally upon the energy sector. Whether this has led to successful integration between these 67

[2011] OJ L326/1.

26

I. The Third Energy Package and the Climate & Environment Package goals of the market, the environment, and security of supply is an immensely difficult and complex question, which will be examined at various places in the text, although we would not claim that experience in practice has yet led to any firm conclusions. (4) EU external relations dimension Finally, we must note the growing acceptance and development of an external 2.52 relations dimension to EU energy law and policy. Naturally, during the past decade there has been a significant propagation of EU liberalization measures via the process of the accession of numerous countries in central and eastern Europe, but the EU has also engaged in numerous initiatives, cooperation agreements, and other international instruments with third countries in the pursuit of its energy policy goals. In particular, the increasing significance of security of supply issues in EU energy policy, in light of the increasing dependence of the EU upon supplies of primary energy sources from outside the EU, has led to a growing focus on relations between the EU (and its Member States) and third countries. Some of these issues will be discussed further (eg the Energy Charter Treaty and the 2.53 INOGATE process: see paras 11.57 ff ), while we can mention others only briefly here.68 At EU level, the Commission has recently published a Communication on security of energy supply and international cooperation,69 and simultaneously proposed the adoption of a decision on notification of Member State agreements with third countries in the energy field.70 The objective of the decision would be to create a ‘mechanism with detailed procedures for the exchange of information between Member States and the Commission with regard to intergovernmental agreements, i.e., legally binding agreements between Member States and third countries, which are likely to have an impact on the operation or the functioning of the internal market for energy or on the security of energy supply in the Union’.71 The proposal responded to the conclusions of the European Council of 4 February 2011, which had concluded that there was a need for greater coherence and consistency in the EU’s external energy relations with producer, transit, and consumer third countries.

68 See, further, A Belyi, ‘The EU’s External Energy Policy’, in MM Roggenkamp, C Redgwell, A Rønne, and I del Guayo (eds), Energy Law in Europe: National, EU and International Regulation (2nd edn, OUP, 2007), ch 4. 69 Commission Communication, ‘On security of energy supply and international cooperation–“The EU Energy Policy: Engaging with Partners beyond Our Borders”’, COM(2011) 539 (7 September 2011). 70 Commission, ‘Proposal for a Decision of the European Parliament and of the Council: setting up an information exchange mechanism with regard to intergovernmental agreements between Member States and third countries in the field of energy’, COM(2011) 540 (7 September 2011). 71 COM(2011) 540 (7 September 2011).

27

The Evolution of the EU’s Energy Legislation 2.54 The Energy Community Treaty 72 was signed by the EU, Albania, and the states

of the former Yugoslavia (Bosnia-Herzegovina, Croatia, FYR Macedonia, Montenegro, Serbia, and UNMIK (the United Nations Interim Administration Mission in Kosovo)) and entered into force on 1 July 2006. Essentially, it aims at the extension of the EU energy market into these countries, via the application of certain elements of EU law in these countries (including the internal market Directives, certain environmental Directives, and EU antitrust and State aid rules). It also contains its own dispute settlement mechanism to deal with disputes arising in the implementation of the Energy Community Treaty. 2.55 The European Economic Area (EEA) includes the EU, Norway, Iceland, and

Liechtenstein; Annex IV of the EEA Agreement lays down those provisions of EU energy law which apply under the framework of the EEA, which includes the internal market Directives and Regulations discussed in this volume (subject to certain exceptions). There are also various bilateral agreements signed by the EU, two of the most significant of which are with Russia73 and the Ukraine74 respectively; but most EU bilateral agreements with third countries contain some provisions related to energy.75 (5) Basic E(E)C and EU energy chronology 2.56 As an overview of the evolution of EU law and policy in the energy sphere, Table 1

provides an outline of a number of the key developments at EU level over the years. Table 1 European Energy Law Chronology Year

Treaties and legislative measures

1951

ECSC: Coal and Steel Community

1957

• EURATOM: Peaceful uses of Nuclear Energy • EEC Treaty (but lacking specific energy policy provisions)

Proposals, soft law measures, and others

72 For discussion, see O Silla, ‘The Internal Energy Market and Neighbouring Countries’, in C Jones (gen ed), EU Energy Law—Volume I: The Internal Energy Market—The Third Liberalisation Package (Leuven: Claeys & Casteels, 2010), ch 16, at 580 –584; and M Hunt and R Karova, ‘The Energy Acquis under the Energy Community Treaty and the Integration of South East European Electricity Markets: An Uneasy Relationship?’, in B Delvaux, M Hunt, and K Talus (eds), EU Energy Law and Policy Issues: ELRF Collection (2nd edn, Rixensart (Belgium): Euroconfidentiel, 2010), section 1.3. 73 Partnership and Co-operation Agreement 1994: see its Art 65 on energy. 74 Memorandum of Understanding on co-operation in the field of energy (1 December 2005). 75 The EU has concluded Memoranda of Understanding or Agreements with various former countries, including Egypt, Jordan, and Morocco. Association and Free trade agreements signed by the EU would typically also cover energy issues.

28

I. The Third Energy Package and the Climate & Environment Package Table 1 Continued Year

Treaties and legislative measures

1958–1972

1973–1977

1981 1986 1988

1990

1991 1992

1996 1997

1998

2001

76

Proposals, soft law measures, and others

Conspicuous lack of actual action (but not of discussion): • 1968 Oil Stocks Directive 68/414/ EEC) [1968] OJ L308 (amended by Directive 72/425/EEC in 1972 [1972] OJ L291/154)76 Various measures to deal with possible Recommendations on the rational use oil supply difficulties: Directives of energy 73/238/EEC [1973] OJ L228/1, and 77/706 [1977] OJ L292/9 Commission complaints at lack of progress COM(81) 540 final Single European Act (esp internal market goal and legal basis) Commission Working Document on an Internal Energy Market (COM(88) 232 (1988)) • Price Transparency Directive 90/377/EEC [1990] OJ L185/1 • Electricity Transit Directive 90/547/ EEC [1990] OJ L313/30 Gas Transit Directive 91/296/EEC [1991] OJ L147/37 Treaty of Maastricht: see esp Articles 3(u) (energy as a common policy) and 154 EC (on trans-European networks) Directive 96/92 on the internal electricity market [1997] OJ L27/20 Treaty of Amsterdam: Protocol on subsidiarity and proportionality; Article 16 EC (services of general economic interest) • Directive 98/30 on the internal market in natural gas [1998] OJ L204/1 • Directive 98/93 amending the 1968 oil stocks Directive [1998] OJ L358/100 Renewable Electricity Directive Commission Proposals (COM(2001) 125 2001/77/EC [2001] OJ L283/33 final (13 March 2001), as amended by COM(2002) 304 final (7 June 2002)) for: • faster market opening in the electricity and gas Directives; • a Regulation on access to cross border transmission; • Commission Proposal for an Emissions trading system (COM(2001) 581 final (23 October 2001))

See, now, Directive 98/93/EC [1998] OJ L358/2.

29

The Evolution of the EU’s Energy Legislation Table 1 Continued Year 2003

2004 2005

2006

2007

2008

2009

Treaties and legislative measures

Proposals, soft law measures, and others

• Directives 2003/54/EC (electricity) and 2003/55/EC (gas), consolidating and speeding up the liberalisation process; along with Regulation 1228/2003/EC on network access for cross-border electricity exchanges • Directive 2003/87/EC establishing a European Emissions Trading System • Decision 1229/2003/EC laying down guidelines for Trans-European Energy Networks Directive 2004/8/EC on the promotion of cogeneration Regulation 1775/2005/EC on access to the natural gas transmission network • Competition Law: Energy Sector • Commission Decision 2006/770/ Inquiry commenced EC amending Annex to Regulation • Energy Green Paper issued 1228/2003 on congestion management guidelines • Second round of Commission decisions on the NAPs under the EU ETS Directive January • CompetitionLaw: Energy Sector Inquiry Final Report; • Energy White Paper issued September • Third legislative package published November • European Strategic Energy Technology Plan launched January • Integrated proposal for Climate Action (including proposal for new renewables directive) April • Adoption of Climate Package (new Renewables and EU ETS Directives) July • Adoption of Third Energy Package (various Directives and Regulations) September • New Minimum Oil Stocks Directive 2009/119/EC December • Entry into force of Treaty of Lisbon (new Energy legal basis, other changes)

30

I. The Third Energy Package and the Climate & Environment Package Table 1 Continued Year

Treaties and legislative measures

2010

June • Regulation 617/2010/EU on notification of investment projects in energy infrastructure October • New Gas Security of Supply Regulation 994/2010/EU

2011

October • Regulation 1227/2011/EU on energy market integrity and transparency (REMIT)

31

Proposals, soft law measures, and others

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Part II STATE OF EU LAW ON THE LIBER ALIZATION OF ENERGY MARKETS AFTER THE THIRD PACK AGE

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3 UNBUNDLING

A. Introduction (1) Background (2) Development of unbundling through the first and second generations of the EU Energy Directives (3) Basic position reached under Third Package

(1) Certification for the designation and appointment of TSOs: general 3.101 (2) Certification for TSOs controlled by a person from a non-EU Member State 3.103 (3) Re-certification for current TSOs? 3.105

3.01 3.01

3.05

D. Unbundling Derogations

3.07

(1) Specific derogations (2) ‘Closed systems’ under Article 28

B. Unbundling in the Electricity and Gas Directives After the Th ird Package 3.09 (1) Introduction (2) Ownership unbundling of the transmission system operator (3) Independent system operator (4) Independent transmission operator (5) Conclusion

C. Certification of the Transmission System Operator

E. Towards Full Ownership Unbundling?

3.09

(1) Why pursue full ownership unbundling? (2) ‘Constitutional’ dimensions of ownership unbundling (3) Competition law and ownership unbundling

3.16 3.32 3.41 3.95

3.106 3.106 3.116 3.117 3.117 3.120 3.125

3.99

A. Introduction (1) Background The history of German energy networks is replete with examples of cross-share- 3.01 holdings and the limitations that this created for new entry, both up- and downstream. Other Member States, including the UK, had a monolithic, vertically integrated structure through which energy supplies were provided, and typically one which was State-owned. In the UK in the 1980s and 1990s, the experience of the liberalization of various utilities (particularly in telecommunications1 but also in the energy field) led it to promote unbundling in general, and ownership unbundling (OU) in particular, whilst encouraging various actors in the energy 1

For a critical comparative survey of unbundling in this sector, see JA Hausman and JG Sidak, ‘Did Mandatory Unbundling Achieve its Purpose? Empirical Evidence from Five Countries’ (2005) 1(1) Journal of Competition Law and Economics 173.

35

Unbundling sector to campaign in favour of (increasingly stringent) unbundling requirements in EU legislation. Furthermore, a competition law-type analysis of vertical integration and cross-subsidies, building upon areas like refusals to supply and essential facilities under what is now Article 102 TFEU has often shown suspicion of the ability of a vertically integrated undertaking to leverage its power at one level of the value chain into other levels, thus distorting competition on linked or closely related markets.2 3.02 It is clear that the Commission’s use of EU competition law in the energy sec-

tor is on the increase in general, and recent investigations and settlements have addressed the ownership of energy transmission networks directly (E.ON, RWE, ENI). The Commission’s Energy Sector Inquiry garnered extensive information for the Commission about the energy sector, its structure, contracts, and operation. Both this and its monitoring of the implementation of the Second Package led it to pursue the parallel tracks of: the Third Package legislative proposals (aiming at full ownership unbundling, but trying to offer a model which would address some ongoing vertical integration: discussed in detail in this chapter); and competition law enforcement aimed, in part at least, at securing divestment of network assets by the vertically integrated perpetrators of various infringements of the EU competition rules. 3.03 As will become clear from the discussion below of unbundling under the Th ird

Package Directives, there is also a clear link between stronger unbundling provisions and the growing powers of national regulatory authorities (NRAs) (seeking to ensure transparency, easing regulatory oversight, checking respect for the often detailed rules laid down where some degree of vertical integration is allowed to remain, etc). The general provisions on NRAs and their role and powers are discussed later in this work (in Chapter 5). 3.04 Finally, it cannot be overlooked that unbundling measures have been subject to

legal challenges. EU and national law constitutional constraints have been raised against far-reaching ownership unbundling proposals: strong objections have been raised by industry and government in Germany, while Dutch moves towards distribution system operator (DSO) unbundling were later successfully challenged on free movement of capital grounds in June 2010. These issues will be treated briefly at the end of our discussion on unbundling, examining possible moves to full OU (see paras 3.117 ff ).

2 See, eg, Joined Cases 6 and 7/73 ICI and Commercial Solvents v Commission [1974] ECR 223 and Case C-333/94 P Tetra Pak International v Commission [1996] ECR I-5951 and Commission Decisions such as Sealink/B&I Holyhead (IV/34.174) [1992] 5 CMLR 255 and Sea Containers v Stena Sealink [1993] OJ L15/8.

36

A. Introduction (2) Development of unbundling through the first and second generations of the EU Energy Directives The First and Second Energy Packages developed a regime which required the func- 3.05 tional, accounting, and eventually, legal separation of the legal entities engaged in the activities of generation, transmission, distribution, and supply. These were minimum harmonization provisions, however, which allowed some Member States to go further than the Directives required (eg the UK introduced full OU for both electricity and gas transmission system operators (TSOs)). Regular benchmarking and monitoring reports were published by the Commission 3.06 on progress in creating the Internal Energy Market, and it consistently complained of Member State delays in implementation of, inter alia, the unbundling requirements, as well as the inadequacy of those unbundling rules in securing a liberalized and competitive energy market (or series of markets) within the EU.3 This led to far-reaching proposals in the Third Package for full ownership unbundling of TSOs, and increased regulatory scrutiny of the activity of TSOs and DSOs; these proposals were subjected to intense negotiation during the legislative process, with strong views expressed by stakeholders, the Commission, the Member States in Council, and by the various committees of the European Parliament.4 (3) Basic position reached under Third Package Ultimately, the default position for TSOs is full ownership unbundling (while 3.07 DSOs are only required to go so far as legal unbundling, although some Member States have sought to go further), with the other options with regard to the TSO styled as alternatives, perhaps even derogations. De facto, however, these options are not treated as some kind of hierarchy, but rather as equally valid options on the menu, as will be discussed in what follows. In spite of the relative setback suffered by the Commission with regard to its 3.08 proposals for full OU as the approach under the Third Package, its Competition Directorate General has continued to pursue energy companies under the EU’s competition rules, and in some cases has secured commitments from infringing undertakings which have resulted and/or will result in the sale of various network businesses. This point will also be addressed briefly at paras 3.125 ff.

3 See, eg. Commission Communication, ‘An Energy Policy for Europe’, COM(2007) 1 (10 January 2007), 4: ‘legal and functional unbundling do not solve the fundamental conflict of interest within integrated companies, whereby the supply and production interests aim to maximize their sales and market share while the network operator is obliged to offer non-discriminatory access to competitors’. 4 For the various stages of the negotiation, see .

37

Unbundling

B. Unbundling in the Electricity and Gas Directives After the Third Package (1) Introduction 3.09 The electricity and gas internal market Directives, both in the Second and the

Third Package legislation, require network operations to be legally and functionally separated from supply and generation or production activities. Member States have complied with this requirement by applying different organizational structures. The requirements of legal and functional unbundling have made a positive contribution to the emergence of competitive electricity and gas markets in several Member States. 3.10 The European Commission has noted that ‘[s]everal Member States have created a

totally separate company for network operation, while others have created a legal entity within an integrated company’. The European Commission added that, notwithstanding the implementation that has occurred: experience has shown that where the transmission system operator is a legal entity within an integrated company, three types of problems arise. First, the transmission system operator may treat its affiliated companies better than competing third parties. In fact, integrated companies may use network assets to make entry more difficult for competitors. Second, under the current unbundling rules, nondiscriminatory access to information cannot be guaranteed as there is no effective means of preventing transmission system operators releasing market sensitive information to the generation or supply branch of the integrated company. Third, investment incentives within an integrated company are distorted.5 3.11 Most of the ex-incumbent electricity and gas companies were typically vertically

integrated, which created difficulties for liberalizing these markets. As one text has neatly summarized the point, ‘[t]hey have an inherent interest in retaining their customers, market share, and thus profitability. When competition is introduced, the ex-monopolists hold a 100 per cent market share. Thus, any gain in market share by new competitors means a loss in market share by the ex-incumbent. It is perfectly natural that the ex-incumbent will endeavour to prevent any loss of market share. Where the ex-incumbent owns the network, it has a natural incentive to make third party access to it as difficult as possible’.6 3.12 The solution to this problem is to require the effective separation of the network

business, both at transmission and distribution level, from generation and supply

5 Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/54/EC concerning common rules for the internal market in electricity (presented by the Commission), Brussels, 19 September 2007, COM(2007), final, 2007/0195 (COD), 4. 6 C Jones (gen ed), EU Energy Law—Volume I: The Internal Energy Market—The Third Liberalisation Package (3rd edn, Leuven: Claeys & Casteels, 2010), 10.

38

B. Unbundling in the Electricity and Gas Directives After the Third Package activities. More effective unbundling of transmission system operators has been regarded as a necessity. Different degrees of unbundling can be envisaged, as has been seen in the development over time of the internal market directives in this area. The Third Package electricity and gas internal market Directives reinforce these 3.13 unbundling requirements, requiring the use of one of the three following models: (1) the ownership unbundling model (which is the basic principle and the default model from the EU Commission’s perspective); (2) the independent system operator (ISO); and (3) the independent transmission operator (ITO). From the preparatory works of the Third Package Directives, it is clear that the pre- 3.14 ferred option of the Commission was, and remains, ownership unbundling.7 The second option was the ISO: here, ownership of the network could still be held by the vertically integrated entity, but the transmission network itself must be managed by an independent system operator, which must be entirely separate from the vertically integrated company and which is to perform all network operator functions. Third, and developed only during the negotiations which led up to the final adoption of the Third Package, was the ITO: under this arrangement, separation of the transmission activities must be achieved through the establishment of an ITO, which must be responsible for the maintenance, development, and operation of the networks, even though those networks remain the property of the vertically integrated companies. The ISO and ITO models allowed by the Directives are optional, must fulfil strict 3.15 requirements, and are applicable in both gas and in electricity. The models are also applicable to various jurisdictions: Member States are likely to implement the Directives and Regulations in different ways, insofar as those measures’ provisions allow them to do so. (2) Ownership unbundling of the transmission system operator In various Member States, many networks are, or historically have been, owned by 3.16 vertically integrated companies, responsible for generation, transmission, distribution, and supply. It has been asserted that, ‘at the time of the Second Package of Directives, there 3.17 was already a general recognition that ownership unbundling was the best way to prevent any discrimination, to minimise the need for regulation, and to ensure that the network is operated in a manner likely to promote a competitive market’.8 But, 7 Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/54/EC concerning common rules for the internal market in electricity (presented by the Commission), Brussels, 19 September 2007, COM(2007), final, 2007/0195 (COD), 5. 8 C Jones (gen ed), EU Energy Law—Volume I: The Internal Energy Market—The Third Liberalisation Package (3rd edn, Leuven: Claeys & Casteels, 2010), 90. Certainly, the Commission

39

Unbundling taking into account the situation of the vertically integrated companies in various Member States, and the political resistance which this generated from certain Member States in the Council as a result, ownership unbundling was considered too drastic a requirement to be imposed across the board. Doubts were also raised as to whether it would satisfy tests of subsidiarity (under what is now Article 5(3) TEU) and proportionality (a general principle of EU law and also an important consideration in many national legal systems).9 Nevertheless, some Member States (eg the Netherlands and the UK) decided to go beyond the minimum requirements of those Directives and introduced ownership unbundling in their national law. 3.18 In the discussions which led to the Third Package, the first option was ownership

unbundling. This was clearly the Commission’s preference, making a clear ownership separation between TSOs and any supply undertakings. The preamble to the Third Package Directives states that: Only the removal of the incentive for vertically integrated undertakings to discriminate against competitors as regards network access and investment can ensure effective unbundling. Ownership unbundling, which implies the appointment of the network owner as the system operator and its independence from any supply and production interests, is clearly an effective and stable way to solve the inherent conflict of interests and to ensure security of supply.10 3.19 In what follows, this model will be called ‘ownership unbundling’ (OU). 3.20 First, Article 9(1) of the Third Electricity and Gas Directives provides for owner-

ship unbundling: Member States shall ensure that . . . : (a) each undertaking which owns a transmission system acts as a transmission system operator; (b) the same person or persons are entitled neither: (i) directly or indirectly to exercise control over an undertaking performing any of the functions of generation or supply, and directly or indirectly to exercise control or exercise any right over a transmission system operator or over a transmission system; nor (ii) directly or indirectly to exercise control over a transmission system operator or over a transmission system, and directly or indirectly to firmly believed this to be the case; various Member States, incumbent vertically integrated undertakings, and others often disagreed. 9 For discussion, see J-C Pielow, G Brunekreeft, and E Ehlers, ‘Legal and Economic Aspects of Ownership Unbundling in the EU’ (2009) Journal of World Energy Law & Business 96, and the response by K Talus and A Johnston at 117. See further, A Johnston, ‘Ownership Unbundling: Prolegomenon to a Legal Analysis’, in MK Bultermann, H Sevenster, L Hancher, and A McDonnell (eds), Views of European Law from the Mountain—Liber Amicorum Piet Jan Slot (Alphen aan den Rijn: Kluwer Law International, 2009), ch 23. 10 Recitals 11 to the Third Electricity and 8 of the Third Gas IEM Directive.

40

B. Unbundling in the Electricity and Gas Directives After the Third Package exercise control or exercise an right over an undertaking performing any of the functions of generation or supply.11 Under OU, therefore, the same person may not exercise control over an under- 3.21 taking performing generation or supply activities, while coterminously exercising control or any right over a TSO or a transmission system (Article 9(1)(b) (i)). Article 9(3)12 of each Directive clarifies that the OU requirements of Article 9(1)(b) also apply across the electricity and gas sectors, in order to prevent influence via vertical integration being exercised by virtue of linkages between gas and electricity markets (eg given natural gas’s highly significant role in electricity generation). Indeed, the preamble to the Third Electricity IEM Directive asserts that OU is 3.22 ‘the most effective tool by which to promote investments in infrastructure in a non-discriminatory way, fair access to the network for new entrants, and transparency in the market. Under ownership unbundling, Member States should therefore be required to ensure that the same person or persons are not entitled to exercise control over a generation or supply undertaking and, at the same time, exercise control or any right over a transmission system operator or transmission system’.13 The same restriction applies in the inverse situation (Article 9(1)(b)(ii)): it is 3.23 possible for an undertaking to exercise control or rights over an undertaking performing generation or supply functions, or one fulfi lling the functions of a transmission system, but not over both at the same time. Second, Article 9(1) in each of the Third Package IEM Directives provides further 3.24 that: (c) the same person or persons are not entitled to appoint members of the supervisory board, the administrative board or bodies legally representing the undertaking, of a transmission system operator or a transmission system, and directly or indirectly to exercise control or exercise any right over an undertaking performing any of the functions of generation or supply; and (d) the same person is not entitled to be a member of the supervisory board, the administrative board or bodies legally representing the undertaking, of both an undertaking performing any of the functions of generation or supply and a transmission system operator or a transmission system.14

In the OU model, there is thus a prohibition on persons being members of the 3.25 board of directors of the TSO and also exercising any functions of generation or supply.

11 12 13 14

Art 9 of the Third Electricity and Third Gas IEM Directives. Recitals 14 to the Third Electricity and 11 to the Third Gas IEM Directive. Recital 11 to the Third Electricity IEM Directive. Art 9 of the Third Electricity and Third Gas IEM Directives.

41

Unbundling 3.26 Third, Member States shall ensure that neither commercially sensitive information

held by a TSO which was part of a vertically integrated undertaking, nor the staff of such a TSO, is transferred to undertakings performing any of the functions of generation and supply. 3.27 Further, the vertically integrated undertaking has the obligation to divest its con-

trolling shares in the TSO, so that it does not maintain control over it and in fact has no influence over it. 3.28 Therefore, the same company cannot at the same time hold control over a supply

undertaking and also have control or influence over a TSO or transmission system, whether through a majority shareholding, voting rights, or the right to appoint key personnel.15 However, it is possible for the vertically integrated undertaking to retain or acquire a minority shareholding in a TSO and/or receive dividends therefrom, although such shareholdings may not be used to control or influence the TSO in any way, lest the TSO’s independence and autonomy be compromised. 3.29 To preserve fully the interests of the shareholders of vertically integrated undertakings,

Member States should have the option of implementing OU either by direct divestiture or by splitting the shares of the integrated undertaking into shares of the network undertaking and shares of the remaining supply and generation undertakings, provided that compliance with the requirements resulting from OU is secured.16 3.30 Since OU requires, in some instances, the restructuring of undertakings, Member

States that decide to implement OU should be granted additional time to apply the relevant provisions. Figure 1 shows how OU can be implemented: the supplier and TSO owning the network are part of two different groups. A. Grid Operator GRIDCO

B. SALESCO Generation and supply Conditions to be respected: - same person(s) cannot directly or indirectly exercise control over an undertaking performing generation or supply, and directly or indirectly exercise control or any right over a transmission system operator or over a transmission system (and vice-versa);

Transport – property of the grid

- same person(s) cannot appoint members of the executive bodies of a transmission system operator or a transmission system and exercise direct or indirect control or any right over an undertaking performing generation or supply; - same person(s) cannot be member of the executive bodies of both a transmission system operator or a transmission system and an undertaking performing generation or supply.

Generationsupply

Figure 1 Ownership Unbundling 15 C Jones (gen ed), EU Energy Law—Volume I: Th e Internal Energy Market—Th e Third Liberalisation Package (3rd edn, Leuven: Claeys & Casteels, 2010), 96. 16 Recital 18 to the Th ird Electricity and 15 to the Th ird Gas IEM Directive.

42

B. Unbundling in the Electricity and Gas Directives After the Third Package Finally, the NRA is charged under Article 10 of each Directive with the respon- 3.31 sibility of approving and designating an undertaking which owns a transmission system as a TSO. The certification procedure applies to the TSO under all models and so will be discussed separately at paras 3.99 ff. (3) Independent system operator (a) Description: In the independent system operator (ISO) model, the supplier 3.32 and network can remain in the same group, but the network operator must be an entirely separate legal entity: the network is leased to the network operator. Under this model, therefore, the vertically integrated company may still own the network assets; however, the transmission network itself must be managed by an independent system operator, whose full independence from production and supply interests must be preserved. Whilst the Commission considered that OU remains the preferred option, the 3.33 Directives do, however, provide this alternative option for Member States which choose not to introduce OU. The European Commission insisted that: ‘[t]his option must, however, provide the same guarantees regarding independence of action of the network in question and the same level of incentives on the network to invest in new infrastructure that may benefit competitors’.17 Articles 13 and 14 of the Third Electricity IEM Directive and Articles 14 and 15 3.34 of the Third Gas IEM Directive make provision for this model. Article 13 of the Electricity Directive and Article 14 of the Gas Directive provide that: Where the transmission system belongs to a vertically integrated undertaking on 3 September 2009, Member States may decide not to apply Article 9(1) and designate an independent system operator upon a proposal from the transmission system owner.18

In the OU model, the vertically integrated company is obliged to sell all net- 3.35 work assets so that it is controlled by shareholders not active in the generation, production, and sale of electricity or gas. A Member State may decide not to apply the rules on OU and instead designate an ISO, so that the ISO does not become the owner of the transmission system. To maintain the independence of the network and to ensure that it can perform its vital functions, an ISO must respect specific requirements and commitments on a variety of topics (Articles 13 of the Th ird Electricity and 14 of the Th ird Gas IEM Directive). In

17 Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/54/EC concerning common rules for the internal market in electricity (presented by the Commission), Brussels, 19 September 2007, COM(2007), final, 2007/0195 (COD) (available at ), 5 and 6. 18 Art 13 of the Th ird Electricity IEM Directive.

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Unbundling particular, the relationship of the ISO with the transmission system owner in the context of investments is a key priority (see, eg, Article 13(5) of the Th ird Electricity IEM Directive). 3.36 For a Member State to be permitted to choose this ISO model, the transmis-

sion system must have been owned by a vertically integrated undertaking at the time of the entry into force of the Directives. The Directives require legal, functional, and personal unbundling. Functional unbundling rules must ensure that the ISO is independent of the network owner. In this way, Article 14 of the Th ird Electricity IEM Directive and Article 15 of the Third Gas IEM Directive provide: (1) A transmission system owner, where an independent system operator has been appointed, which is part of a vertically integrated undertaking shall be independent at least in terms of its legal form, organisation and decision making from other activities not relating to transmission. (2) In order to ensure the independence of the transmission system owner referred to in paragraph 1, the following minimum criteria shall apply: (a) persons responsible for the management of the transmission system owner shall not participate in company structures of the integrated electricity undertaking responsible, directly or indirectly, for the day-to-day operation of the generation, distribution and supply of electricity; (b) appropriate measures shall be taken to ensure that the professional interests of persons responsible for the management of the transmission system owner are taken into account in a manner that ensures that they are capable of acting independently; and (c) the transmission system owner shall establish a compliance programme, which sets out measures taken to ensure that discriminatory conduct is excluded, and ensure that observance of it is adequately monitored. The compliance programme shall set out the specific obligations of employees to meet those objectives. An annual report, setting out the measures taken, shall be submitted by the person or body responsible for monitoring the compliance programme to the regulatory authority and shall be published. (3) The Commission may adopt Guidelines to ensure full and effective compliance of the transmission system owner with paragraph 2 of this Article. Those measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 46(2).19

19

Art 14 of the Third Electricity IEM Directive.

44

B. Unbundling in the Electricity and Gas Directives After the Third Package 3.37

These rules are illustrated in Figure 2.

B. Shareholders

A. Independent System Operator (ISO)

Holding Company

Designation subject to the approval of the European Commission

Generation and supply

C. Transmission System Owner

Figure 2 Independent System Operator

In addition, to ensure that the operator remains independent from, and acts truly 3.38 independently of, the vertically integrated company, a regulatory regime and permanent regulatory monitoring must be put in place. (b) Specific duties of the national regulatory authority: When an ISO is desig- 3.39 nated, Article 37(3) applies. According to Article 37(3): In addition to the duties conferred upon it under paragraph 1 of this Article, when an independent system operator has been designated under Article 13, the regulatory authority shall: (a) monitor the transmission system owner’s and the independent system operator’s compliance with their obligations under this Article, and issue penalties for non-compliance in accordance with paragraph 4(d); (b) monitor the relations and communications between the independent system operator and the transmission system owner so as to ensure compliance of the independent system operator with its obligations, and in particular approve contracts and act as a dispute settlement authority between the independent system operator and the transmission system owner in respect of any complaint submitted by either party pursuant to paragraph 11; (c) without prejudice to the procedure under Article 13(2)(c), for the first ten-year network development plan, approve the investments planning and the multi-annual network development plan presented annually by the independent system operator; (d) ensure that network access tariffs collected by the independent system operator include remuneration for the network owner or network owners, which provides for adequate remuneration of the network assets and of any new investments made therein, provided they are economically and efficiently incurred;

45

Unbundling (e) have the powers to carry out inspections, including unannounced inspections, at the premises of transmission system owner and independent system operator; and (f ) monitor the use of congestion charges collected by the independent system operator in accordance with Article 16(6) of Regulation (EC) No 714/2009.20 3.40 These provisions endow the NRAs with specific regulatory competences, which

they must exercise in addition to their general functions and powers laid down in the two internal market Directives (discussed in Chapter 5). Those NRA competences will be an important tool to oversee and check the relationship between the ISO and the network owner: eg approving the contracts between them, monitoring their communications inter se and their relations, supervising the tariffs applied between the ISO and the network owner, etc. The NRA’s role here includes certain powers to approve particular ISO plans, including those relating to network development and investment (Articles 37(3)(c) (Electricity) and 41(3)(c) (Gas)). (4) Independent transmission operator 3.41 (a) Description: In the independent transmission operator (ITO) model, the vertically integrated company retains ownership of the network; the network, however, is operated by another undertaking, and one which may have no connection with the integrated holding company. The roles of the vertically integrated company are thus: lessor of the transmission assets to that independent ITO; and financial investor in the network business, while the ITO is to take all operational decisions concerning network.21 3.42 Again, it is possible for the supplier and network operator to remain in the same

corporate group; but both the owner of the network and the network operator must respect the detailed rules under the Third Package, which are designed to ensure the independence of the ITO from the network’s owner. This structure thus allows for the retention of vertically integrated ownership, but tries to ensure the autonomy and managerial independence of the ITO.22 After all, the point of these alternatives to full OU is to secure the competitive benefits of clear separation between the different levels of the value chain, while allowing the maintenance of the pre-existing ownership structure. 3.43 As is also the case for the ISO model, the ITO option may only be chosen by

an implementing Member State if, at the time of the entry into force of these Directives, the relevant sector contained a vertically integrated undertaking. 20

Art 37(3) of the Third Electricity IEM Directive. C Jones (gen ed), EU Energy Law—Volume I: The Internal Energy Market—The Third Liberalisation Package (3rd edn, Leuven: Claeys & Casteels, 2010), 11. 22 C Jones (gen ed), EU Energy Law—Volume I: The Internal Energy Market—The Third Liberalisation Package (3rd edn, Leuven: Claeys & Casteels, 2010), 98. 21

46

B. Unbundling in the Electricity and Gas Directives After the Third Package The ITO model allows the TSO to remain part of an integrated undertaking. 3.44 However, the Directives have provided rules which aim to preserve effective unbundling. These rules are set in Articles 17 to 23 (Chapter V) of the Third Electricity Directive and in Articles 17 to 23 (Chapter IV) of the Third Gas Directive. Concerning the assets, equipment, staff, and identity of the network operator, 3.45 Article 17(1) of the Third Electricity Directive provides that: Transmission system operators shall be equipped with all human, technical, physical and financial resources necessary for fulfilling their obligations under this Directive and carrying out the activity of electricity transmission . . . 23

The activities, services, and systems which will have to be carried out and owned by 3.46 the ITO are also listed in this provision. Under Article 17(4): The transmission system operator shall not, in its corporate identity, communication, branding and premises, create confusion in respect of the separate identity of the vertically integrated undertaking or any part thereof.24

The ITO’s full autonomy requires that it has the financial, human, and material 3.47 resources and assets which it needs to operate and develop the network independently from the vertically integrated entity. The rules concerning this independence of the ITO are set in Article 18: (1) The transmission system operator shall have: (a) effective decision-making rights, independent from the vertically integrated undertaking, with respect to assets necessary to operate, maintain or develop the transmission system; and (b) the power to raise money on the capital market in particular through borrowing and capital increase. (2) The transmission system operator shall at all times act so as to ensure it has the resources it needs in order to carry out the activity of transmission properly and efficiently . . .

Article 19 of the Third Electricity IEM Directive contains specific rules on the 3.48 independence of the staff and the management of the TSO. The ITO should also have the ability to pursue network development and the powers to make investment decisions (Article 22 of the Third Electricity IEM Directive). To ensure the independent management of the ITO, managing personnel should comply with the appropriate ‘cooling off period’, ranging from six months to four years in duration (see paras 3.54 ff ).

23 24

Art 17(1) of the Third Electricity IEM Directive. Art 17(4) of the Third Electricity IEM Directive.

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Unbundling 3.49 The Commission will adopt a ‘specific detailed report’ on the ITO option and its

functioning by 3 March 2013, which should assess whether in practice it leads to effective unbundling.25 3.50 (b) Specific duties of the national regulatory authority: Under the ITO model, a

Supervisory Body must be appointed by the vertically integrated undertaking. The financial independence of the ITO must be safeguarded: . . . without prejudice to the decisions of the Supervisory Body under Article 20, appropriate financial resources for future investment projects and/or for the replacement of existing assets shall be made available to the transmission system operator in due time by the vertically integrated undertaking following an appropriate request from the transmission system operator.26 3.51 So, the structural dependence which may exist between the ITO and the vertically

integrated undertaking is to be counteracted by significant control over the ITO’s investments and the role of the vertically integrated undertaking therein. The ITO should submit a ten-year network development plan (Article 22 of the Electricity IEM Directive). The ITO should also make the necessary network investments: if these should not be carried out, then important powers are granted to the NRA according to Article 22, in order to ensure ‘that the investment in question is made’. 3.52 A compliance officer must also be appointed by the ITO to ensure non-

discrimination: The overall management structure and the corporate statutes of the transmission system operator shall ensure effective independence of the transmission system operator in compliance with this Chapter. The vertically integrated undertaking shall not determine, directly or indirectly, the competitive behaviour of the transmission system operator in relation to the day to day activities of the transmission system operator.27 3.53 The NRA also has specific competences related to the ITO. For instance, if the

vertically integrated undertaking does not invest in the network, the regulator can force the ITO to invest, for example by imposing a capital decrease or third party investment (for further possibilities, see Article 22(7) of the Third Electricity IEM Directive). Figure 3 provides a summary of the conditions which an ITO must respect in order to comply with the Directives.

25 26 27

Art 47(3) of the Third Electricity IEM Directive. Art 17(1)(d) of the Third Electricity IEM Directive. Art 18(4) of the Third Electricity IEM Directive.

48

B. Unbundling in the Electricity and Gas Directives After the Third Package

A. Independent Transmission Operator (limited liability company) Supervisory Body

B. Holding Company

Designation

Compliance Officer

Generation and supply

No share of IT system or equipment, physical premises, security access systems and consultants, or external contractors for those

Conditions to be respected by the ITO: -–owner of the necessary assets, including the grid; -–employs the necessary staff (including for legal, accountancy, and IT services); -–no confusion with the Holding Company or its entities; -–no leasing of personnel and rendering of services to and from any other parts of the Holding Company, except if: (i) no discrimination between system users; and (ii) with the approval of the Regulator; -–accounts audited by an auditor different from the one auditing the Holding Company or any part of it; -–effective decision-making rights; -–power to borrow money on the capital market; -–no shareholding in holding subsidiaries performing supply and/or generations and vice versa; -–anteriority clause for the appointment of the persons responsible for the management and/or members of the administrative bodies of the ITO (majority: three years/minority: six months); -–no position, or responsibility, interest or business relationship with any part of the Holding Company or with its controlling shareholder.

Figure 3 Independent Transmission Operator (c) Rules concerning ITO independence and particular issues: Article 17 of the 3.54 Third Electricity Directive imposes rules of independence on the assets, equipment, and staff of the ITO. It provides: (1) Transmission system operators shall be equipped with all human, technical, physical, and financial resources necessary for fulfilling their obligations under this Directive and carrying out the activity of electricity transmission, in particular:

49

Unbundling (a) assets that are necessary for the activity of electricity transmission, including the transmission system, shall be owned by the transmission system operator; (b) personnel, necessary for the activity of electricity transmission, including the performance of all corporate tasks, shall be employed by the transmission system operator; (c) leasing of personnel and rendering of services, to and from any other parts of the vertically integrated undertaking shall be prohibited. A transmission system operator may, however, render services to the vertically integrated undertaking as long as: (i) the provision of those services does not discriminate between system users, is available to all system users on the same terms and conditions and does not restrict, distort or prevent competition in generation or supply; and (ii) the terms and conditions of the provision of those services are approved by the regulatory authority; (d) without prejudice to the decisions of the Supervisory Body under Article 20, appropriate financial resources for future investment projects and/or for the replacement of existing assets shall be made available to the transmission system operator in due time by the vertically integrated undertaking following an appropriate request from the transmission system operator. 3.55 The ITO has to be autonomous in these different aspects: financial, human, and

technical. These resources should be available for the management of the electricity or gas network. Some of the issues raised by Article 17 are analysed in the following paragraphs. 3.56 (i) Requirement of independence of the TSO towards the vertically integrated com-

pany: With regard to personnel, both Directives require the independence of the staff and the management of the TSO. The Third Directives make it clear that the personnel necessary for the managing of the network should be employed directly by the TSO. 3.57 Moreover, the overall management structure of the ITO shall be independent from

the vertically integrated undertaking. Article 19(3) in both the Third Electricity IEM Directive and Third Gas IEM Directive therefore provide: [n]o professional position or responsibility, interest or business relationship, directly or indirectly, with the vertically integrated undertaking or any part of it or its controlling shareholders other than the transmission system operator shall be exercised for a period of three years before the appointment of the persons responsible for the management and/or members of the administrative bodies of the transmission system operator who are subject to this paragraph.28

28

Arts 19(3) of the Third Electricity and 19(3) of the Third Gas IEM Directive.

50

B. Unbundling in the Electricity and Gas Directives After the Third Package In the same way, the Third Electricity and Gas IEM Directives provide that:

3.58

[t]he persons responsible for the management and/or members of the administrative bodies of the transmission system operator who are not subject to paragraph 3 shall have exercised no management or other relevant activity in the vertically integrated undertaking for a period of at least six months before their appointment.29

With regard to the requirement of independence of the persons in charge of the 3.59 management and/or members of the administrative bodies of the manager of the TSO for the period of three years (Article 19(3)) and the period of six months (Article 19(8)), a key question is whether these periods apply retroactively before the date of entry into force of the Third Package Directives. Articles 19(3) and 19(4) of the Directives require a strict independence of the 3.60 management and/or members of the administrative bodies of the transmission system operator, so holding that role can never be compatible with any activity in the vertically integrated company. The Commission’s Interpretative Note on this topic mentions that the persons in charge of the ITO’s management cannot hold any commercial relation, activity or professional responsibility with the vertically integrated undertaking or part of it, for a three-year period before their nomination.30 As these provisions make no reference to the entry into force of the Directives, it is submitted that this rule also applies to periods before the Directives had entered into force: the key date, rather, is that of nomination. Indeed, the draft of the Commission’s Interpretative Note specified that an exemp- 3.61 tion from this rule existed with regard to the persons responsible for the management of the network itself: A derogation to this rule relates to the TSO itself: the management of the TSO already in place before the setting up of the ITO can stay in function (Article 19(3) of the Electricity and Gas Directive).31

According to the draft Interpretative Note, the persons in charge of the manage- 3.62 ment who were already named before the installation of the ITO may remain in their functions. Those persons could thus remain in their functions even if they had a professional responsibility within the vertically integrated company.

29

Arts 19(8) of the Third Electricity and 19(5) of the Third Gas IEM Directive. Commission Staff Working Paper, ‘Interpretive Note on Directive 2009/72/EC concerning Common Rules for the Internal Market in Electricity and Directive 2009/73/EC concerning common rules for the Internal Market in Natural Gas: The Unbundling Regime’ (22 January 2010) (hereafter, ‘Interpretive Note: Unbundling’), 18. 31 Commission Staff Working Paper, ‘Draft Interpretative Note on directive 2009/72/EC concerning common rules for the internal market in electricity and Directive 2009/73/EC concerning common rules for the internal market in natural gas: the unbundling regime’ (22 January 2010) (hereafter, ‘Draft of the Interpretive Note’), 14. 30

51

Unbundling Thus, if one wanted to maintain a director within a company managing the network, it was enough that he or she was already in post before the creation of the ITO. This exemption, however, no longer appears expressly in the final text of the Interpretative Note. 3.63 (ii) The recruitment of personnel: The recruitment of TSO personnel within a verti-

cally integrated undertaking will often have been decided at the level of the vertically integrated undertaking. The question that may be asked is whether, in the future, the vertically integrated undertaking may itself still recruit personnel for the transmission system operator. 3.64 Article 19(1) of the Third Electricity and Gas IEM Directives deals with the inde-

pendence of the TSO’s personnel, and provides that: [d]ecisions regarding the appointment and renewal, working conditions including remuneration, and termination of the term of office of the persons responsible for the management and/or members of the administrative bodies of the transmission system operator shall be taken by the Supervisory Body of the transmission system operator appointed in accordance with Article 20. 3.65 Moreover, Article 19(4) of the Third Directives provides that those persons shall

have no other professional position or responsibility, interest or business relationship, directly or indirectly, with any other part of the vertically integrated undertaking or with its controlling shareholders. 3.66 The persons responsible for the management and/or members of the administra-

tive bodies of the TSO may not be appointed, and thus may not be ‘hired’ by any other organ than the Supervisory Body of the TSO. The situation is thus restrictive for the people responsible for the management and/or the members of the administrative bodies of the TSO. 3.67 With regard to other personnel, Article 17(1)(b) of each of the Third Directives

provides that: Transmission system operators shall be equipped with all human, technical, physical and financial resources necessary for fulfilling their obligations under this Directive and carrying out the activity of electricity transmission, in particular: ... (b) personnel, necessary for the activity of electricity transmission, including the performance of all corporate tasks, shall be employed by the transmission system operator . . . 3.68 Moreover, Member States shall ensure that the personnel of a TSO which was part

of a vertically integrated undertaking are not transferred to undertakings performing any of the functions of generation and supply.32

32

Art 9(7) of the Third Electricity IEM Directive.

52

B. Unbundling in the Electricity and Gas Directives After the Third Package Leasing of personnel is also prohibited under Article 17(1)(c) of the Third Directives: 3.69 ‘leasing of personnel and rendering of services, to and from any other parts of the vertically integrated undertaking shall be prohibited’. According to the Directives, and taking into account the requirement of independ- 3.70 ence of the management of network, owing to the fact that the personnel must be employed by the TSO (Article 17(1)(b)) and that the leasing of personnel is prohibited (Article 17(1)(c)), it thus appears clear that, within this framework, it would be unacceptable that the personnel of the manager of the grid system be ‘engaged’ by another part of the vertically integrated company. Moreover, the draft of the Commission’s Interpretative Note specified that the personnel ‘shall be employed by the ITO’,33 which assumes that the contract of employment is signed by the ITO. The Interpretative Note also clarifies that the ITO must employ a sufficient number 3.71 of qualified employees:34 As regards corporate services, including legal services, accountancy and IT services, which are considered to constitute part of the activity of electricity or gas transmission as defined in Articles 12 and 17(2) Electricity Directive and Articles 13 and 17(2) Gas Directive, the ITO must employ a sufficient number of qualified staff members to handle day-to-day core activities. Only if the ITO has employed a sufficient number of staff members for day-to-day handling of these activities may it, in specific circumstances and by way of exception, conclude contracts with thirdparty service providers for legal, IT, or accountancy services. The same applies to specific services relating to, for example, the development and repair of the network. The ITO should employ a sufficient number of qualified staff members to handle day-to-day activities in this area, in order to be autonomous. Only if this condition is fulfilled can it, by way of exception, conclude contracts for services in this area with third-party service providers.35

The Interpretative Note also addresses in more detail the question of the leasing of 3.72 personnel by the vertically integrated undertaking: A specific regime concerns the leasing of personnel and contracting of services between any part of the vertically integrated undertaking and the ITO. As the ITO should be autonomous and not dependent on other parts of the vertically integrated undertaking, leasing of personnel and contracting of services to the ITO by other parts of the vertically integrated undertaking, including by the DSO, are categorically prohibited (Article 17(1)(c) Electricity and Gas Directives) . . . Furthermore, the ITO is not allowed to share IT systems or equipment, physical premises and security access systems with any other part of the vertically integrated undertaking. The ITO is also not allowed to use the same consultants or external

33 34 35

Draft of the Interpretative Note, 11. Interpretive Note: Unbundling, 16. Interpretive Note: Unbundling, 16.

53

Unbundling contractors for IT systems or equipment, security access systems or auditing, in accordance with Article 17(5) and (6) Electricity and Gas Directives.36 3.73 The Interpretative Note thus suggests that the Directives prohibit categorically

the loan of personnel. Because the ITO must not be dependent upon the vertically integrated undertaking, leasing of personnel and subcontracting of services are fully prohibited from the vertically integrated undertaking or from any part of it. 3.74 The Interpretative Note specifies that it is the Supervisory Body of the ITO which

is in charge of the appointment and of the renewal of the work contracts of the members of the management and the persons responsible for the management: The Supervisory Body of the ITO is in charge of taking all decisions regarding the appointment and renewal, working conditions including remuneration, and termination of the term of the management of the ITO.37 3.75 The Interpretative Note also makes clear that the employees cannot hold interests

or receive financial benefits, directly or indirectly, from the vertically integrated undertaking, any part of it or an undertaking other than the ITO: The management and the employees of the ITO cannot hold an interest in or receive any financial benefit, directly or indirectly, from any part of the vertically integrated undertaking other than the ITO. In addition, remuneration of the management and employees cannot depend on activities or results of any part of the vertically integrated undertaking other than the ITO. This last rule prevents for example the granting to the management of stock options based on the shares of the vertically integrated undertaking.38 3.76 In conclusion, taking into account the above-mentioned provisions of the new

Directives and the Commission’s Interpretative Note, the members of the management, the persons responsible for the management, and/or the members of the administrative bodies of an ITO must be appointed by the Supervisory Body of the TSO. 3.77 With regard to the other members of the ITO’s personnel, taking into account the

various provisions of the Directive, the requirement of the independence of the TSO and owing to the fact that they must be ‘employed’ by the ITO, a ‘recruitment’ or ‘appointment’ by the holding company or the vertically integrated company will not be compatible with the requirements of the Directives. 3.78 (iii) Common services: The question can be asked whether the TSO carrying on the

network activity independently of the vertically integrated undertaking may, on basis of contracts, within some limits and with some controls and constraints, benefit from the support of the IT, legal, and accounting departments of the vertically

36 37 38

Interpretive Note: Unbundling, 16. Interpretive Note: Unbundling, 18. Interpretive Note: Unbundling, 19.

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B. Unbundling in the Electricity and Gas Directives After the Third Package integrated company. In short, will the ITO be able to benefit, subject to safeguards, from the support of such ‘group services’? On this subject, each of the Directives provides that ‘the transmission system 3.79 operator shall not share IT systems or equipment, physical premises and security access systems with any part of the vertically integrated undertaking nor use the same consultants or external contractors for IT systems or equipment, and security access systems’.39 The Commission’s Interpretative Note underlines that the Directives are clear and that the ITO must employ all human and physical resources necessary to fulfil its obligations and to continue its activity of transmission of gas and electricity. These rules of appointment do not relate to cleaning and safety services, however:40 This requirement concerning autonomy of the ITO does not relate to activities that do not directly concern the activity of electricity or gas transmission, such as office cleaning services or office security services. As regards these ancillary activities personnel does not necessarily have to be employed by the ITO and contracts for services can be concluded with third-party service providers whenever this is considered appropriate.41

As discussed at para 3.71, the Interpretative Note clarifies that, concerning person- 3.80 nel, the ITO should employ a sufficient number of qualified staff members, and only if these are sufficient to cover its day-to-day activities may it, exceptionally, enter into contracts with third-party service providers for legal, IT, or accountancy services, or for network development and repair.42 Similarly, the Interpretative Note makes it clear that the TSO may not call upon the vertically integrated undertaking for its services (including the sharing or leasing of IT systems or equipment, physical premises, and security access systems), as this would endanger the ITO’s autonomous and independent operation.43 With regard to the services which could be rendered by the ITO to the vertically 3.81 integrated undertaking, this is allowed in specific circumstances in accordance with Article 17(1)(c) of the Third Directives: leasing of personnel and rendering of services, to and from any other parts of the vertically integrated undertaking shall be prohibited. A transmission system operator may, however, render services to the vertically integrated undertaking as long as: (i) the provision of those services does not discriminate between system users, is available to all system users on the same terms and conditions and does not restrict, distort or prevent competition in generation or supply; and

39 40 41 42 43

Art 17(5) of the Third Electricity and Third Gas IEM Directives. Interpretive Note: Unbundling, 15. Interpretive Note: Unbundling, 15 and 16. Interpretive Note: Unbundling, 15. Interpretive Note: Unbundling, 16.

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Unbundling (ii) the terms and conditions of the provision of those services are approved by the regulatory authority.44 3.82 (iv) ‘Supervisory Body’ and ‘compliance officer’: First, according to Articles 20 and

21 of each of the Third Directives, the TSO under the ITO model should have a ‘Supervisory Body’ and ‘compliance officer’. Article 20 in both of the Third Directives provides that: [t]he transmission system operator shall have a Supervisory Body which shall be in charge of taking decisions which may have a significant impact on the value of the assets of the shareholders within the transmission system operator, in particular decisions regarding the approval of the annual and longer-term financial plans, the level of indebtedness of the transmission system operator and the amount of dividends distributed to shareholders. The decisions falling under the remit of the Supervisory Body shall exclude those that are related to the day-to-day activities of the transmission system operator and management of the network, and in relation to activities necessary for the preparation of the ten-year network development plan developed pursuant to Article 22. The Supervisory Body shall be composed of members representing the vertically integrated undertaking, members representing third party shareholders and, where the relevant legislation of a Member State so provides, members representing other interested parties such as employees of the transmission system operator. 3.83 The establishment of a Supervisory Body is a key element of the ITO option.

The Supervisory Body will be in charge of the decisions concerning the appointment of the management (including remuneration, term of office, renewal, etc) and all decisions which may influence the value of the assets of the ITO. But the Supervisory Body shall not intervene in decisions falling under the remit of the day-to-day activities of the TSO and the management of the network. Such decisions by the Supervisory Body must be notified to the NRA and can only become effective where the NRA raises no objections to them within three weeks. 3.84 The Supervisory Body, once established, will then designate a ‘compliance officer’

or an officer charged with ensuring that the obligations of the ITO are respected. Article 21 of each of the Third Directives provides: (1) Member States shall ensure that transmission system operators establish and implement a compliance program which sets out the measures taken in order to ensure that discriminatory conduct is excluded, and ensure that the compliance with that program is adequately monitored. The compliance program shall set out the specific obligations of employees to meet those objectives. It shall be subject to approval by the regulatory authority. Without prejudice to the powers of the national regulator, compliance with the program shall be independently monitored by a compliance officer.

44

Art 17(1)(c) of the Third Electricity and Third Gas IEM Directives.

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B. Unbundling in the Electricity and Gas Directives After the Third Package (2) The compliance officer shall be appointed by the Supervisory Body, subject to the approval by the regulatory authority. The regulatory authority may refuse the approval of the compliance officer only for reasons of lack of independence or professional capacity. The compliance officer may be a natural or legal person. Article 19(2) to (8) shall apply to the compliance officer. (3) The compliance officer shall be in charge of: (a) monitoring the implementation of the compliance program; (b) elaborating an annual report, setting out the measures taken in order to implement the compliance program and submitting it to the regulatory authority; (c) reporting to the Supervisory Body and issuing recommendations on the compliance program and its implementation; (d) notifying the regulatory authority on any substantial breaches with regard to the implementation of the compliance program; and (e) reporting to the regulatory authority on any commercial and financial relations between the vertically integrated undertaking and the transmission system operator. (4) The compliance officer shall submit the proposed decisions on the investment plan or on individual investments in the network to the regulatory authority.45

A compliance programme against discriminatory conduct should be established, 3.85 and the compliance programme and the compliance officer are subject to the detailed rules of Article 21 of the Third Electricity and Gas IEM Directives. The Interpretative Note does not clarify whether, in the case of a cross-border grid 3.86 system, it is necessary to appoint a compliance officer for each of the two countries nor, indeed, whether this could be the same person. Insofar as the compliance officer is the privileged bond between the TSO and his regulator, it seems preferable to appoint two compliance officers, each one in charge of the relationships with its NRA. This structure would have to be validated and approved by the European Commission but it seems that, precisely within the framework of a cross-border merger and a combined TSO, this solution would be at the same time advisable and pragmatic. Indeed, it could be less easy for an operator to develop and maintain optimal and privileged relations with the NRA of another Member State, with whose regulation the TSO is likely to be far less familiar, and vice versa. The approach suggested here would also allow us to avoid questioning the TSO’s knowledge and competence vis-à-vis another Member State’s regulatory regime. (v) The management of combined grids: Articles 29 and 26(2) of each of the Third 3.87 Directives46 refer to the possibility of a combined operator: ie an operator for the

45 46

Art 21 of the Third Electricity and Third Gas IEM Directives. See also Art 28 of the Third Gas IEM Directive.

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Unbundling transmission and for the distribution networks. The ITO model allows this formula of combined grid operators.47 Article 29 of the Third Directives, indeed, provides that: Article 26(1) shall not prevent the operation of a combined transmission and distribution system operator provided that operator complies with Articles 9(1), or 13 and 14, or Chapter V or falls under Article 44(2). 3.88 However, the combined reading of Articles 26 and 29 and, in particular,

the requirement in Article 26 that DSO management must be independent of the management of the TSO48 raises certain difficulties.49 Article 26 in each of the Third Directives provides: In addition to the requirements under paragraph 1, where the distribution system operator is part of a vertically integrated undertaking, it shall be independent in terms of its organization and decision-making from the other activities not related to distribution. In order to achieve this, the following minimum criteria shall apply: (a) those persons responsible for the management of the distribution system operator must not participate in company structures of the integrated electricity undertaking responsible, directly or indirectly, for the day-to-day operation of the generation, transmission or supply of electricity.50 3.89 There is uncertainty concerning the interaction between Articles 26 and 29 of

the Third Directives. Article 26 provides that the distribution system operator shall be independent in terms of its organization and decision-making from the other activities not related to distribution. Article 26 also provides that the persons responsible for the management of the distribution system operator may not belong to the structures of the integrated undertaking which are directly or indirectly in charge of the daily management of the production activities, transmission or supply of electricity. Article 29, on the other hand, provides the possibility of creating a combined transmission and distribution system operator, and thus the exploitation of a combined network of transmission and distribution by the same operator. 3.90 An interesting point is that, on this issue, the draft of the Commission’s Interpret-

ative Note referred only to the activities of supply and generation, and not to the activities of transmission. The draft recalled several times the requirement of ‘management separation . . . [:] the management of the network company do not work at the same time for the supply or production company of the vertically integrated company’.51 47

See Art 29 of the Third Electricity and Third Gas IEM Directives. Viz: ‘as a consequence, a manager of the DSO cannot at the same time be a director of the related transmission, supply or production company, or vice versa’. 49 Interpretive Note: Unbundling, 24. 50 Art 26(2) of the Th ird Electricity and Th ird Gas IEM Directives. 51 Interpretive Note: Unbundling, 19. 48

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B. Unbundling in the Electricity and Gas Directives After the Third Package In the same way, the Interpretative Note refers to the activities of ‘production or 3.91 supply’: [the i]ndependence of the persons responsible for the network management may be put into jeopardy by their salary structure, notably if their salary is based on the performance of the holding company or of the production or supply company, as this may create conflicts of interest. Also the transfer of managers from the DSO to other parts of the company and vice versa may entail a risk of conflicts of interest and requires rules and measures safeguarding independence. Conflicts of interest for the network management may also arise if the DSO directly or indirectly holds shares in the related supply or production company and obtains a financial interest in its performance.52

On the question as to whether a combined network operator may manage the 3.92 transmission and the distribution network, and use common services for these two activities, the Interpretative Note answers as follows: An important question in the context of separation of management is to what extent it is permissible to have common services, i.e. services which are shared between transmission/distribution, supply and perhaps other businesses within the vertically integrated company. Such services could include personnel and finance, IT services, accommodation and transport. It might be argued that a requirement to systematically duplicate such common services would significantly increase costs without bringing corresponding additional benefits. However, it is appropriate to look at this issue carefully on a case-by-case basis, requiring in any event that conditions are fulfilled to reduce competition concerns and to exclude conflicts of interests.53

The discussion in the Interpretative Note concerning the use of common services 3.93 suggests, in principle, that the use of combined services by a combined TSO and DSO may be possible, subject to evaluation on a case-by-case basis. Avoiding the creation of a completely new undertaking and instead using the pos- 3.94 sibility of a combined grid operator (TSO and DSO) would make it possible to avoid problems which might arise from the transfer of licences or agreements. It is indeed much easier, if there are regroupings of concessions or licences within the same company, to make transfers rather than to lodge a new request for licences or concessions in order to have the right, in the relevant Member State, to act as a TSO or a DSO. Thus, maintaining the same legal personality while still respecting the conditions related to the designation and the granting of the concessions must make it possible to maintain the rights acquired by concessions, licences, or agreements. Indeed, financial contracts, public obligations, and other concessions are linked with the nomination of a TSO or a DSO. In such regroupings, therefore, it will be necessary to take care not to call into question the designation or the certification of the TSO or the DSO (on certification, see paras 3.99 ff ). 52 53

Interpretive Note: Unbundling, 24. Interpretive Note: Unbundling, 20.

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Unbundling (5) Conclusion 3.95 The three unbundling options apply in the same manner to both the electricity and

the gas sectors. In principle, subject to the caveat about pre-existing vertically integrated undertakings, any of the three options can be chosen by the Member States. 3.96 From a legal standpoint, both the ISO and ITO models are therefore derogations

from the principle of ownership unbundling: this is clear from the wording of Article 9 in each Directive. This could, in particular, justify a restrictive interpretation of their scope of application. 3.97 Second, it is not possible to revert from ownership unbundling back to an ITO: the

ISO and ITO options can only be chosen for a TSO in a system which currently still involves a measure of vertical ownership integration. 3.98 The implementation, in due time, of the Third Energy Package is also important.

The Third Package Directives and Regulations lay down a deadline of implementation into Member State law of 11 March 2011, but it should be noted that the provisions under Article 9 concerning ownership unbundling have been applicable only from 3 March 2012.

C. Certification of the Transmission System Operator 3.99 The Third Energy Package has introduced an innovation with regard to the desig-

nation and appointment of a TSO: henceforth, a TSO is to be subject to prior certification by its NRA. Such certification aims to guarantee that the TSO respects its obligations to unbundle its activities from production and/or supply of electricity and/or natural gas. The certification process applies to each of the unbundling models analysed above. 3.100 Two types of procedure are provided by the Third Electricity and Gas IEM

Directives. (1) Certification for the designation and appointment of TSOs: general 3.101 Article 10 of each Directive lays down a procedure which intends to ensure that no

supply or production undertaking or, in the case of a vertically integrated undertaking (under the ISO or ITO models), no supply or production subsidiary anywhere in the EU, can own or operate a transmission system in any Member State of the EU, except in accordance with the unbundling provisions laid out above. 3.102 The NRA’s approval is only to be granted where the Article 9 unbundling require-

ments have been satisfied (Article 10(2)), and TSOs must notify the NRA of any planned transaction which may require reassessment of compliance with Article 9 (see Article 10(3)). An NRA’s certification decision must be notified to the 60

C. Certification of the Transmission System Operator Commission: the latter is empowered by Article 3 of the Electricity54 and Gas55 Regulations to assess whether that certification does indeed comply with the rules laid down in Articles 9 and 10 of the Directives. Further, NRAs are to continue to monitor a TSO’s respect for the OU conditions and have the power to open a new certification procedure if a new decision should be required (Article 10(4)). (2) Certification for TSOs controlled by a person from a non-EU Member State According to Article 11 in each Directive, any third country undertaking which 3.103 wishes to acquire a substantial participation in, or control over, a transmission grid located within the EU will be subject to the same unbundling requirements as EU-based undertakings. The Commission’s original proposal for the Third Package Directives emphasized that: it is imperative—without prejudice to the international obligations of the [EU]—to ensure that all economic operators active on European energy markets respect and act in accordance with market investor principles . . . The aim is to guarantee that companies from third countries respect the same rules that apply to EU-based undertakings in both letter and spirit—not to discriminate against them.56

While the far-reaching nature of the original proposal was watered down some- 3.104 what, Article 11(1) requires the NRA to notify the Commission of any request for TSO certification by a non-EU applicant or any change in circumstances that might lead to such an applicant securing control of an EU TSO. Under Article 11(3), the NRA has four months in which to adopt a draft decision on such certification and notify it to the Commission (Article 11(4)). The NRA is required to refuse if it has not been demonstrated that: (a) the entity concerned complies with the requirements of Article 9; and (b) to the regulatory authority or to another competent authority57 designated by the Member State that granting certification will not put at risk the security of energy supply of the Member State and the [EU].58 The Commission has two months to deliver its opinion (unless an extension of two months is sought to elicit the views of ACER, the notifying Member States, and interested parties) on the notification from the NRA (Article 11(6)) and then the NRA has a further two months within which to deliver its final certification decision (Article 11(8)).

54 55 56

Regulation 714/2009/EC [2009] OJ L211/15. Regulation 715/2009/EC [2009] OJ L211/36. COM(2007) 528 and 529 final (containing COD (2007) 195 and 196) (19 September 2007),

7–8. 57

On security of supply and the competent authority, see paras 10.44 ff. In answering the question under Art 11(3)(b), the relevant national authority must consider: ‘(i) the rights and obligations of the [EU] with respect to that third country arising under international 58

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Unbundling (3) Re-certification for current TSOs? 3.105 One practical issue which may arise in this regard is whether, on the entry into

force of the Third Package Directives, the NRA is required (or indeed even empowered) to take all such certification decisions again, or whether the previous certification of TSO undertakings may subsist (provided, of course, that they continue to respect the conditions of the new Directives). It is submitted that such a fresh decision is not necessary as a matter of course. The purpose of the certification provisions is to apply the unbundling rules to new TSOs and to monitor whether a breach of the unbundling rules has been committed by those entities already properly designated and appointed as TSOs prior to the Third Package. Accordingly, the latter category of TSOs should continue to be treated as validly certified, unless one of the triggers for reassessment (i.e. failure to respect unbundling or control by a third-country entity) is met. This approach respects the acquired rights of those TSOs already validly designated and appointed in accordance with Article 1 of the First Protocol to the European Convention for the protection of Human Rights and Fundamental Freedoms (ECHR): uncertainty in this regard is to be avoided if at all possible. The Commission’s Interpretative Note on the unbundling regime mentions nothing about any need to take such approval decisions again and would thus seem to accept the position taken here.59

D. Unbundling Derogations (1) Specific derogations 3.106 (a) Derogations requested by acceding Member States: The development and

adoption of the Second Package took place at the same time as negotiations for the accession of a number of new EU Member States. As part of that accession, some of the new Member States requested derogations from particular provisions of the legislation. The Slovenian derogation60 from the old Electricity Regulation 1228/03/EC expired in 2007 and need no longer concern us. Estonia, meanwhile,

law, including any agreement concluded with one or more third countries to which the [EU] is party and which addresses the issues of security of energy supply; (ii) the rights and obligations of the Member Sate with respect to that third country arising under agreements concluded with it, insofar as they are in compliance with [EU] law; and (iii) other specific facts and circumstances of the case and the third country concerned’. 59 Viz: ‘The regulatory authorities are under the obligation to open a certification procedure upon notification by a potential TSO, or upon reasoned request from the Commission. Apart from that, regulatory authorities must monitor compliance of TSOs with the rules on unbundling on a continuous basis, and must open a new certification procedure on their own initiative where according to their knowledge a planned change in rights or influence over transmission system owners or TSOs made lead to an infringement of unbundling rules, or when they have reason to believe that such infringement may have occurred’ (Interpretive Note: Unbundling, 22). 60 Regulation 1223/2004/EC [2004] OJ L233/3.

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D. Unbundling Derogations under Directive 2004/85/EC, secured a temporary derogation from the application of what is now Article 33(1)(b) and (c) of the Third Electricity IEM Directive, thus delaying full market opening until 1 January 2013, and this remains applicable in the Third Directive.61 Slovakia’s application to derogate from the requirement for unbundling of 3.107 TSOs under Article 9(1) of Directive 2003/55, meanwhile, was rejected by the Commission.62 (b) Small isolated systems or markets: Article 44(1) of the Third Electricity 3.108 Directive and Article 49(1) of the Gas Directive provide the possibility of derogation for small isolated systems or markets. Thus: Member States which can demonstrate, after this Directive has been brought into force, that there are substantial problems for the operation of their small isolated systems, may apply for derogations from the relevant provisions of Chapters IV, VI, VII, and VIII, as well as Chapter III, in the case of micro isolated systems, as far as refurbishing, upgrading and expanding existing capacity are concerned, which may be granted to them by the Commission. The Commission shall inform the Member States of those applications before taking a decision, taking into account respect for confidentiality. That decision shall be published in the Official Journal of the European Union.63

Small isolated systems are defined in Article 2(26) of the Third Electricity Directive 3.109 as ‘any system with consumption of less than 3000 GWh in the year 1996, where less than 5 per cent of annual consumption is obtained through interconnection with other systems’. Micro isolated systems, meanwhile, are defined in Article 2(27) as ‘any system with consumption less than 500 GWh in the year 1996, where there is no connection with other systems’. An exemption for small isolated systems was included in the First Electricity IEM 3.110 Directive.64 As stated by one group of commentators: [i]n a small isolated system, which in fact means an island not connected to the main grid of a country, the economies of scale of electricity production at present means no meaningful competition is possible. It is likely that, in such system, the level of demand means that there is room for very few generation facilities, and possibly no more than one. In such circumstances the creation of a competitive market is not possible and to ‘liberalise’ it would do more harm than good . . . This would most likely lead to higher prices than a regulated monopoly.65

61 C Jones (gen ed), EU Energy Law—Volume I: Th e Internal Energy Market—Th e Third Liberalisation Package (3rd edn, Leuven: Claeys & Casteels, 2010), 444. 62 Decision C/2004/3148. 63 Art 44(1) of the Th ird Electricity IEM Directive. 64 Art 24(3) of Directive 96/92/EC [1997] OJ L27/20. 65 C Jones (gen ed), EU Energy Law—Volume I: Th e Internal Energy Market—Th e Third Liberalisation Package (3rd edn, Leuven: Claeys & Casteels, 2010), 446.

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Unbundling 3.111 Member States must apply to the Commission for such a derogation: they do not

apply automatically under the Directives. If it agrees, the Commission will make such a grant in a formal decision and publish it in the Official Journal. 3.112 A number of applications for derogations for small isolated electricity systems such

as the Azores, Cyprus, Malta, Corsica, and Madeira have already been made and considered by the Commission. The Azores was granted an extensive derogation, effectively resulting in the non-application of the electricity Directive on that territory.66 In the case of Cyprus, certain derogations were requested and granted under the Second Package.67 In 2006, Malta applied for and was granted a full derogation from market opening68 because, due to the size and structure of its electricity market it was not feasible that effective competition could develop. These are now enshrined as an automatic derogation in Article 44(2) of the Third Electricity IEM Directive,69 by virtue of which Article 9 shall not apply to Cyprus, Luxembourg, and/or Malta. In addition, Articles 26, 32, and 33 shall not apply to Malta. 3.113 In the field of gas, Article 7(3) of the Third Gas Directive deals with ‘isolated sys-

tems forming gas islands’. With a view to creating an internal market in natural gas, Member States should foster the integration of their national markets and the cooperation of system operators at EU and regional level, also incorporating the isolated systems forming gas islands that persist in the EU. Article 49 of the Third Gas IEM Directive, meanwhile, addresses isolated and emergent70 gas markets in more detail. For our purposes here, it contains certain derogations from (inter alia) the unbundling provisions. First, Cyprus, as an isolated (Article 49(1)) and an emergent (Article 49(2)) gas market, has now been granted the express power to derogate from the requirements of Articles 4, 9, 37, and/or 38 (under Article 49(1)) and Articles 4, 9, 13(1) and (3), 14, 24, 25(5), 26, 31, 32, 37(1), and/or 38. The derogation does not require notification to and approval by the Commission, and any such derogation(s) are to end from the moment when Cyprus no longer qualifies as an isolated and/or (as the case may be) emergent market. Second, the special position of natural gas in Estonia, Latvia, and Finland is acknowledged under 66 Decision 2004/920/EC of 20 December 2004 concerning the derogation from certain dispositions of Directive 2003/54/CE to the Azores archipelago [2004] OJ L389/31. 67 C Jones (gen ed), EU Energy Law—Volume I: The Internal Energy Market—The Third Liberalisation Package (3rd edn, Leuven: Claeys & Casteels, 2010), 449. 68 Decision 2006/859/EC [2006] OJ L332/32 (30 November 2006). 69 Note the second paragraph of Art 44(2) clarifies that: ‘[f]or the purposes of Article 9(1)(b), the notion “undertaking performing any of the functions of generation or supply” shall not include final customers who perform any of the functions of generation and/or supply of electricity, either directly or via undertakings over which they exercise control, either individually or jointly, provided that the final customers including their shares of the electricity produced in controlled undertakings are, on an annual average, net consumers of electricity and provided that the economic value of the electricity they sell to third parties is insignificant in proportion to their other business operations.’ 70 Which means, ‘a Member State in which the first commercial supply of its first long-term natural gas supply contract was made not more than 10 years earlier’ (Art 2(31) of the Third Gas IEM Directive).

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E. Towards Full Ownership Unbundling? Article 49(1), third sub-paragraph, according to which Articles 4, 9, 37, and/or 38 shall not apply to those Member States until any of them is directly connected to the interconnected system of any other Member State apart from each other and Lithuania. These specific provisions reflect the more general statement in Article 49(1) of the 3.114 Third Gas IEM Directive, under which any Member State not directly connected to the interconnected system of any other Member State and having only one external supplier may derogate from Articles 4, 9, 37, and/or 38: at present, the particular cases listed in the later paragraphs of Article 49 cover all of those Member States which might otherwise fall under the first paragraph, although future acceding Member States might yet wish to take advantage of Article 49(1). (c) Extension of time for implementation: Article 9(4) of the Third Electricity 3.115 Directive provides that ‘ Member States may allow for derogations from points (b) and (c) of paragraph 1 until 3 March 2013, provided that transmission system operators are not part of a vertically integrated undertaking’.71 (2) ‘Closed systems’ under Article 28 The specific provisions concerning ‘closed distribution systems’ may be understood 3.116 as derogations from the standard rules on unbundling and third party access. This area has become topical after the ECJ’s judgment in the citiworks case, and the issue is given full discussion in the chapter on third party access (Chapter 4).

E. Towards Full Ownership Unbundling?72 (1) Why pursue full ownership unbundling? It might be asked, given the far-reaching unbundling provisions already contained 3.117 in the Second Package (requiring legal, accounting, and functional separation of the key stages in the value chain): why does the Commission continue to pursue full OU?73 Eminent authors have argued that, before gathering experience on the operation over time of the legal unbundling regime, to move further to full OU would be premature and a breach of subsidiarity and/or proportionality principles, whether under EU or national (constitutional) law.74 It is thus worth exploring

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Art 9(4) Third Electricity IEM Directive. See, generally, E Ehlers, Electricity and Gas Supply Network Unbundling in Germany, Great Britain and The Netherlands and the Law of the European Union: A Comparison (Antwerp: Intersentia, 2009) and A Johnston, ‘Ownership Unbundling: Prolegomenon to a Legal Analysis’ (n 9). 73 Both in its proposals for the Third Package (as discussed at para 3.18) and its use of EU competition law (see the discussion at paras 3.125 ff ). 74 See, eg, Pielow, Brunekreeft, and Ehlers (n 9) for detailed argument in this vein. 72

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Unbundling what might be gained from full OU. Pollitt has summarized the key arguments in favour of OU:75 (i) increased promotion of competition, by reducing discrimination against nonvertically integrated undertakings across a range of areas (prices, terms and conditions, access to information). This should encourage new market entry, by removing the fear that incumbents’ power in their home markets may be exploited to the detriment of new competitors;76 (ii) improving the ability of NRAs to perform their tasks effectively, by encouraging greater (cost) transparency in network and commercial businesses; (iii) allowing a better focus on, and increase in, investment in transmission networks, especially with regard to interconnections and the concomitant benefits to inter-Member State trade and market integration. This aims: to address currently distorted incentives, which are not to invest in the interests of the system as a whole but rather in the overall interests of the vertically integrated undertaking; and to reduce the future risks of (arbitrary) government intervention in the market and its structure, ensuring a stability regulatory regime going forward. 3.118 It should be noted that, at national level, there may be other policies and priorities

influencing such decisions to pursue OU: some countries may be keen to pave the way to the privatization of the unbundled assets (eg DSO ownership unbundling in the Netherlands); others may be committed to retaining a clear ‘public utility’ role for TSOs and/or DSOs, leading them to delay or oppose such unbundling and privatization. Further, there may be fears that full OU will facilitate foreign takeovers of domestic energy businesses. Various devices in national law, such as ‘Golden Shares’, have been employed in attempts to prevent such foreign acquisitions, largely unsuccessfully when used vis-à-vis undertakings established in other EU Member States due to the TFEU’s rules concerning free movement of capital.77 The Commission v Belgium case provides a framework for analysing possible

75 M Pollitt, ‘The Arguments For and Against Ownership Unbundling of Energy Transmission Networks’ (2008) 36 Energy Policy 704; see also H Cremer, J Cremer, and P de Donder, ‘Legal vs. Ownership Unbundling in Network Industries’ (CEPR, Discussion Paper No 5767, August 2006; available at and ). 76 See also Commission, ‘Proposal for a Directive amending Directive 2003/54/EC concerning common rules for the internal market in electricity’, COM(2007) 528 (19 September 2007), 4. 77 See Cases C-367/98 Commission v Portugal [2002] ECR I-4731, C-483/99 Commission v France [2002] ECR I-4781, C-503/99 Commission v Belgium [2002] ECR I-4809, discussed by H Fleischer, ‘Annotation’ (2003) 40 CMLRev 493; more recent cases include Cases C-174/04 Commission v Italy [2005] ECR I-4933, C-274/06 Commission v Spain [2008] ECR I-165, and C-326/07 Commission v Italy [2009] ECR I-2291. See, further, M Hunt, ‘Ownership Unbundling: The Main Legal Issue in a Controversial Debate’, in B Delvaux, M Hunt, and K Talus (eds), EU Energy Law and Policy Issues: the ELRF Collection (Rixensart (Belgium): Euroconfidentiel, 2008), sec 2, ch 2 and K Talus, Vertical Natural Gas Transportation Capacity, Upstream Commodity Contracts and EU Competition Law (Alphen aan den Rijn: Kluwer Law International, 2011), 55–58.

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E. Towards Full Ownership Unbundling? justifications for such national law golden shares on the basis of security of supply (discussed further at paras 9.30 ff ), emphasizing the limited extent to which this justification could be invoked. Further, Article 11 of both the Third Electricity and Gas IEM Directives responds to the concern that undertakings from non-EU Member States might acquire TSOs in the EU, undermining the impact of the unbundling provisions and/or threatening security of supply (on which see Recitals 25 (Electricity) and 22 (Gas)). This provision requires a foreign TSO to follow a special certification procedure (in place of the ordinary one applied to EU-based TSO owners under Article 10 of each Directive), and NRAs must refuse to certify such a TSO if either the relevant Directive’s unbundling rules are not met by that TSO (even if the other assets in the value chain are located outside the territory of the EU) or if EU security of supply would be threatened (Article 11(3)).78 In practice, of course, such goals may only partly be achieved by OU, and criticisms 3.119 have been made that some of these goals may positively be hindered by OU: eg raising the vast amounts of capital necessary to invest in upgrading and expanding transmission networks may prove more difficult where the TSO undertaking lacks the deeper range of assets held by a vertically integrated undertaking and where it does not have the opportunity to develop revenues from other related businesses (like generation or supply) which will be generated by such transmission investments. Also, the costs of replacing relations within a vertically integrated undertaking with a series of arm’s length contracts under a regulated regime are argued by some to outweigh the benefits listed above of moving to full OU.79 (2) ‘Constitutional’ dimensions of ownership unbundling Alongside these economic arguments concerning the costs and benefits of OU, a 3.120 range of legal arguments has also been raised to challenge OU measures.80 (a) Free movement law: The rules of the TFEU concerning free movement have 3.121 been raised as a potential objection to national measures pursuing full OU. They are treated here under the loose heading of ‘constitutional dimensions’ due to the directly effective and hierarchically superior nature of such Treaty rules under EU 78 For discussion of the Commission’s original, and more far-reaching, proposal and the potential implications of WTO law for such EU measures, see V van Hoorn, ‘“Unbundling”, “Reciprocity” and the European Internal Energy Market: WTO Consistency and Broader Implications for Europe’ [2009] European Energy and Environmental Law Review 51. For the Russian context, see S de Jong and J Wouters, ‘European Energy Security Governance: Key Challenges and Opportunities in EU-Russia Energy Relations’ (Leuven Centre for Global Governance, Working Paper No 65, June 2011) (available at ), esp. at 23–29. 79 See, eg, M Mulder, V Shestalova, and M Lijesen, ‘Vertical separation of the energy-distribution industry’ (CPB No 84, 2005) and B Baarsma et al, ‘Divide and Rule. The Economic and Legal Implications of the Proposed Ownership Unbundling of Distribution and Supply Companies in the Dutch Electricity Sector’ (2007) 35 Energy Policy 1785. 80 For a pre-Third Package discussion, see PD Cameron, Competition in Energy Markets: Law and Regulation in the European Union (2nd edn, Oxford: OUP, 2007), 126.

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Unbundling law. In the Netherlands, objections have been raised at various stages to OU proposals on the basis of their restrictive effect upon the free movement of capital protected by Article 63 TFEU.81 The measures adopted to secure full OU of DSOs were eventually challenged in court by three Dutch generating companies, and in June 2010 the Court of Appeal in The Hague ruled that the Dutch legislation amounted to a potentially justifiable, but ultimately disproportionate restriction upon the free movement of capital within the EU.82 Prima facie, full OU for DSOs does indeed restrict capital movement because those engaged in generation, trade, or supply activities would be prevented from acquiring a significant interest in a distribution company. The Appeal Court refused to allow the promotion of pure economic interests83 as a justification for such a restriction, in part because the ECJ’s case law does not allow this (see, eg, the Campus Oil judgment)84 and in part because the pre-existing EU-level legislation in the Third Package had already addressed such concerns in a manner less restrictive than the Dutch rules (ie to go further was, in the circumstances, disproportionate). Clearly, full OU for TSOs is also a prima facie restriction upon the free movement of capital for similar reasons, but justifying that such a restriction is necessary and proportionate is more straightforward, given the existence of the rules in the Third Package on the subject (as has previously been discussed in detail) and the relatively wide discretion likely to be afforded to the EU legislator by the ECJ in any challenge to those rules. 3.122 (b) EU fundamental rights law: At the EU level, the fundamental rights and prin-

ciples developed under the European Convention for the protection of Human Rights and Fundamental Freedoms (ECHR) by the European Court of Human Rights (ECtHR) in Strasbourg are of significance. This is for two reasons. First, the ECJ has developed its jurisprudence on this question over the years (arguably largely in response to concerns at national level that the process of scrutiny and judicial review of the legislative competence of the EC did not take sufficient care in respect of fundamental rights arguments). It has created a linkage between the ECHR and its case law, on the one hand, and the EC legal order, on the other, by the device of ‘general principles of EU law’, drawn from and inspired by the 81 Although it should be noted that the freedom of establishment under Art 49 TFEU may also be engaged: for discussion on the interaction between the capital and establishment rules, see Hunt (n 77), 73–89. 82 Essent, Delta and Eneco v Dutch State (22 June 2010). For discussion, see HHB Vedder, ‘Een streep door de splitsingswet? Het Hof Den Haag over de Won’ (2010) 9(3/4) Nederlands Tijdschrift voor Energierecht 177 (the ‘Won’ being the ‘Wet onafhankelijk netbeheer’ or Dutch Unbundling Act). An appeal against this judgment is pending before the Dutch Supreme Court; meanwhile, uncertainty reigns, especially given that Nuon and Essent had already sold all of their non-DSOs assets to other undertakings, raising the prospect of possible damages claims against the Dutch Government should the Appeal Court’s judgment be confirmed. 83 Specifically, (i) preventing cross-subsidies between regulated distribution activities and other competitive parts of the business; (ii) securing greater transparency, so as to protect customers of DSOs; and (iii) to guarantee security of supply. 84 Case 72/83 Campus Oil v Minister for Industry and Energy [1984] ECR 2727; see our discussion of security of supply as a justification for restrictions upon free movement at paras 9.24 ff.

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E. Towards Full Ownership Unbundling? common constitutional traditions of the EU’s Member States.85 One of the few clearly consistent elements in those traditions is the membership of the Council of Europe and its ECHR: as a result, the case law developed by the ECtHR has become an important source of inspiration for the ECJ and the General Court (formerly the Court of First Instance (CFI)) in their development of fundamental rights protection within the EU. Second, all EU Member States are also signatory to the ECHR and thus are also responsible for ensuring that its provisions are respected within their national legal order. For our purposes, the key fundamental right in question is likely to be the right 3.123 to property laid down in Article 1 of the First Protocol to the ECHR (and the corresponding terms of Article 17 of the EU Charter of Fundamental Rights). A fuller discussion of the structure of reasoning required by the ECtHR case law in this area can be found elsewhere:86 in short, provided that the transmission assets are sold off, thus ensuring that their current owners receive some compensation in return for their inability any longer to own such assets, it seems that this should amply satisfy the proportionality requirements imposed by the ECHR under this provision.87 (c) National constitutional law: Various authors and stakeholders have also raised 3.124 arguments under national constitutional law, suggesting that EU legislation or decisions which would positively require full ownership unbundling would not be enforced with their national legal order. While strictly a matter of national law, it is important to highlight that such arguments exist and have been strongly supported by a number of governments and eminent commentators. They tend to raise arguments very similar to those which might arise under the ECHR and/or the EU’s Charter of Fundamental Rights with regard to property rights; as with those

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The foundational cases are Case 11/70 Internationale Handelsgesellschaft v Einfuhr und Vorratsstelle für Getreide und Futtermittel [1970] ECR 1125, esp. paras. 3 and 4; Case 4/73, Nold v Commission [1974] ECR 491, esp para 13; Case 44/79, Hauer v Land Rheinland-Pfalz [1979] ECR 3727, esp. paras. 14 and 15 and subsequent discussion, with clear references to the right to property under Art 1 of the First Protocol to the ECHR. The right to property was also of importance in the ECJ’s judgment in Case C-84/95 Bosphorus v Minister of Transport [1996] ECR I-3953. 86 See A Johnston, ‘Take-or-pay Contracts for Renewables: An Analysis of European Legal Issues’, sec. 4, ch. 4 in B Delvaux, M Hunt, and K Talus (eds), EU Energy Law and Policy Issues—The Energy Law Research Forum Collection (Rixensart (Belgium): Euroconfidentiel, 2008), at sec B.1 for discussion; see also S Praduroux and K Talus, ‘The Third Legislative Package and Ownership Unbundling in the Light of the European Fundamental Rights Discourse’ (2008) 9 Competition and Regulation in Network Industries 3. 87 It can be noted that the rationale underlying the fundamental rights analysis under the ECHR (mirrored in many national systems) is very similar to the basis upon which claims to recover stranded costs have been developed and subsequently analysed under EC law in the State aids field. See Commission Communication relating to the methodology for analysing State aid linked to stranded costs (26 July 2001), which is available at . See further the brief article by B Allibert in the Commission’s Competition Policy Newsletter, No 3, October 2001, 25–27, discussing the Decisions taken by the Commission on the applications by Austria, Spain, and the Netherlands.

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Unbundling European fundamental rights instruments, in practice the success of such arguments will turn on questions of the proportionality of any such prima facie restrictions upon those protected rights. It may be the case at national level that courts may grant rather less leeway to the national legislator than might be available under the ECHR and the EU Charter, although this remains to be seen in practice. Even if the proportionality test were more tightly operated, however, the Constitutional Courts of some EU Member States would still not refuse to enforce such EU law rules unless they found that the EU’s activities showed systemic and persistent disregard for the need to safeguard such fundamental rights on the EU level.88 (3) Competition law and ownership unbundling 3.125 It has long been clear that, as a general matter, merger law could make a significant

contribution to such market structure questions. Where it is thought that allowing a merger involving such an undertaking might lead to competition difficulties, it is open to the Commission to prohibit it from being implemented under the EU’s Merger Control Regulation 139/2004/EC (MCR).89 Instead of prohibition, conditions may be attached to the Commission’s approval of such mergers, including requiring the merging parties to divest themselves of certain assets. A good illustration of this phenomenon is the Electricité de France (EDF)/Energie BadenWürttemburg (EnBW) merger,90 in which the Commission required that EDF sell off Compagnie Nationale de Rhône (including its electricity generation assets on the Rhône river barrage system) as a condition of EDF being allowed to acquire the stake in EnBW. 3.126

National merger control law may also be relevant, particularly where the relevant merger control thresholds for the application of the MCR are not met, or where the Commission refers a merger down to the national merger control authorities (Article 9 MCR). This point is underlined by national merger laws which contain provisions allowing intervention on public interest grounds: while such provisions in the UK have rarely been used,91 if important infrastructural questions are 88 See, inter alia, Brunner v European Union Treaty [1994] 1 CMLR 57 and, most recently, The Lisbon Treaty Judgment, BVerfG, 2 BvE 2/08, 30 June 2009 (available in English at ). From a voluminous literature, see the following useful discussions in English of the developing German position: M Herdegen, ‘Maastricht and the German Constitutional Court: Constitutional Restraints for an “Ever Closer Union” ’ (1994) 31 CMLRev 235, U Everling, ‘Will Europe Slip on Bananas? The Bananas Judgment of the Court of Justice and National Courts’ (1996) 33 CML Rev 401, and A Steinbach, ‘The Lisbon Judgment of the German Federal Constitutional Court—New Guidance on the Limits of European Integration?’ (2010) 11 German Law Journal 367 (available at ). 89 [2004] OJ L24/1. 90 Case No COMP/M.1853, EDF/EnBW (7 February 2001). 91 Indeed, even when the formal test referred to the ‘public interest’, successive Secretaries of State instead took a firm and consistent policy line that this was to be interpreted as a test based solely upon competition criteria: see, eg, B Rodger, ‘Reinforcing the Scottish “Ring-Fence”: A

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E. Towards Full Ownership Unbundling? involved in a merger, this might be one of those rare occasions where such powers were called into action.92 Similarly, these questions may be sufficient to encourage the national authorities to request that the Commission should refer a case ‘down’ (under Article 22(3) MCR) to the national merger control body, even where the merger’s size has ensured that it had met the thresholds for the application of the EU regime. Lately, however, the other provisions of EU competition law have come to the fore 3.127 in the energy sector in general, and with particular force when applied to network assets. Most recently, the Commission has accepted commitments from E.ON,93 RWE,94 and ENI95 to sell (some of) their transmission networks as part of the settlement of proceedings for breach of the EU competition rules. These undertakings had been guilty of various practices in breach of what is now Article 102 TFEU. Th is strategy of the parallel usage by Commission of ex post competition law en- 3.128 forcement and legislative proposals in Third Package to achieve ownership unbundling goals is interesting, and it is perhaps ironic that more ‘progress’ was achieved by the Commission vis-à-vis the German transmission grids using competition law than in the EU’s legislative process, where the German Government put up a staunch defence of the legal status of German TSOs, only to see the sale of E.ON and RWE’s grids agreed in a deal to avoid (even heftier) competition law fines. This strategy is not uncontroversial: some commentators96 see this as a reflection of the weakness of ex ante regulatory tools and processes, but also as the development of a strange ‘quasi-ex ante regulatory approach through antitrust’, leading to negotiations between the Commission and energy companies in an ongoing and iterative process, rather than the traditional ex post application of antitrust law. Achieving structural remedies through only partly public decision-making processes leading to commitments97 by energy undertakings creates unpredictability and may Critique of UK Merger Policy vis-à-vis the Scottish Economy’ [1996] ECLR 104, who criticized UK merger policy (under the previous regime of the Fair Trading Act 1973) for its failure to take into account important regional economic considerations, instead subsuming them in the overall competition-based analysis. 92 In the current UK regime, the Secretary of State can add to the range of relevant public interest considerations by making an Order (approved by both Houses of Parliament), while the legislature can also add to the list of public interest matters by statute. Just such an exception currently seems to be planned to deal with the current financial instability, with the intention of allowing Lloyds TSB plc to acquire Halifax–Bank of Scotland: for discussion see, eg, . 93 [2009] OJ C36/8 (13 February 2009): the Dutch TSO, TenneT duly acquired E.ON’s TSO business on 10 November 2009. 94 [2008] OJ C310/23 (5 December 2008). 95 [2010] OJ C55/13 (5 March 2010). 96 L Hancher and A de Hauteclocque, ‘Manufacturing the EU Energy Markets: The Current Dynamics of Regulatory Practice’ (TILEC Discussion Paper 2010-003, January 2010). 97 The ECJ has recently (Case C-441/07 P, Alrosa v Commission [2010] ECR I-5949) overturned the CFI’s judgment (Case T-170/06, [2007] ECR II-2601) in the Alrosa case: the CFI had required the Commission more clearly to explain the competition problem involved and to justify

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Unbundling damage the legitimacy of both the application of competition law and, indeed, of the EU’s legislative processes which led to the Third Package (by creating the impression that such finely balanced legislative compromises can simply be upset by the Commission’s application of the EU’s competition rules).

the proportionality of the commitments required, as well as to protect the procedural rights of the defendants and third parties. But the ECJ found that the Commission’s discretion under the commitments procedure (Art 9 of Regulation 1/2003/EC, [2003] OJ L1/1) was broad: no positive finding of infringement is required of the Commission and ‘judicial review . . . relates solely to whether the Commission’s assessment is manifestly incorrect’ (at para 42).

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4 THIRD PARTY ACCESS

A. Introduction B. Th ird Party Access in EU Energy Legislation (1) Regulated third party access (2) Possibility of negotiated third party access to certain specified facilities

C. Derogations and Specific Cases (1) Lack of capacity (2) Small isolated systems/markets

(3) Emergent markets/regions 4.71 (4) Gas take-or-pay contracts 4.82 (5) New interconnectors/infrastructure and significant increases of capacities of existing interconnectors/infrastructures 4.98 (6) Direct lines 4.113 (7) Public service obligations 4.121 (8) Closed distribution systems 4.125 (9) Position of long-term contracts: pre-liberalization long-term contracts 4.136

4.01 4.06 4.07 4.31 4.56 4.57 4.65

A. Introduction Third party access (TPA) is the cornerstone of the liberalization of the electricity 4.01 and energy market in Europe. This was recently addressed by the ECJ in Case C-439/06 citiworks AG (22 May 2008).1 The ECJ underlined that ‘for competition to function, non-discriminatory, transparent and fairly priced network access is of paramount importance in bringing about the internal electricity market’2 and that ‘open third-party access to transmission and distribution systems constitutes one of the essential measures which the Member States are required to implement in order to bring about the internal market in electricity’.3 The starting point of third party access to the EU energy markets was the access to 4.02 grids for the transit of electricity and gas. The Transit Directives—ie for electricity, Council Directive 90/547/EEC of 29 October 1990 on the transit of electricity

1 Case C-439/06 citiworks AG v Flughafen Leipzig/Halle GmbH [2008] ECR 2008 I-3913, hereafter, ‘citiworks case’. This case is further analysed in the present chapter, in the context of ‘closed distribution systems’: see paras 4.125 ff. 2 citiworks case, para 40. 3 citiworks case, para 44.

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Third Party Access through transmission grids4 and, for gas, Council Directive 91/296/EEC of 31 May 1991 of the transit of natural gas through grids5 —organized negotiated access to grids for transit purposes on the basis of non-discriminatory conditions, fair for all the parties concerned, exclusive of unfair clauses or unjustified restrictions, and respecting security of supply and quality of services.6 4.03 Third party access was then extended to the electricity and natural gas transmis-

sion and distribution systems by the First Energy Package. Member States had the choice between negotiated and regulated access. While the former was based on voluntary commercial agreements between suppliers and eligible customers,7 the latter was based on published tariffs (and/or published terms and conditions for the gas market) for the use of transmission and distribution systems.8 On the electricity market, Member States could also opt for a ‘single buyer’ responsible for the purchase of the electricity contracted by an eligible customer from a producer ‘at a price equal to the sale price offered by the single buyer to eligible customer minus the price of published tariffs’.9 In practice, this procedure has not been implemented. 4.04 In the Second Energy Package, only the model of regulated access to electricity

and natural gas transmission and distribution was retained. This system was also extended to include access to liquefied natural gas (LNG) facilities.10 On the gas market, access to storage facilities, linepack, and ancillary services as well as to upstream pipeline networks was also addressed. For the former, it could be negotiated or regulated11 while, for the latter, Member States had to take the necessary measures to allow negotiations.12 4.05 Third party access to the EU energy markets evolved further in the Third Energy

Package. The application of regulated tariffs to balancing services besides transmission and distribution tariffs was clarified.13 The access to storage facilities and linepack was also reinforced.14 This chapter analyses the law concerning third party access, as it stands after the entry into force of the Third Energy Package. The

4

[1990] OJ L313/30, 13 November 1990, hereafter ‘Electricity Transit Directive’. [1991] OJ L147/37, 12 June 1991, hereafter ‘Gas Transit Directive’. 6 Art 3(1) and (2) of the Electricity and Gas Transit Directives. 7 Art 17(1) to (3) of the First Electricity Directive and Art 15 of the First Gas Directive. 8 Art 17(4) of the First Electricity Directive and Art 16 of the First Gas Directive. 9 Art 18 of the First Electricity Directive. 10 Art 20(1) of the Second Electricity IEM Directive and Art 18(1) of the Second Gas Directive. 11 Art 19 of the Second Gas Directive. 12 Art 20 of the Second Gas Directive. 13 Art 37(6) of the Third Electricity IEM Directive and Art 41(6) of the Third Gas IEM Directive. 14 Art 33(1) of the Third Gas IEM Directive. 5

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B. Third Party Access in EU Energy Legislation provisions guaranteeing third party access are examined first (paras 4.06 ff ) before turning to the derogations and specific cases (paras 4.56 ff ).

B. Third Party Access in EU Energy Legislation Third party access in the Third Energy Package is based on regulated access (paras 4.06 4.07 ff ). However, negotiated access still may apply for specific facilities (paras 4.31 ff ). (1) Regulated third party access Regulated tariffs are the cornerstone of regulated third party access (paras 4.08 ff ). 4.07 Transmission system operators (TSOs) and distribution system operators (DSOs), as well as national regulatory authorities (NRAs), are guarantors of this third party access (paras 4.26 ff ). (a) Regulated tariffs: In accordance with Article 32(1) of the Third Electricity and 4.08 Gas Directives, access to the transmission and distribution systems as well as LNG facilities has to be ‘based on published tariffs, applicable to all eligible customers, including supply undertakings and applied objectively and without discrimination between system users’. The articulation of regulated third party access on such tariffs was underlined by 4.09 the ECJ in its recent judgment in Julius Sabatauskas.15 The ECJ underlined in this judgment that the concept of access was generally used in the context of regulated tariffs, independent of the connection modalities to the grid.16

15

Case C-239/07 Julius Sabatauskas [2008] ECR I-7523, hereafter ‘Sabatauskas’. The ECJ was questioned about the possibility of interpreting the third party access provisions of the Second Electricity IEM Directive as ‘obliging Member States to establish legal rules whereby any third party has the right, at his discretion, provided that the electricity system has “the necessary capacity”, to choose the system—electricity transmission system or electricity distribution system—to which he wishes to be connected and the operator of that system has an obligation to grant access to the network’. It decided that: 16

40. The terms “access” and “connection” appear in the Directive [2003/54/EC] with different meanings. The term “access” is linked to the supply of electricity, including inter alia the quality, regularity and cost of the service. It is often used in the context of guaranteeing nondiscriminatory tariff s. Thus, it is stated in recitals 2 and 13 of the preamble to the Directive [2003/54/EC] that access to the network on the basis of tariffs published prior to their entry into force guarantees non-discriminatory transmission and distribution tariffs, in recital 6 that access must be non-discriminatory, transparent and fairly priced, in recital 15 that the intervention of regulatory authorities guarantees non-discriminatory access to the network and in recital 17 that non-discriminatory and cost-reflective balancing mechanisms are necessary in order to ensure effective market access for all market players. 41. The term “connection” is used, in particular, in a technical context and relates to physical connection to the system . . . 46. It is one of the objectives of the Directive [2003/54/EC] that access to the system should be open—which . . . constitutes an essential measure for bringing about the completion of the internal market in electricity—and that it should be based on objective, non-discriminatory

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Third Party Access 4.10 The scope and criteria of regulated tariffs are analysed (paras 4.11 ff ), before turn-

ing to the procedure applicable for the adoption and publication of those tariffs (paras 4.20 ff ). 4.11 (i) Scope and Criteria of Regulated Tariff s: Regulated tariffs cover three

components: (1) the connection and access to national transmission and distribution system as well as the access to LNG facilities; (2) balancing services; and (3) the access to cross-border infrastructures. 4.12 Regarding the connection and access to national transmission and distribution

systems as well as LNG facilities, several criteria have to be met by those tariffs. First of all, they have to be objective and non-discriminatory.17 This does not imply standardized tariffs; differentiated tariffs may be applied for different services, quantities, requirements, nominations, etc, as long as they are adopted in line with the procedure hereafter examined.18 4.13 The second criterion is the one of ‘cost-reflectivity’:19 the tariffs or their methodolo-

gies ‘shall allow the necessary investments in the networks to be carried out in a manner allowing those investments to ensure the viability of the networks’.20 For the internal natural gas market, it is furthermore specified that tariffs applied by TSOs should ‘take into account the need for system integrity and its improvement and reflect the actual costs incurred, insofar as such costs correspond to those of an efficient and structurally comparable network operator and are transparent, whilst including an appropriate return on investment, and, where appropriate, taking account of the benchmarking of tariffs by the regulatory authorities’.21 4.14 A third criterion for access and connection tariffs to transmission and distribution

systems, as well as for access to LNG facilities, is the existence of incentives, over

and transparent criteria and on tariffs published prior to their entry into force, and not that it should be at the customer’s discretion. 47. It follows from this that Member States retain a certain flexibility in steering system users towards one or another type of system, provided, however, that they do so for non-discriminatory reasons and in accordance with objective considerations. System users thus have a right of access to the electricity system but Member States may decide that the connection is to be made on one or another type of system.’ (ECJ, Sabatauskas, paras 41, 42, 46, and 47.) 17 Recital (36) and Art 32(1) of the Third Electricity IEM Directive and Recital (32) and Art 32(1) of the Third Gas IEM Directive. 18 See paras 4.20 ff. Differentiated tariffs are expressly envisaged for the natural gas sector by Regulation 715/2009 for the distinction between firm and interruptible capacity. 19 Recital (36) and Art 37(6)(a) of the Third Electricity IEM Directive and Recital (32) and Art 41(6)(a) of the Third Gas IEM Directive. 20 Article 37(6)(a) of the Third Electricity IEM Directive and Art 41(6)(a) of the Third Gas IEM Directive. 21 Art 13(1), para 1 of Regulation 715/2009.

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B. Third Party Access in EU Energy Legislation both short and long term, ‘to increase efficiencies, foster market integration and security of supply and support the related research activities’.22 For the natural gas market, a further criterion applies for interruptible capacity: the 4.15 probability of interruption has to be reflected in the price.23 Finally, and still only for the natural gas market, ‘third party access services may be 4.16 granted subject to appropriate guarantees from network users with respect to the creditworthiness of such users. Such guarantees shall not constitute undue marketentry barriers and shall be non-discriminatory, transparent and proportionate’.24 Turning to balancing services, this component fell within the scope of regulated 4.17 tariffs following the adoption of the Third Energy Package. Indeed, it has been clarified that the terms and conditions of balancing services, ‘including the rules and tariffs, for the provisions of such services’ by TSO and DSOs shall be adopted according to the same methodology as for regulated tariffs for the connection and access to transmission and distribution networks.25 As for tariffs for access and connection to transmission and distribution systems as well as for access to LNG facilities, balancing services tariffs should be non-discriminatory and cost-reflective.26 This criterion has been clarified for the gas market in Regulation 715/2009: ‘imbalance charges shall be cost-reflective to the extent possible, whilst providing appropriate incentives on network users to balance their input and off-take of gas. They shall avoid cross-subsidisation between network users and shall not hamper the entry of new entrants’.27 Such tariffs should also provide incentives to network users ‘to balance their input and off-takes’28 as well as, both over the short and long term, ‘to increase efficiencies, foster market integration and security of supply and support the related research activities’.29 The last component of regulated tariffs—access to cross-border infrastructures— 4.18 was also added by the Third Energy Package Directives. The Third Directives are, however, silent regarding the scope and criteria of this component. Some clarifications may be found for the electricity market in Regulation 714/2009, which 22 Art 37(8) of the Third Electricity IEM Directive and Art 41(8) of the Third Gas IEM Directive. 23 Art 14(1) para 2 of Regulation 715/2005. 24 Arts 14(3) and 15(4) of Regulation 1775/2009. 25 Arts 15(7), 25(6), and 37(6) of the Third Electricity IEM Directive and Arts 13(3), 25(5), and 41(6) of the Third Gas IEM Directive. The need to address balancing tariffs was addressed in Recital (35) of the Third Electricity IEM Directive and in Recital (31) of the Third Gas IEM Directive. 26 Arts 15(7), 25(6), and 37(6) of the Third Electricity IEM Directive and Arts 13(3), 25(5), and 41(6) of the Third Gas IEM Directive. The need to address balancing tariffs was addressed in Recital (35) of the Third Electricity IEM Directive and in Recital (31) of the Third Gas IEM Directive. 27 Art 21(3) of Regulation 715/2009. 28 Art 37(6)(b) of the Third Electricity IEM Directive and Art 41(6)(b) of the Third Gas IEM Directive. 29 Art 37(8) of the Third Electricity IEM Directive and Art 41(8) of the Third Gas IEM Directive.

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Third Party Access aims at ‘setting fair rules for cross-border exchange in electricity’ and providing ‘for mechanisms to harmonise the rules for cross-border exchanges in electricity’.30 Article 14 of Regulation 714/2009 provides guidelines regarding ‘charges for access to networks’. Such charges shall be ‘transparent, take into account the need for network security and reflect actual costs incurred insofar as they correspond to those of an efficient and structurally comparable network operator and are applied in a non-discriminatory manner. Those charges shall not be distance-related’.31 If possible, tariffs applied to producers and/or consumers should ‘provide locational signals at [EU] level, and take into account the amount of network losses and congestion caused, and investment caused for infrastructure’.32 The following elements should also be taken into account: ‘payments and receipts resulting from the inter-transmission system operator compensation mechanism’ and ‘actual payments made and received as well as payments expected for future period of time, estimated on the basis of past periods’.33 Finally, no specific charges may be set up for individual transactions for declared transits of electricity.34 4.19 As for the natural gas market, Regulation 715/2009 provides that tariffs for net-

work users have to be set separately for each point of entry or exit of the transmission system. A transitional period was granted until 3 September 2011, with network charges having to be calculated irrespective of the contractual paths but on the basis of different entry and exit points.35 4.20 (ii) Procedure for adoption of regulated tariff s: The adoption of regulated tariffs is one

of the core duties of national regulatory authorities (NRAs). It is cited as their first duty by Article 37(1)(a) of the Third Electricity IEM Directive and Article 41(1)(a) of the Third Gas IEM Directive: ‘the regulatory authority shall have the following duties: (a) fixing or approving, in accordance with transparent criteria, transmission or distribution tariffs or their methodologies …’. It follows from Article 37(6) of the Third Electricity IEM Directive and from Article 41(6) of the Third Gas IEM Directive that ‘the regulatory authorities shall be responsible for fixing or approving sufficiently in advance of their entry into force at least the methodologies used to calculate or establish’ those tariffs or methodologies. 4.21 As underlined by the Commission in its Interpretative Note of 22 January 2010

concerning regulatory authorities,36 those dispositions leave Member States with

30

Art 1(a) and (b) of Regulation 714/2009. Art 14(1) of Regulation 714/2009. 32 Art 14(2) of Regulation 714/2009. 33 Art 14(3) of Regulation 714/2009. 34 Art 14(5) of Regulation 714/2009. 35 Art 13(1) para 4 of Regulation 1775/2009. 36 Commission Staff Working Paper, Interpretative Note on Directive 2009/72/EC Concerning Common Rules for the Internal Market in Electricity and Directive 2009/73/EC Concerning Common Rules for the Internal Market in Natural Gas: The Regulatory Authorities, 22 January 2010 (hereafter, ‘Interpretative Note: Regulatory Authorities’). 31

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B. Third Party Access in EU Energy Legislation four options for the intervention of national regulatory authorities in the adoption of regulated tariffs. The NRAs may:37 (1) (2) (3) (4)

fix the tariffs; fix the methodology for the adoption of the tariffs; approve the tariffs; or approve the methodology.

The scope of the competences of NRAs in the adoption of regulated tariffs has been 4.22 recently analysed by the ECJ in Commission v Belgium.38 In this case, the methodology applicable to depreciations and equitable margin in the case of extensions of existing installations or new installations recognized as of national or European interest was fixed by the Belgian Government, after receiving an opinion from the NRA (the Commission de Régulation de l’Electricité et du Gaz (CREG)). The procedure for the adoption of this methodology differed from the other methodologies applicable to the access and connection to the Belgian electricity and natural gas transmission and distribution systems: there, the methodologies were adopted by the Belgian Government following a proposal from the CREG. The ECJ considered that a procedure where the CREG was only given the opportunity to provide an ‘opinion’ on the methodology infringed the competences of NRAs regarding regulated tariffs.39 The ECJ also underlined that the intervention of the CREG at a later stage in the approval of the tariffs proposed by system operators for certain types of investment (for the extension of existing installations or in new installations recognized as having a Belgian or European interest) was not relevant in curing this defect of the Belgian rules, since the grant of the relevant competences to the Belgian Government had the effect of reducing the competences granted to the CREG, so that the CREG was accordingly bound by specific rules in its approval of the tariffs.40 Besides this judgment, it worth underlining that, contrary to the Second Package 4.23 Directives, Member States may no longer make the decision of the NRA regarding tariffs (setting or approval of tariffs, or setting or approval of the methodologies) conditional upon the formal approval of another relevant designated body of a Member State.41 Following the adoption of the Third Energy Package, decisions of NRAs regarding tariffs are to be autonomous and directly binding; Member States may, however, still intervene through ‘general policy guidelines’. As the 37

Interpretative Note: Regulatory Authorities (n 36), 14. Case C-474/08 Commission v Belgium [2009] ECR I-175* (summary publication only, judgment of 19 December 2009). 39 Commission v Belgium (n 38), paras 27–29. 40 Commission v Belgium (n 38), para 30. 41 Such a possibility was provided by Art 23(3) of the Second Electricity IEM Directive and by Art 25(3) of the Second Gas Directive, and could result in referral to another regulatory body such as the national competition office (eg in Germany, the Bundeskartellamt) or to a government office, such as the Ministry of Economic Affairs. 38

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Third Party Access Commission’s Interpretive Note on regulatory authorities under the Third Package states: The core duties of the NRA as regards network tariffs do not deprive the Member State of the possibility to issue general policy guidelines which ultimately will have to be translated by the NRA into the tariff structure and methodology. However, these guidelines should not encroach on the NRA’s competences or infringe any of the requirements of the Electricity and Gas Directives and Regulations. Although a Member State could eg issue a general policy guideline with regard to attracting investments in renewables, the Commission’s services would consider a rule setting the profit margin in the cost-plus tariff as a prohibited direct instruction to the NRA.42 4.24 The position taken by France in transposing the Th ird Energy Package into

national law is worthy of note here: while entrusting the NRA, the Commission de Régulation de l’Energie (CRE), with the competence to fi x the relevant tariff methodologies, various guidelines were laid down in the Decree n°2011/504 of 9 May 2011. 43 Notably, it is provided that tariff s have to be calculated in a transparent and non-discriminatory way, in order to cover the whole of the costs borne by the system operators, to the extent that such costs correspond to those of an efficient system operator.44 It is also provided that the costs borne by the system operators and to be covered in the tariff s should, in particular, include the costs resulting from the execution of public service obligations, the costs linked to the necessary research and development for the increase of the grid capacities (especially interconnections with neighbouring countries), and the costs for connection to the grids and the services operated exclusively by system operators. 45 4.25 A final step to be analysed in the procedure of adoption of regulated tariffs is

their publication: regulated tariffs have to be published prior to their entry into force. In case a national regulatory authority is entrusted with the mere task of fixing or approving a methodology, the tariffs adopted on its basis should also be published.

42

Interpretative Note: Regulatory Authorities (n 36), 14. Ordonnance n°2011/504 du 9 mai 2011 portant codification de la partie législative du Code de l’Energie. 44 Art L 341–2, first subsection of the French Energy Code: ‘Les tarifs d’utilisation du réseau public de transport et des réseaux publics de distribution sont calculés de manière transparente et non discriminatoire, afin de couvrir l’ensemble des coûts supportés par les gestionnaires de ces réseaux dans la mesure où ces coûts correspondent à ceux d’un gestionnaire de réseau efficace’. 45 Art L 341–2, first subsection of the French Energy Code: ‘1° Les coûts résultant de l’exécution des missions et des contrats de service public; 2° Les surcoûts de recherche et de développement nécessaires à l’accroissement des capacités de transport des lignes électriques, en particulier de celles destinées à l’interconnexion avec les pays voisins et à l’amélioration de leur insertion esthétique dans l’environnement; 3° Une partie des coûts de raccordement à ces réseaux et une partie des coûts des prestations annexes réalisées à titre exclusif par les gestionnaires de ces réseaux, l’autre partie pouvant faire l’objet d’une contribution dans les conditions fi xées aux articles L. 342-6 et suivants’. 43

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B. Third Party Access in EU Energy Legislation (b) TSOs/DSOs and national regulatory authorities: guarantor of the third 4.26 party access: Several duties and responsibilities are entrusted to TSOs and DSOs as well as to NRAs to ensure third party access to the transmission systems, distribution systems, and LNG facilities. Those tasks are examined briefly in the following paragraphs. (i) Duties and responsibilities of TSOs and DSOs in third party access: TSOs and 4.27 DSOs have the responsibility to provide third party access to the system and facilities they manage.46 Besides this general responsibility, several duties of TSOs and DSOs are relevant for third party access: – an information and transparency duty: TSOs and DSOs have to ‘provide system users with the information they need for efficient access to [including use of] the system’.47 Such information notably relates to the availability of the capacities, in relation to capacity-allocation mechanisms and congestion management procedures;48 – while providing information, TSOs and DSOs should be careful to preserve the confidentiality of the commercially sensitive information obtained in the course of their business.49 TSOs should particularly not misuse to the advantage of related undertakings the information obtained from third parties in the context of their access to the system;50 – a non-discrimination duty: TSOs and DSOs have to ensure that no discrimination occurs ‘between system users or classes of system users, particularly in favour of [their] related undertakings’;51 – a duty to operate, maintain, and develop, under economic conditions and with due regard to the environment, secure, reliable, and efficient systems and/or facilities (such as LNG facilities).52 TSOs on the electricity market are entrusted in this context with the task to ensure the ‘availability of all necessary ancillary services, including those provided by demand response’;53

46 Art 12(h) of the Third Electricity IEM Directive and Art 14(1)(a)–(b) and 15(1)(a) of Regulation 715/2009. 47 Art 12(g) and 25(3) of the Third Electricity IEM Directive and Art 13(d) and 25(3) of the Third Gas IEM Directive. 48 Art 15(3) and (4) and Annex 1, Guidelines on the management and allocation of available transfer capacity of interconnections between national systems, point 5, Transparency of Regulation 714/2009 and Art 14 to 17 of Regulation 715/2009. Those provisions are examined further at paras 4.57 ff. 49 Arts 16(1) and (3) and 27 of the Third Electricity IEM Directive and Arts 16(1) and (3) and 27 of the Third Gas IEM Directive as well as Arts 14 and 15 of Regulation 715/2009. 50 Art 16(2) of the Third Electricity IEM Directive and Art 16(2) of the Third Gas IEM Directive. 51 Arts 12(f) and 25(2) of the Third Electricity IEM Directive and Arts 13(1)(b) and 25(2) of the Third Gas IEM Directive. 52 Arts 12(a) and (d) and 25(1) of the Third Electricity IEM Directive and Arts 13(1)(a) and 25(1) of the Third Gas IEM Directive. 53 Art 12(d) of the Third Electricity IEM Directive.

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Third Party Access – a duty to procure the energy used for their activities on the basis of transparent, non-discriminatory, and market-based procedures;54 and – a duty to complete balancing tasks on the basis of objective, transparent, and non-discriminatory rules.55 4.28 TSOs and DSOs on the electricity market also have specific duties regarding

access to, and dispatching of electricity on, their systems. TSOs are responsible for dispatching the generating installation in their areas and for determining the use of interconnectors with others systems.56 In this frame, TSOs have to respect certain priority criteria. They first have to give priority to generating installations using renewable energy sources or generating installations producing combined heat and power. Such priority relates both to access to, and the dispatching of the electricity on, the transmission system.57 TSOs may also, if allowed by Member States for reasons for security of supply, give priority in the dispatching to generating installations using indigenous primary energy fuel sources. Such priority is capped at, in a calendar year, 15 per cent of the overall primary energy necessary to produce the electricity consumed in the Member States concerned.58 4.29 As for DSOs, they are required to dispatch generating installations with a priority

to installation using renewable energy sources or waste or producing combined heat and power.59 4.30 (ii) Duties and responsibilities of national regulatory authorities in third party access:

Besides their core duties in the adoption of regulated tariffs, as examined in the preceding paragraphs, the following responsibilities and duties of NRAs are also relevant for third party access: – NRAs are required to promote, in close cooperation with the Agency for the Co-operation of Energy Regulators (ACER), other regulatory authorities and the Commission, a competitive, secure, and environmentally sustainable internal market in electricity and natural gas within the EU, and effective market opening for all customers and suppliers in the EU;60 – NRAs have to facilitate the access to the network for new generation capacity, in particular removing barriers that could prevent access for new market entrants and of electricity/gas for renewable energy sources;61 54 Arts 15(6) and 25(5) of the Th ird Electricity IEM Directive and Art 13(5) of the Th ird Gas IEM Directive. 55 Arts 15(7) and 25(6) of the Th ird Electricity IEM Directive and Arts 13(3) and 25(5) of the Third Gas IEM Directive as well as Art 21 of Regulation 715/2009. 56 Art 15(1) of the Th ird of Electricity Directive. 57 Art 15(3) of the Th ird Electricity IEM Directive and Art 16(2)(b) and (c) of Directive 2009/28/ EC, this later Directive is hereafter examined in Ch 12 on Renewable Energy Sources. 58 Art 15(4) of the Th ird Electricity IEM Directive. 59 Art 25(4) of the Th ird Electricity IEM Directive. 60 Art 36(a) of the Third Electricity IEM Directive and Art 40(1) of the Third Gas IEM Directive. 61 Art 36(e) of the Third Electricity IEM Directive and Art 40(e) of the Third Gas IEM Directive.

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B. Third Party Access in EU Energy Legislation – NRAs must monitor the level and effectiveness of market opening and competition at both wholesale and retail levels. Any relevant case or information is to be brought by the national regulatory authorities to the competent competition authorities;62 – NRAs also have to monitor ‘the occurrence of restrictive contractual practices, including exclusivity clauses which may prevent large non-household customers from contracting simultaneously with more than one supplier or restrict their choice to do so’. Where appropriate, national regulatory authorities have to inform the national competition authorities of such practices;63 and – NRAs must ensure access to customer consumption data, on the basis of an easily understandable harmonized format, and are to guarantee a prompt access for all customers to such data in order to allow them to exercise third party access.64 (2) Possibility of negotiated third party access to certain specified facilities As has already been underlined, access to certain, specified facilities may be granted 4.31 on a negotiated basis. The facilities concerned are: storage facilities, linepack, and ancillary services, as well as upstream pipelines. (a) Gas storage facilities and linepack: The regime applicable for the access to stor- 4.32 age facilities and linepack has been reinforced by the Third Energy Package.65 To analyse this regime and reinforcement, we will: (i) first recall the scope of storage facilities and linepack (paras 4.33 ff ); then (ii) examine the designation, unbundling and tasks of storage system operators (paras 4.38 ff ); before finally (iii) reviewing the possible access regimes (paras 4.40 ff ).

62 Art 37(j) of the Th ird Electricity IEM Directive and Art 41(j) of the Th ird Gas IEM Directive. 63 Art 37(k) of the Th ird Electricity IEM Directive and Art 41(k) of the Th ird Gas IEM Directive. 64 Art 37(p) of the Th ird Electricity IEM Directive and Art 41(q) of the Th ird Gas IEM Directive. 65 Such reinforcements were highlighted by Recital 24 of the Th ird Gas IEM Directive, according to which: ‘[i]t is necessary to ensure the independence of storage system operators in order to improve third-party access to storage facilities that are technically and/or economically necessary for providing efficient access to the system for the supply of customers. It is therefore appropriate that storage facilities are operated through legally separate entities that have effective decisionmaking rights with respect to assets necessary to maintain, operate and develop storage facilities. It is also necessary to increase transparency in respect of the storage capacity that is offered to third parties, by obliging Member States to define and publish a non-discriminatory, clear framework that determines the appropriate regulatory regime applicable to storage facilities. That obligation should not require a new decision on access regimes but should improve the transparency regarding the access regime to storage. Confidentiality requirements for commercially sensitive information are particularly important where data of strategic nature are concerned or where there is only a single user of a storage facility’.

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Third Party Access 4.33 (i) Scope of the regime applicable to gas storage facilities and linepack: A storage facility

is defined by Article 2(9) of the Third Gas IEM Directive as ‘a facility used for the stocking of natural gas and owned and/or operated by a natural gas undertaking, including the part of LNG facilities used for storage but excluding the portion used for production operations, and excluding facilities reserved exclusively for transmission system operators in carrying out their functions’. 4.34 It follows from this definition that the portions of storage used for production

operations are excluded. Such exclusion is justified by the need to allow producers exclusive use of some of the storage portions to smooth any production irregularities.66 4.35 Storage for the use of TSOs is also excluded from the definition of ‘storage facili-

ties’. Unlike the exception for production purposes, it follows from the word ‘exclusively’ in the definition of storage facilities of Article 2(9) of the Third Gas IEM Directive that part of a storage facility may not be reserved by TSOs.67 4.36 The inclusion of LNG facilities in the definition of ‘storage facilities’ is clarified

by Article 33(2) of the Third Gas IEM Directive. This Article states that the third party access regime applicable to storage facilities ‘shall not apply to . . . temporary storage that are related to LNG facilities and are necessary for the re-gasification process and subsequent delivery to the transmission system’. 4.37 As to linepack, this is defined by Article 2(15) of the Third Gas IEM Directive as

‘the storage of gas by compression in gas transmission and distribution systems, but not including facilities reserved for transmission system operators carrying out their functions’. 4.38 (ii) Designation, unbundling, and tasks of storage system operators: In the applica-

tion of Article 12 of the Third Gas IEM Directive, Member States have to designate storage system operators.68 Such operators are bound by the rule of legal and functional unbundling. Where an independent system operator is appointed or a storage system operator is part of a vertically integrated undertaking, the transmission system owner has to be independent—at least in terms of its legal form, 66 Commission Staff Working Paper, Interpretative Note on Directive 2009/73/EC Concerning Common Rules for the Internal Market in Natural Gas: Third-Party Access to Storage Facilities (22 January 2010), 4 (hereafter, ‘Interpretive Note: TPA to Storage Facilities’): ‘[i]n light of the EU’s general policy goal of stimulating domestic production, such exclusive use of storage for production operations is therefore justified if it enables or improves the production process. It is the responsibility of the Member State in which the production is located to ensure that the use of storage for production operations is not abused by producers, through the creation of de facto priority access to storages’. 67 Interpretive Note: TPA to Storage Facilities, 4. 68 Art 12 of the Th ird Gas IEM Directive: ‘Member States shall designate, or shall require natural gas undertakings which own storage facilities to designate, for a period of time to be determined by Member states, having regard to considerations or efficiency and economic balance, one or more storage . . . system operators’.

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B. Third Party Access in EU Energy Legislation organization, and decision-making—from other activities not relating to transmission, distribution, and storage. This unbundling obligation only applies ‘to storage facilities that are technically and/or economically necessary for providing efficient access to the system for the supply of customers’.69 The tasks of storage system operators are identical to those of transmission system 4.39 operators. The reader is accordingly referred to the above analysis of the relevant duties and responsibilities of gas TSOs regarding third party access.70 (iii) Access to storage facilities and linepack: Access to storage facilities and linepack 4.40 is organized by Article 33 of the Third Gas IEM Directive. Such access is limited to the cases where it is ‘technically and/or economically necessary for providing efficient access to the system for supply of customers’.71 Several criteria have been provided by the Commission to assess the technical and/or economical necessity of access to storage facilities and linepack:72 – according to the type of storage, it should be analysed whether other instruments are ‘available for suppliers to obtain the same level of technical and economic flexibility as through a storage facility’. Elements to take into account relate to: the availability and price of transport capacity, the liquidity of hubs and other traded markets, as well as any need for short-term or seasonal storage; – depending upon the storage facility, it could be considered that access is required for only a part of the storage facilities. Such a consideration should be analysed regularly in the light of any market development that may render a bigger portion of the storage facilities necessary; – the technical and/or economic necessity of the access to a storage facility or linepack should not be assessed on the basis of the portfolio of customers; and – equally, the possibility of investing in new storage facilities as well as geological potentials should not be taken into account. The technical and/or economic necessity to provide access to storage facilities and linepack is to be assessed on the basis of existing installations. However, should new facilities be constructed, the applicable regime would need to be reassessed. Once the technical and/or economic necessity to grant access to a storage facilities 4.41 and linepack is recognized, Member States have the choice between negotiated and regulated access. In the case of negotiated access, Member States or, if so provided, the national 4.42 regulatory authorities, have to take necessary measures to allow natural gas undertakings and eligible customers either inside or outside the territory covered by the 69 Art 15(1) of the Th ird Gas IEM Directive. The criteria in respect of these unbundling obligations are analysed above in Ch 3. 70 Art 13(1) of the Th ird Gas IEM Directive: see paras 4.27 ff. 71 Art 33(1) of the Th ird Gas IEM Directive. 72 Interpretive Note: TPA to Storage Facilities, 10.

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Third Party Access interconnected system to negotiate access to storage facilities and linepack. The parties shall be obliged to negotiate access in good faith. The contracts are to be negotiated with either the relevant storage system operator or natural gas undertaking. Storage system operators and natural gas undertakings had to publish the main commercial conditions for the use of storage facilities and linepack by 1 January 200573 and must continue to do so on an annual basis every year thereafter. System users shall be consulted in the frame of the development of the main commercial conditions.74 4.43 Regarding regulated access to storage facilities and linepack, this is to be based on

published tariffs and/or other terms and obligations for use of those storage facilities and linepack. When developing such tariffs (or the methodologies for their calculation), Member States or, if so provided, the regulatory authorities, shall consult system users. This access may also cover supply contracts with competing natural gas undertakings other than the owner and/or operator of the system or a related undertaking.75 4.44 Several guidelines for Member States were provided by the Commission, to assist

in making the choice between negotiated and regulated access to storage facilities and linepack. The following indicative principles may be taken into account: – the existence of a flexibility market: it should be questioned whether there is effective competition between facilities or between facilities and other flexibility services in the market. It should also be questioned whether there is competitive pressure between storage facilities or between facilities and other flexibility services, which will allow the market mechanism to ensure efficient tariffs, products, product variety, and access to the services offered; – effective access to storage: it should be determined whether a high proportion of the storage capacity has already been booked on a long-term basis, leaving only a small proportion of the storage capacity on the market each year; and – the degree of dispersal of storage clients: it should be assessed whether most of the capacity is booked by one or only a few large undertakings, and the effects of such concentration on the storage pricing and the efficiency of the use of the storage facilities should be examined.76 4.45 Whichever access system is chosen (negotiated or regulated), it must be objective,

transparent and non-discriminatory. ‘Objective’ implies that the access system has to correspond to the factual characteristics of the storage facilities and linepack. ‘Transparent’ means that, as for regulated access to transmission and distribution

73 This date corresponds to the six months following the entry into force of the Second Gas Directive, in accordance with the regime previously provided by Art 19(3) of this Directive. 74 Art 33(3) of the Third Gas IEM Directive. 75 Art 33(4) of the Third Gas IEM Directive. 76 Interpretive Note: TPA to Storage Facilities, 12.

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B. Third Party Access in EU Energy Legislation services as well as LNG facilities, all criteria have to be published prior to the entry into force. They have to be easily understandable for any third party and must be technically justified. Finally, ‘non-discriminatory’ access means that system users must be treated according to the same objectives and according to equal terms regarding, in particular, pricing and other access conditions. Finally, it should be highlighted that the provisions of Regulation 715/2009/EC 4.46 apply to both negotiated and regulated access.77 (b) Ancillary services: Ancillary services are defined by Article 2(14) of the Third 4.47 Gas IEM Directive as ‘all services necessary for access to and the operation of transmission networks, distribution networks, LNG facilities, and/or storage facilities, including load balancing, blending and injection of inert gases, but not including facilities reserved exclusively for transmission system operators carrying out their functions’. Access to ancillary services on the natural gas market, except for those related LNG 4.48 facilities and necessary for the re-gasification process and subsequent delivery to the transmission system,78 is organized according to the same rules as for the access to storage facilities and linepack, examined above, with two exceptions. The first exception is that access to ancillary services is not bound by the need to 4.49 demonstrate a technical and/or economic necessity to provide efficient access to the system for the supply of customers.79 The second exception is that no criteria have to be defined and published to determine which regime (negotiated or regulated) is applicable to ancillary services.80 (c) Upstream gas pipelines: An upstream pipeline network is defined by Article 4.50 2(2) of the Third Gas IEM Directive as ‘any pipeline or network of pipelines operated and/or constructed as part of an oil or gas production project, or used to convey natural gas from one or more such projects to a processing plant or terminal or final coastal landing terminal’. Access to such networks is governed by Article 34 of the Third Gas IEM Directive. 4.51 According to this provision, Member States must ‘take the necessary measures to ensure that natural gas undertakings and eligible customers, wherever they are located, are able to obtain access to upstream pipeline networks, including facilities supplying technical services incidental to such access . . . except for the parts for such networks and facilities which are used for local production operations at the site of a field where the gas is produced’.81 77 Art 1(4), of Regulation 715/2009/EC: ‘This regulation, with the exception of Article 19(4), shall apply only to storage facilities falling under Article 33(3) or (4) of Directive 2009/73/EC.’ 78 Art 33(2) of the Third Gas IEM Directive. 79 Art 33(1) of the Third Gas IEM Directive. 80 Art 33(1) of the Third Gas IEM Directive. 81 Art 34(1) of the Third Gas IEM Directive.

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Third Party Access 4.52 Measures adopted by Member States for the access to upstream pipeline network

have to be notified to the Commission.82 4.53 The modalities of the access to upstream pipeline networks are left to subsidiarity

and thus are for Member States to decide. Such modalities should, however, be in accordance with the relevant legal instruments. The objectives of ‘fair and open access, achieving a competitive market in natural gas and avoiding any abuse of a dominant position, taking into account security and regularity of supplies, capacity which is or can reasonably be made available, and environmental protection’ should be applied.83 4.54 Some guidelines are given in the Third Gas IEM Directive regarding various mat-

ters which could be taken into account by Member States when adopting upstream access regimes: (a) the need to refuse access where there is a incompatibility of technical specifications which cannot reasonably be overcome; (b) the need to avoid difficulties which cannot reasonably be overcome and could prejudice the efficient, current and planned future production of hydrocarbons, including that from fields of marginal economic viability; (c) the need to respect the duly substantiated reasonable needs of the owner or operator of the upstream pipeline network for the transport and processing of gas and the interests of all other users of the upstream pipeline network or relevant processing or handling facilities who may be affected; and (d) the need to apply their laws and administrative procedures, in conformity with [EU] law, for the grant of authorization for production or upstream development.84 4.55 Settlement arrangements have to be set up to address disputes relating to access to

upstream pipeline networks. The authorities which have competence to deal with such disputes have to be independent of the parties, and must be given access to all relevant information. Disputes have to be settled expeditiously and the relevant settlement authority is required take into account the above-mentioned criteria as well as the number of parties which may be involved in negotiating access to the relevant upstream gas pipeline.85 Cross-border disputes shall be settled by the dispute settlement arrangement of the Member State having jurisdiction over the upstream pipeline network which refuses access. Should more than one Member State cover the network concerned, both Member States shall consult each other to ensure a consistent application of the access regime to upstream pipeline networks provided by Article 34 of the Third Gas IEM Directive.86 82 83 84 85 86

Art 34(1) of the Third Gas IEM Directive. Art 34(2) of the Third Gas IEM Directive. Art 34(2)(a)–(d) of the Third Gas IEM Directive. Art 34(3) of the Third Gas IEM Directive. Art 34(4) of the Third Gas IEM Directive.

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C. Derogations and Specific Cases

C. Derogations and Specific Cases There are several grounds on the basis of which third party access may be either 4.56 refused or adjusted. The following derogations and specific cases may be highlighted: lack of capacity (paras 4.57 ff ); small isolated systems and markets (paras 4.65 ff ); emergent markets and regimes (paras 4.71 ff ); gas take-or-pay contracts (paras 4.82 ff ); new interconnectors/infrastructures and significant increases of existing interconnectors/infrastructures (paras 4.98 ff ); direct lines (paras 4.113 ff ); public service obligations (paras 4.121 ff ); closed distribution systems (paras 4.125 ff ); and long-term contracts concluded prior to the liberalization of the energy markets (paras 4.136 ff ). (1) Lack of capacity According to Article 32(2) of the Third Electricity IEM Directive and Article 35(1) 4.57 of the Third Gas IEM Directive, access to the system may be refused where there is a lack of capacity. Duly substantiated reasons have to be provided for such refusals. In the final report 4.58 of its Energy Sector Inquiry, the Commission underlined the insufficiency of the data relating to network availability:87 [n]etwork users require more transparency going beyond the current minimum requirements set by EU legislation. Of particular importance is data relating to network availability, especially for electricity interconnections and gas transit pipelines. Data on the operation of generation capacity and gas storage also needs to be more widely available. For electricity, in particular, it was noted that rules on proper market conduct and supervision differ significantly between Member States, as there is little harmonization at EU level of the transparency requirements.

Paragraph 26 of its Final Report thus recommended that:88 [t]o ensure a level playing field, all market participants require information to be made available on an equal footing and in a timely manner. At present there is an information asymmetry between the vertically integrated incumbents and their competitors. Improved transparency would minimise risks for new market players and so reduce entry barriers and improve trust in the wholesale markets and confidence in price signals. Obviously it needs to be ensured that no collusion takes place on the basis of the published information and, although commercial confidentiality is important, this should not be allowed to undermine effective transparency by being given too wide an interpretation.

87 Communication from the Commission, Inquiry pursuant to Art 17 of Regulation (EC) No 1/2003 into the European Gas and Electricity Sectors (final report), COM(2006) 851 final (10 January 2007), 7, para 25 (hereafter, ‘Energy Sector Inquiry: Final Report’). 88 Energy Sector Inquiry: Final Report, 7, para 26.

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4.59

Third Party Access 4.60 Beyond the general obligation of TSOs and DSOs to provide system users with the

information they need for efficient access to the system,89 several provisions aiming at the transparency of network availability were reinforced or added by the Third Energy Package. 4.61 For the electricity market, Article 15(2) of the Third Electricity IEM Directive pro-

vides that ‘the dispatching of generating installations and the use of interconnectors shall be determined on the basis of criteria which shall be approved by national regulatory authorities where competent and which must be objective, published and applied in a non-discriminatory manner, ensuring the proper functioning of the internal market in electricity’.90 The level of information to be provided by TSOs was reinforced by Regulation 714/2009: – TSOs have to publish an ‘estimate of available transfer capacity for each day, indicating any available transfer capacity already reserved’. Such publications have to cover at least week ahead and month ahead estimates. Quantitative indications of the expected reliability of the available capacity must also be provided;91 – TSOs must also publish ‘relevant data on aggregated forecast and actual demand, on availability and actual use of generation and load assets, on availability and use of the networks and interconnections, and on balancing power and reserve capacity’;92 and – the guidelines on the management and allocation of available transfer capacity of interconnections between national systems annexed to Regulation 714/2009 was completed by a point entitled ‘Transparency’, which specifies the duties of TSOs regarding the publication of ‘all relevant data related to network availability, network access and network use, including a report on where and why congestion exists, the methods applied for managing the congestion and the plans for its future management’.93 4.62 Regarding the gas market, the transparency requirements were reinforced by

Regulation 715/2009. TSOs, LNG and storage system operators have to publish information on the technical contracted and available capacities on a numerical, regular, and rolling basis, as well as in a user-friendly, standardized manner.94 For the capacity on the transmission system, information has to be provided for all relevant points including entry and exit points. Beside this obligation, TSOs have

89 Arts 12(g) and 25(3) of the Third Electricity IEM Directive and Arts 13(1)(d) and 25(4) of the Third Gas IEM Directive. 90 Art 15(2) of the Third Electricity IEM Directive. 91 Art 15(3) of Regulation 714/2009/EC. 92 Art 15(4) of Regulation 714/2009/EC. 93 Annex 1 of Regulation 714/2009, Guidelines on the management and allocations of available transfer capacity of interconnections between national systems, para 5, ‘Transparency’. 94 Arts 18(3) and 19(2) of Regulation 715/2009/EC.

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C. Derogations and Specific Cases to publish ex ante and ex post ‘supply and demand information, based on nominations, forecasts and realised flow in and out of the system’.95 As to LNG and storage system operators, they have to publish ‘the amount of gas in each storage or LNG facility, or group of storage facilities if that corresponds to the way in which the access is offered to system users, inflows and outflows, and the available storage and LNG facility capacities, including those facilities exempted from third-party access’.96 Such information must also be communicated to the TSOs for publication on an aggregated level per system or subsystem defined by the relevant points. This type of information is to be updated at least on a daily basis.97 The incidence of an access refusal on the basis of a lack of capacity is handled differ- 4.63 ently in the Third Electricity IEM Directive and in the Third Gas IEM Directive. On the electricity market, the Member State or their NRA (if so provided by the national implementing rules) must ensure that the system user who has been refused access can bring his claim to a dispute settlement procedure. The NRA shall also ensure that relevant information on the measures that would be necessary to reinforce the network is provided by the TSO or DSO concerned.98 For the gas market, Member States are empowered by the Third Gas IEM Directive 4.64 to take the necessary measures to ensure that a natural gas undertaking which refuses access because of a lack of capacity must make the necessary enhancements, as long as it is economic to make them or a potential customer is willing to pay for them. In this case, a natural gas undertaking could not refuse access on the ground of lack of capacity.99 (2) Small isolated systems/markets Member States may apply for derogation to third party access on the electricity 4.65 market in case of substantial problems for the operation of the small or microisolated systems.100 Small isolated systems are defined by the Third Electricity IEM Directive as ‘any 4.66 system with consumption of less than 3,000 GWh in the year 1996, where less

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Art 18(6) of Regulation 715/2009/EC. Art 19(4) of Regulation 715/2009/EC. 97 Art 19(4) of Regulation 715/2009/EC. 98 Art 32(2) of the Third Electricity IEM Directive. 99 Art 35(2) of the Third Gas IEM Directive. See also Commission Staff Working Paper, Interpretative Note on Directive 2009/33/EC Concerning Common Rules for the Internal Market in Natural Gas: Third-Party Access to Storage Facilities (22 January 2010), 15. 100 Art 44(1) of the Third Electricity IEM Directive. Small isolated systems and micro-isolated systems may also apply for derogations to the relevant provisions related to transmission system operation (Ch IV), to distribution system operation (Ch VI), and to unbundling and transparency of accounts (Ch VII). Micro-isolated systems may also seek to derogate from the relevant provisions related to generation (Ch III) ‘as far as refurbishing, upgrading and expanding existing capacity are concerned’. 96

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Third Party Access than 5 per cent of annual consumption is obtained through interconnection with other systems’.101 4.67 A micro-isolated system is defined as ‘any system with consumption less than 500

GWh in the year 1996, where there is no connection with other systems’.102 4.68 The reference to 1996 in the eligibility threshold is justified by the fact that the

derogation for small isolated systems was already granted by the First Electricity IEM Directive.103 The derogation for micro-isolated systems was introduced by the Second Electricity Directive and it logically also adopted 1996 as the reference year for eligibility.104 4.69 Any small and micro-isolated system derogations are subject to a decision from the

Commission. Member States have to apply to the Commission for a derogation, demonstrating that, after the Third Electricity IEM Directive has been brought into force, there would be substantial problems for the operation of their small/ micro-isolated systems. Before taking its decision, the Commission has to inform every Member State so as to allow all of them to submit any remarks that they may have. Once the decision is taken it is published in the Official Journal of the European Union.105 An automatic derogation from third party access has, however, been granted to Malta.106 4.70 No similar derogation from third party access is provided on the gas market.

Where an isolated gas market is permitted to derogate from certain provisions of the Third Gas IEM Directive, the provisions related to third party access are not involved.107 (3) Emergent markets/regions 4.71 On the gas market, Member States may derogate from third party access in case of

emergent markets. According to Article 49(2) of the Third Gas IEM Directive,108 101

Art 2(26) of the Third Electricity IEM Directive. Art 2(27) of the Third Electricity IEM Directive. 103 Art 24(3) of the First Electricity Directive and Art 2(23) of this Directive for the definition of ‘small isolated system’. 104 Art 26(1) of the Second Electricity IEM Directive for the derogation regime and Art 2(27) of this Directive for the definition of micro-isolated systems. 105 Art 44(1) of the Third Electricity IEM Directive. 106 Art 44(2) of the Third Electricity IEM Directive. 107 Art 49(1) of the Third Gas IEM Directive: ‘Member States not directly connected to the interconnected system of any other Member State and having only one main external supplier may derogate from Articles 4 [authorization procedure], 9 [unbundling of transmission systems and transmission system operators], 37 [market opening and reciprocity] and/or 38 [direct lines]. A supply undertaking having a market share of more than 75 per cent shall be considered to be a main supplier. Any such derogation shall automatically expire where at least one of the conditions referred to in this paragraph no longer applies. Any such derogation shall be notified to the Commission.’ 108 This Article reiterates without modifications the derogation already provided in Art 28(2) of the Second Gas Directive. 102

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C. Derogations and Specific Cases ‘a Member State, qualifying as an emergent market, which, because of the implementation of this Directive, would experience substantial problems may derogate from [Article] . . . 32 . . . Such derogation shall automatically expire from the moment when the Member State no longer qualifies as an emergent market’.109 An emergent market is understood as ‘a Member State in which the first com- 4.72 mercial supply of its first long-term natural gas supply contract was made not more than 10 years earlier’.110 The purpose of the derogation for emergent markets is to support the transition 4.73 from emergent market to a normal market in which competition will function. Such derogation is to expire as soon as a Member State no longer qualifies as an emergent market in the light of the definition of ‘emergent market’, which leaves Member States with a maximum of a ten-year derogation period. Ten years after the ‘first commercial supply of the first long-term natural gas supply contract’,111 the market of the Member State concerned shall be opened to competition. A gradual market opening is provided by Article 49(3) of the Third Gas IEM Directive. After the expiry of the ten-year delay, the market has to be opened to eligible customers corresponding to at least 33 per cent of the total annual gas consumption of the national gas market. During this time, the Member State may decide not to apply third party access to: ancillary services; and temporary storage for the degasification process, and its subsequent delivery to the transmission system. Two years after the expiry of the ten-year delay, all non-household customers have 4.74 to be eligible and third party access must be extended to both ancillary services and temporary storage for the degasification process and its subsequent delivery to the transmission system. Three years thereafter, all customers have to be eligible. The application of this derogation is not subject to any decision of the Commission: 4.75 this derogation merely has to be notified. The possibility for Cyprus to apply this derogation from third party access to its market was expressly provided in the Third Gas IEM Directive.112 Any derogation for an emergent market has to be published in the Official Journal of the European Union.113

109 Member States qualifying as emergent markets may also derogate from the requirements of the Third Gas IEM Directive regarding: the authorization procedure (Art 4), the unbundling of transmission systems and TSO (Art 9), some of the tasks of transmission, storage, and/or LNG system operators (Art 13(1) and (3)), from independent system operators (Art 14), from the designation of DSOs (Art 24), from some of the tasks of DSOs (Art 25(1)), from the unbundling of DSOs (Art 26), from the unbundling of accounts (Art 31), from market opening and reciprocity (Art 37(1)), and/or from direct lines (Art 38). 110 Art 2(31) of the Third Gas IEM Directive. 111 Art 2(31) of the Third Gas IEM Directive. 112 Art 49(2), para 2 of the Third Gas IEM Directive. 113 Art 49(7) of the Third Gas IEM Directive.

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Third Party Access 4.76 Besides emergent markets, a possibility to derogate from third party access is also

provided for emergent regions. Such a derogation is governed by Article 49(4) and (5) of the Third Gas IEM Directive, which are unchanged from the previous regime of Article 28(4) and (5) of the Second Gas IEM Directive. 4.77 The derogation for emergent regions is temporary and may be granted where the

implementation of the Third Gas IEM Directive would cause ‘substantial problems in geographically limited area of a Member State, in particular concerning the development of the transmission and major distribution infrastructure, and with a view to encouraging investment’.114 The scope of the derogations that may be granted is similar to that available for an emergent market, as examined above. However, in this case, contrary to emergent markets, Member States have to apply to the Commission. 4.78 In its assessment of the application, the Commission has to take into account the

following criteria: – the need for infrastructure investments, which would not be economic to operate in a competitive market environment; – the level and payback prospects of investment required; – the size and maturity of the gas system in the area concerned; – the prospects for the gas market concerned; and – the geographical size and characteristics of the area or region concerned, and socio-economic and demographic factors.115 4.79 The scope of any derogation for gas infrastructure other than distribution infra-

structures is limited. A derogation may only be granted where no other gas infrastructure has been established in the area or has been established for less than a ten-year period. The derogation cannot exceed ten years from the first supply of gas in the area.116 4.80 Derogations for distribution infrastructure are limited only in their possible dura-

tion. They cannot be granted for a period longer than 20 years from the first supply of gas via the relevant infrastructure in the area.117 4.81 Before taking any decision on the application for derogation, the Commission must

inform all Member States so as to allow them to submit their remarks and comments. Once the decision is taken, it has to be published in the Official Journal of the European Union. Greece has an express derogation for its existing distribution

114 115 116 117

Art 49(4) of the Third Gas IEM Directive. Art 49(5), para 1 of the Third Gas IEM Directive. Art 49(5), para 2 of the Third Gas IEM Directive. Art 49(5), para 3 of the Third Gas IEM Directive.

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C. Derogations and Specific Cases concessions in the Third Gas IEM Directive. This derogation was also already granted by the Second Gas IEM Directive.118 (4) Gas take-or-pay contracts Prior to the liberalization of the gas market, most of the EU’s gas supply was con- 4.82 tracted under long-term take-or-pay (TOP) contracts,119 aimed at sharing the price and volume risks between producers and buyers, given the long lead times in investment planning and capital intensive operations.120 At the time of the adoption of the First Gas IEM Directive, it was considered that incumbent operators bound by TOP contracts might have an excess of gas following loss of market share and no acquisition of new clients.121 The opportunity to derogate from third party access in case of TOP clauses was accordingly provided in Article 25 of Directive 98/30/EC. This possibility was retained in the Second122 and Third123 Gas IEM Directives, 4.83 TOP clauses being recognized as ‘funding instruments for exploiting gas fields and constructing pipelines’.124 No similar possibility is provided for the electricity sector. The possibility to derogate from third party access in case of TOP clauses in the 4.84 internal market for natural gas is to remain the exception, rather than the rule. It may apply where a natural gas undertaking ‘encounters, or considers it would encounter serious economic and financial difficulties because of its take-or-pay commitments accepted in one or more gas-purchase contracts’.125 To benefit from a temporary derogation, a natural gas undertaking has to apply to 4.85 the Member State concerned or the designated regulatory authority. Depending upon the option chosen by the Member State, the application may be presented 118 Art 49(8) of the Third Gas IEM Directive (which is unchanged from Art 28(8) of the Second Gas Directive) states that: ‘Greece may derogate from Art 4 [authorization procedure], 24 [designation of distribution system operators], 25 [tasks of distribution system operator], 26 [unbundling of distribution system operators], 32 [third party access], 37 [market opening and reciprocity] and/or 38 [direct lines] of this Directive for the geographical areas and time periods specified in the licences issued by it, prior to 15 March 2002 and in accordance with Directive 98/30/EC, for the development and exclusive exploitation of distribution networks in certain geographical areas.’ 119 The characteristics of such TOP contracts are examined at paras 8.159 ff. 120 DGXVII/A3/B3, Directive 98/30/EC, ‘Meeting of Follow-up Group, Take-or-Pay Contracts’ (22 October 1998), 3. 121 C Jones (gen ed), EU Energy Law—Volume I: The Internal Energy Market—The Third Liberalisation Package (3rd edn, Leuven: Claeys & Casteels, 2010), 459. 122 Arts 21(1) and 27 of Directive 2003/55/EC. 123 Arts 32(1) and 48 of Directive 2009/73/EC. 124 Report of the European Parliament of 1 March 2002 on the Proposal for a Directive of the European Parliament and of the Council amending Directives 96/92/EC and 98/30/EC concerning common rules for the internal market in electricity and natural gas—Committee on Industry, External Trade, Research and Energy (2001/0077/(COD)), 78. 125 Art 48(1) of Directive 2009/73/EC.

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Third Party Access before or after the refusal of access. In the latter case, the application is to be presented without delay. Duly substantiated reasons regarding the nature and extent of the difficulties, as well as efforts undertaken to solve them, have to be provided. 4.86 In the absence of reasonable alternative solutions, the Member State concerned

or the designated regulatory authority may grant a derogation from third party access. Such a decision must be notified without delay to the Commission, which decides in the last resort whether to approve, amend or withdraw the derogation. 4.87 Several criteria have to be taken into account by the relevant Member State or its

designated regulatory authority and the Commission when deciding whether to grant a derogation from third party access in the case of TOP clauses. The scope of those criteria was outlined by the Follow-up Group devoted to TOP contracts which met on 22 October 1998, pursuant to the adoption of Directive 98/30/EC.126 4.88 (a) The objective of the Directive: Clearly, the goal is to achieve a competitive gas

market. From the Follow-up Group’s work, it is clear that this criterion should be considered as having primacy. It highlighted that ‘any decision on refusing access should . . . be balanced and justified against the main objective of the directive which is the opposite, namely providing access to the system’. 4.89 (b) The constraints over public service obligations (PSOs) and security of supply:

As highlighted by the Follow-up Group, PSOs—including those related to security of supply—are to be respected where a derogation is to be granted. 4.90 (c) The position of the natural gas undertaking on the gas market and the level of

competition on that market: The notion of ‘position of the natural gas undertaking on the gas market’ was clarified by the Follow-up Group as follows: [t]he position of the gas company would include aspects such as size of the company (area of operation; balance sheet; assets; market share; turnover; etc); the role of the company in international gas trade; the supply and sales portfolio of the company; the extent of the gas infrastructure owned by the company including storage; ownership in other gas/energy companies (up-stream and down-stream); rights and obligations of the company (including public service obligations, if any), etc. As to the level of competition on the gas market, reference was made to ‘the market in which the company operates, which could be regional, national or wider’. It was also highlighted that the competitive analyses should not be limited to the natural gas market but could ‘also assess the general level of competition in the market’. 4.91 (d) The seriousness of the difficulties encountered: The Follow-up Group also

insisted on the need to consider the financial and economical implications for customers whose access may be denied if the derogation were granted. It also

126 DGXVII/A3/B3, ‘Directive 98/30/EC, Meeting of Follow-up Group, Take-or-Pay Contracts’, 22 October 1998, 6–8.

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C. Derogations and Specific Cases outlined the fact that the derogation should be proportionate to the difficulties encountered: ‘depending on the seriousness of the problem, the duration and scope of the derogation and access refusal (0–100 per cent of the requested TPA volumes) should be tailored’. The Follow-up Group did not specify any threshold for the grant of a derogation, considering that it was not precisely quantified and a case-by-case analysis was necessary. The triggering threshold should be one that ‘renders a derogation indispensable for the continued activity of a given gas company’. (e) The date of signature and the terms of the concerned contracts: This crite- 4.92 rion allows a distinction to be drawn between existing and future contracts. As highlighted by the Follow-up Group, this criterion requires that market operators should ‘take account of the changing market circumstances and ensure that future contractual terms would better allow for changes resulting from a more competitive gas market’. In the application of this criterion, derogations for TOP contracts concluded after the entry into force of Directive 2009/73/EC are less likely to be accepted. This was already highlighted at the time of Directive 98/30/EC by the Follow-up Group: in any case, for contracts entered into after the entry into force of the gas directive (ie 10 August 1998), the Commission will scrutinise with particular thoroughness the impact on competition and market developments of a take-or-pay contracts in difficulties including possible alternative contractual options available at the time of signature of the contract and the reasonableness and necessity of a derogation.

(f) The efforts undertaken to address the difficulties: As highlighted by the 4.93 Follow-up Group, the grant of a derogation from TPA in the case of a TOP clause should be the last available solution after the exhaustion and failure of all alternative solutions. Accordingly, efforts to find alternative solutions must be assessed. Such efforts, as highlighted by the Follow-up Group, may include ‘attempts to sell the gas elsewhere; attempts to renegotiate the contract; efforts to increase company efficiency, etc’. (g) The extent to which difficulties were foreseeable at the time of signing the 4.94 TOP clause: This criterion reiterates the prudence necessary in the conclusion of TOP contracts after the entry into force of Directive 2009/73/EC. (h) The level of connection of the system with other systems and their degree of 4.95 interoperability: The scope of this criterion was clarified by the Follow-up Group as follows: not all regional and national gas networks are equally well integrated into the European gas grid. There may also be technical aspects which hamper interoperability with other systems . . . These issues may hamper the possibilities of gas companies in such areas to sell gas outside their traditional supply area in case of serious take-or-pay problems.

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Third Party Access 4.96 The last criterion covers the effects of the possible derogation upon the correct appli-

cation of Directive 2009/73/EC regarding the smooth functioning of the internal market in natural gas. As highlighted by the Follow-up Group, this criterion recalls that the derogation should be applied in a restrictive manner considering its negative effect on the smooth functioning of the internal market in natural gas. 4.97 The derogation regime is less strict for contracts concluded before the entry into

force of the Second Gas IEM Directive, ie before 4 August 2003. For such contracts, the decision on an application for derogation should ensure economically viable outlets. (5) New interconnectors/infrastructure and significant increases of capacities of existing interconnectors/infrastructures 4.98 Third party access may be waived in favour of major new interconnectors/infra-

structures or significant increases in the capacity of the existing interconnectors/ infrastructures. Such derogation is provided for the electricity market by Article 17 of Regulation 714/2009 and for the gas market by Article 48 of the Third Gas IEM Directive. Those Articles reiterate (with only minor modifications) the regime already provided respectively by Article 7 of Regulation 1228/2003 and Article 22 of the Second Gas IEM Directive, a regime which had been clarified by the Commission in a couple of interpretative notes.127 4.99 The rationale behind the third party access derogation in cases of new intercon-

nectors/infrastructure or significant increases in the capacity of existing interconnectors/infrastructures is the need to ensure the realization of such investments. Those investments are, by their nature, highly expensive and risky. The reconciliation of such costs and risks in regulated tariff may be difficult; while operators would require a guarantee regarding the return on their investments, NRAs may be reluctant to include highly expensive and risky projects in the general regulated tariffs.128 In the absence of the socialization of the costs of new major interconnectors/infrastructure or the significant increases of capacities of existing interconnectors/infrastructures, it appears justified, in respect of several of the conditions examined hereafter, to derogate from third party access.

127 Namely: the Note of DG TREN on Directive 2003/55/EC and Regulation 1228/2003 in the Electricity and Gas Internal Market Concerning Exemptions from Certain Provisions of the Third Party Access Regime (30 January 2004); and Commission Staff Working Document on Article 22 of Directive 2003/55/EC Concerning Common Rules for the Internal Market in Natural Gas and Article 7 of Regulation (EC) No 1223/2003 on Conditions for Access to the Network for Crossborder Exchanges in Electricity, New Infrastructure Exemptions, SEC(2009) 642 (6 May 2009) (hereafter, ‘Working Document: New Infrastructure Exemptions’). 128 C Jones (gen ed), EU Energy Law—Volume I: Th e Internal Energy Market—Th e Third Liberalisation Package (3rd edn, Leuven: Claeys & Casteels, 2010), 466, paras 11.70–11.72.

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C. Derogations and Specific Cases For the electricity market, the new infrastructures potentially covered by the 4.100 derogation are ‘new direct current interconnectors’. Alternating current interconnectors may also be granted a derogation in exceptional cases, provided ‘that the costs and risks of the investments in question are particularly high when compared with the costs and risks normally incurred when connecting two neighbouring national transmission systems by an alternating current interconnector’.129 Significant increases of capacity in existing interconnectors may also be granted a derogation.130 For the gas market, the derogation is limited to ‘major new gas infrastructure, 4.101 ie interconnectors, LNG and storage facilities’. Projects employing significant increases of capacity in existing infrastructures, and modifications of such infrastructures enabling the development of new sources of gas supply, may also be eligible for a third party access derogation.131 Several conditions have to be met for the grant of the derogation.132 A first condi- 4.102 tion relates to the enhancement of competition. The investment must enhance competition in electricity/gas supply133 and, should a derogation be granted, this should not be detrimental to competition.134 These two requirements ‘imply that the project must be pro-competitive and thus create benefits for consumers’.135 In assessing this condition, the Commission is particularly attentive to the market power of the operators applying for the derogation.136 Where a dominant undertaking would be a direct or indirect beneficiary of a derogation, conditions would have to be attached to the derogation to address competition concerns. The investment has to increase the opportunities for non-dominant competitors to enter the concerned market or to expand their market position. Capacity caps137 may accordingly be imposed upon the beneficiary of the derogation in the allocation of its new infrastructures capacity.

129

Art 17(1) and (2) of Regulation 714/2009/EC. Art 17(3) of Regulation 714/2009/EC. 131 Art 36(1) and (2) of the Third Gas IEM Directive. 132 Those conditions are identical for the electricity and gas sectors, except for two conditions. 133 Art 17(1)(a) of Regulation 714/2009/EC and Art 36(1)(a) of the Third Gas IEM Directive. 134 Art 17(1)(f) of Regulation 714/2009/EC and Art 36(1)(e) of the Third Gas IEM Directive. 135 Working Document: New Infrastructure Exemptions (n 127), para 30. 136 Working Document: New Infrastructure Exemptions (n 127), para 33: ‘Exemption requests by dominant undertakings in markets served by the new infrastructure are likely to have the greatest potential for harming competition and therefore require particularly careful scrutiny. However, exemption requests introduced by non-dominant undertakings may also in certain circumstances have a negative effect on competition. This may be the case, in particular, where the undertakings requesting the exemption—individually or collectively—have a significant degree of market power or where the exemption might favour the market position of third parties that are either dominant or have a significant degree of market power. This could be the case, for example, where the exemption is requested by a company that has no supply interests, but capacity in the exempted infrastructure is or could be contracted on a long term basis by dominant suppliers.’ 137 Working Document: New Infrastructure Exemptions (n 127), para 34. 130

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Third Party Access 4.103 A second condition to be assessed for the grant of a TPA derogation in such cases is

the level of risks: ‘[is] the level of risks attached to the investments . . . such that the investment would not take place unless an exemption is granted[?]’.138 Two risks may be taken into account: the first is the risk that the investment is not used. This may be caused by the absence of capacity users for the upstream supply or for the downstream demand. A risk of non-use could also be caused by a change in flows following other changes in the system. A second risk is the risk that costs and/or revenues will change in the future. This may occur following a non-use or a change in the market situation or in contract or access terms and conditions.139 The conclusion of long-term contracts is often considered to mitigate those risks.140 Where the investment in the new infrastructure is likely to lead to a monopoly situation, the second type of risk would then be considerably reduced, as well as making it necessary to derogate from third party access (albeit raising questions about whether the first or the fifth conditions, concerning competition, could be met). 4.104 A third condition for third party access derogation in cases of new infrastructure or

significant increase of the capacity of an existing infrastructure relates to the ownership structure: ‘the interconnector/infrastructure must be owned by a natural or legal person which is separate at least in terms of its legal form from the system operators in whose systems that interconnector/infrastructure would be built’.141 This condition aims to ensure that the costs of infrastructure falling outside of the scope of regulated tariffs are not underwritten through such tariffs, so as to guarantee the ring-fencing of the non-regulated activities of TSOs.142 4.105 A fourth condition relates to the levying of charges: ‘charges must be levied on

users of that interconnector/infrastructure’.143 This condition also aims at ringfencing the non-regulated activities of TSOs. 4.106 A fifth condition is the fact that the exemption should not be detrimental to com-

petition or the effective functioning of the internal market or the efficient functioning of the regulated system to which the infrastructure is connected.144 Contrary to the condition related to the enhancement of competition, this condition focuses on the possible negative effects of the exemption itself. It implies the assessment of the repercussions of the exemption on other projects.145

138

Art 17(1)(b) of Regulation 714/2009/EC and Art 36(1)(b) of the Third Gas IEM Directive. Working Document: New Infrastructure Exemptions (n 127), para 41. 140 Such long-term contracts are examined further, first, at paras 4.136 ff, with attention to those concluded prior to the liberalization of the energy market and then, at paras 8.121–8.171, with regard to the conclusion of new long-term contracts. 141 Art 17(1)(c) of Regulation 174/2009 and Art 36(1)(c) of the Third Gas IEM Directive. 142 Working Document: New Infrastructure Exemptions (n 127), paras 53 and 54. 143 Art 17(1)(d) of Regulation 714/2009/EC and Art 36(d) of the Third Gas IEM Directive. 144 Art 17(1)(f) of Regulation 714/2009/EC and Art 36(i) of the Third Gas IEM Directive. 145 Working Document: New Infrastructure Exemptions (n 127), paras 60–63. 139

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C. Derogations and Specific Cases For the electricity sector, an additional condition relates to the absence of coverage 4.107 of the costs from transmission or distribution charges since the partial opening of the electricity market following the adoption of the First Electricity Directive: no part of the capital or operating cost of the interconnector applying for the derogation must have been ‘recovered from any component of charges made for the use of transmission or distribution systems linked by the interconnector’.146 The effect of this condition is to prevent the granting of any derogation to existing interconnectors.147 Finally, for the gas market only, an additional condition relates to the enhance- 4.108 ment of security of supply.148 Several criteria are considered to assess whether a new infrastructure or an increase of capacity in an existing infrastructure enhances the security of supply: – the contribution to a diversification of supply to the relevant market through, for instance, new sources of supply or new routes of supply from an existing source of supply; – the contribution to the achievement of security of supply standards for household customers in the supply markets in accordance with the legislation concerning measures to safeguard security of natural gas supply;149 – the flexibility of supply of the infrastructure project;150 and – the size of the planned project.151 As to the procedure for the grant of a derogation to third party access to a new infra- 4.109 structure or to the significant increases of the capacity of an existing infrastructure, it is the following. The exemption is decided in a first stage by the relevant NRA on a case-by-case basis. Such exemption may cover all or part of the capacity of the new interconnector or infrastructure, or of the existing infrastructure or interconnector whose capacity is significantly increased.152 When deciding to grant an exemption, consideration must be given to the necessity of imposing conditions on the duration of the exemption and the issue of non-discriminatory access to the interconnector/infrastructure. The NRA must also decide upon the rules and mechanisms for management and allocation of capacity of the infrastructure or

146

Art 17(1)(e) of Regulation 714/2009/EC. Working Document: New Infrastructure Exemptions (n 127), para 59. 148 Art 36(1)(a) of the Third Gas IEM Directive. 149 The most recent instrument is Regulation 994/2010/EU [2010] OJ L295/1: see the discussion in Ch 10 on Security of Supply (paras 10.31 ff ). 150 Working Document: New Infrastructure Exemptions (n 127), para 26. Amongst the elements of flexibility, the contribution to LNG terminals may be favoured compared to contribution in gas pipelines since LNG terminals allow a wider choice of location for the import of gas. Another element of flexibility could be related to the existence of an anti-hoarding mechanism. 151 Working Document: New Infrastructure Exemptions (n 127), paras 25–27. 152 Art 17(4) of Regulation 714/2009/EC and Art 36(3) and (6) of the Third Gas IEM Directive. 147

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Third Party Access interconnector in question. Congestion management rules must notably include the obligation to offer unused capacity on the secondary market.153 4.110 ACER is competent to provide an advisory opinion prior to the decision of the

relevant NRA. This possibility is automatic for new interconnectors or significant increases of the capacity of existing interconnectors on the electricity market. On the gas market, ACER may provide an advisory opinion in cases where the infrastructure in question is located in the territory of more than one Member State. Moreover, on the gas market the Agency can exercise the decision-making task conferred upon the relevant NRAs in cases where the NRA(s) were unable to reach an agreement within a certain period of time or upon a joint request from the NRAs concerned.154 4.111 Once a decision has been reached, the NRA(s) must transmit it to the Agency and

to the Commission, and the Commission takes the final decision.155 4.112 Contrary to the regime previously provided in the Second Gas IEM Directive

and in the First Electricity Regulation, under the new regime the decision of the Commission to grant a third party access derogation is limited in time: the Commission’s approval shall lose its effect two years after its adoption in the event that the construction of the interconnector/infrastructure has not yet started, and five years from its adoption in the event that the interconnector/infrastructure has not become operational. A time extension may be granted by the Commission where the delay is due to major obstacles beyond the control of the person to whom the exemption has been granted.156 The Commission is also competent to adopt guidelines for the application of the conditions attached to such derogations.157 (6) Direct lines 4.113 A specific case of third party access may occur where there are direct lines. This

case is governed by Article 34 of the Third Electricity IEM Directive and Article 38 of the Third Gas IEM Directive. Both Articles are unchanged from the previous Second IEM Directives.158 4.114 Direct lines on the electricity market are defined as ‘either an electricity line link-

ing an isolated generation site with an isolated customer or an electricity line linking an electricity producer and an electricity supply undertaking to supply directly 153 Art 17(4) paras 3 and 4 of Regulation 714/2009/EC and Art 36(6) paras 2 and 3 of the Th ird Gas IEM Directive. 154 Art 17(4) para 2 of Regulation 714/2009/EC and Art 36(4) of the Th ird Gas IEM Directive. 155 Art 17(7) and (8) of Regulation 714/2009/EC and Art 36(8) and (9) of the Th ird Gas IEM Directive. 156 Art 17(8) para 5 of Regulation 714/2009/EC and Art 36(9) para 5 of the Th ird Gas IEM Directive. 157 Art 17(9) of Regulation 714/2009/EC and Art 36(10) of the Th ird Gas IEM Directive. 158 Art 22 of the Second Electricity IEM Directive and Art 24 of the Second Gas Directive.

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C. Derogations and Specific Cases their own premises, subsidiaries and eligible customers’.159 For the gas market, direct lines are understood as ‘a natural gas pipeline complementary to the interconnected system’.160 While not clear from the definition in the Third Electricity IEM Directive, it 4.115 appears from the Third Gas IEM Directive that direct lines are part of the distribution or transmission network, depending upon the network to which they are interconnected. Member States have to enable the supply of electricity through direct lines. Two 4.116 cases are targeted for the electricity market: the supply of electricity by electricity producers and electricity supply undertakings established within the territory of the concerned Member State to their own premises, subsidiaries, and eligible customers. The second case is the possibility of all eligible customers within the territory of the concerned Member State to be supplied through a direct line by a producer and supply undertakings. Two cases are also targeted for the gas market. Natural gas undertakings established within the territory of a concerned Member State have to be able to supply the eligible customer through a direct line. Any such eligible customer within the territory of the concerned Member State has to be able to be supplied through a direct line by natural gas undertakings.161 The criteria for granting authorization for the construction of direct lines have to 4.117 be laid down by the Member States. They should be objective, transparent, and non-discriminatory.162 The impact of such direct lines upon third party access is clarified in the Third 4.118 Electricity IEM Directive. According to its Article 34(3), ‘the possibility of supplying electricity through a direct line . . . shall not affect the possibility of contracting electricity in accordance with Article 32’. It follows from this provision that direct lines must comply with TPA on the basis of regulated and published tariffs. Although no similar provision is provided in the Third Gas IEM Directive, the application of third party access to gas direct lines should, as a matter of consistency and logic, be identical. Besides, it should be highlighted that Member States may make any authorization 4.119 to construct a direct line conditional upon either the refusal of system access on the basis of the aforementioned Article 32 related to third party access or upon the opening of a dispute settlement procedure regarding access to the network.163 159

Art 2(15) of the Third Electricity IEM Directive. Art 2(18) of the Third Gas IEM Directive. 161 Art 34(1) of the Th ird Electricity IEM Directive and Art 38(1) of the Th ird Gas IEM Directive. 162 Art 34(2) of the Th ird Electricity IEM Directive and Art 38(2) of the Th ird Gas IEM Directive. 163 Art 34(4) of the Th ird Electricity IEM Directive and Art 38(3) of the Th ird Gas IEM Directive. 160

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Third Party Access 4.120 Finally, a Member State, at least with regard to the electricity market, could refuse

to authorize a direct line if it would obstruct the provisions of the Third Electricity IEM Directive relating to public service obligations.164 (7) Public service obligations 4.121 To ensure the reconciliation of market opening and competition with minimum

standards to customers, Member States are entitled to impose public service obligations (PSOs) upon electricity and natural gas undertakings.165 4.122 Member States may decide in the electricity sector to derogate from third party

access ‘in so far as [its] application would obstruct the performance, in law or in fact, of the obligations imposed on electricity undertakings in the general economic interest and in so far as the development of trade would not be affected to such an extent as would be contrary to the interest of the [Union]. The interest of the [Union] includes, inter alia, competition with regard to eligible customers . . . and Article [106] of the Treaty’.166 4.123 A similar possibility of derogation from third party access is provided by the Third

Gas IEM Directive but at the option of natural gas undertakings. It follows from Article 35(1) of the Third Gas IEM Directive, related to refusal of access, that ‘natural gas undertakings may refuse access to the system where the access to the system would prevent them from carrying out the public service obligations referred to in Article 3(2) which are assigned to them’. 4.124 The possible impact of any PSO-based derogation from third party access should

be proportionate. There should be no other alternative for fulfilling those PSOs which is less restrictive to competition and trade.167 (8) Closed distribution systems 4.125 The Third Energy Package introduced the concept of ‘closed distribution systems’.

The introduction of this concept followed the ECJ’s citiworks judgment.168 This judgment related to a dispute between a supplier of electricity (citiworks) and the operator of the airport of Leipzig/Halle, also operator of the electricity grid of that airport (Flughafen Leipzig/Halle). That grid had been qualified as a private grid by the German Regulatory Authority, the Bundesnetzagentur. According to the German

164

Art 34(5) of the Third Electricity IEM Directive. Art 3(2) of the Third Electricity IEM Directive and Art 3(2) of the Third Gas IEM Directive. Such public service obligations (PSO) are examined in Ch 7. 166 Art 3(14) of the Third Electricity IEM Directive. 167 See the citiworks case, para 60. 168 See the citiworks case, para 60. 165

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C. Derogations and Specific Cases law, the provisions concerning third party access were not applicable to such private grids.169 The dispute was brought before the national court, which decided to question the ECJ about the compatibility of the German law with the provisions of the Second Electricity IEM Directive related to third party access.170 The ECJ considered that the exclusion of third party access could not be justified by the fact that the system to which access was sought constituted a private internal system with no effect on competition because of the low consumption of electricity and which was an accessory to the principal activity related to the operation of an airport. The ECJ accordingly decided that ‘a provision . . . which exempts certain operators of energy supply systems from the obligation to provide third parties with open access to those systems on the ground that they are located on a geographically connected operation zone and that they predominantly serve to supply the energy needs of the undertaking itself and of connected undertakings’ does not respect the principle of third party access and is accordingly incompatible with EU energy law.171 Following this judgment, concern grew that the application of the system opera- 4.126 tors’ obligations to private systems was likely to lead to unnecessary administrative burdens, irreconcilable with such private systems outside the public transmission or distribution grid.172 The Third Energy Package accordingly introduced the concept of ‘closed distribution systems’, which could be eligible, on certain conditions, for some exemptions from the distribution system operators’ obligations. Closed distribution systems are governed by Article 28 of both the Third Electricity 4.127 IEM Directive and the Third Gas IEM Directive. A closed distribution system is defined as a ‘system which distributes [electricity/gas] within a geographically confined industrial, commercial or shared services site and does not . . . supply household customers . . . if: (a) for specific, technical or safety reasons, the operations or the production process of the users of that system are integrated; or (b) that system distributes [electricity/gas] primarily to the owner or operator of the system or to their related undertakings’.173

169 Art 110 of the German Law of 7 July 2005 related to the supply in electricity and gas, at the time of the dispute. 170 See the citiworks case, para 22: ‘By its question, the national court is asking, in essence, whether Article 20(1) of Directive 2003/54 is to be interpreted as precluding a provision, such as the first point of Paragraph 110(1) of the EnWG, which exempts certain operators of energy supply systems from the obligation to provide third parties with open access to those systems on the ground that they are located on a geographically connected operation zone and predominantly serve to supply the energy needs of the undertaking itself or of connected undertakings, where it is not established that open third-party access to those systems would impose an unreasonable burden.’ 171 See the citiworks case, para 65. 172 Commission Staff Working Paper, Interpretative Note on Directive 2009/72/EC Concerning Common Rules for the Internal Market in Electricity and Directive 2009/73/EC Concerning Common Rules for the Internal Market in Natural Gas: Retail Markets (22 January 2010), 10. 173 Art 28(1) of both the Third Electricity and Third Gas IEM Directives.

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Third Party Access 4.128 The scope of this definition of closed distribution systems is clarified by Recital

(13) of the Third Electricity IEM Directive and Recital (28) of the Third Gas IEM Directive: Industrial, commercial or shared services sites such as train station buildings, airports, hospitals, large camping sites with integrated facilities or chemical industry sites can include closed distribution systems because of the specialized nature of their operations. 4.129 A closed distribution system should not in principle supply household customers,

except on an incidental basis.174 4.130 Closed distribution systems are distinct from ‘public networks’175 for the supply of

electricity and natural gas. They result, most of the time, from historic situations implied by the localization of certain end users, usually industrial, from the public system. In certain cases, an end user is downstream from another end user. In order to provide access for the downstream end user to the public electricity or natural gas system, the upstream client allows the downstream client to pass through its installations, potentially subject to services or valuable considerations. Before the adoption of the Third Energy Package, such situations were governed by ‘wheeling agreements’, also known as ‘pass-through contracts’. 4.131 In the light of those characteristics and to guarantee the legal security of pre-exist-

ing situations, the Third Energy IEM Directives allow Member States to implement a derogation regime for closed distribution systems. The possibility to exempt closed distribution systems from the adoption of regulated tariffs and their publication prior to the entry into force is expressly provided.176 Should this exemption be applied, Member States have to provide the possibility for end-users connected to a closed distribution system to bring the applicable tariffs or methodologies before the NRA for their review and approval a posteriori.177 There is accordingly no derogation from third party access: such access is to be applied to closed distribution systems, but it may be applied, for instance, on the basis of contractually negotiated tariffs. It should be highlighted that in its first reading of the proposals for the Third Electricity and Gas Directives, the European Parliament had recommended leaving the possibility to Member States to exempt industrial sites

174 Art 24(4) of both the Third Electricity and the Third Gas IEM Directives: ‘[i]ncidental use by a small number of households with employment or similar associations with the owner of the distribution system are located within the area served by a closed distribution system shall not preclude an exemption . . . being granted’. 175 Commission Staff Working Document, Interpretative Note on Directive 2009/72/EC Concerning Common Rules for the Internal Market in Electricity and Directive 2009/73/EC Concerning Common Rules for the Internal Market in Natural Gas: Retail Markets (22 January 2010), 10 (hereafter, ‘Interpretive Note: Retail Markets’): ‘the closed distribution system must be located on a geographically confined site. This distinguishes it from the general public network’. 176 Art 28(2) of both the Third Electricity and the Third Gas IEM Directives. 177 Art 28(3) of both the Third Electricity and the Third Gas IEM Directives.

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C. Derogations and Specific Cases from third party access.178 The European Parliament defined an industrial site as ‘a privately-owned geographical area with a power grid which is primarily designed to supply industrial consumers in that area’. The proposed regime to derogate from third party access in case of such industrial sites was justified by the European Parliament as follows: [o]perators of energy grids on industrial sites do not have to comply with obligations on the operation of the grid in all EU Member States. This has no legal basis. EU legislation should enable Member States to provide derogations for industrial sites to ensure legal certainty. The differentiated treatment of industrial grids ensures proportionate efforts while not compromising the aims of liberalisation. This amendment does not compromise the rights of end consumers on industrial sites. Typically, there are few independent end consumers supplied from industrial sites.179

Another exemption from system operators’ obligations is expressly provided for the 4.132 electricity sector. Member States may provide for NRAs to exempt the operator of a closed distribution system from the requirement to procure the energy used to cover energy losses and reserved capacity in the system according to transparent, non-discriminatory, and market-based procedures.180 Besides the express exemptions laid down in the Directives, Member States may 4.133 decide on other exemptions, as underlined by the Commission in its Interpretative Note: Where there is an obligation on Member States to develop rules applying to DSOs they may design targeted and proportionate rules for closed DSOs that take into account their particular circumstances. This is particularly important as the precise nature of many obligations on system operators is set by Member States and not directly laid down in the Electricity or Gas Directive.181

In the absence of the application of derogations to closed distribution systems, such 4.134 systems are subject to the obligations of system operators regarding tariffs, PSOs, grid management, etc.

178 European Parliament Legislative Resolution of 18 June 2008 on the Proposal for a Directive of the European Parliament and of the Council Amending Directive 2003/54/EC Concerning Common Rules for the Internal Market in Electricity, A6-0191/2008, 22, and European Parliament Legislative Resolution of 9 July 2008 on the Proposal for a Directive of the European Parliament and of the Council Amending Directive 2003/55/EC Concerning Common Rules for the Internal Market in Natural Gas, A6-257/2008, 27. 179 Report of the European Parliament on the Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/54/EC Concerning Common Rules for the Internal Market In Electricity, 19 May 2008, A6-0191/2008, 22. 180 Art 28(2)(a) of the Third Electricity IEM Directive. 181 Interpretive Note: Retail Markets (n 175), 11.

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Third Party Access 4.135 Closed distribution systems provide a legal basis for wheeling agreements and are

accordingly likely to be based upon similar contractual clauses. The following common contractual clauses may be of particular relevance: – the determination of an access point to the transport or distribution grid. Such a clause might read: ‘taking due account of the physical constraints of the site for the access of the downstream end-user to the grid, the upstream end-user grants to the downstream end-user a long-term, reliable and secure access to the grid through the connection point up to a capacity of . . .’; – the point where the property and risks are transferred. This point is usually the point where the electricity is put at the disposal of the downstream end-user. This clause might be drafted as follows: ‘the property and the risks attached to the wheeled electricity shall pass from the upstream end-user to the downstream end-user at the point of putting at disposal’; – the interruption of supply of the downstream end-user. The upstream enduser is usually not responsible for such interruptions since it is not part of the contract but merely makes its installations available to facilitate the supply. For instance: ‘since the upstream end-user has no incidence on the grid and the connection, it cannot be responsible to the downstream user for incidences on the grid or the connection’; – the maintenance of the installations necessary to the wheeling of the electricity and/or natural gas. For instance: ‘each party commits to maintain its installations in good state and secure and reliable conditions for the entire duration of the wheeling contract and having regard to the physical constraints of the site towards the grid’; – the allocation procedures of the downstream end-user in order to avoid unbalance on the grid. The allocation procedures of the system operator or of the access responsible party may be imposed. For example: ‘the downstream enduser shall apply the allocation procedures imposed by the TSO/DSO or, should the case be, the Access Responsible Party, and shall have in any event the same Access Responsible Party as the upstream end-user, in conformity with the applicable legislation’; – the allocation of the costs for the use of the transport and/or distribution grid. This might read: ‘unless otherwise agreed, the downstream end-user shall pay its share, or the equivalent, in the costs for the access and connection incurred by the upstream end-user for the site’. (9) Position of long-term contracts: pre-liberalization long-term contracts 4.136 Third party access may be hindered by long-term contracts booking most of the

capacity of, inter alia, transmission or distribution grids, interconnectors or storage facilities. Restrictions to third party access are particularly to be found in long-term contracts concluded prior to the liberalization of the energy markets, usually in the 108

C. Derogations and Specific Cases context of energy transit. During its Energy Sector Inquiry, DG COMP underlined that ‘pre-liberalisation contracts are the main reason why primary capacity is booked long-term by historical incumbents’.182 It also underlined that: most capacity on crucial transit lines—which are vital for market integration— is in the hands of historic players. The transit contracts signed by these historic players before liberalisation will not expire, on average, before 2022. As a consequence, new entrants have little access to most of the transit pipelines, which in practice means that shipping gas over distances covering several pipelines is hardly possible.183

This subsection accordingly focuses on pre-liberalization long-term contracts. The 4.137 possibility to adopt new long-term contracts following the opening of the electricity and gas markets is examined later in the chapter devoted to Energy Contracts.184 First, the evolution of EU energy legislation regarding pre-liberalization long-term 4.138 contracts is analysed (at paras 4.139 ff ), before turning to the question of the sanctity of such contracts (at paras 4.156 ff ). (a) Evolution of EU Energy Legislation Regarding Pre-liberalization 4.139 Long-term Contracts (i) First Energy Package, the Commission Communication on ‘Stranded Costs’ and the ECJ’s judgment in Vereniging voor Energie, Milieu en Water: Long-term contracts which pre-dated liberalization were addressed in the First Electricity IEM Directive. Article 24 provided a transitional regime allowing for derogations from certain provisions of the liberalized electricity market, including third party access, where respect for prior commitments or guarantees of operations would be endangered: (1) Those Member States in which commitments or guarantees of operation given before the entry into force of this Directive may not be honoured on account of the provisions of this Directive, may apply for a transitional regime which may be granted by the Commission, taking into account, amongst other things, the size of the system concerned, the level of interconnection of the system and the structure of its electricity industry. The Commission shall inform the Member States of those applications before it takes a decision, taking into account respect for confidentiality. This decision shall be published in the Official Journal of the European Communities. (2) The transitional regime shall be of limited duration and shall be linked to expiry of the commitments or guarantees referred to in paragraph 1. The transitional regime may cover derogations from Chapters IV, VI and VII of this Directive. 182 Commission, DG Competition, Energy Sector Inquiry—Issues Paper (15 November 2005), 18, para 45. 183 Commission, DG Competition, Energy Sector Inquiry—Issues Paper (15 November 2005), 24. 184 Ch 8, at paras 8.119 ff.

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Third Party Access Applications for a transitional regime must be notified to the Commission no later than one year after the entry into force of this Directive. 4.140 No similar transitional regime was provided in the First Gas IEM Directive, which

only considered the possibility of derogation from third party access in cases of serious economic and financial difficulties. 4.141 Following the adoption of the First Electricity IEM Directive, several Member

States expressed, alongside the use of the transitional regime provided in Article 24 of Directive 96/92/EC, their wish to introduce State aid mechanisms to support the adaptation of their electricity companies to the introduction of competition under favourable conditions. Such mechanisms were accepted, as long as they were limited to the historical costs of commitments or guarantees that could no longer be honoured following the liberalization of the electricity market, generally referred to as ‘stranded costs’.185 4.142 In July 2001, the Commission published the Communication on the Methodology

for Analysing State Aid Linked to Stranded Costs.186 This Communication determined the eligible stranded costs and the extent to which aid for such costs would be compatible with the EU’s State aid rules. Long-term purchase contracts were explicitly cited amongst possible stranded costs. To be eligible, the following conditions had to be fulfilled: (1) the ‘commitments or guarantees of operation’ had to be anterior to the entry into force of the First Electricity Directive, ie 19 February 1997; (2) such ‘commitments or guarantees of operation’ must have presented the risk of not being honoured following the adoption of the First Electricity Directive, ie they should become non-economical and affect the competitiveness of the concerned undertaking; (3) the ‘commitments or guarantees of operation’ had to be irrevocable; and (4) stranded costs are economic costs corresponding to the actual sums invested, paid, or payable in application of the ‘commitments or guarantees of operation’. 4.143 The scope of the transitional regime provided by Article 24 of Directive 96/92/EC

was clarified by the ECJ’s judgment in Vereniging voor Energie, Milieu en Water (commonly know as the ‘VEMW case’) of 7 June 2005.187 The ECJ considered that contracts concluded prior to the liberalization of the electricity markets were

185 For a deeper analysis of this point, see PD Cameron, Competition in Energy Markets, Law and Regulation in the European Union (2nd edn, Oxford: OUP, 2007), 432–446. 186 Commission Communication relating to the Methodology for Analysing State Aid Linked to Stranded Costs (25 July 2001); see Commission Press Release IP/01/1077: ‘Commission adopts document on “Methodology for analyzing State aid linked to stranded costs” in the electricity sector.’ 187 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, Nederlands

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C. Derogations and Specific Cases not per se exempted from, inter alia, third party access. To benefit from such an exemption, the procedure provided in Article 24 of Directive 96/92/EC had to be followed. Should that not be the case, any advantage to an undertaking previously in a monopoly situation would be incompatible with the principle of access to the system, the cornerstone of the liberalization of the electricity markets: Equal treatment of this kind could be compromised if it were accepted that each Member State could, outside of the procedure and conditions laid down in Article 24 of the Directive, confer an advantage on the undertaking previously holding its monopoly in order to safeguard performance of the long-term contracts which that undertaking concluded prior to the liberalisation of the electricity market. That would run counter to the objective of the Directive set out in recital (12) in its preamble, according to which ‘whatever the nature of the prevailing market organisation, access to the system must be open in accordance with this Directive and must lead to equivalent economic results in the States and hence to a directly comparable level of opening-up of markets and to a directly comparable degree of access to electricity markets.188

The ECJ accordingly decided that priority access granted on the basis of commit- 4.144 ments contracted prior to the liberalization of the electricity market but without compliance with the procedure provided in Article 24 of Directive 96/92/EC led to the grant of a discriminatory access and was accordingly incompatible with Directive 96/92/EC.189 The ECJ furthermore rejected the argument based upon the protection of legiti- 4.145 mate expectations and of legal certainty. It considered that no elements indicated the maintenance of the situation applicable at the time the concerned contracts were concluded: 75. In the present case, the [EU] institutions did not adopt any measure or assume any form of conduct which could have pointed to the maintenance of the legislative situation in force in 1989 and 1990, under which the international contracts of the SEP were concluded . . . 78. It cannot therefore be argued that the [EU] institutions created well-founded expectations on the part of the SEP that a monopoly for the importation of electricity into the Netherlands would be maintained or that the SEP would be allowed to enjoy a preferential right to use the network for the cross-border transmission of

Elektriciteit Administratiekantoor BV [2005] ECR I-4983 (hereinafter, ‘VEMW ’). For discussion, see the Opinion of Advocate General Jääskinen in Case C-264/09 Commission v Slovakia, Opinion of 15 March 2011, paras 46–54; in its judgment of 15 September, the ECJ relied upon the relevant Investment Protection Agreement which bound Slovakia prior to its accession to the EU. 188 VEMW, para 63. 189 VEMW, para 71: ‘[i]t follows that priority access to a portion of the capacity for the crossborder transmission of electricity conferred on an operator by reason of commitments assumed before the Directive entered into force, but without compliance with the procedure set out in Article 24 of the Directive, must be regarded as being discriminatory within the terms of Articles 7(5) and 16 of the Directive and as therefore being contrary to those articles’.

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Third Party Access electricity until the expiry of the international contracts which had been entered into. 4.146 (ii) Second Energy Package: The Second Energy Package mostly focused upon

pre-liberalization long-term term contracts in the natural gas sector. Directive 2003/55/EC expressly maintained, in its Article 32(1), the validity of long-term gas contracts concluded before the liberalization of the internal natural gas market in accordance with the Transit Directive:190 Directive 91/296/EEC shall be repealed with effect from 1 July 2004, without prejudice to contracts concluded pursuant to Article 3(1) of Directive 91/296/EEC, which shall continue to be valid and to be implemented under the terms of the said Directive. 4.147 Existing gas contracts were also addressed in Regulation 1775/2005/EC, in order

to specify that such contracts are subject to congestion management procedures.191 It followed from Articles 5(3) and (4) of that Regulation that: (3) When transmission system operators conclude new transportation contracts or renegotiate existing transportation contracts, these contracts shall take into account the following principles: (a) in the event of contractual congestion, the transmission system operator shall offer unused capacity on the primary market at least on a day-ahead and interruptible basis; (b) network users who wish to re-sell or sublet their unused contracted capacity on the secondary market shall be entitled to do so. Member States may require notification or information of the transmission system operator by network users. (4) When capacity contracted under existing transportation contracts remains unused and contractual congestion occurs, transmission system operators shall apply paragraph 3 unless this would infringe the requirements of the existing transportation contracts. Where this would infringe the existing transportation contracts, transmission system operators shall, following consultation with the competent authorities, submit a request to the network user for the use on the secondary market of unused capacity in accordance with paragraph 3. 4.148 The scope of application of congestion management procedures to pre-liberaliza-

tion long-term contracts was clarified in the guidelines drafted by the Commission for Article 5 of Regulation 1775/2005. The draft guidelines, presented at the 11th Madrid Forum on 18–19 May 2006, are particularly relevant here: 2.6 Requirements of existing transportation contracts (Art 5(4)) (63) Article 5(4) of the Regulation stipulates that, as a general rule, the provisions of Article 5(3) also apply to existing contracts . . . unless this would infringe the requirements of the existing contracts.

190 Council Directive 91/296/EEC of 31 May 1991 on the transit of natural gas through grids [1991] OJ L147/37. 191 On such congestion management procedures, see Ch 8, at paras 8.121–8.142.

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C. Derogations and Specific Cases (64) DG TREN services take the view that the requirements of the existing contracts would only be infringed if: • the contract in question could not be properly executed anymore by applying the interruptible UIOLI [ie Use-It-Or-Lose-It] approach as required by Article 5(3)(a), or • explicit provisions in existing transportation contracts concluded before 1 July 2006 forbid the application of Article 5(3) of the Regulation. (65) DG TREN services tend to consider the former case a reinforcement of the interruptible UIOLI principle meaning that the initial capacity holder would not finally lose the capacity contracted, but can dispose of it by nominating the gas flows meant to serve his customers. (66) As for the latter case, the contractual provisions in question would have to comply with the general competition rules. Where this is not the case provisions would be void and thus could not infringe the requirements of an existing contract. (67) In the event, however, that such provisions comply with the general competition rules, Article 5(4) establishes an obligation for the TSO to call on the capacity holder for offering his unused capacity on the secondary market in line with the provisions laid down in Article 5(3)(b).192

The final version of those guidelines, dated 12 June 2007, provides that: 4.14. Requirements of existing transportation contracts (Art. 5(4)) 38. Article 5(4) of the Regulation stipulates that, as a general rule, the provisions of Article 5(3) also apply to existing contracts, unless this infringes the requirements of the existing contracts. 39. The principle of selling unused capacity on an interruptible basis as required by Article 5(3)(a) need not constitute an infringement of the requirements of the existing contracts. As the capacity is sold on an interruptible basis, the initial capacity holder would not lose the capacity contracted, but could dispose of it by nominating the gas flows meant to serve his customers . . . 41. In the event that the network user or TSO could successfully prove that the requirements of his transportation contract have been infringed, Article 5(4) establishes an obligation for the TSO to call on the capacity holder to offer his unused capacity on the secondary market in line with the provisions laid down in Article 5(3)(b). This means that, in such a case, either the TSO would exceptionally take part in the secondary market with the network user’s capacity on that network user’s behalf or the network user would be able to use the capacity on the secondary market.193

192 Congestion Management Procedures, Draft Explanatory Note of DG Energy & Transport on Article 5 ‘Principles of Capacity Allocation Mechanism and Congestion Management Procedures’, paras 3, 4, and 5, as well as para 2(2) of the Annex to Regulation (EC) No 1775/2005 of the European Parliament and of the Council of 28 September 2005 on Conditions for Access to the Natural Gas Transmission Networks, paras 63–67, p 16. 193 Commission, Staff Working Document on Capacity Allocation and Congestion Management for Access to the Natural Gas Transmission Networks Regulated under Article 5 of Regulation (EC) No 1775/2005 on Conditions for Access to the Natural Gas Transmission Networks, SEC(2007) 822 (12 June 2007), paras 38–40.

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4.149

Third Party Access 4.150 What about the position of long-term gas contracts, which had been concluded

before the liberalization of the internal natural gas market and were in accordance with the Transit Directive, following the adoption of Regulation 1775/2005/ EC? The question of whether the derogation regime for such contracts would be maintained was at issue in a case brought before the ECJ by the Belgian gas TSO Fluxys against the Commission de Régulation de l’Electricité et du Gaz ((CREG), the NRA for the federal Belgian level). The ECJ was deprived of the opportunity to settle the question in its judgment of 9 December 2010, after Fluxys withdrew from the procedure.194 However, the position taken by Advocate General Trstenjak in her Opinion of 28 September 2010 does provide some guidance. CREG considered that the absence of any explicit derogation in the 2005 Regulation for such pre-liberalization long-term gas contracts led to the implicit removal of the derogation provided by Article 32(1) of Directive 2003/55/EC. The Advocate General, however, considered that the mere failure of the Regulation to mention any derogation for such contracts could not lead to its implicit abrogation, particularly given the important economic consequences of the removal of that derogation.195 The Advocate General also considered that the derogation provided for such pre-liberalization long-term gas contracts was justified by the need to respect the ‘legitimate expectation’ of shippers which held such contracts. The derogation, therefore, did not discriminate when compared with other types of gas contracts which are fully subject to the rules of the liberalized natural gas market.196 4.151 With regard to the electricity sector, Directive 2003/54/EC did not retain the transi-

tional regime provided in Article 24 of Directive 96/92/EC and did not invoke in any of its provisions the question of pre-liberalization long-term contracts. Such contracts are only mentioned in the Annex to Regulation 1228/2003/EC, which provided guidelines on the management and allocation of available transfer capacities of interconnections between national systems. According to this Annex, ‘existing long-term contracts shall have no pre-emption rights when they come up for renewal’.197 4.152 (iii) Commission Staff Working Document: The question of pre-liberalization

long-term contracts was assessed in 2006 by the Commission in a Staff Working Document,198 in the light of both the Second Energy Package, adopted in 2003,

194 Case C-241/09 Fluxys v Commission de Régulation de l’Electricité et du Gaz (CREG), judgment of 9 December 2010. 195 Case C-241/09 Fluxys v Commission de Régulation de l’Electricité et du Gaz (CREG), Opinion of Advocate General Trstenjak (28 September 2010), paras 68–72. 196 Case C-241/09 Fluxys v Commission de Régulation de l’Electricité et du Gaz (CREG), Opinion of Advocate General Trstenjak (28 September 2010), paras 73–75. 197 Regulation 1228/2003, Annex, para 2: Guidelines on the Management and Allocation of Available Transfer Capacity of Interconnections between National Systems, Position of Long-term Contracts. 198 Commission, Staff Working Document on the Decision C-17/03 of 7 June 2005 of the Court of Justice of the European Communities, Preferential Access to Transport Networks under

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C. Derogations and Specific Cases and the ECJ’s 2005 judgment in the VEMW case. Considering the electricity market, the Commission recalled that ‘Directive 2003/54/EC . . . [no] longer provide for any specific derogations in relation to the application of non-discriminatory rules to historical long-term supply and capacity reservation contracts’.199 It did, however, highlight that existing long-term contracts are not outlawed following the judgment of the ECJ in VEMW. They merely cannot benefit from priority allocation200 of capacities: ‘[u]nder the Directive and the Regulation, only the priority allocation of transmission or distribution capacities is incompatible with [EU] rules. Long-term supply contracts are not per se invalid under the Court judgment, although they cannot be subject to preferential treatment’.201 The Commission adopted a similar position with regard to the gas market, with the 4.153 exception of ‘transit gas contracts that were concluded and implemented under the terms of Directive 91/296/EEC’, in line with Article 32(1) of Directive 2003/55/ EC. The possible exemption of TOP contracts in cases of serious economic and financial difficulties was also recalled by the Commission. (iv) Third Energy Package: The Third Energy Package gives much less attention to 4.154 pre-liberalization long-term contracts. For the electricity market, neither Directive 2009/72/EC nor Regulation 714/2009/EC specifically mentions such contracts. For the gas market, Directive 2009/73/EC does not retain the substance of Article 32(1) of Directive 2003/55/EC, but simply repeals the 2003 Directive entirely. As to the application of congestion management procedures to pre-liberalization longterm contracts, it is reinforced in the new Regulation 715/2009, Recital 21 which insists upon the application of congestion management and capacity-allocation principles to existing contracts.202 Furthermore, provisions related to congestion

the Electricity and Gas Internal Market Directives, SEC(2006) 547 (26 April 2006) (hereafter, ‘Working Document: Preferential Access’). 199 Working Document: Preferential Access (n 198), 3, para 6. 200 The issues of priority access, discrimination, and derogations (under the Second Electricity IEM Directive 2003/54/EC and the Electricity Cross-border Exchanges Regulation 1228/2003/ EC) were in issue in Case C-264/09 Commission v Slovakia (judgment of 15 September 2011). In his Opinion, AG Jääskinen advised that such priority access rights (granted for 16 years in return for investment in the construction of a transmission line) were discriminatory under Art 20 of Directive 2003/54/EC and would thus require justification (since they had not been granted pursuant to a derogation under Art 7 of the Regulation 1228/2003/EC). He found such justification via what is now Art 351 TFEU, under which pre-existing international obligations concluded before Slovakia’s membership of the EU could not be affected by the EU Treaties (paras 68–110). The ECJ did not examine the arguments under the Directive in any detail, but essentially agreed with the approach of its Advocate General with regard to the Investment Protection Agreement which applied to Swiss investments in Slovakia and which had been entered into prior to Slovak accession to the EU. Thus, the preferential access agreement counted as an ‘investment’ protected by that Agreement and was therefore covered by Art 351 TFEU (paras 29–53). 201 Working Document: Preferential Access (n 198), 3, para 7. 202 According to Recital (21) of Regulation 715/2009: ‘[t]here is substantial contractual congestion in the gas networks. The congestion-management and capacity-allocation principles for new or newly negotiated contracts are therefore based on the freeing-up of unused capacity by enabling

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Third Party Access management rules no longer distinguish (as they did under the old Article 5(3) and (4) of the 2005 Regulation) between existing contracts, on the one hand, and renegotiation of such contracts and conclusion of new contracts, on the other.203 4.155 It thus appears that, from the expiry of the transposition period (ie 3 March 2011),

the Third Energy Package’s provisions shall apply in full to pre-liberalization longterm contracts. 4.156 (b) Sanctity of pre-liberalization long-term contracts: In the light of the evolution

of the provisions applicable to pre-liberalization long-term contracts in EU energy legislation, one should question the extent to which the sanctity of such pre-liberalization long-term contracts is affected. In the energy sector, the sanctity of such contracts covers the highly significant issues of contractual capacities, contractual tariffs, and the allocation of those capacities. 4.157 To address this question, it should first be examined whether pre-liberalization

long-term contracts remain valid following the adoption of the Third Energy Package. Some elements of an answer to this question may be found in the impact assessment of the Commission accompanying the preparatory work of the Third Energy Package:204 4.1.5. Modifying the treatment of pre-liberalisation long term contracts for gas transmission Article 32(1) of Directive 2003/55/EC exempts long-term contracts for gas transmission concluded pursuant to Article 3(1) of Directive 91/296/EEC. A possibility would be to delete or change this provision in order to clarify that the legislation also applies to such contracts. 4.158

In the end, this option was not retained: 6.5. Actions to regulate long-term contracts in gas Article 32(1) of Directive 2003/55/EC exempts long-term contracts for gas transmission concluded pursuant to Article 3(1) of Directive 91/296/EEC. However, at

network users to sublet or resell their contracted capacities and the obligation of transmission system operators to offer unused capacity to the market, at least on a day-ahead and interruptible basis. Given the large proportion of existing contracts and the need to create a true level playing field between users of new and existing capacity, those principles should be applied to all contracted capacity, including existing contracts’. 203 Art 16 of Regulation 715/2009 accordingly states that: ‘[t]he transmission system operator shall implement and publish non-discriminatory and transparent congestion-management procedures which facilitate cross-border exchanges in natural gas on a non-discriminatory basis and which shall be based on the following principles: (a) in the event of contractual congestion, the transmission system operator shall offer unused capacity on the primary market at least on a dayahead and interruptible basis; and (b) network users who wish to re-sell or sublet their unused contracted capacity on the secondary market shall be entitled to do so.’ 204 Commission, Staff Working Document—Accompanying the Legislative Package on the Internal Market for Electricity and Gas, Impact Assessment, SEC(2007) 1179 (19 September 2007).

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C. Derogations and Specific Cases this stage, further legislative measures concerning long-term contracts in gas do not appear to be proportionate.

This choice was confirmed in the impact assessment summary:

4.159

Policy options and analysis of impacts: . . . – Pre-liberalisation long-term contracts The current framework has created some confusion. One possibility would be to delete or change the provisions to make it clear that the legislation also applies to such contracts, but this may question the validity of pre-liberalisation contracts for import of gas into the EU. The Commission has concluded that the Directive should not be amended on this issue. It is clear that all contracts concluded before the entry into force of Directive 2003/55/EC continue to be valid insofar as they comply with [EU] competition law and that these contracts are equally subject to the provisions of the of the current framework . . . Conclusions: comparing the options – Action to regulate long-term contracts in gas: the cost-benefit analysis of further legislative measures on long-term contracts in gas was not conclusive.

In the face of those elements, it could reasonably be advanced that pre-liberali- 4.160 zation long-term contracts remain in force on aspects which are not contrary to the EU competition rules and to the rules of the internal electricity and natural gas markets. This position was supported by Advocate General Trstenjak in her Opinion in the Fluxys case: the ‘legitimate expectation’ of shippers having such contracts justified the derogation provided for such pre-liberalization long-term gas contracts.205 Accordingly, assuming that such contracts respect the competition rules,206 they 4.161 should be enforceable subject to the regulatory rules laid down by the Third Energy Package and as specified by each Member States following the transposition of 205

Case C-241/09 Fluxys v Commission de Régulation de l’Electricité et du Gaz (CREG), Opinion of Advocate General Trstenjak (28 September 2010), paras 73–75; the withdrawal of Fluxys from the case meant that the ECJ did not rule on the substance of the matter: see judgment of 9 December 2010. See, also, the Opinion of AG Jääskinen (15 March 2011) in Case C-264/09 Commission v Slovakia (judgment of 15 September 2011), paras 32–37. 206 Which includes both EU antitrust and State aid rules. The Commission has recently, and not uncontroversially, applied what is now Art 107 TFEU to long-term power purchase agreements in both Poland and Hungary: Commission Decision of 25 September 2007 on State aid awarded by Poland as part of power purchase agreements (etc) [2009] OJ L83/1 and Commission Decision C41/05 of 4 June 2008 on the State aid awarded by Hungary through power purchase agreements [2009] OJ L225/53; the Hungarian Decision was upheld by the General Court of Joined Cases T-80/06 and T-182/09 Budapest: Erömü v Commission (judgment of 13 February 2012). EU State aid law was applied because the State-owned single buyer in each country was the purchaser and because State legislation made provision for generating the revenue used to pay the costs under the power purchase agreements (PPAs). For discussion, see L Hancher, ‘Long-term Contracts and State Aid: A New Application of the EU State Aid Regime or a Special Case?’, in J-M Glachant, D Finon, and A de Hauteclocque (eds), Competition, Contracts and Electricity Markets: A New Perspective (Cheltenham (UK): Edward Elgar, 2011), Ch 10.

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Third Party Access this package into their national legal orders. Pre-liberalization long-term contracts would therefore be subject to regulated congestion management procedures, regulated tariffs and regulated capacity allocation procedures. 4.162 Such regulated allocation procedures should be unlikely to interfere with the sanc-

tity of pre-liberalization long-term contracts; such procedures are mostly operational. The application of regulated tariffs and regulated congestion management procedures, however, may well affect the sanctity of pre-liberalization long-term contracts. Such an effect could be diminished for the congestion management procedures by the non-application of the ‘use-it-or-lose-it’ procedure. According to such procedures, the holder of such unused capacities would lose them to the profit of the TSO, which would then sell them. The capacity-holder would accordingly lose both its capacities and the revenues from such capacities. This could reasonably be argued to be a disproportionate interference with the sanctity of preliberalization long-term contracts.207 Softer procedures, such as ‘use-it-or-lend-it’ or ‘use-it-or-sell-it’, could be more proportionate. Under a use-it-or-lend-it regime, the non-used capacity of a given capacity-holder is put at the disposal of other grid users but is reallocated to the initial capacity-holder as soon as it decides to use it.208 Under a use-it-or-sell-it approach, a capacity-holder has the choice between using its capacity and transforming into a financial right: ie reallocating its capacity to the market in subsequent allocation procedures and then benefiting from the income generated by this reallocation.209 The proportionality of use-it-or-lend-it and useit-or-sell-it approaches may be implied from the Guidelines of the Commission concerning Article 5 of Regulation 1775/2005, discussed in paras 4.148–4.149. It follows from those Guidelines that ‘the initial capacity-holder will not lose the capacity contracted, but could dispose of it by nominating the gas flows meant to serve his customers’.210 It is also underlined that, for the sale of unused capacity 207

This was notably recognized by some of the NRAs in implementing congestion management procedures into their national orders. In Belgium, for instance, the Commission de Régulation de l’Electricité et du Gaz opted in its project Grid Code for use-it-or-sell-it, considering that a use-it-orlose-it mechanism was ‘too drastic and complex from a legal perspective’ (Proposition (C)090716CDC-882, ‘arrêté royal relatif au code de bonne conduite en matière d’accès au réseau de transport de gaz naturel, à l’installation de stockage pour le gaz naturel et à l’installation de GNL et modifiant l’arrêté royal du 12 juin 2001 relatif aux conditions générales de fourniture de gaz naturel et aux conditions d’octroi des autorisations de fourniture de gaz naturel’, available at ). 208 Congestion Management Procedures, Draft Explanatory Note of DG Energy & Transport on Article 5, ‘Principles of capacity allocation mechanisms and congestion management procedures’, paras 3, 4, and 5 as well as para 2.2 of the Annex to Regulation 1775/2005/EC on Conditions for Access to the Natural Gas Transmission Networks [2005] OJ L289/1 (28 September 2005), and the 11th meeting of the Madrid Forum (18–19 May 2006), 7: ‘any capacity not nominated for use would be offered to other network users, but falls back to the initial capacity holder at the moment he nominates it for use’. 209 See, Commission de Régulation de l’Energie ((CRE) the French NRA), ‘Activity Report, June 2008’, Annexes, 155. 210 Commission, Staff Working Document on Capacity Allocation and Congestion Management for Access to the Natural Gas Transmission Networks Regulated under Article 5 of Regulation (EC) No 1775/2005 on Conditions for Access to the Natural Gas Transmission Networks,

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C. Derogations and Specific Cases on the secondary market, ‘either the TSO would exceptionally take part in the secondary market with the network user’s capacity on that network user’s behalf or the network user would be able to use the capacity on the secondary market’.211 This analysis of the proportionate application of the provisions of the Third Energy 4.163 Package to pre-liberalization long-term gas contracts appears to be confirmed by the Framework Guidelines recently adopted by the ACER on Capacity Allocation Mechanisms for the European Gas Transmission Network.212 Such Framework Guidelines are to apply to cross-border interconnection points between two or more Member States as well as adjacent entry-exit systems within the same Member State, provided that the points are subject to booking procedures by users.213 They provide for the bundling of the existing capacity contracted before the entry into force of the network code to be adopted in application of the framework guidelines. It is, however, provided that this bundled capacity shall then be ‘split between the original capacity holders proportionally to their capacity rights’. In detail:214 The network code(s) shall ensure that existing capacity contracted before the entry into force of the same network code(s) shall be bundled no later than five years thereafter. To this end, parties to existing capacity contracts shall aim to reach an agreement on the split of the bundled capacity at the [relevant] interconnection points . . . National Regulatory Authorities may mediate between the parties to promote such agreements. If no agreement on the split of the bundled capacity is reached, the network code(s) shall provide that the bundled capacity shall be considered split between the original capacity holders proportionally to their capacity rights. The parties to an existing capacity contract shall adjust the original capacity contracts with their respective Transmission System Operators according to the agreed split of the bundled capacity or, if no agreement is reached, to the above proportionality rule, as further detailed in the network code(s). The duration of the amended capacity contracts with bundled services shall not exceed the duration of the original capacity contracts. Any further details of this procedure shall be set out in the network code(s).

Besides these arguments, several mechanisms could be envisaged to ensure the pro- 4.164 tection of the sanctity of pre-liberalization long-term energy contracts with regard to tariffs and congestion management procedures. Those mechanisms are: (i) Article 1

SEC(2007) 822 (12 June 2007), para 39 (hereafter, ‘Working Document: Capacity Allocation and Congestion Management (Gas)’). 211 Working Document: Capacity Allocation and Congestion Management (Gas) (n 210), para 40. 212 ACER, ‘Framework Guidelines on Capacity Allocation Mechanisms for the European Gas Transmission Network’, FG-2011-G-001 (3 August 2011) (hereafter, ‘ACER: Framework Guidelines on Capacity Allocation (Gas)’). 213 ACER: Framework Guidelines on Capacity Allocation (Gas), point 1.2. 214 ACER: Framework Guidelines on Capacity Allocation (Gas), point 2.4.2.

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Third Party Access of the First Protocol to the ECHR; (ii) the Energy Charter Treaty (or, indeed, relevant bilateral investment treaties (BITs)215); and (iii) the regime concerning stranded costs (already discussed at paras 4.139 ff ).216 Without engaging in a full analysis of those mechanisms, the following general guidelines may be provided. 4.165 (i) First Protocol to the European Convention on Human Rights and Fundamental

Freedoms (ECHR):217 On the assumption that pre-liberalization long-term contracts are valid under the competition rules, they would constitute assets likely to fall under the protection of Article 1 of the First Protocol to the ECHR. According to that Article: (1) Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. (2) The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties. 4.166 The concept of ‘possessions’ is autonomously understood by the ECtHR. An

established interest with economic value will generally fall within the scope of this notion. A legal right to receive a certain benefit, such as a contract, may accordingly be covered by Article 1 of the First Protocol to the ECHR. Three types of infringement of the peaceful enjoyment of one’s possessions are identified by the ECtHR: deprivation, control of use, and interference with peaceful enjoyment. 4.167 Deprivation is established where an owner’s property rights are terminated, usu-

ally following their legal transfer by law or the exercise of the legal power to do so. Control of use of property is distinguished from deprivation by the fact that it leads

215 See Case C-264/09 Commission v Slovakia (judgment of 15 September 2011): Opinion of Advocate General Jääskinen, paras 68–110, and the judgment of the ECJ, paras 29–53 (concerning the Investment Protection Agreement, a BIT concluded between Switzerland and Slovakia prior to Slovakia’s accession to the EU, and what is now Art 351 TFEU). 216 Although note that, in its recent State aid Decisions on Polish and Hungarian PPAs (n 206), the Commission required termination of the PPAs (Poland) and removal of purchase obligations and recovery of the aid as if the contracts had never existed (Hungary): this, in effect, seems a direct order by the Commission to terminate private contracts: see Hancher, n 206, 253–254. See, further, the Opinion of Advocate General Jääskinen in Case C-264/09 Commission v Slovakia (judgment of 15 September 2011), paras 32–37, where he ‘doubts that the Member State should be required to annul a valid private law contract . . . such an action would be contrary to the principle of legal certainty and would risk punishing innocent third parties in respect of a breach committed by a Member State’ (para 37). The ECJ’s judgment would appear to reach a similar result (esp paras 48–52). 217 For a deeper analysis of this point, see A Johnston ‘Chapter 4: Take-or-Pay Contracts, for Renewables: An Analysis of European Legal Issues’ in B Delvaux, M Hunt, and K Talus (eds), EU Energy Law and Policy Issues (Rixensart (Belgium): Euroconfidentiel, 2008), 274–283.

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C. Derogations and Specific Cases either to the imposition of positive requirements upon the use of the property or to restrictions of owners’ activities. If the conditions for deprivation or control of use are not met, interference with peaceful enjoyment could be shown for ‘any kind of interference which is hard to pin down’.218 If an infringement to peaceful enjoyment of one’s possessions is shown, compensa- 4.168 tion may be granted, according to certain conditions. There is no guarantee of full compensation at market value, legitimate objectives of public interest being the possible ground and justification for the interference. The question of whether the application of regulated tariffs and regulated congestion 4.169 management procedures, as transposed into national laws, constitute an infringement to peaceful enjoyment of pre-liberalization long-term contracts could be settled by the courts. The justifiability of those measures and the proportionality of their interference with the sanctity of such contracts are then likely to be taken into account. (ii) Energy Charter and the Energy Charter Treaty:219 The Energy Charter was 4.170 adopted on 17 December 1991 in order to develop energy cooperation amongst the states of Eurasia. It was followed by the adoption, on 17 December 1994, of the Energy Charter Treaty (ECT). This Treaty aims to promote East–West industrial cooperation in domains such as investment, transit, and trade.220 Both the Energy Charter and the ECT are relevant in the context of the question of 4.171 the pre-liberalization long-term energy contracts. Here, we focus upon the promotion and protection of investments provided by the ECT. The notion of ‘investment’ is defined in this Energy Charter as ‘every kind of asset, 4.172 owned or controlled directly or indirectly by an Investor’.221 This notably includes ‘any right conferred by law or contract or by virtue of any licences and permits granted pursuant to law to undertake any Economic Activity in the Energy Sector’.222 Preliberalization long-term energy contracts, assuming that they are compatible with the EU competition rules, are likely to fall within the scope of this definition. Investments are promoted and protected by Part III of the ECT. According to its 4.173 Article 10(1): Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable and transparent conditions for

218 L Sermet, Th e European Convention on Human Rights and Property Rights (rev. edn, Strasbourg: Council of Europe Publishing, 1998), 29. 219 For an outline, see the discussion at paras 11.01 ff, and the references cited therein. 220 For general discussion and further references, see T Wälde (ed), Th e Energy Charter Treaty: An East-West Gateway for Investment and Trade (The Hague: Kluwer Law International, 1996) and C Bamberger and T Wälde, ‘The Energy Charter Treaty’, in M Roggenkamp et al (eds), Energy Law in Europe: National, EU and International Regulation (2nd edn, OUP, 2007), Ch 3. 221 Art 1(6), para 1 of the ECT. 222 Art 1(6), para 1(f) of the ECT.

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Third Party Access Investors of other Contracting Parties to make Investments in its Area. Such conditions shall include a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment. Such Investments shall also enjoy the most constant protection and security and no Contracting Party shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment, or disposal. In no case shall such Investments be accorded treatment less favourable than that required by international law, including treaty obligations. Each Contracting Party shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party. 4.174

Article 13 of the ECT protects investments against expropriation: (1) Investments of Investors of a Contracting Party in the Area of any other Contracting Party shall not be nationalized, expropriated or subjected to a measure or measures having effect equivalent to nationalization or expropriation (hereinafter referred to as ‘Expropriation’) except where such Expropriation is: (a) for a purpose which is in the public interest; (b) not discriminatory; (c) carried out under due process of law; and (d) accompanied by the payment of prompt, adequate and effective compensation. Such compensation shall amount to the fair market value of the Investment expropriated at the time immediately before the Expropriation or impending Expropriation became known in such a way as to affect the value of the Investment (hereinafter referred to as the ‘Valuation Date’). Such fair market value shall at the request of the Investor be expressed in a Freely Convertible Currency on the basis of the market rate of exchange existing for that currency on the Valuation Date. Compensation shall also include interest at a commercial rate established on a market basis from the date of Expropriation until the date of payment. (2) The Investor affected shall have a right to prompt review, under the law of the Contracting Party making the Expropriation, by a judicial or other competent and independent authority of that Contracting Party, of its case, of the valuation of its Investment, and of the payment of compensation, in accordance with the principles set out in paragraph (1). (3) For the avoidance of doubt, Expropriation shall include situations where a Contracting Party expropriates the assets of a company or enterprise in its Area in which an Investor of any other Contracting Party has an Investment, including through the ownership of shares.

4.175 These provisions of the ECT may be invoked for the protection of any investment

realized within the EU. While in the past most of the disputes targeted by such provisions concerned the former countries of the Soviet Union and Turkey, in 122

C. Derogations and Specific Cases recent years more and more disputes have involved Member States of the EU. For example, under its provisions a dispute was brought on 17 April 2009 before the International Centre for Settlement of Investment Disputes by the German undertaking Vattenfall against the German Federal Republic.223 The dispute concerned the construction of a power plant in Germany. Two disputes were also brought against Hungary by the undertakings Electrabel (Belgium) and EDF (France) in the context of the implementation of long-term electricity contracts.224 A dispute between an investor and a contracting party is governed by Article 26 of 4.176 the ECT. If it cannot be settled amicably, it may be brought before: the courts of the contracting party; a previously agreed dispute settlement procedure; or an international arbitration tribunal, such as the International Centre for Settlement of Investment Disputes, a sole arbitrator or an ad hoc arbitration tribunal established under the Arbitration Rules of the United Nations Commission on International Trade Law or the Arbitration Institute of the Stockholm Chamber of Commerce. Case law related to the implementation of Article 26 is compiled by the Energy Charter Secretariat.225 It follows from this case law that three conditions have to be met for a contracting party to be found liable to an investor: (1) the investment interference must be the result of an action from the State or one of its bodies; (2) the investment interference must constitute a violation of the obligations of contracting parties regarding the promotion and protection of investments (Part III of the ECT); and (3) the investment interference must lead to a loss or a damage for the investor. The substantial reduction of the economic value and of the security of investments has been accepted in the past as a loss and damage for investors.226 The question of whether the application of regulated tariffs and regulated conges- 4.177 tion management procedures, as transposed into national laws, could fall within the scope of the ECT could yet be settled by courts. The justifiability of those measures and the proportionality of their interference with the sanctity of such contracts will then have to be examined.227

223

See . Electrabel SA v Republic of Hungary (ICSID Case No ARB/07/19) and EDF International SA v Republic of Hungary, United Nations Commission on International Trade Law. 225 Available at . 226 Nykomb Synergetics Technology Holding AB v Latvia (16 December 2003), available at . 227 See the Opinion of AG Jääskinen in Case C-264/09 (n 216), at paras 60–64 on the ECT. See, further, J Kleinheisterkamp, ‘The Next 10 Year ECT Investment Arbitration: A Vision for the Future—From a European Law Perspective’ (LSE Law, Society and Economy Working Paper 7/2011). 224

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5 REGULATORY AUTHORITIES AND EUROPEAN COOPER ATION

A. Introduction B. National Regulatory Authorities (1) (2) (3) (4) (5) (6)

5.01 5.02 5.03 5.06 5.16 5.21 5.36

C. European Bodies (Florence and Madrid Fora, and ACER)

A single regulatory authority Independence Objectives and general principles Duties and powers of NRAs Accountability, appeal, and review Regulation on energy market integrity and transparency 5.42

(1) Introduction (2) Cooperation within the Florence and Madrid Fora (3) Cooperation within ACER, ENTSO-E, and ENTSO-G

5.48 5.48 5.50 5.57

A. Introduction As the detail of EU-level legislation on the energy sector has grown, so has the 5.01 realization that the effective application and enforcement of such rules are dependent upon strong, well-resourced, and independent national energy regulators in the Member States. At the same time, the impact of the cross-border relations between such regulators, both within the EU and with third countries, has become clearer, as has the need for a degree of coordination at European level between regulatory initiatives and activities (particularly where market liberalization and integration have faced conflicting national regimes and demands, causing delays, cost increases, and creating disincentives to invest in important new generation, transmission, and transit capacity). This chapter discusses the current incarnation of the provisions on national regulatory authorities in the energy sector and the growth of cooperation on energy issues at the EU level, in the form of various formal and informal bodies and institutions. The growth in the detail and complexity of provisions concerning these regulatory issues and bodies is a key characteristic of the Third Package.

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B. National Regulatory Authorities 5.02 The development of EU-level legislative requirements concerning national regu-

latory authorities (NRAs) over the three legislative packages has been striking. After meeting with initial resistance from some Member States, which wished to retain their own specific national regulatory arrangements, successive reforms have provided more detailed rules concerning NRAs. The Second Package (see Articles 23 (Elec) and 25 (Gas)) generalized the requirement of specific national energy regulatory authorities in each Member State across the EU, with a specified set of minimum powers and a requirement that such NRAs be independent from the energy industries with whose regulation they were charged. A requirement that such NRAs coordinated their activities inter se was also introduced, as was the need to communicate with the Commission. These have been developed and new provisions added by the Third Package. Many of the specific functions of NRAs in particular fields are discussed in the individual chapters devoted to these issues (see, eg, unbundling (Ch 3) and third party access (TPA) (Ch 4)), while the potential role of NRAs under other EU energy legislation is also addressed (see Part III on security of supply). Here, we will lay out the general framework concerning NRAs under the Third Package. (1) A single regulatory authority 5.03 The Third Package makes clear that ‘[e]ach Member State shall designate a single

national regulatory authority at national level’ (Articles 35(1) (Elec)1 and 39(1) (Gas)2); this is a change from the Second Package, under which it was possible for Member States to spread the competences and tasks of energy regulation at national level across one or more bodies (eg an energy regulator, a government ministry, a national competition authority). Previously, a number of Member States had reserved tariff decisions and some other matters to government ministries; the new provisions on the independence of NRAs would also create problems for such an approach to core NRA functions today: this will be discussed shortly. Nothing in the Third Package prevents this single NRA from remaining an entity made up of several bodies (for example a director, a board, and a secretariat) with different decision-making responsibilities. However, in its Interpretive Note on the regulatory authorities,3 the Commission emphasizes that ‘such structures all need to be integrally part of the single [NRA] entrusted with the duties and powers listed

1

Third Electricity IEM Directive 2009/72/EC [2009] OJ L211/55. Third Gas IEM Directive 2009/73/EC [2009] OJ L211/94. 3 Commission Staff Working Paper: Interpretive Note on Directive 2009/72/EC Concerning Common Rules for the Internal Market in Electricity and Directive 2009/73/EC Concerning Common Rules for the Internal Market in Natural Gas: The Regulatory Authorities (Brussels, 22 January 2010) (hereafter, ‘Interpretive Note: Regulatory Authorities’), 4. 2

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B. National Regulatory Authorities in the [Third Package] Directives and Regulations and each of these bodies and structures must meet all the independence requirements [therein]’ (on which see paras 5.06 ff ). However, the Third Package does make provision for two possible exceptions from 5.04 this default position with regard to NRAs, insofar as regional regulatory authorities (Articles 35(2) (Elec) and 39(2) (Gas)) and small and isolated systems (Articles 35(3) (Elec) and 39(3) (Gas)) are concerned. With regard to regional authorities, ‘[p]aragraph 1 of this Article shall be without prejudice to the designation of other regulatory authorities at regional level within Member States’: this is intended to accommodate those Member States whose federal or devolved structure divides such regulatory powers along sub-national regional lines. In the case of ‘small systems on a geographically separate region’, meanwhile, a Member State may ‘by way of derogation from paragraph 1 of this Article’ also designate a regional regulator where the consumption of that region in 2008 was less than 3 per cent of that Member State’s total consumption (which in practice is likely to apply only to small islands). In both cases, however, there should be only one national representative for that Member State in the Agency for the Co-operation of Energy Regulators (ACER) (on which see paras 5.57 ff ), so arrangements will have to be made at national level to designate that representative accordingly. Exactly how far a Member State has discretion to allocate the tasks otherwise 5.05 entrusted to the single NRA to such ‘other’ regulatory authorities is not entirely clear from the wording of these provisions. It has been suggested that the small and isolated systems may be given a fully-fledged regulator whose territorial scope is limited to that geographically separated area, while regional regulatory authorities might enjoy a wide range of those powers ordinarily granted to the single NRA, subject to competence in the last resort for that single NRA, particularly where the matters involved have a national (as opposed to purely regional) aspect.4 (2) Independence The provisions on the independence of NRAs have been significantly strength- 5.06 ened by the Third Package, effectively resulting in a form of unbundling or ringfencing of the duties of NRAs from all outside powers which might seek to direct or instruct them in their activities (see the reference in para 5.07 to the NRA being ‘legally distinct and functionally independent’). These far-reaching provisions may have significant consequences, not just for national institutions, but also for the energy regulatory systems and practices of many Member States. They are closely connected with provisions concerning the accountability of NRAs for the performance of their duties (discussed at paras 5.36 ff ). 4 E Cabau, ‘National Regulatory Authorities’, in C Jones (gen. ed.), EU Energy Law, Volume I: The Internal Energy Market—The Third Liberalisation Package (3rd edn, Leuven: Claeys & Casteels, 2010), ch 6, 221–222.

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Regulatory Authorities and European Cooperation 5.07 (a) The general principle: Articles 35(4) (Elec) and 39(4) (Gas) provide that

‘Member States shall guarantee the independence of the regulatory authority and shall ensure that it exercises its powers impartially and transparently’. To achieve this, each Member State is required in particular to ensure that, when carrying out its regulatory tasks,5 its NRA: (a) is legally distinct and functionally independent from any other public or private entity; (b) ensures that its staff and the persons responsible for its management: (i) act independently from any market interest; and (ii) do not seek or take instructions from any government or other public or private entity . . . This requirement is without prejudice to close cooperation, as appropriate, with other relevant national authorities or to general policy guidelines issued by the government not related to the [NRA’s] regulatory powers and duties. . . . 6 5.08 Thus, both as an institution and in its personnel, the Member State must ensure

the independence of its energy NRA. Institutionally, a NRA can no longer be a part of a national government department but is required to have a legally distinct status, ensuring that it can take its decisions in an autonomous manner. The Commission’s Interpretive Note takes the view that this also precludes the sharing of offices and personnel between the NRA and government bodies (or, indeed, any private entity),7 which bears a striking resemblance to the position with regard to unbundling (discussed in Ch 3). 5.09 The provisions concerning the NRA’s staff and management are designed to pre-

vent it from becoming beholden to particular outside influences, whether political or economic: in this way, the Commission hopes that the NRA will contribute to the creation of a ‘stable and predictable investment climate’ and will respect the requirement to take its decisions impartially (Interpretive Note, at p 6). It is noteworthy, however, that the Directive is less detailed in this area with regard to NRAs than in its provisions concerning the independence of the staff of the independent transmission operator (ITO) (see Article 19 in each of the Third IEM Directives, and our discussion at paras 3.56 ff ).8 Nevertheless, the Commission’s Interpretive 5 Defined as those ‘conferred upon it by this Directive and related legislation’, thus including other tasks under the Third IEM Directives relating to, eg TPA and unbundling, as well as other legislation such as the latest Electricity and Gas Regulations (eg their Art 3) and possibly also measures concerning Security of Supply and Carbon Capture and Storage (for discussion of the ‘competent authority’ to be designated under those provisions, see paras 10.43 ff and Ch 13.B.2 (esp para 13.39) respectively). 6 Note also that this does not preclude judicial review or parliamentary supervision of the NRA’s decisions or activities ‘in accordance with the constitutional laws of the Member States (Recitals 34 (Elec) and 30 (Gas)). 7 Interpretive Note: Regulatory Authorities (n 3), 6. 8 eg there are no detailed provisions concerning time intervals between work in the private sector and then moving to the NRA or vice versa.

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B. National Regulatory Authorities Note (at p 7) makes a range of suggestions concerning the more detailed implications of the general position laid down in Articles 35(4) (Elec) and 39(4) (Gas). Member States should develop national rules to protect such independence in the NRA’s staff, preventing them from holding positions or investments in energy companies and requiring the NRA and the appointing authority to the NRA’s Board to verify compliance with these requirements on a case-by-case basis. Further, the Commission has taken the view that dissuasive sanctions should be established at national level, to be imposed against anyone attempting to direct, instruct, or improperly influence the NRA in its decision-making. One difficult issue under these provisions will concern the extent to which Member 5.10 State governments remain free to develop their own national energy policy and require that the NRA contribute to meeting such policy goals. The Third IEM Directives specifically do not intend to prejudice the operation of such general government policy guidelines, insofar as they are compatible with the EU Treaties and legislation and where they do not relate to the NRA’s powers and duties. Where national policy goals become rather specific, it may be difficult to adopt them without risking infringement of the rules on the independence of the NRA in the performance of the wide range of tasks with which it is entrusted under the Third IEM Directives.9 (b) Safeguarding NRA independence: Articles 35(5) (Elec) and 39(5) (Gas) of the 5.11 Third IEM Directives also endeavour to protect the independence of the NRA in its activities. They require Member States to ensure that: (a) the [NRA] can take autonomous decisions, independently from any political body, and has separate annual budget allocations, with autonomy in the implementation of the allocated budget, and adequate human and financial resources to carry out its duties; and (b) the members of the board of the regulatory authority or, in the absence of a board, the regulatory authority’s top management are appointed for a fi xed term of five up to seven years, renewable once.

In regard to point (b) . . . Member States shall ensure an appropriate rotation scheme for the board or the top management. [They] may be relieved from office during their term only if they no longer fulfil the conditions set out in this Article or have been guilty of misconduct under national law. (i) Autonomous and independent decision-making: The Commission’s Interpretive 5.12 Note suggests (at p 9) that this autonomy has both an ex ante and an ex post aspect: the former requires the NRA to be left to take decisions without interference, 9 See, eg, the UK’s Transmission Access Review Process, and in particular, Department of Energy and Climate Change, ‘Government Response to the technical consultation on the model for improving grid access’ (27 July 2010), where it claimed to be laying down the ‘strategic policy framework within which Ofgem will regulate the market’ by requiring that certain costs relating to grid access be ‘socialized’ across all parties liable for use of system charges, rather than ‘fi xing or approving any specific methodology’ (at 12 and 25).

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Regulatory Authorities and European Cooperation without the need for prior approval or authorization (albeit within the goals of the national energy policy, provided that this is compatible with EU law); the latter ‘means that the decisions of the NRA are immediately binding and directly applicable without the need for any formal or other approval or consent of another public authority or any other third parties’, although they may be subject to judicial review or other independent appeal routes established at national level. 5.13 (ii) Budget and financial resources: The ‘power of the purse’ has been a key ele-

ment in the independence and autonomy of public bodies throughout the ages, and with the expanding role attributed to NRAs by the Th ird Package, it was important to ensure that they were adequately resourced and that the tightening of the purse strings was not a threat which could be used by national governments to undermine the NRA’s independence. At the same time, the Directives do not seek to prevent the operation of normal national parliamentary scrutiny of such budgets, as Recitals 34 (Elec) and 30 (Gas) acknowledge: national budgetary law and rules should provide the framework within which the rules on the NRA’s budget allocation and implementation should be set under national law. Where that budget is part of the overall State budget, the Commission’s Interpretive Note suggests (at p 9) that the allocation for the NRA must now clearly be separated from the general budget, to ensure that the allocation can be identified and assessed as adequate to allow the NRA to perform its functions. Once allocated, it is clear that the NRA shall have autonomy in implementing that budget and, in accordance with Articles 35(4)(b)(ii) (Elec) and 39(4)(b)(ii) (Gas) (discussed at paras 5.07 ff ), it can neither seek or receive instructions on how it should be spent. 5.14 (iii) Board/management appointment and term: Fixed-term appointments aim to

ensure that the senior positions in the NRA cannot be subjected to appointment and dismissal by political whim or displeasure, thus protecting the independence of the NRA and the autonomy of its decision-making processes over time. In its Interpretive Note (at p 11), the Commission stresses that ‘the power of Member States to appoint members of the board of the NRA . . . should not result in any instruction being given concerning the regulatory powers and duties of the NRA’. This kind of political influence may be easier to criticize than to prove and weed out, however, in spite of the provisions on transparency. 5.15 (c) Nature of the principle and provisions under the Directives: It should also

be emphasized that these provisions are not exhaustive of the requirement of the NRA’s independence and should rather be seen as key elements which are required to be specified precisely in the Directives. The general requirement of independence may still catch other national arrangements and structures not explicitly addressed directly in these provisions.

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B. National Regulatory Authorities (3) Objectives and general principles (a) General principles: transparency and impartiality: As previously noted, 5.16 Articles 35(4) (Elec) and 39(4) (Gas) provide that ‘Member States shall . . . ensure that [the NRA] exercises its powers impartially and transparently’. Impartiality in decision-making is of course a core element in any scheme of regulation, aiming to ensure that decisions are taken in the general interest and based on objective criteria. In its Interpretive Note (at p 5), the Commission asserts that Member States must provide for dissuasive sanctions to be imposed where the impartiality rule is breached. Transparency is increasingly viewed as a general principle of EU law,10 and it is a 5.17 key element of the balance struck by the Third Package with regard to the role of NRAs. On the one hand, they are granted wide-ranging new powers and responsibilities, and a firmly independent decision-making function; the quid pro quo for this is that their activities must be open to scrutiny, to ensure impartiality and accountability11 to users of the system and to the national system’s own structures of political responsibility. Thus, the rules for an NRA’s decision-making and other procedures should be published, and information concerning the NRA, its organization, and structure should be made available to the public. The Commission also argues in its Interpretive Note (at p 5) that transparency requires consultation of stakeholders before key decisions are adopted, including publication of consultation documents, public hearings, and collation and publication of responses to such consultation, including reasons for how those responses were considered and taken into account. Final NRA decisions should also be made public, thus informing the public about the reasons for such decisions and showing the impartiality with which such decisions are taken. Similarly, such transparency should also extend to a report on how the budget allocated was in fact spent (Interpretive Note, at p 5), in coordination with the NRA’s reporting duties (see Articles 37(1)(e) (Elec) and 41(1)(3) (Gas), discussed at para 5.38). (b) Objectives: Under Articles 36 (Elec) and 40 (Gas) of the Third Package 5.18 Directives, NRAs are provided with a series of general objectives. In the performance of its regulatory tasks under these Directives, the NRA is to take ‘all reasonable measures . . . within the framework of their duties and powers’ to pursue the following objectives: (a) promoting, in close cooperation with [ACER], regulatory authorities of other Member States and the Commission, a competitive, secure and environmentally sustainable internal market in electricity/natural gas within the [EU], and effective market opening for all customers and suppliers in

10 11

See, eg, Art 15 TFEU. On accountability of NRAs generally, see paras 5.36 ff.

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(b) (c)

(d)

(e)

(f)

(g)

(h)

the [EU], and ensuring appropriate conditions for the effective and reliable operation of electricity/gas networks, taking into account long-term objectives; developing competitive and properly functioning regional markets within the [EU] in view of the achievement of the objectives referred to in point (a); eliminating restrictions upon trade in electricity/natural gas between Member States, including developing appropriate cross-border transmission capacities to meet demand and enhancing the integration of national markets which may facilitate electricity/natural gas flows across the [EU]; helping to achieve, in the most cost-effective way, the development of secure, reliable, and efficient non-discriminatory systems that are consumeroriented, and promoting system adequacy and, in line with general energy policy objectives, energy efficiency as well as the integration of large- and small-scale production of electricity/gas from renewable energy sources and distributed generation/production in both transmission and distribution networks; facilitating access to the network for new generation/production capacity, in particular removing barriers that could prevent access for new market entrants and of electricity/gas from renewable energy sources; ensuring that system operators and system users are granted appropriate incentives, in both the short and the long term, to increase efficiencies in system performance and foster market integration; ensuring that customers benefit through the efficient functioning of their national market, promoting effective competition and helping to ensure consumer protection; and helping to achieve high standards of public service12 in electricity supply/ for natural gas, contributing to the protection of vulnerable customers and contributing to the compatibility of necessary data exchange processes for customer switching.

5.19 These objectives are neither a conferral of competence nor of specific powers,

but so that (for example) they do not establish general competence in competition law enforcement or the pursuit of energy efficiency. In such areas, close consultation with other relevant national authorities is envisaged by the Th ird Package, to ensure the coordination of the activities of these different bodies in the overall pursuit of these general objectives: thus, any competences of the NRAs in these areas are also not exclusive in nature. While it would in theory be possible for a Member State to be in breach of the Th ird IEM Directives were an NRA to fail to take measures within its powers to achieve these objectives, in practice this would be difficult for the Commission to establish. It would have

12

In the Third Electricity IEM Directive, ‘universal and public service’.

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B. National Regulatory Authorities to show that the measures not taken were: reasonable, within the NRA’s powers and duties, and not an encroachment upon other authorities’ competences.13 The specific duties and powers of NRAs are laid down in the subsequent provisions 5.20 of the Third Package Directives, to which we now turn. (4) Duties and powers of NRAs By contrast with the position under the Second Package Directives (where a list 5.21 of duties was provided, but very few specific powers of NRAs were specified), the Third IEM Directives in Electricity and Gas make significant changes (Articles 37 (Elec) and 41 (Gas)). The NRA’s duties have been expanded greatly, but it has also been laid down for the first time in EU-level legislation that a Member State must also grant its NRA significant powers to ensure that it is able to carry out its functions effectively. Both the duties and the powers listed under these Directives are a minimum harmonization list: Member States are free, insofar as this is compatible with EU law (eg concerning free movement or competition), to require NRAs to perform further duties and/or to confer greater powers upon them than required under the Third Package. The NRA’s powers and duties relating to particular topics under the Third Package 5.22 are addressed in the relevant specific chapters (in particular, on unbundling and the independent system operator (ISO) and ITO options (Articles 37(3) and (5) (Elec) and 41(3) and (5) (Gas), see Ch 3). The general provisions are discussed in the following sections. (a) Duties: Under the Third Electricity and Gas IEM Directives, Articles 37(1) 5.23 and 41(1) (respectively) provide a long list (paragraphs (a) to (u) in both cases) of the minimum duties of the NRAs. In large part, these lists are identical for both electricity and gas, diverging in substance only where specific differences between the two require.14 It is not helpful simply to reproduce the full list here and the reader is referred to the Directives themselves for full details; insofar as these duties relate to certain specific topics, they have been covered elsewhere in this volume (eg concerning: consumer protection, in Ch 7; unbundling in Ch 3; and TPA in Ch 4). In its Interpretive Note, the Commission divides these duties into ‘core’ and ‘monitoring’ duties, in part because it is possible for Member States to provide that the latter may be performed by a body other than the NRA (we will return to this point shortly).

13

Cabau (n 4), 229. Viz: in the Electricity Directive, paras (r), (s), and (t); and in the Gas Directive, paras (f), (n), (s), and (t). 14

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Regulatory Authorities and European Cooperation 5.24 (i) Core duties: The Commission considers the core NRA duties to be those which

relate to: – tariffs for access to transmission and distribution networks (including fixing or approving tariffs or methodologies for their calculation); – unbundling (checking for cross-subsidies); – general oversight of energy companies (ensuring compliance with the rules of EU law); – consumer protection (ensuring effective enforcement of the Annex I measures (discussed in Ch 7) and access to consumption data); and – implementation of, and compliance with, legally binding decisions of the Commission or ACER (Articles 37(1)(d) (Elec) and 41(1)(d) (Gas)). 5.25 Two of these categories are worthy of more detailed discussion, in line with their

treatment in the Commission’s Interpretive Note. The first concerns network tariffs, laid down in general in paragraph (1)(a) of the relevant Articles and developed in more detail in paragraphs (6) to (8) and (10) of each. Under paragraphs (6) and (7), the NRA is required to fix or approve both network tariffs/methodologies and the terms/methodologies for network access (including balancing services and cross-border infrastructures). These must be approved, set, and published ‘sufficiently in advance of their entry into force’. This is a change from the Second Package, where it was still possible for Member States to require the NRA to submit such matters to another body (often the relevant government department) for final approval: now, this task must be performed by the NRA. In practice, the NRA will take such decisions on the basis of a proposal from the transmission system operator (TSO), distribution system operator (DSO), or liquefied natural gas (LNG) system operator, or a proposal agreed between any of them and their network users (see Recitals 36 (Elec) and 32 (Gas)). 5.26 In performing this tariff/methodology-setting function, the NRA ‘shall ensure

that transmission or distribution system operators are granted appropriate incentive, over both the short and long term, to increase efficiencies, foster market integration and security of supply and support the related research activities’ (Articles 37(8) (Elec) and 41(8) (Gas)). This illustrates the need for the coordination of the NRA’s work with that of ACER, since (for example) those research plans are submitted to ACER for its opinion.15 5.27 The second category, and another noteworthy innovation of the Third Package, is

the conferral of a general competence upon NRAs to ensure compliance with EU law within their remit. Strictly, the Third IEM Directives refer to ‘ensuring compliance of transmission and distribution system operators and, where relevant, system owners, as well as of any electricity/natural gas undertakings, with their obligations

15

Interpretive Note: Regulatory Authorities (n 3), 14.

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B. National Regulatory Authorities under this Directive and other relevant [EU] legislation, including as regards crossborder issues’. In its Interpretive Note, the Commission argues that (without prejudice to its own role in securing compliance with the TFEU) these provisions mean that ‘the NRA has the power to ensure compliance with the entire sector-specific regulatory “acquis communautaire ” relevant to the energy market, and this vis-à-vis not only the TSOs but any electricity or gas undertaking’ (at p 15). One uncertainty which this interpretation might create concerns whether this NRA enforcement role extends to the enforcement of the free movement rules16 of the TFEU, as well as the specific provisions of the EU’s energy legislative oeuvre: at the very least, the NRA would clearly be under an obligation not to take decisions which might place its Member State in breach of the free movement rules. The further possible implications of TFEU free movement law are dependent upon the extent to which those provisions are applicable to the relevant actors in the energy sector, since a degree of uncertainty remains as to the horizontally directly effective nature of those provisions under EU law. This means that the status of the relevant energy undertaking (a private party or a ‘State body’)17 may determine the extent to which it might be subject to the free movement rules under the TFEU. Of course, insofar as the EU’s energy legislation has already harmonized many such issues concerning imports, exports, and the provision of services, that legislation would apply in any case and would clearly fall within the role of the NRAs under Articles 37 and 41 of the Third Package Directives. (ii) Monitoring duties: The Third Package Directives also contain a long list of 5.28 monitoring duties which Member States must ensure are performed within their national systems. These cover a wide range of activities and issues, which generally concern infrastructure and network access, market monitoring and assessing the development of competition, and checking the application and enforcement of consumer protection measures. However, by virtue of the first sub-paragraph of Articles 37(2) (Elec) and 41(2) (Gas), it is open to Member States to entrust these monitoring functions to a body other than the NRA, although ‘in such a case, the information resulting from such monitoring shall be made available to the [NRA] as soon as possible’. If it does not so specify, the presumption is that these tasks are also to be performed by the NRA. In its Interpretive Note, the Commission is at pains to stress that this covers all 5.29 monitoring information, not just a final report or summary, and should thus include confidential information collected. Indeed, the Commission goes so far as to argue 16 Clearly, with regard to EU (and national) competition law, the NRA’s role will function in coordination with the pre-existing competences under EU and national law: see Arts 37(2) (Elec) and 41(2) (Gas), third sub-paragraph, where it is emphasized that ‘approvals given by the [NRA] are without prejudice to . . . any penalties imposed by other relevant authorities or the Commission’ (and see also the second sub-paragraph of these Articles concerning cooperation with other national authorities). 17 Case C-188/89 Foster v British Gas [1990] ECR I-3313.

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Regulatory Authorities and European Cooperation that ‘a Member State has to guarantee that the NRA has specific access to all data resulting from the monitoring exercise’ (Interpretive Note, at p 15). Indeed, many of the NRA’s core tasks would be difficult, if not impossible, to perform effectively without access to much of such monitoring data: how, for example, would the NRA be able to scrutinize whether any cross-subsidization was taking place between different levels of a vertically integrated energy undertaking (under Articles 37(1)(f) (Elec) and 41(1)(f) (Gas) respectively) in the absence of data concerning wholesale and resale prices (which is to be monitored according to paragraphs (i) and (j) of the same Articles 37(1) and 41(1))? In addition, the Commission suggests that, even if another body is entrusted with these monitoring functions, it is still open to the NRA to conduct its own monitoring activities, as part of the performance of its own irreducible core functions (Interpretive Note, at p 16): this would garner much of the information for the NRA itself, although a preferable approach might involve organized cooperation and information exchange between the NRA and the separate monitoring body. 5.30 (iii) Cross-border issues: The NRAs are also expected to play a vital role in develop-

ing cross-border cooperation and trade between Member States: the Third Package Directives are, after all, concerned with the development of an Internal Energy Market in the EU. One aspect of this cooperation is now embodied in the ACER (discussed at paras 5.57 ff ); another set of NRA duties is laid down by Articles 38 (Elec) and 42 (Gas). They require the NRAs ‘[to] closely consult and cooperate with each other, and . . . provide each other and the [ACER] with any information necessary for the fulfilment of their tasks under’ the Third IEM Directives; any NRA receiving such information is to ensure the same level of confidentiality with regard to that information as is required of the originating NRA (paragraph 1 of those Articles). This general obligation is augmented by paragraph 2, which lays down specific obligations of inter-NRA cooperation at least at a regional level,18 in order to: (a) foster the creation of operational arrangements in order to: – enable optimal management of the network, – promote joint electricity exchanges and the allocation of cross-border capacity, and – enable an adequate level of interconnection capacity, including through new interconnectors within the region and between the regions, to allow for development of effective competition and improvement of security of supply, without discriminating between supply undertakings in different Member States; 18 In light of the experiences under the so-called ‘mini-fora’ conducted under the auspices of the Florence and Madrid Fora (on which see paras 5.42 ff ), which launched Regional Initiatives in 2006 as a means to move away from separate national energy markets towards greater cross-border trade and integration. For discussion, see F Gräper and C Schoser, ‘The Establishment of Common Network Rules’, in C Jones (gen ed), EU Energy Law, Volume I: The Internal Energy Market—The Third Liberalisation Package (3rd edn, Leuven: Claeys-Casteels, 2010), Ch 12, 532–534.

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B. National Regulatory Authorities (b) coordinate the development of all network codes for the relevant TSOs and other market actors; and (c) coordinate the development of rules governing the management of congestion. Paragraph 3 confirms that NRAs must be given the right to enter into cooperative 5.31 arrangements with each other to foster such regulatory cooperation, while paragraph 4 reminds NRAs to carry out the specific activities in paragraph 2 ‘in close consultation with other relevant national authorities and without prejudice to their specific competences’. Finally, under paragraph 5 the Commission is empowered to adopt guidelines on these NRA duties of cooperation inter se and/or with ACER: such measures would be adopted following the comitology procedure known as the regulatory procedure with scrutiny (as referred to in Articles 46(2) (Elec) and 51(3) (Gas)). (b) Powers: The Third Package Directives, in Article 37(4) (Elec) and Article 41(4) 5.32 (Gas) lay down a series of specific powers which Member States must ensure are given to their NRAs. The list is the minimum which must be granted to NRAs, to which Member States may add if they wish. These powers, in essentially identical terms for both electricity and gas, are intended to enable the NRAs to carry out their ‘duties’ (discussed in paras 5.23 ff ) ‘in an efficient and expeditious manner’, and involve: (a) issuing binding decisions to undertakings; (b) carrying out investigations19 into the functioning of the electricity/gas markets, and imposing any necessary and proportionate measures20 to promote effective competition and ensure the proper functioning of the market (liaising with NCAs, financial regulators, and the Commission where appropriate in conducting investigations relating to competition law); (c) requiring information from undertakings where relevant to fulfilling the NRA’s tasks (including justifications for refusal to allow TPA and measures necessary to reinforce the network); (d) imposing effective, proportionate, and dissuasive penalties on undertakings not complying with their obligations under the Directives or any relevant legally binding decisions of the NRA or ACER,21 or to propose that a 19 Which the Commission views as a law enforcement power, including the correlative powers to carry out inspections on the premises of electricity and gas undertakings (Interpretive Note (n 3), 17). This raises questions about procedural safeguards under such circumstances, perhaps relying upon provisions already present in national law for NCAs with regard to competition investigations. 20 Which can include virtual power plants or gas release programmes (Recitals 37 (Elec) and 33 (Gas)), but (according to the Commission’s Interpretive Note (n 3), 17) other measures could be envisaged, including gas capacity and storage capacity release programmes, and requiring a TSO to make certain investments (Interpretive Note: Regulatory Authorities (n 3), 18). 21 Which will, in time, include compliance with the network codes adopted through the EU-level comitology procedure, as well as the guidelines adopted by the Commission on the advice of ACER (since the latter has no enforcement powers of its own and will have to rely upon NRAs in this regard).

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Regulatory Authorities and European Cooperation competent court impose such penalties. This includes the power to impose penalties for non-compliance with the obligations under the Third IEM Directives upon the TSO of up to 10 per cent of the TSO’s annual turnover; or upon a vertically integrated undertaking of up to 10 per cent of its annual turnover;22 and (e) granting the NRA appropriate rights of investigation and powers of instructions for dispute settlement (on which see Articles 37(11) and (12) (Elec) and 41(11) and (12) (Gas)). 5.33 Perhaps most noteworthy among this list are the enforcement teeth provided to

the NRA’s role by paragraphs (b) and (d). Both will raise questions for the implementing Member State with regard to procedural protections for undertakings potentially subject to such sanctions: the model developed and much tested under the EU and national competition law regimes may provide useful guidance in this regard.23 We should also note the NRA’s role as a dispute settlement body under Articles 37(11) (Elec) and 41(11) (Gas), where a third party has a complaint against a TSO or DSO’s performance of its obligations under the Third IEM Directives. The NRA is to issue a decision within two months of receipt of the complaint (unless the NRA seeks further information (when a two-month extension applies, or further where the complainant agrees to an extension)). Once issued, that decision is binding unless and until overruled on appeal (on which see Articles 37(15) to (17) (Elec) and 41(15) to (17) (Gas), discussed at para 5.40). 5.34 In the original Commission proposal for the Third Package Directives, 24 a power

was also included for the NRAs to contribute to ensuring high standards of universal and public service, but this was relegated to recitals in the final version (see Recitals 37 (Elec) and 33 (Gas)). It has been suggested25 that there is thus no obligation on Member States to grant such a power to NRAs, but rather that NRAs must contribute to those goals within the framework of its other powers (as listed in paras 5.32 ff ). 5.35 In addition to these powers, the NRA has a key role under the Third Package

Directives (Articles 40 (Elec) and 44 (Gas)) in record-keeping and the exchange of information with regard to the supply market, to promote transparency and market integrity in energy trading. This information concerns ‘all transactions in electricity/gas supply contracts and electricity/gas derivatives with wholesale customers and transmission system operators [as well as storage and LNG operators]’ (paragraph (1) of each Article).26 Under paragraph 3 of the same Articles, the NRA 22

These thresholds come from those applicable under EU competition law. For discussion, see (eg) R Whish & D Bailey, Competition Law (7th edn, Oxford: OUP, 2012). 24 COM(2007) 530. 25 Cabau (n 4), 243. 26 This data is to include details on the characteristics of such transactions: duration, delivery and settlement rules, quantity, dates and times of execution, transaction process, and means of identifying the customer, as well as all unsettled contracts and derivatives (para 2 of the relevant Articles). 23

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B. National Regulatory Authorities may decide to release this data to market participants, after duly addressing any difficulties raised by commercially sensitive information contained therein. (5) Accountability, appeal, and review The concomitant of the significantly increased role, responsibilities and powers 5.36 of the NRAs under the Third Package is the need to provide carefully for NRAs’ accountability 27 for the performance of their functions. (a) Political/institutional aspects: The obligation imposed upon NRAs to perform 5.37 their functions in a transparent manner has been discussed previously (paras 5.16 ff ), and is an important component of ensuring the accountability of the NRA, including publication of information and decisions with reasons for action taken,28 consultation, and reporting on how it has spent its budget each year. More generally, the Third IEM Directives impose reporting obligations on the 5.38 NRAs. Under Articles 37(1)(e) (Elec) and 41(1)(e) (Gas), the NRA must report ‘annually on its activity and the fulfilment of its duties to the relevant authorities of the Member States, the [ACER] and the Commission. Such reports shall cover the steps taken and the results obtained as regards each of the tasks listed’ in those Articles (as discussed). Although not expressly laid down in those paragraphs, the Commission has indicated that such reports should be published, due to the NRA’s transparency obligations (Interpretive Note, at 19). (b) Legal aspects: The NRAs’ new powers and function also make it vital that 5.39 their decisions are amenable to appeal and/or review before an independent court or other tribunal. On the specific issue of NRA decisions concerning tariffs/methodologies, Articles 37(12) (Elec) and 41(12) (Gas) provide that ‘any party who is affected and who has a right to complain . . . may submit a complaint for review. Such a complaint shall not have suspensive [sic] effect’. This rather limited provision aims to ensure that, where a Member State does provide for such a review, its effects should not be disruptive to the introduction of the relevant tariff/methodology decision (by implementing relatively short time limits of two months from publication and preventing such review from suspending the application of that decision). It does not oblige Member States to introduce such a review procedure.29 Articles 37(15) to (17) (Elec) and 41(15) to (17) (Gas) lay down a general ‘right of 5.40 appeal’ against NRA decisions. The specific procedures laid down in paragraphs

27 In its Interpretive Note: Regulatory Authorities, the Commission emphasizes (at 20) the link between independence and accountability, and suggests that various actions might be taken at national level to increase parliamentary scrutiny of NRAs, including hearings in connection with NRA budget discussions or appointment of board/management personnel, and the submission of a draft NRA work programme to the national Parliament. 28 See also Arts 37(16) (Elec) and 41(16) (Gas), discussed at para 5.40. 29 Cabau (n 4), 250.

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Regulatory Authorities and European Cooperation 11 and 12 of each of these Articles (as discussed) are ‘without prejudice to the exercise of rights of appeal under [EU] or national law’ (paragraph 15 of both Articles). Paragraph 16 reinforces the points already made concerning transparency and the giving of reasons: ‘Decisions taken by [NRAs] shall be fully reasoned and justified to allow for judicial review. The decisions shall be available to the public while preserving the confidentiality of commercially sensitive information.’ Then, in paragraph 17, the Directives establish a right of appeal: ‘Member States shall ensure that suitable30 mechanisms exist at national level under which a party affected by a decision of [an NRA] has a right of appeal to a body independent of the parties involved and of any government.’ The combination of the terms ‘review’ and ‘appeal’ under this set of provisions may cause certain difficulties for some Member States where notions of review are of a more limited nature than a full appeal on the merits. Further, the notion of ‘a party affected by a decision’ seems, in principle, to be broader than simply the addressee of a given NRA decision, which may require some national systems to extend their appeal/review systems to include challenges to NRA decisions by third parties as well.31 5.41 Finally, the NRAs are also subjected to a review procedure to check their com-

pliance with EU-level Guidelines: under Articles 39(1) (Elec) and 43(1) (Gas), an NRA or the Commission may request the opinion of ACER as to whether another NRA has acted in compliance with the various Guidelines which the Commission is empowered to adopt under the Third IEM Directives and Regulations, and the ACER Regulation. ACER’s opinion is to be adopted within three months (paragraph 2) and, while not binding on the NRA, is likely to carry significant weight and thus may often be complied with by that NRA without the need for further formal steps. The Commission may subsequently decide to examine the matter further (paragraph 5) and may ultimately require the relevant NRA to withdraw its decision where it does not comply with the Guidelines (paragraph 6(b)): in such a case, the NRA is obliged to comply with the Commission’s decision within two months of its adoption (paragraph 8). The Commission is empowered by paragraph 9 of these Articles to adopt Guidelines setting out the procedure to be followed under this review procedure, which again must be adopted following the regulatory procedure with scrutiny under the comitology rules.

30 In its Interpretive Note, the Commission suggests that this ‘suitability’ requirement may mean that particular procedures should be adopted by Member States to address certain situations: eg rapid court procedures to deal with urgent situations. 31 See, in the UK, Ofgem, ‘Consultation Paper: Regulating Energy Networks for the Future: RPI-X@20 Emerging Thinking—Third party right to challenge our final price control decisions’ (January 2010) and Department of Energy and Climate Change, ‘Implementation of the EU Third Package—Decision Paper’ (December 2010), adding a dedicated consumer body to the list of potential holders of the right to challenge Ofgem decisions.

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B. National Regulatory Authorities (6) Regulation on energy market integrity and transparency The Commission proposals32 on energy market integrity and transparency have 5.42 now led to the adoption on 10 October 2011 of Regulation 1227/2011/EU on wholesale energy market integrity and transparency (often known as ‘REMIT’).33 The provisions of this new measure are certainly likely to present challenges for the NRAs, both in their sole capacity but also as a hybrid with national financial regulatory bodies and with national competition authorities (NCAs), at both the Member State and the EU level. At Union level, NRAs are expected to work with each other and with ACER,34 5.43 informing ACER of any contraventions of the Regulation.35 Even though primary responsibility for this task is attributed to ACER, under the Commission proposals it was envisaged that the NRAs will have an extensive role in ensuring efficient market monitoring,36 and this is confirmed by the final text of the Regulation.37 Whilst the Regulation envisages a strong degree of cooperation between the NRAs and ACER (see Articles 1(1) and (3), 7 to 10, and 16), the latter’s powers to request NRAs to supply information and to commence investigations in respect of suspected breaches (see Article 16(4)) may create a challenging hierarchical structure for NRAs. In addition, efficient market monitoring may not only entail a potentially substantial strain on available resources, but may also involve NRAs in activities where they have minimal expertise to date. This may be alleviated (or indeed exacerbated) by the acknowledgment that NCAs38 and other more general market monitoring bodies (see the ‘competent financial authority’ referred to in Article 2(9)) may also be part of the overall monitoring framework. Further, such monitoring is also likely to prove particularly difficult where trading activities and related investigations on market abuse encompass a number of jurisdictions: as energy markets (and related transactions) begin to spread across national borders, the need for intensive coordination between NRAs (and other relevant bodies) may increase significantly. Furthermore, under the Regulation, the NRAs have responsibility for ensuring 5.44 that the prohibitions on insider trading and market manipulation are respected and are therefore seen as being vital to the effective enforcement of the Regulation

32 COM(2010) 726 (8 December 2010) available at: . 33 [2011] OJ L326/1 (8 December 2011); it entered into force on 28 December 2011 (by virtue of its Art 22). 34 ACER was established under Regulation 713/2009/EC of the European Council and of the Parliament of 13 July 2009, establishing an Agency for the Co-operation of Energy Regulators, [2009] OJ 211/1 (14 August 2009). See our discussion on ACER at paras 5.58 ff. 35 Art 11 of the Commission proposal; Art 16 of the Regulation. 36 Recital 13 and Art 6 of the Commission proposal. 37 See Art 7 of the Regulation. 38 See Arts 7(2) and (3), 10(1), 12(1), 16(1) and (3) of the Regulation.

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Regulatory Authorities and European Cooperation across the Member States.39 This task may again prove testing for the NRAs: as acknowledged in the Commission’s Impact Assessment accompanying the proposal for the Regulation, an ‘energy-specific meaning of insider information or market manipulation’ remains to be ‘practically established’.40 The Regulation endeavours to provide relatively detailed definitions of these terms (see Article 2(1), (2), and (3)), and the Commission proposals41 and the final text of the Regulation envisage that the NRAs should have wide-ranging investigatory powers for the exercise of this role, such as the right to carry out on-site inspections and request a court to impose the temporary prohibition of a professional activity.42 Thus, for instance, the European Economic and Social Committee has observed that the powers conferred on the NRAs are ‘both comprehensive and penetrating’; at the same time, however, it has emphasized the need ‘for greater certainty of enforcement of the regulation in this area’, suggesting the possibility of permitting only ‘a relatively short period for Member States to fulfil their obligation to guarantee that the authorities are granted these powers of investigation’.43 5.45 A certain degree of useful guidance may perhaps be found in the current frame-

work of the Market Abuse Directive (MAD).44 Indeed, the Commission itself— whose proposals for a Regulation were based on the advice of the Committee of European Securities Regulators (CESR) and the European Regulators Group for Electricity and Gas (ERGEG) on the need for a tailored market abuse regime for energy sector products not covered by the MAD—has stressed the important links between the two legislative initiatives.45 It should be noted, however, that the MAD is itself under review: the Commission adopted legislative proposals on the revision of the MAD on 20 October 2011, 46 and that, in particular, the specific definition of ‘inside information’ used in relation to commodity derivatives has already come under scrutiny. An added layer of difficulty for NRAs in this regard may be provided by the expectation that they will also need to interact

39

Art 13 of the Regulation. COM(2010) 726, at 21. 41 Art 10 and Recital 19 of the Commission proposal. 42 Art 13(2) of the Regulation. 43 Opinion of the European Economic and Social Committee on the ‘Proposal for a regulation of the European Parliament and of the Council on energy market integrity and transparency’, para 5.4. 44 Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation, [2003] OJ L 96/16 (12 April 2003). 45 CESR and ERGEG advice to the European Commission in the context of the Third Energy Package (CESR/08-527, CESR/08-739, CESR/08-998), presented to the Commission in October 2008–January 2009. 46 See Commission proposal for a Regulation of the European Parliament and of the Council on insider dealing and market manipulation (COM(2011) 651) and Commission Proposal for a Directive of the European Parliament and of the Council on criminal sanctions for insider dealing and market manipulation (COM(2011) 654) (both 20 October 2011). For the relevant documentation and developments, see . 40

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C. European Bodies (Florence and Madrid Fora, and ACER) closely with competent financial authorities to deal in a coordinated manner with market abuse on wholesale energy markets, including both commodity and derivatives markets.47 The Commission proposals also referred to the possibility of adopting delegated 5.46 acts clarifying further the legislative framework put forward, which may entail a number of additional latent duties and challenges for NRAs. The final text of the Regulation (while adding some detail on such delegated rule-making) retained this possibility: see Articles 6, 8(2) and (6),48 and 20 of the Regulation. At the same time, however, the Commission stressed the need to respect subsidiar- 5.47 ity and highlighted the centrality of NRAs to the anticipated legislation. Indeed, in the Explanatory Memorandum to the proposal for a Regulation, the Commission explained that NRAs and other Member State authorities, such as financial regulators and competition authorities, have a direct interest in the market results in the wholesale energy markets sector and can contribute an indispensable understanding of the various markets across the Member States.49 These roles were retained, and indeed that of the NCAs enhanced, in the final text of the Regulation. Thus, there will clearly be a wide range of cooperation and coordination issues for NRAs under this Regulation, at the national level, between Member States, and with ACER at the EU level.

C. European Bodies (Florence and Madrid Fora, and ACER) (1) Introduction Cooperation at the European level is the cornerstone of the development of sound, 5.48 effective, and interconnected internal markets for electricity and gas. Such cooperation was launched as early as the end of the 1990s with the work of the Florence and Madrid Fora. Following the adoption of the Third Energy Package, cooperation at the 5.49 European level has been strengthened further with the creation of the ACER, as well as the European Network of Transmission System Operators for Electricity (ENTSO-E) and the European Network of Transmission System Operators for Gas (ENTSO-G).

47

Recital 21 of the Commission proposal. NB the Commission and Council have attached conflicting ‘Statements’ to the official text of the Regulation concerning the exercise of such Commission delegated/implementing powers under Art 8(2)(a) and 8(6)(a): the Commission considers that such matters could only be addressed by legislative measures, while the Council is adamant that the text of the Regulation specifically requires the Commission to adopt such implementing acts and that this is a ‘legally binding’ obligation: see [2011] OJ L326/1, at L326/16. 49 Explanatory Memorandum to the proposed Regulation, para 4.3.3. 48

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Regulatory Authorities and European Cooperation (2) Cooperation within the Florence and Madrid Fora 5.50 Shortly after the adoption of the first electricity and gas Directives, in 1996 and

1998 respectively, two Fora were created to provide a neutral and informal EU-level framework for discussing issues and exchanging experiences concerning the establishment of competitive internal markets for electricity and natural gas. The Forum dedicated to the electricity first met on 5 and 6 February 1998 in Florence, Italy, and accordingly became known as the ‘Florence Forum’. For gas, the Forum is known as the ‘Madrid Forum’ following its first meeting in Madrid, Spain, on 30 September and 1 October 1999.50 5.51 These Fora were created to provide the necessary technical and practical details

for the implementation of the harmonized rules adopted at the European level ‘to achieve the basic goal of an effectively functioning single market’,51 such rules being, in accordance with the subsidiarity principle, limited to the general framework and principles for the introduction of competition in the electricity and natural gas markets. 5.52 In order to reach an overall consensus over such technical and practical details, the

Florence and Madrid Fora aimed at gathering all parties involved in the process of the liberalization of the electricity and gas markets: governments, the European Commission, national regulators, TSOs, electricity and gas traders, industry, consumers, network users, and power exchanges. Such wide-ranging participation allowed the Fora to become a platform for informal discussions, open exchange of experiences, and benchmarking. 5.53 Since their creation, the Florence and Madrid Fora have usually met twice a year.

They have focused on issues related to the cross-border trade of electricity and gas. 5.54 The Florence Forum notably addressed questions linked to the setting of tariffs for

cross-border electricity trade, the management of scarce interconnection capacity and the implementation of Inter-TSO compensation mechanism. This latter mechanism provides for the compensation of electricity TSOs for the costs they incurred while hosting cross-border flows on their grids.52 5.55 The Madrid Forum has examined, among other issues, the tariff-setting meth-

odologies for cross-border gas trade, the allocation and management of scarce 50 For discussion of the operation of these Fora up to 2004, see B Eberlein, ‘Regulation by Co-operation: the “Third Way” in Making Rules for the Internal Energy Market’, in PD Cameron (ed), Legal Aspects of EU Energy Regulation: Implementing the New Directives on Electricity and Gas Across Europe (OUP, 2005), ch 4. More recently, see PD Cameron, Competition in Energy Markets: Law and Regulation in the European Union (2nd edn, OUP, 2007), ch 2, esp. paras 3.12–3.39. 51 Minutes of the 1st European Gas Regulatory Forum, Madrid, 30 September and 1 October 1999. 52 The documentation concerning the work of the Florence Forum may be found at .

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C. European Bodies (Florence and Madrid Fora, and ACER) interconnection capacity, and other technical and commercial barriers to the creation of a fully operational internal gas market.53 Following the adoption of the Third Energy Package, the Florence and Madrid 5.56 Fora remain major actors in promoting and facilitating the progress of the electricity and natural gas markets, ensuring the incorporation of the benefits of experience directly from the sector. Gathering all stakeholders involved in the electricity and gas markets, the Florence and Madrid Fora will continue to meet after the establishment of the ACER, ENTSO-E, and ENTSO-G. The last/most recent meetings of these Fora, respectively on 23 and 24 March 2011 for the Florence Forum and on 21 and 22 March 2011 for the Madrid Forum, accordingly focused on the preparation of the work of the ACER, ENTSO-E, and ENTSO-G. (3) Cooperation within ACER, ENTSO-E, and ENTSO-G During the negotiations which led to the adoption of the Third Energy Package, it 5.57 appeared necessary to reinforce cooperation between Member States, particularly at the level of the NRAs and of the TSOs, to remove the remaining obstacles to cross-border trade in electricity and natural gas and achieve the objectives pursued by the EU’s Energy Policy. Cooperation at the European level was thus officially institutionalized with the creation of three new entities: ACER, ENTSO-E, and ENTSO-G. (a) The Agency for Co-operation of Energy Regulators (ACER): The creation of 5.58 ACER aims to fill a regulatory gap at EU level and to contribute towards the effective functioning of the internal markets in electricity and gas. It was established by Regulation 713/2009/EC54 (‘the ACER Regulation’) with the mission to assist NRAs in exercising, at EU level, the regulatory tasks which they perform in the Member States and, where necessary, to coordinate their action. A detailed description of ACER and its internal structure and functioning will not 5.59 be provided here.55 However, certain key aspects of ACER and its role, tasks, and powers should be highlighted. First, a full grasp of ACER’s functioning cannot be acquired simply by reading the ACER Regulation, because various functions and powers are also included in the other legislative instruments of the Third Package (in particular the Electricity56 and Gas57 Regulations and the Third Electricity and Gas IEM Directives) and there are regular cross-references between those instruments in that regard. 53 Documentation on the work of the Madrid Forum may be found at . 54 [2009] OJ L211/1. 55 For details, see F Ermacora, ‘The Agency for the Co-operation of Energy Regulators (ACER)’, ch 7 in C Jones (gen ed) (n 4), esp 295–326. 56 Regulation 714/2009/EC [2009] OJ L211/15. 57 Regulation 715/2009/EC [2009] OJ L211/36.

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Regulatory Authorities and European Cooperation 5.60 ACER has a range of tasks with regard to TSOs and networks, including a key role

in the development of network codes and development plans, as well as monitoring functions: these are highlighted at paras 5.67 ff in the context of cooperation at the EU level. A range of functions has also been entrusted to ACER vis-à-vis NRAs: it may make recommendations to NRAs and market actors to assist them in sharing good practices and is to provide a framework within which NRAs can cooperate with each other (Article 7 of the ACER Regulation). Linked to this is the power of ACER (Article 5 of the Third Electricity IEM Directive) to make recommendations concerning the compatibility of technical safety criteria and rules between Member States, to ensure interoperability between and non-discrimination by national systems. ACER is also charged with certain monitoring functions concerning NRAs: NRAs may request ACER to provide an opinion on whether that NRA (Article 7 of the ACER Regulation) or any other NRA (Third IEM Directives: Articles 39 (Electricity) and 43 (Gas)) has complied with the Third Package legislation and Guidelines adopted thereunder. Failure of the NRA in question to comply with ACER’s opinion (which is to be issued within three months) under these provisions will lead to ACER informing the Commission of the matter, whereupon the Commission may decide to initiate enforcement proceedings under the TFEU. Under Article 3(1) of the Electricity and Gas Regulations, ACER may also be required by the Commission to issue an opinion on the certification of TSOs (under Article 10(6) of the Third IEM Directives) in connection with the implementation of the unbundling requirements (as discussed in Ch 3 at paras 3.99 ff ). 5.61 In its relationship with NRAs, ACER has also been endowed with the power to

adopt binding decisions on certain issues. Under Article 8 of the ACER Regulation, ACER is empowered to adopt decisions concerning cross-border infrastructure (including access thereto and its operational security) only where the relevant NRAs have been unable to reach agreement on such matters or where such NRAs jointly request ACER to do so. That provision also lays down the minimum content of such access conditions (Article 8(2)) and procedural rules on the roles of ACER and the Commission thereunder. It has been argued58 that an agreement between NRAs to disagree is not sufficient ‘agreement’ to exclude ACER’s powers under Article 8, although this is not explicit in its provisions. A similar fall-back role is laid down in Article 9(1) of the ACER Regulation, in conjunction with Article 17(5) of the Electricity Regulation and Article 36(4) of the Third Gas IEM Directive concerning the exemption of new infrastructure from the normal regulatory regime of the Third Package.59 5.62 Given this ability of ACER to adopt decisions which may have legal effects upon

individuals and NRAs, it was necessary to create provisions which address appeals

58 59

Ermacora (n 55), at 286. For details, see Ermacora (n 55), 288–289.

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C. European Bodies (Florence and Madrid Fora, and ACER) against ACER’s decisions. A Board of Appeal was thus created by Article 18 of the ACER Regulation, comprised of members of current or former senior staff of NRAs, appointed by ACER’s Administrative Board (Article 12) on a proposal from the Commission. The Board takes decisions on the basis of a majority of four out of its six members, who must act independently at all times and who may not perform other functions within ACER while serving on that Board. Article 19 of the ACER Regulation lays down the Appeals procedure for challenging ACER decisions under Articles 7, 8, or 9 of the ACER Regulation:60 it may be invoked by any natural or legal person, including the NRAs, where they are the addressee of the ACER decision or are directly and individually concerned by it (Article 19(1)). In turn, such appellate decisions may be challenged before the General Court under Article 263 TFEU; similarly, ACER may be subject to an action for failure to act under Article 265 TFEU. Under Article 5 of the ACER Regulation, ACER may also perform a general 5.63 advisory role to the EU’s institutions at the request of the European Parliament, Council of Commission, or on its own initiative, ACER may provide an opinion or recommendation ‘on any of the issues relating to the purpose for which it was established’. It is also, under Article 11 of the ACER Regulation, to perform a general monitoring and reporting role with regard to the internal markets in electricity and gas, providing a public annual report, including identifying any barriers to the completion of the internal market and possible proposals for addressing those difficulties. This role is to be conducted in close cooperation with energy NRAs and is ‘without prejudice to the competences of competition authorities’ (Article 11(1)). ACER’s various explicit tasks must also be performed with an eye to the goals of 5.64 Trans-European Energy Networks (on which see Ch 6) and the enhancement of energy security (Recitals 14 and 15 to the ACER Regulation), even though ACER has not been given any specific functions or powers in relation to these issues. Given the Third Package’s appreciation of the need for increased cooperation 5.65 between the EU and third countries, it is consistent that the ACER Regulation also provides for third country participation in the work of ACER, under its Article 31, where those third countries have entered into agreements with the EU which require them to apply EU law in the energy field and, where relevant, environmental and competition law provisions as well. Finally, Article 34 of the ACER Regulation provides for the Commission to con- 5.66 duct a review of the operation of ACER (within three years61 of the first Director of ACER taking up his duties),62 assessing the results it has achieved and the working

60 Art 20 acknowledges that recourse may be had to the General Court under Art 263 TFEU to challenge ACER measures not covered by the Art 19 appellate procedure. 61 And at least every four years thereafter (Art 34(1)). 62 Art 34(3); the first Director is Alberto Pototschnig, who began work on 3 March 2011.

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Regulatory Authorities and European Cooperation methods employed. That evaluation will be submitted to the ACER’s Board of Regulators, which is to issue recommendations concerning possible changes to the ACER Regulation, ACER itself, and its operation (Article 34(2)). The Commission may forward these, along with its own proposals, to the European Parliament and the Council. 5.67 (b) The European Networks of Transmission System Operators: ENTSO-E was

established by Regulation 714/2009/EC63 with the purpose of ensuring cooperation at EU level between electricity TSOs, thereby promoting the completion and functioning of the internal market. ENTSO-G was created by Regulation 715/2009/EC64 with the same purpose for the natural gas market. 5.68 (c) Cooperation concerning networks: codes, guidelines, and development plans:

The main work of ACER, ENTSO-E, and ENTSO-G is to adopt the necessary network codes and plans for the development of fully and efficient interconnected European markets in electricity and gas. The adoption of network codes is intended to provide the necessary technical rules to ensure non-discrimination, effective competition, and the efficient functioning of the market. In particular, these codes are to cover issues such as: network connection rules; third-party access rules; balancing rules; interoperability rules; capacity allocation; and congestion management rules, etc. Such codes are to be adopted by the European Commission65 following a procedure involving both the ACER and ENTSO-E, or ENTSO-G (as appropriate).66 5.69 The ACER should first adopt ‘framework guidelines’ on the basis of an annual

work programme from the European Commission, identifying the priorities of actions for a given year. The project for priorities for 2012 and beyond was opened to consultation by the European Commission on 10 March 2011.67 ACER’s guidelines should set out clear and objective principles for the development of network codes. 5.70 Such codes are then to be drafted in a project by ENTSO-E/ENTSO-G, on the

basis of ACER’s framework guidelines and the European Commission’s work programme. Projects will be reviewed by ACER and finally approved by the European Commission. Alternative procedures are provided in the event that 63

[2009] OJ L211/15. [2009] OJ L211/36. 65 Avoiding potential problems concerning formal rule-making by delegated agencies rather than the Commission, in light of Case 9/56 Meroni & Co, Industrie Metallurgische v High Authority [1957-1958] ECR 133. For critical discussion of this general issue, see most recently M Chamon, ‘EU Agencies between Meroni and Romano or the Devil and the Deep Blue Sea’ (2011) 48 CMLRev 1055. 66 Art 6 of Regulations 714/2009/EC and 715/2009/EC. 67 Commission Public Consultation Paper, ‘Establishment of the priority list for the development of network codes for 2012 and beyond’ (10 March 2011) (available at ). 64

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C. European Bodies (Florence and Madrid Fora, and ACER) either ENTSO-E/ENTSO-G or ACER fails to fulfil its tasks (see Article 6 of the Electricity and Gas Regulations). Once adopted, Article 7 of both the Electricity and Gas Regulations provide that ‘persons likely to have an interest’ in the relevant network code may propose draft amendments thereto: on receipt of such proposals, or under proposals issued on its own initiative, ACER must consult all stakeholders and may make reasoned proposals to the Commission, which may decide to adopt amendments to those codes as a result.

ENTSO

Commission

ENTSO Work Programme

Agency

Agency

Commission

Preparation of framework guidelines

6 m (extexsible)

Framework guidelines 12 m

Preparation of network codes Commission

Draft code

Agency

Opinion 3 m

Commission

Comitology

~ 12 m

Legally binding codes

Figure 4 Procedure for the Adoption of Network Codes The European Commission has summarized the procedure for the adoption of the 5.71 network codes in its work programme (put out for consultation between 10 March and 10 April 2011) in the diagram reproduced as Figure 4.68 68 Commission Public Consultation Paper, ‘Establishment of the priority list for the development of network codes for 2012 and beyond’ (n 67), 7.

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Regulatory Authorities and European Cooperation 5.72 Progress has been made on the development of these Framework Guidelines by

ACER. On 29 July 2011, Framework Guidelines were adopted by ACER for the capacity allocation and congestion management for electricity,69 while on 3 August 2011 it adopted Capacity Allocation Mechanisms for the European Gas Transmission Network.70 The full technical detail of these Guidelines goes beyond the remit of this work, although they are discussed in outline where relevant to TPA questions concerning long-term gas contracts (see para 4.163) and energy contracts more generally (see para 8.23). 5.73 Besides participating in the development of network codes, ENTSO-E and

ENTSO-G are each required to adopt a non-binding EU-wide ten-year network development plan.71 These plans are to provide adequacy at the level of the generation for the electricity market and at the level of the supply for the gas market. Under Article 6 of the ACER Regulation, ACER is charged with monitoring the implementation of new interconnector capacity, the implementation of EU-wide network development plans, and regional cooperation between TSOs under the Electricity and Gas Regulations.

69 ACER, ‘Framework Guidelines on Capacity Allocation and Congestion Management for Electricity’, FG-2011-E-002 (29 July 2011). 70 ACER, ‘Framework Guidelines on Capacity Allocation Mechanisms for the European Gas Transmission Network’, FG-2011-G-001 (3 August 2011). 71 Art 8(3) of Regulations 714/2009 and 715/2009.

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6 TR ANSEUROPEAN ENERGY NETWORKS

A. TEN-E: Treaty and Legislative Bases 6.02 B. The TEN-E Decision: Projects and 6.05 Priorities C. The TEN-E Regulation: EU 6.11 Financial Aid

D. Possible Future Reforms E. Links Between TEN-Es and Other Areas of EU Energy Law F. European Energy Programme for Recovery

6.19 6.21 6.22

The availability of infrastructure capacity in network-bound sectors such as gas 6.01 and electricity is obviously a vital issue for the development of cross-border trade, competition, and markets,1 but it is also crucial to securing access to the supply of energy, both within the EU and into the EU from third states.2 Furthermore, developing key network infrastructure can be instrumental in raising standards of living in less prosperous areas, by connecting them to other regions, markets, and opportunities. Network infrastructure thus directly impinges upon EU objectives in the fields of the internal market, security, and cohesion policy, while in recent years it has also become apparent that many of the EU’s environmental goals3 (particularly in the energy field) are increasingly dependent upon infrastructure development.4 All of these objectives are clearly reflected in the EU rules concerning Trans-European Energy Networks (TEN-E).5

1 See, for an early recognition, Commission, White Paper: Towards an EU Energy Policy, COM(1995) 682 (13 December 1995). 2 See, eg, Recitals 7 and 8 to Decision 1364/2006/EC [2006] OJ L262/1. 3 Technically, environmental goals are in any case to be integrated into the achievement of other EU objectives thanks to Art 11 TFEU. 4 Grid access for electricity generated from renewable sources (see para 7.35 and Ch 12), grid capacity to deal with intermittent generation sources such as wind power, ‘smart grids’ and smart meters to improve demand management and efficiency (see paras 7.36 ff and 7.68 to 7.75), etc. 5 See, eg, Recitals 2, 3, and 7, and Art 3 of Decision 1364/2006/EC [2006] OJ L262/1.

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Trans-European Energy Networks

A. TEN-E: Treaty and Legislative Bases 6.02 Originally introduced by the Treaty of Amsterdam, the legal basis for EU activi-

ties in the field of Trans-European Networks (TENs) in transport, telecommunications, and energy infrastructures is now found in Articles 170, 171, and 172 TFEU. Measures in this field are to operate within the framework of ‘open and competitive markets’ (an important point to which we will return) and ‘shall aim at promoting the interconnection and interoperability of national networks as well as access to such networks’ taking ‘account in particular of the need to link island, landlocked and peripheral regions with the central regions of the Union’ (Article 170(2) TFEU). The EU is to adopt guidelines on the subject, establishing the objectives and priorities of such policies and identifying projects of common interest6 to be pursued and is to implement measures required to facilitate interoperability between networks (eg technical standardization) (Article 170(1) TFEU). 6.03 Where a Member State supports a project of common interest as identified in the rel-

evant guidelines, the EU may add its support through ‘feasibility studies, loan guarantees or interest-rate subsidies’, always being careful to consider the potential economic viability of such projects. EU cooperation with third countries to promote projects of mutual interest is also possible by virtue of Article 171(3) TFEU. Article 172 TFEU provides that guidelines and measures in this field are to be adopted by the European Parliament and the Council under the ordinary legislative procedure of the TFEU.7 6.04 These provisions have led to the creation of an EU system for TEN-E under

which the projects of common interest (and priorities among them) are defined in a Decision (currently, Decision 1634/2006/EC)8 and the mechanism for providing the EU funding is laid down in a Regulation (Regulation 680/2007/ EC).9

B. The TEN-E Decision: Projects and Priorities 6.05 The scope of the Decision extends beyond high pressure gas pipelines and high

voltage electricity transmission networks: according to Article 2, also covered are 6 Note that a Member State must approve guidelines or projects which specifically relate to its territory: Art 172 TFEU. 7 On which, see, eg, A Dashwood et al, Wyatt & Dashwood: European Union Law (6th edn, Oxford: Hart Publishing, 2011), ch 4. 8 [2006] OJ L262/1. 9 [2007] OJ L162/1. Previously, the relevant rules were to be found in Regulation 2236/95/ EC [1995] OJ L228/1, as amended by Regulations: 1655/1999/EC [1999] OJ L197/1, 788/2004/ EC [2004] OJ L138/17, 807/2004/EC [2004] OJ L143/4, and 1159/2005/EC [2005] OJ L191/16. Art 20 of the new Regulation 680/2007/EC makes clear that any projects underway under the old regime of Regulation 2236/95/EC continue to be subject to it (as amended).

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B. The TEN-E Decision: Projects and Priorities ‘any equipment or installations essential for the system in question to operate properly, including protection, monitoring and control systems’, as well as liquefied natural gas (LNG) facilities (reception, storage, regasification) and underground gas storage facilities connected to gas pipelines. The objectives of such TEN-E actions are specified in Article 3 of the Decision, 6.06 which essentially repeats the goals listed in Article 170 TFEU (Article 3(a) to (c)), with the addition of the need for such projects to contribute to sustainable development and the protection of the environment (Article 3(d)). The identification of priorities for action is commenced by Article 4, which lays down the key issues in electricity and gas,10 and all such priorities ‘shall be compatible with sustainable development’. Projects to achieve these objectives are then identified, among which there are projects of ‘common interest’ and ‘priority projects’, the latter containing a particularly important category of ‘projects of European interest’. The significance of these categorizations is the eligibility and priority afforded to each category when applying for funding. A project of common interest must: fall within the scope of the Decision (Article 6.07 2), meet its objectives and priorities (Articles 3 and 4), and show its economic viability (Article 6). Further criteria to qualify as such a project are provided in Annex II (which largely consists of a list of potential linkages between countries where the relevant objectives of the Decision need to be met), and this is further specified by a lengthy list of particular projects of common interest in Annex III. Priority projects must meet the following criteria under Article 7(4): ‘(a) they 6.08 shall have a significant impact on the competitive operation of the internal market; and/or (b) they shall strengthen security of supply in the [Union]; and/or (c) they shall result in an increase in the use of renewable energies.’ A list of the axes for such priority projects is provided in Annex I: such projects can only have such priority in applying for funding if they meet the criteria and fall along one of the relevant axes. Within that list in Annex I, specific projects of European interest11 are identified, which are to be given appropriate priority when allocating support budgets under the associated Regulation (Article 2 of the Decision) or under other EU measures. Alongside this priority, more intense activity by Member States is required to ensure regular exchanges of information and coordination meetings (Article 8(6)) concerning projects of European interest;

10 Aiming at adaptation and development of networks to support the internal energy market (eg addressing bottlenecks and congestion issues), establishing networks in isolated (etc) regions, ensuring interoperability of networks within the EU and with various neighbouring countries, and meeting the needs of gas consumption and the integration of renewable energy into electricity grids. 11 Subsequently, within these projects of European interest the Commission adopted the Priority Interconnection Plan, COM(2006) 846 (10 January 2007), identifying (inter alia) key projects experiencing delays and proposing the designation of European coordinators.

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Trans-European Energy Networks such projects are to be implemented rapidly and Member States have various obligations to report to the Commission on the timetable for their completion. Further, Article 10 makes it possible to appoint a European coordinator to facilitate a project of European interest, if significant delays to the project have arisen.12 6.09 More generally, the Decision charges the Member States and the Commission with

securing a ‘more favourable context’ for the development of TEN-Es: Article 11 encourages the Commission on technical cooperation, streamlining authorization procedures, and providing assistance to such projects, if necessary by proposing initiatives to promote these goals, using the appropriate comitology procedure13 laid down in Article 14. 6.10 When considering all projects, their effects upon competition and security of

supply must be taken into account (Article 12). As Recital 4 highlights, the general rule is that the construction and maintenance of energy infrastructure should be subject to market principles and it should only be in rare circumstances that EU fi nancial aid is made available for construction and maintenance of such infrastructure (and if this is proposed, it must be justified carefully). Thus, the basic assumption is that TSOs will be the major players in such projects, covering the costs of such investments through the tariff s paid by their network users.14 Th is principle is carried forward in the TEN-E Regulation when one considers the aspects of such projects for which funding may be made available.

C. The TEN-E Regulation: EU Financial Aid 6.11 Under Article 3 of Regulation 680/2007/EC, only projects of common interest

shall be eligible for aid under the Regulation, and only provided that those projects comply with EU law (see also Article 12). 6.12 When deciding whether to award aid (and how much: Article 6(2)) under the

Regulation, Article 5(1) provides that aid shall be granted to projects of common interest ‘in relation to their contribution to the objectives and priorities defined’ in the TEN-E Decision.

12 To date, four coordinators have been appointed, covering five projects, of which two projects remained ongoing at the time of writing: see for details, including coordinators’ reports. 13 On this procedure, see, eg, C Bergström, Comitology: Delegation of Powers in the European Union and the Committee System (Oxford: OUP, 2004). 14 See, eg, Report on the Implementation of the Trans-European Energy Networks in the period 2007–2009, COM(2010) 203 (4 May 2010), 4.

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C. The TEN-E Regulation: EU Financial Aid Under Article 5(3), the priority status accorded to projects of European interest is 6.13 made clear, insofar at they contribute to: (a) the development of the network so as to strengthen economic and social cohesion by reducing the isolation of the less-favoured and island regions of the Community; (b) the optimization of the capacity of the network and the completion of the internal energy market, in particular projects concerning cross-border sections; (c) the security of energy supply, diversification of sources of energy supplies and, in particular, interconnections with third countries; (d) the connection of renewable energy resources; and (e) the safety, reliability, and interoperability of interconnected networks.

Under Article 5(4), any decision to grant EU aid must consider, inter alia:

6.14

(a) the maturity of the project; (b) the stimulating effect of Community intervention on public and private funding; (c) the soundness of the financial package; (d) socio-economic effects; (e) environmental consequences; (f) the need to overcome financial obstacles; and (g) the complexity of the project, for example that which arises from the need to cross a natural barrier.

The types of funding available are listed in Article 6 of the Regulation, and these 6.15 include: – financing of feasibility studies (up to a maximum of 50 per cent of the cost) (Articles 2(8) and 6(1)(a) and (2)(a)); – interest rate rebates on loans from the European Investment Bank (Article 6(1)(c)); – a financial contribution to provisioning and capital allocation for European Investment Bank (EIB) guarantees (for a maximum of five or, exceptionally, seven years: Article 6(1)(d));15 and – grants for works (up to a maximum of 10 per cent16 of the eligible cost) (Article 6(1)(a) and (2)(b)(ii)).

15 The Annex to the Regulation provides further details concerning the operation of such loan guarantee instruments. 16 Note that this appears to have removed the higher maximum level of 20 per cent of eligible costs introduced into Art 5(3)(b) of Regulation 2236/95/EC by the amendment contained in Art 1(1) of Regulation 807/2004/EC: this higher level was an exception from the ordinary 10 per cent, and applied to ‘priority projects on the energy networks’. In the light of Recital 12 to the new Regulation, this seems a strange outcome.

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Trans-European Energy Networks 6.16 To emphasize the TEN-E scheme’s relatively small contribution to the overall costs

of any given project, one can do little better than to quote the Commission’s latest report on the subject:17 The budget of the TEN-E funding programme amounts to €155 million for the budget period 2007–201318 of which some €70 million [is] for the period 2007– 2009. Although the maximum co-financing rate is up to 50 per cent for studies and 10 per cent of eligible costs of works, it rarely amounts to more than 0.01 to 1 per cent of the total investment cost of a project. 6.17 Alongside the TEN-E programme, therefore, other funding sources are impor-

tant. EIB funding makes a relatively significant contribution to infrastructure investment in the energy sector (see COM(2010) 203, at p 5), and the Structural and Cohesion Funds19 and the European Regional Development Fund20 have also provided substantial sums in this regard. So far as projects with neighbouring countries are concerned, resources available under the European Neighbourhood Policy and technical assistance funds have also been used in the energy field. 6.18 Article 11 of the TEN-E Regulation imposes monitoring and reporting obliga-

tions upon Member States with regard to projects receiving EU aid under this programme. This includes notification to the Commission of the systems of management and control that are set up to ensure the efficient implementation of the project and the checking of expenditure in conformity with the conditions for the grant of aid. Article 13 empowers the Commission to cancel, suspend, reduce, or discontinue aid granted and even seek its reimbursement where certain time limits and other conditions for the grant of such aid have not been met.

D. Possible Future Reforms 6.19 Under Articles 9(2) and 15 of the TEN-E Decision and Article 17 of the new

financial aid Regulation, the Commission must submit reports on the operation of these provisions every two years. In the most recent report21 (and the first to 17

COM(2010) 203, at 4–5. Note that this amounts to just under 1.9 per cent of the total resources allocated to TENs (Art 18 of the Regulation), compared with €8.13 billion allocated to transport. 19 See Council Regulations 1083/2006/EC (laying down general provisions on the ERDF, ESF, and the Cohesion Fund, [2006] OJ L210/25) and 1084/2006/EC (establishing a Cohesion Fund, [2006] OJ L210/79). Eg, under Council Decision 2006/702/EC (on strategic guidelines on cohesion, [2006] OJ L291/11) support is provided to projects for the development of renewables and the improvement of energy efficiency. 20 See Council Regulation 1080/2006/EC on the ERDF, [2006] OJ L210/1: see its Art 4(9) on energy investments improving certain TEN-E projects. 21 Report on the Implementation of the Trans-European Energy Networks in the period 2007–2009, COM(2010) 203 (4 May 2010): . For the preceding period, see the Commission’s Report on the Implementation of the Trans-European Energy Networks Programme in the period 2002–2006, 18

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E. Links Between TEN-Es and Other Areas of EU Energy Law be adopted under the new Regulation), authorization procedures for cross-border projects are highlighted as an important constraint: while some Member States have taken steps to streamline such procedures, planning delays can still add years to such projects. The Commission suggests that measures22 adopted at EU level could secure more coordination and consistency in this area. In its conclusions, the Commission emphasized that the current TEN-E pro- 6.20 gramme is not well designed to meet the new energy policy challenges facing the EU and its Member States, due to its lack of flexibility and its minimal financial resources. Various reforms were proposed, including: – better definition of EU energy infrastructure strategic priorities (taking account of new technologies, distributed generation, the need for CCS pipeline networks, etc);23 – a new, clearer approach to project definition (to replace the messy categorization discussed in paras 6.05 ff ); – better exploitation of potential cooperation between Member States in individual projects (concerning both political and practical planning issues, to ensure appropriate priority is given to such projects at national level, etc); and – the need to attract a level of investment which matches the scale of the challenges in energy infrastructure (this may allow public funding for the completion of such projects where clear and widespread European benefits can be shown, as well as market failures which have prevented these key projects from being realized).

E. Links Between TEN-Es and Other Areas of EU Energy Law We have noted that a range of EU energy policy objectives—internal market and 6.21 competition, security of supply, environmental and sustainability goals—can be seen in the evolution of the TEN-Es programme. While the status of a given project as a TEN-E does not in itself exempt that infrastructure from the rules otherwise applicable under EU law, it may support arguments made by Member States

COM(2008) 770 (13 November 2008), which provides details of projects completed, applications received, and decisions taken under the TEN-E programme, including the amounts granted and the types of expenditure involved. This should be read in conjunction with its contemporaneously published Green Paper: Towards a Secure, Sustainable and Competitive European Energy Network, COM(2008) 782 (13 November 2008). 22 Clearly, the Commission’s earlier Recommendation on the subject (1999/29/EC [1999] OJ L8/27) is not having the desired effect. 23 Most recently, a contribution to this goal was made by Regulation 617/2010/EU, Euratom [2010] OJ L180/7, which imposes obligations upon Member States to notify energy infrastructure investment projects to the Commission.

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Trans-European Energy Networks or undertakings for exemptions or derogations from certain rules. For example, Member State subsidies to support certain TEN-E infrastructure projects, when granted on top of EU funding under the TEN-E programme, may benefit from the designation of the project as one of ‘European interest’ when seeking authorization from the Commission for such aid (Article 107(3)(b) TFEU). Similarly, applications to exempt new infrastructure from some of the rigours of the internal market legislation in gas and electricity are also likely to overlap with TEN-E status.24 The Commission has adopted a number of Decisions concerning such exemptions under the Second Gas IEM Directive25 and the Electricity Regulation,26 and many of these were priority projects or projects of European interest within the TEN-E definitions.

F. European Energy Programme for Recovery 6.22 In the wake of the global financial crisis, the EU made available various funds to

promote certain infrastructure and development projects within the EU, in the hope of helping to stimulate economic recovery. Regulation 663/2009/EC27 was adopted with some speed, setting up a ‘European Energy Programme for Recovery’ (EEPR) which aimed to stimulate recovery, strengthen security of energy supply, and reduce greenhouse gas emissions (Article 1). The total budget made available was €3.98 billion, divided among its sub-programmes on gas and electricity infrastructure (€2.365 billion), CCS (€1.05 billion), and offshore wind energy (€0.565 billion) respectively. 6.23 For our purposes here, the relevant part of the Regulation is Chapter II, Section 1,

concerning gas and electricity infrastructure projects which, given the funds allocated, is clearly the main focus of the Regulation. The objectives of the Regulation in this regard repeat those in the TEN-E Decision and Regulation, while the priorities are stated in Article 5 to be ‘urgently to adapt and develop energy networks of particular importance to the [Union] in support of the operation of the internal energy market and, in particular, to increase interconnection capacity, security and diversification of supply and to overcome environmental, technical and financial obstacles’. Projects will only be eligible if they intend to carry out one of the specified projects in Part A of the Annex to the Regulation and are within the maximum amount of EEPR support there specified. They must also satisfy the selection criteria in Article 8, which again mostly repeat those in the

24 25 26 27

For discussion of these exemptions, see Chs 3 and 4 (on unbundling and TPA, respectively). Available at . Available at . [2009] OJ L200/31. For related documentation; see .

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F. European Energy Programme for Recovery TEN-E Regulation, with certain specific additions.28 The key differences from the TEN-E Regulation, however, are the project elements which may be funded and the extent of funding available, both in absolute terms (as already noted) and as a proportion of the eligible costs of the individual project: here, up to a maximum of 50 per cent of such project-related costs may be awarded (Article 9(2)). The Commission’s first report on the implementation of the EEPR 29 explains the 6.24 process, the bids received in response to the call for tenders, and the projects finally selected. A wide range of strong proposals was received, and the EEPR has served to accelerate the development of some key infrastructure projects, attracting cofinancers and encouraging them to make investment commitments, estimated at almost ten times the value of the funds committed (circa €2.3 billion) under the EEPR. These benefits are also having knock-on effects along the supply chain, in particular enhancing manufacturing, assembly, and installation of gas and electricity transmission infrastructure and off-shore wind turbines.30 The remaining unspent funds (circa €146 million) from the EEPR are to be reallocated to support energy saving, energy efficiency, and renewable energy projects.31

28 In particular, Art 8(2): ‘(f) the contribution to the continuity and interoperability of the energy network, and to the optimisation of its capacity; (g) the contribution to the improvement of service quality, safety and security; (h) the contribution to the creation of a well-integrated energy market.’ 29 Report on the Implementation of the European Energy Programme for Recovery, COM(2010) 191 (24 April 2010). 30 Report on the Implementation of the European Energy Programme for Recovery, COM(2010) 191 (24 April 2010), 8. 31 Regulation 1233/2010/EU amending Regulation 663/2009 (15 December 2010) [201] OJ L346/5; see, further Commission, ‘Report on the implementation of the European Energy Programme for Recovery’, COM(2011) 217 (20 April 2011).

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7 CONSUMER PROTECTION AND PUBLIC SERVICE OBLIGATIONS

A. Introduction B. Definition of PSOs C. Description of PSOs (1) (2) (3) (4) (5)

7.01 7.07

Universal service obligation in electricity Security of supply Quality and price of supply Environmental issues and protection Information duties

7.13 7.13 7.31 7.32 7.33 7.39

(6) Relations with suppliers 7.43 (7) Transparency and information provision 7.58 (8) Specific customers 7.76 (9) Single points of contact, complaints, and dispute settlement 7.102 (10) Roles of market operators 7.106 (11) Roles of regulators 7.112

A. Introduction Traditionally, consumer protection and public service obligations have been 7.01 dealt with mainly at Member State level. Under a State-owned monopoly, electricity and gas suppliers provided a public service, hence the assumption that they would act in the public interest, ensuring that the consumer would be supplied and protected as a priority, rather than focusing on turning a profit. The reality, of course, was sometimes rather different, and energy supply regimes at national level were subject to numerous other economic and political pressures beyond serving the consumer.1 And, of course, even government-owned monopolies had budgetary constraints which could sometimes (perhaps often) affect services. 2

1 eg the use of the energy system to fund industrial, employment, and regional policies, such as subsidizing coal mining via guaranteed purchasing by power generators. See, eg: M Chick, Electricity and Energy Policy in Britain, France and the United States since 1945 (Cheltenham (UK): Edward Elgar, 2007), esp ch 2; and D Helm, Energy, the State, and the Market: British Energy Policy since 1979 (rev paperback edn, OUP, 2004), esp chs 2, 4, and 5. 2 C Jones (gen ed), EU Energy Law—Volume I: The Internal Energy Market—The Third Liberalisation Package (3rd edn, Leuven: Claeys & Casteels, 2010), 394.

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Consumer Protection and Public Service Obligations 7.02 This background explains the paucity of references to public service obligations

(PSOs) in the earlier energy internal market Directives. With regard to PSOs, the former Directives stated in their preamble that the free play of competitive forces might not guarantee the security of supply, environmental, and/or consumer protection. Consequently, at the time of the first wave of energy liberalization legislation, the Member States were authorized to impose some PSOs upon the companies of the sector. Those PSOs could relate to safety, including the security of supply, the regularity, the quality and the prices of the supply, as well as environmental protection (see Article 3 of Second Electricity and Gas IEM Directives of 2003).3 Indeed, when introduced, it has been demonstrated that competition ‘has also led in many respects to an increase rather than a decrease in standards of consumer protection. But a risk does exist that, unchecked, some public service elements could be reduced’.4 7.03 An increasing focus on consumer protection and PSO issues at EU level appeared

in the Second Package of Directives and has been strongly developed in the Third Package. 7.04 In a general way, the EU obliges the Member States to take measures which are

essential to achieve the goals of economic and social cohesion, environmental protection (which can include measures of energy efficiency and demand-management as well as measures aimed to combat the climate change), and promoting the security of energy supply. These goals have also been reinforced at Treaty level, both in the EU Charter of Fundamental rights (Article 36) and in Articles 14 and 106 TFEU, as well as under particular provisions in the sector-specific legislation (including in particular in the telecommunications sector).5 7.05 In the Third Package, the Electricity and Gas IEM Directives also aim, by the

means of PSOs, to protect certain categories of consumers, in particular ‘vulnerable consumers’. For this purpose, Appendix I of the Third Electricity IEM Directive contains a list of obligations and measures for consumer protection. Under the energy legislation (Articles 3(15) (Elec) and 3(11) (Gas)), the Member States must inform the Commission of all the measures that have been taken at national level to fulfil the obligations of universal service and public service, including environmental protection and consumer protection, and they must assess, monitor, and report upon their possible effects on national and international competition.

3

Directives 2003/54/EC and 2003/55/EC, respectively. C Jones (n 2), 394. 5 See, eg P Nihoul, ‘The Status of Consumers in European Liberalisation Directives’ [2009] Yearbook on Consumer Law 67 (also available at ) and, for comparison with the electronic communications sector, see the same author’s ‘Les consommateurs sontils protégés dans l’environnement libéralisé? Une analyse fondée sur l’étude du cadre réglementaire européen relatif aux communications électroniques’ (2009) 1 Opinio Juris in Comparatione, no 3 (available at ). 4

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B. Definition of PSOs Article 3(14) of the Third Electricity IEM Directive and Article 3(10) of the Third 7.06 Gas IEM Directive explicitly permit Member States to derogate from certain specific requirements of the Directives where it proves necessary to do so to achieve specified public service objectives. More generally, Article 3(2) in both Directives implies that PSOs may operate as derogations from otherwise applicable general rules of EU law (such as the TFEU’s competition and free movement rules).

B. Definition of PSOs Energy supplies are essential to the functioning of the modern economy, and of 7.07 course to the daily lives of companies and citizens. Electricity is, in the modern developed world, clearly considered an essential good: supply interruptions are potentially hugely expensive and considered unacceptable. Gas is perhaps less often considered similarly essential—since it can often be replaced by an alternative product: electricity can provide cooking and heating facilities, for example— although it is clearly of huge importance, particularly once houses and businesses are connected to, and come to rely upon, the gas supply network.6 According to the character of energy as an ‘essential good’, and as a result of the full 7.08 household market opening required after the Third Package, the new Directives contain a number of public service-related guarantees. The starting assumption here, as with regard to security of supply (see Ch 10), is that competition and the market will generally deliver supplies at levels of service and price which will be adequate to protect and benefit the end user. But it is also recognized that some goals for the energy supply system may not be achieved straightforwardly via market forces, hence the provisions of Article 3(2) in both Directives, and Articles 3(14) (Elec) and 3(10) (Gas) respectively. This framework has prompted one set of commentators to note that, in the context of the Electricity and Gas IEM Directives, ‘public service’ means ‘the guaranteeing, through regulatory standards, measures or requirements, of levels of consumer or environmental protection that might otherwise not be maintained through the simple operation of the market mechanism’.7 More generally, customer protection measures under the EU’s energy legislative 7.09 framework are often discussed in the context of phrases such as ‘public service’ or ‘public service obligation’ (PSO), although these are malleable and contextdependent terms. Their meaning depends upon the circumstances in which they are used and the perspective from which one views such issues (eg those upon whom the obligations are imposed: transmission system operators (TSOs), distribution

6 7

C Jones (n 2), 394. C Jones (n 2), 395.

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Consumer Protection and Public Service Obligations system operators (DSOs), suppliers, or those relying upon possible rights concomitant upon such obligations (businesses, consumers)). Under the Third Package, however, the obligations imposed by the Directives (see their Article 3 and Annex I) require Member States to achieve the relevant results (imposing a positive duty on Member States (using the word ‘shall’) to achieve the specified PSO objectives), while leaving discretion to the Member States to decide exactly how this will be achieved and by whom. 7.10 Therefore, the focus here will be upon these specific obligations, grouping them

under a number of common headings and pointing out overlaps between categories where appropriate. 7.11 It is important to note that there is also a limitation upon the range of areas for

which PSOs can be imposed by Member States under Article 3(2) of the Third Electricity and Gas IEM Directives, and the details of Consumer Protection are detailed in Annex I of the Third Electricity and Gas IEM Directives. Thus, PSOs may relate to security (including security of supply), regularity, quality and price of supplies, and environmental protection, including energy efficiency, energy from renewable sources, and climate protection.8 The public service requirements should be clearly and publicly defined at national level and may take national circumstances into account.9 Thus, the implementation of the PSOs may vary from one Member State to another. 7.12 It is clear from the case law of the ECJ that such national PSOs must also respect

the proportionality test in their operation: in Federutility, Italy was in principle permitted to empower its NRA to use a PSO to adopt ‘reference prices’ for gas supplies (which, in practice, were set at levels below market prices) provided that this pursued the objective of protecting final consumers, as part of ‘the reconciliation which Member States must make . . . between the objective[s] of liberalisation and . . . the necessary protection of final consumers’.10 This required positive justification, because the basic premise of the EU’s Energy IEM legislation is to achieve a liberalized and competitive market in which suppliers are free to deliver their products to all customers.11 Such PSO-authorized interventions in the market mechanism should: (1) be limited in duration (and thus are best regarded as only transitional in nature, not permanent); (2) go only so far as necessary to achieve the consumer protection objective;12 and (3) respect the Article 3(2) requirement that 8

Art 3(2) of the Third Electricity and Gas IEM Directives. See, eg, Recital 50 to the Third Electricity IEM Directive. 10 Case C-265/08 Federutility et al v Autoritá per l’energia elettrica e il gas (ECJ, judgment of 20 April 2010), at para 32. 11 Federutility (n 10), at paras 17–19. 12 In particular, the Court emphasized (Federutility (n 10), at paras 40–43) that, while it was possible to use reference prices for business as well as household customers, account must be taken of the different position in which those two categories of customers find themselves. Failure to do so would breach the proportionality criterion. 9

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C. Description of PSOs PSOs be clearly defined, transparent, non-discriminatory, and verifiable, while also guaranteeing equal access to consumers for EU gas companies.13 It was for the national court to verify whether these conditions had been satisfied by the Italian reference price scheme in this case. One might wonder how well qualified national courts are to conduct this assessment, whether here or under the new Gas Security of Supply Regulation.14

C. Description of PSOs (1) Universal service obligation in electricity Article 3(3) of the Third Electricity IEM Directive provides that:

7.13

Member States shall ensure that all household customers, and, where Member States deem it appropriate, small enterprises (namely enterprises with fewer than 50 occupied persons and an annual turnover or balance sheet not exceeding EUR 10 million), enjoy universal service, that is the right to be supplied with electricity of a specified quality within their territory at reasonable, easily and clearly comparable, transparent and non-discriminatory prices. To ensure the provision of universal service, Member States may appoint a supplier of last resort. Member States shall impose on distribution companies an obligation to connect customers to their network under terms, conditions and tariffs set in accordance with the procedure laid down in Article 37(6). Nothing in this Directive shall prevent Member States from strengthening the market position of the household, small and medium-sized consumers by promoting the possibilities of voluntary aggregation of representation for that class of consumers.

By this Article, Member States have the obligation to ensure that all household 7.14 customers and, where Member States deem it appropriate, small enterprises, benefit from universal service. Universal service is defined as ‘the right to be supplied with electricity of a specified quality within their territory at reasonable, easily and clearly comparable, transparent and non-discriminatory prices’. Moreover, where universal service is also provided to small enterprises, measures to 7.15 ensure that such universal service is provided may differ according to whether they are aimed at household customers or small enterprises.15 Only the Third Electricity IEM Directive contains this obligation, which thus does 7.16 not apply to natural gas. This partly reflects the reasons discussed in the preceding

13 Federutility (n 10), at paras 33–47; Art 3(2) expressly requires Member States to have ‘full regard’ to the provisions of the Treaty, in particular what is now Art 106 TFEU: the structure of analysis thereunder clearly informed the Court’s reasoning in Federutility. 14 K Talus, Vertical Natural Gas Transportation Capacity, Upstream Commodity Contracts and EU Competition Law (Alphen aan den Rijn: Kluwer Law International, 2011), 59–60. 15 Recital 45 to the Third Electricity IEM Directive.

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Consumer Protection and Public Service Obligations paragraphs, as well as the practical consideration that not all regions of the EU are connected to a gas transmission network or to the distribution network. 7.17 The electricity universal service obligation (USO) involves various different

aspects. 7.18 (a) Connection to the grid: First, all households have the right to be connected

to the grid. Therefore, ‘Member States shall impose on distribution companies an obligation to connect customers to their network under terms, conditions and tariffs set in accordance with the procedure laid down in Article 37(6)’.16 7.19 (b) Supply: Once connected, households have the right to be supplied with elec-

tricity. This obligation may cover two aspects. First, Article 3(3) of the Third Electricity IEM Directive may require the allocation of a supplier to each customer at the point at which the market is opened. Customers not wishing to switch would remain with the incumbent. 7.20 Second, the continuity and the quality of the supply must be ensured. The concept

of ‘security’ or ‘continuity of supply’ is broadly conceived in Article 3 of the Third Directives: Article 3(2) of the Third Electricity IEM Directive aims at the security of supply in the sense of ‘regularity, quality and price of supplies’. Reference must also be made to Article 3(3) of the Third Electricity IEM Directive, which establishes ‘the right to be supplied with electricity of a specified quality’.17 The physical quality of the energy supplied is regulated through the technical rules contained in the grid codes, or under a supply licence requirement. The physical quality of the energy supplied (using a so-called ‘on spec clause’) is also typically governed by the terms of supply contracts (see Ch 8 on Energy Contracts). 7.21 (c) Supply at reasonable price:18 Third, under Article 3(3) they have the right to be

supplied with electricity at ‘reasonable, easily and clearly comparable, transparent, and non-discriminatory prices’. 7.22 Moreover, Recital 50 to the Third Electricity IEM Directive provides that ‘the pub-

lic service requirements, including as regards the universal service, and the common minimum standards that follow from them, need to be further strengthened to make sure that all consumers, especially vulnerable ones, are able to benefit from competition and fair prices’. 7.23 National regulatory authorities (NRAs) have a duty to monitor the effectiveness of

market opening and competition at the retail level: this concerns market opening for all customers and the protection of the customers with regard to PSOs. Within

16 Art 3(3) of the Third Electricity IEM Directive; Art 37(6) of the same Directive makes the regulator responsible, directly or indirectly, for the approval of connection and access tariffs. 17 Art 3(3) of the Third Electricity IEM Directive. 18 See also the discussion of the Federutility case at para 7.12.

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C. Description of PSOs this framework, Article 37(1)(j) of the Third Electricity IEM Directive provides that the regulatory authority shall have the following duties: monitoring the level and effectiveness of market opening and competition at wholesale and retail levels, including on electricity exchanges, prices for household customers including prepayment systems, switching rates, disconnection rates, charges for and the execution of maintenance services, and complaints by household customers, as well as any distortion or restriction of competition, including providing any relevant information, and bringing any relevant cases to the relevant competition authorities.

In addition to this monitoring role, the NRA has an obligation to monitor19 the 7.24 compatibility of supply prices with competition law. Article 37(1)(o) of the Third Electricity IEM Directive provides that the NRA will publish ‘recommendations, at least annually, in relation to compliance of supply prices with Article 3, and providing these to the competition authorities, where appropriate’.20 (d) Supplier of last resort: Fourth, a safety net is required in the event that any 7.25 household customer’s supplier fails to meet its contractual obligations and, for example, goes into liquidation. It is in this context that Article 3(3) of the Third Electricity IEM Directive provides that ‘Member States may appoint a supplier of last resort’. The possibility for Member States to implement the USO by appointing a supplier 7.26 of last resort may be a positive development for customers. The appointment of a supplier of last resort must be accompanied by financial or other compensation or the grant of exclusive rights: this must be achieved in a non-discriminatory and transparent way (Article 3(2)). Different Member States have different definitions and national systems put in 7.27 place for the designation of a supplier of last resort for electricity and gas. The notion of supplier of last resort may be compared to the definition of ‘default supplier’, where the situation is markedly different: The term supplier of last resort appears in Article 3 in the existing Directives, but no definition is given. This status review shows that a supplier of last resort is not the same as a default supplier. A majority of the countries do have a definition of supplier of last resort for electricity and gas. For electricity, 20 respondents out of 27 have a definition, and for gas 16 out of 25 respondents have a definition. For those countries which have a definition, it is most common that the supplier of last resort is appointed when a supplier goes bankrupt or when a customer cannot find a supplier on the market. It is also worth noting that it is not unusual for the supplier

19 The precise national division of competences with regard to the enforcement of competition law in the energy sector varies from one Member State to the next: eg in the UK there is concurrent competence for both Ofgem and the OFT in this regard. In other Member States, competition law enforcement is strictly reserved to the specific national competition authorities. 20 Art 37(1)(o) of the Third Electricity IEM Directive.

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Consumer Protection and Public Service Obligations of last resort to also act as the default supplier, or vice versa. Some countries do not separate or distinguish between the terms. The supplier of last resort is most commonly designated by the regulator. This status review shows that it is almost always the case that the default supplier is in fact the same as the incumbent supplier, and in half of the responding countries the role of supplier of last resort falls on the incumbent supplier. To choose incumbent suppliers to act as default supplier and supplier of last resort is, from a competition perspective, not the best solution . . . A market-oriented solution for appointing a default supplier/supplier of last resort could be to have a tendering procedure to facilitate competition between suppliers . . . An increased number of suppliers would give the customers more options, which would lead to enhanced competition in the retail markets.21 7.28 In some Member States, the supplier of last resort also acts as a default supplier.

This means that not all countries separate the two functions. 7.29 For the supplier of last resort, on both the electricity and gas markets, it can be

concluded that: The supplier of last resort is, like the default supplier, most commonly designated by the regulator and in half of the cases it is the incumbent supplier that acts as the supplier of last resort. The service of the supplier of last resort is, like the service of the default supplier, normally not time limited. This is of course not an ideal situation if competition amongst suppliers should be promoted and enhanced . . . If there is no time limit, the customers are more likely to remain with the supplier of last resort than if the service of the supplier of last resort is time limited . . . Competition in the retail markets is essential to ensure high quality services at the lowest prices and to maximise customer empowerment.22 7.30 In countries where there are no definitions of ‘default supplier’ and/or ‘supplier of

last resort’, there are support systems which ensure that the customer is supplied with energy in some specific situations. Those systems will be activated when a customer does not choose a supplier, when a supplier goes bankrupt, when a contract expires, or when a customer cannot find a supplier on the market.23 (2) Security of supply 7.31 Measures to protect and promote security of energy supply have become a critical

part of any modern set of rules in this area, and are discussed in detail in Chapters 9 and 10. As will become apparent from that treatment, the precise definition of what is covered by the term ‘security of supply’ is fraught with difficulty. At this point, it suffices to note that the terms used in Article 3(2) of both Directives are

21 ERGEG, ‘Status review of the definitions of vulnerable customer, default supplier and supplier of last resort of 16 July 2009, Ref: E09-CEM-26-04, Status Review of vulnerable customer, default supplier and supplier of last resort’ available through , 7–8. 22 ERGEG (n 21), 31. 23 ERGEG (n 21), 31.

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C. Description of PSOs capable of covering a broad conception of the term, yet the details concerning consumer protection in Annex I in both Directives focus on narrower notions of continuity, quality, and reliability of supplies. The Third Electricity and Gas IEM Directives, therefore, allow scope for the use of both broader and narrower conceptions of security of supply, although Member States and undertakings must take care to ensure that they are able to use the specific notion upon which they rely under the relevant provision(s) of the Directive in question. (3) Quality and price of supply While it is possible to discuss PSOs, which aim to ensure the quality and rea- 7.32 sonable price levels of energy supplies in their own terms, the operation of such provisions makes most sense when discussed in the specific context of particular actors (whether TSOs, suppliers and the like, or customers (household, Small and Medium-sized Enterprises (SMEs), and other legal persons)). Accordingly, issues of prices and quality have been addressed as they arise in the remaining paragraphs of this chapter.24 (4) Environmental issues and protection (a) Environmental labelling: Under Article 3(9) of the Third Electricity IEM 7.33 Directive, Member States must ensure that electricity suppliers25 provide final customers with information (in or with their bills and in promotional materials26 made available to customers) concerning: (a) the contribution of each source of energy to the supplier’s overall fuel mix over the preceding year, in a comprehensible manner which (at national level) allows clear comparison with the mix of other suppliers; and (b) references to existing sources (eg web pages) where the environmental impact of electricity produced from that fuel mix is publicly available. ‘Environmental impact’ means at least the carbon dioxide emissions and radioactive waste resulting from the relevant electricity generation. Where the relevant electricity supply is obtained via an electricity exchange or 7.34 imported from an undertaking established outside the EU, these obligations may

24

See esp paras 7.76 ff, on specific customers. A concept not defined in the Directive, but clearly encompassing pure traders as well as more ‘traditional’ supply companies. Traders may find the calculation of such proportions difficult, as may exchanges, even after the advent of some certification rules in the EU’s Renewables Directives (see Art 5 of Directive 2001/77/EC [2001] OJ L283/33 and now Art 15 of Directive 2009/28/EC [2009] OJ L140/16). See the discussion in Ch 12.A.2. 26 This term is not defined by the Directive and it raises questions concerning its reach: clearly, leaflets sent or handed to customers would be covered, but the position of television, internet, and newspaper advertising is less obvious. Jones et al (n 2) suggest that the latter are excluded because they are only ‘directed at’, but not ‘made available to’ final customers (at 413–414). 25

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Consumer Protection and Public Service Obligations be fulfilled by using aggregate figures for the preceding year from that exchange or from the relevant undertaking (Article 3(9), second paragraph). The third paragraph of Article 3(9) requires the NRA to monitor whether these obligations are being met by suppliers: ensuring comparability, for example, may require the development of common terms and categories, which is unlikely to occur spontaneously among supply companies. Similarly, active involvement by the NRA may be required to establish how imports from non-EU undertakings must satisfy these requirements: care should be taken by NRAs to ensure that such principles do not amount to infringements of international trade law, by engaging in consultation with prospective importers and ensuring that those principles do not discriminate against non-EU suppliers. 7.35 (b) Priority grid access for renewables: Under Article 16(2)(a) of the Second

Renewables Directive, TSOs and DSOs are required to guarantee the transmission and distribution of electricity generated from renewable sources, and Article 16(2)(b) requires Member States to provide for either priority or guaranteed grid access for renewables. Further, Article 16(2)(c) demands that priority be given by TSOs to renewable generating installations in dispatching decisions, insofar as secure operation permits this. It is worth emphasizing that nothing in the Third Electricity IEM Directive or the Second Renewables Directive establishes any priorities as between renewables generators with regard to grid access. This is a matter that is left to Member States to regulate as they wish, subject of course to compatibility with the unbundling requirements (eg TSO duties concerning nondiscrimination, independence, etc discussed in Ch 3), EU free movement law (eg with regard to imports of renewables), and EU and national competition law (eg concerning the behaviour of incumbent generators with large market share and/or TSO behaviour under the essential facilities doctrine). 7.36 (c) Energy efficiency and climate change: Articles 3(10) (Elec) and 3(7) (Gas) are

in almost identical terms and require Member States to ‘implement measures to achieve the objectives of social and economic cohesion and environmental protection’. The key difference between the two provisions is that, under the Electricity Directive, such measures ‘shall include energy efficiency/demand-side management measures and means to combat climate change, and security of supply, where appropriate’.27 Under the Gas Directive, meanwhile, there is no mention of energy efficiency or demand management, and greater leeway is provided to Member States, whose measures ‘may include’ combating climate change and improving supply security (emphases added). Under both of these provisions, it is specified that such ‘measures may include, in particular, the provision of adequate economic incentives, using, where appropriate, all existing national and [EU] tools, for the

27 However, the addition of the phrase ‘where appropriate’ under the Electricity Directive leaves open to question the strength of the obligation imposed by Art 3(10) upon Member States.

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C. Description of PSOs maintenance and construction of the necessary network infrastructure, including interconnection capacity’. Clearly, however, any such ‘incentives’ provided by Member States must comply with the EU State aid rules.28 Greater detail concerning possible energy efficiency measures is provided in Articles 7.37 3(11) (Elec) and 3(8) (Gas): Member States or their NRA shall ‘strongly recommend that . . . undertakings optimise the use of electricity/gas, for example by providing energy management services, developing innovative pricing formula[e], or introducing intelligent metering systems or smart grids, where appropriate’. While the wording of all of these provisions uses the imperative ‘shall’ formulation, 7.38 it cannot be denied that, beyond requiring Member States to do something on pursuit of these goals, they ‘contain very little [in the way of] substantive legal obligations which Member States can be obliged to meet. [They are] therefore more of a statement of political intent than . . . legally binding requirement[s]’.29 And given that specific EU legislation on such matters is developing, it seems more likely that detailed guidance on such measures should be sought, there, and in Member States’ own domestic law- and policy-making. (5) Information duties Member States have a clear obligation to ensure that consumers and citizens are 7.39 easily able to identify any PSOs implemented with respect to electricity and gas. Moreover, as has already been mentioned, Member States must inform the 7.40 Commission of all the measures that have been taken to fulfil the obligations of universal service and public service, including the environmental protection and consumer protection and their possible effects on national and international competition. This notification duty is mentioned in Article 3(15) of the Third Electricity and 7.41 Article 3(11) of the Third Gas IEM Directives, which provide that: Member States shall, upon implementation of this Directive, inform the Commission of all measures adopted to fulfil universal service and public service obligations, including consumer protection and environmental protection, and their possible effect on national and international competition, whether or not such measures require a derogation from this Directive. They shall inform the Commission subsequently every two years of any changes to such measures, whether or not they require derogation from this Directive.

These notification requirements are intended to keep the Commission well and 7.42 regularly informed of such measures adopted at national level. This will assist the

28

Confirmed by Recitals 49 (Elec) and 46 (Gas) respectively. C Jones (gen ed), EU Energy Law—Volume I: The Internal Energy Market—The Third Liberalisation Package (3rd edn, Leuven: Claeys & Casteels, 2010), 431. 29

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Consumer Protection and Public Service Obligations Commission in performing its general30 and specific31 monitoring and reporting duties (concerning environmental protection, supply security, and consumer protection) under the Third Package Directives, as well as its more general duties under the TFEU with regard to the competition and free movement rules. Member States, too, could learn from each other’s experiences in the PSO field, either directly or via benchmarking and reporting conducted by the Commission.32 (6) Relations with suppliers 7.43 (a) Choice of supplier: Since 1 July 2007, all consumers in the EU have had the

right to choose their supplier, both in the electricity and gas markets. This affects the various EU Member States in different ways: some countries have had a free electricity market for years while others may be implementing this for the first time and have not yet organized meter operations and meter values. Reducing such obstacles is one of the single most important issues for achieving a well-functioning end user market. 7.44 (b) Contractual provision: Annex I of the Third Electricity and Gas IEM Directives

impose a requirement that certain information is given to final customers when concluding energy contracts with a supplier. The information given to the customer must include the identity of the supplier, the services provided, the duration of the contract, the compensation and refund arrangements, the consumer’s rights, the applicable prices, their consumption data, etc. 7.45 These obligations to provide information to consumers are discussed in detail at

paras 7.58 ff and in Chapter 8 on ‘Energy Contracts’. 7.46 (c) Switching process: Article 3(7) of the Third Electricity and 3(3) of the Third

Gas IEM Directives provide that ‘Member States shall ensure that the eligible customer is in fact able easily to switch to a new supplier’. This imposes an obligation on Member States to ensure that eligible customers can easily switch supplier. This provision was adopted after the European Regulators’ Group for Electricity and Gas (ERGEG) stated that: All customers shall be able to switch electricity supplier. Since 1 July 2007, all customers in both the gas and electricity markets of the EU are eligible to take part in the free market, switch supplier or renegotiate the terms and conditions with their existing supplier. This is a significant reform. However, declaring that all customers have full market access is not enough. In addition, the organisation of the market must be such that customers have easily accessible information about suppliers and

30

See Arts 47 (Elec) and 52 (Gas) of the IEM Directives. See Art 3(2) of each IEM Directive: such PSOs must be ‘clearly defined, transparent, nondiscriminatory and verifiable’. 32 C Jones (gen ed) (n 29), 432. 31

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C. Description of PSOs their offers. A switch of supplier must be simple to carry out for both for customers and suppliers and DSOs must act as market facilitators, not market actors.33

The switching process may be divided into three stages:

7.47

(i) Access to information: In the first stage, the customer searches for information on 7.48 prices, products, contracts, and suppliers. The customer also examines the terms of his or her contract with his or her present supplier and collects the data which is required to perform the switch of supplier. At this stage, the consumer should have access to his or her entry on the database. 7.49 This access will allow him or her to have access to all the information he or she needs to make the switch. This access to consumer information is thus essential. The fact that customers are entitled to receive all consumption data in an easily understandable, harmonized format is a means of improving customers’ ability to switch supplier.34 The relevant data include all information that a consumer would need either to assess his or her own consumption pattern or compare his or her consumption costs with offers provided by other suppliers. The information should also be understandable for consumers: ‘[t]aken together, 7.50 these new provisions of Article 3 and Annex I are designed to make it easier for consumers to understand their own consumption, to use this information either to compare it with offers from other energy suppliers, or to allow other suppliers to have access to their consumption data so as to provide them with a new offer of supply.’35 (ii) The supplier switching procedure: The second stage lasts from when the cus- 7.51 tomer signs a new contract and the customer or the new supplier have collected all the required data until the agreed date where the switch is going to take place. Meter reading should be registered on the switching day itself by automatic meter reading, but can also be handled in different ways by manual meter reading. The second stage can be referred to as the theoretical duration of the switch.36 (iii) Execution of the switch, delay, or cancellation: The third stage takes into account 7.52 the cases where there is an error, a delay, or perhaps the cancellation of the switch by the customer or the DSO, thereby prolonging the real duration of the switch. 33 Obstacles to supplier switching in the electricity retail market—Guidelines of Good Practice and Status Review of 10 April 2008, available through , 4. 34 Arts 3(5) of the Th ird Electricity IEM and 3(6) of the Th ird Gas IEM Directives. 35 Commission Staff Working Paper, Interpretative Note on Directive 2009/72/EC Concerning Common Rules for the Internal Market in Electricity and Directive 2009/73/EC Concerning Common Rules for the Internal Market in Natural Gas: Retail Markets (22 January 2010) (hereafter, ‘Interpretive Note: Retail Markets’), 5. 36 ERGEG, ‘Obstacles to supplier switching in the electricity retail market—Guidelines of Good Practice and Status Review of 10 April 2008’ available through , 5.

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Consumer Protection and Public Service Obligations The third stage ends when the customer receives a confirmation letter from the new supplier and/or the first bill and additionally when the account with the former supplier has been settled.37 7.53 Switching should be quick and easy for the customer. Articles 3(5)(a) (Elec) and

3(6)(a) (Gas) provide that ‘Member States shall ensure that: where a customer, while respecting contractual conditions, wishes to change supplier, the change is effected by the operator(s) concerned within three weeks’. 7.54 (iv) No charge for switching: Annex I(1)(j) in both IEM Directives provides that ‘cus-

tomers receive a final closure account following any change of electricity supplier no later than six weeks after the change of supplier has taken place’. Customers may not be charged for switching. Indeed: in order to promote switching, customers must be confident of the benefits of switching supplier. This means that the customer must be able to obtain a more preferable contract and that he/she must perceive that it is in fact beneficial to make the switch. Although customers are not charged for switching, there are both real and perceived costs related to switching, including fees, search costs, psychological costs and more. These costs make it less attractive to switch supplier. In cases where regulated prices are set lower than market prices, the customer has no incentive to switch. Thus, a market with regulated prices hinders the development of the retail market as there is no real competition between electricity suppliers.38 7.55 Thus, no charge can be levied by a DSO for the administrative costs involved when

a customer changes supplier. Any such cost must be paid by all consumers and is thus socialized. 7.56 It is also important to ensure that all consumers have easy access to information

on the switching procedure, supply prices, and products. To make the first stage more efficient and convenient for the customer, it is useful if each NRA requires the creation of a website providing information concerning suppliers, products, prices, etc. This measure is recommended by ERGEG.39 7.57 (v) Non-discrimination: It is important to ensure that the DSOs do not create obsta-

cles to switching. Most DSOs are either vertically integrated with a supplier or within the same corporation as a supplier. As stated by ERGEG, ‘[t]he DSO then has an incentive to discriminate against other suppliers within their grid area. Without clear regulation making such conduct illegal, the consequences for the market could be severe’.40

37 38 39 40

See n 36. See n 36, 8. See n 36, 5. See n 36, 26.

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C. Description of PSOs (7) Transparency and information provision Article 3(5)(b) of the Third Electricity IEM Directive requires:

7.58

Member States [to] ensure that . . . (b) customers are entitled to receive all relevant consumption data.

Annex I of both the Third Electricity and Gas IEM Directives contain very impor- 7.59 tant provisions concerning the measures that will be taken by the Member States to ensure respect for public service and consumer protection requirements (as per Article 3 of both Directives). These Annexes also provide details41 concerning the information to be provided to consumers: Measures on consumer protection. Without prejudice to EU rules on consumer protection, in particular Directive 97/7/EC of the European Parliament and of the Council of 20 May 1997 on the protection of consumers in respect of distance contracts and Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, the measures referred to in Article 3 are to ensure that customers: (a) have a right to a contract with their electricity service provider that specifies: – the identity and address of the supplier, – the services provided, the service quality levels offered, as well as the time for the initial connection, – the types of maintenance service offered, – the means by which up-to-date information on all applicable tariffs and maintenance charges may be obtained, – the duration of the contract, the conditions for renewal and termination of services and of the contract and whether withdrawal from the contract without charge is permitted, – any compensation and the refund arrangements which apply if contracted service quality levels are not met, including inaccurate and delayed billing, – the method of initiating procedures for settlement of disputes in accordance with point (f), – information relating to consumer rights, including on the complaint handling and all of the information referred to in this point, clearly communicated through billing or the electricity undertaking’s web site. Conditions shall be fair and well-known in advance. In any case, this information should be provided prior to the conclusion or confirmation of the contract. Where contracts are concluded through intermediaries, the information relating to the matters set out in this point shall also be provided prior to the conclusion of the contract; (b) are given adequate notice of any intention to modify contractual conditions and are informed about their right of withdrawal when the notice is given. Service providers shall notify their subscribers directly of any increase in charges, at an appropriate time no later than one normal billing period after the increase comes into effect in a transparent and comprehensible manner. Member States shall ensure that customers are free to withdraw from contracts

41 The extent of which has grown markedly since the first appearance of these Annexes in the Second Energy Package in 2003.

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Consumer Protection and Public Service Obligations

(c) (d)

(e) (f)

(g) (h)

(i)

(j)

if they do not accept the new conditions notified to them by their electricity service provider; receive transparent information on applicable prices and tariffs and on standard terms and conditions, in respect of access to and use of electricity services; are offered a wide choice of payment methods, which do not unduly discriminate between customers. Prepayment systems shall be fair and adequately reflect likely consumption. Any difference in terms and conditions shall reflect the costs to the supplier of the different payment systems. General terms and conditions shall be fair and transparent. They shall be given in clear and comprehensible language and shall not include non-contractual barriers to the exercise of customers’ rights, for example excessive contractual documentation. Customers shall be protected against unfair or misleading selling methods; are not charged for changing supplier; benefit from transparent, simple and inexpensive procedures for dealing with their complaints. In particular, all consumers shall have the right to a good standard of service and complaint handling by their electricity service provider. Such out-of-court dispute settlement procedures shall enable disputes to be settled fairly and promptly, preferably within three months, with provision, where warranted, for a system of reimbursement and/or compensation. They should, wherever possible, be in line with the principles set out in Commission Recommendation 98/257/EC of 30 March 1998 on the principles applicable to the bodies responsible for out-of-court settlement of consumer disputes; when having access to universal service under the provisions adopted by Member States pursuant to Article 3(3), are informed about their rights regarding universal service; have at their disposal their consumption data, and shall be able to, by explicit agreement and free of charge, give any registered supply undertaking access to its metering data. The party responsible for data management shall be obliged to give those data to the undertaking. Member States shall define a format for the data and a procedure for suppliers and consumers to have access to the data. No additional costs shall be charged to the consumer for that service; are properly informed of actual electricity consumption and costs frequently enough to enable them to regulate their own electricity consumption. That information shall be given by using a sufficient time frame, which takes account of the capability of customer’s metering equipment and the electricity product in question. Due account shall be taken of the cost-efficiency of such measures. No additional costs shall be charged to the consumer for that service; receive a final closure account following any change of electricity supplier no later than six weeks after the change of supplier has taken place.

7.60 Annex I of the Third Gas IEM Directive is identical in its substance, except for its

paragraph (g), which requires Member States to ensure that: customers . . . connected to the gas system are informed about their rights to be supplied, under the national legislation applicable, with natural gas of a specified quality at reasonable prices. 7.61 The role of the NRAs with regard to national retail markets and consumer protec-

tion has also been considerably reinforced.

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C. Description of PSOs (a) Information for consumers: Annex I(1)(i) to both the Third Electricity and Gas 7.62 IEM Directives requires that: customers . . . are properly informed of actual electricity consumption and costs frequently enough to enable them to regulate their own electricity consumption. That information shall be given by using a sufficient time frame, which takes account of the capability of customer’s metering equipment and the electricity product in question. Due account shall be taken of the cost-efficiency of such measures. No additional costs shall be charged to the consumer for that service.

Inaccurate and patchy billing records were the subject of regular complaints by 7.63 consumers, which hindered proper assessment of the service and prices provided, often discouraging switching. Improved information for consumers should be the result of this provision, which should facilitate the proper functioning of the market. Articles 3(16) (Elec) and 3(12) (Gas) provide that: The Commission shall establish, in consultation with relevant stakeholders including Member States, the national regulatory authorities, consumer organisations, electricity undertakings and, building on the progress achieved to date, social partners, a clear and concise energy consumer checklist of practical information relating to energy consumer rights. Member States shall ensure that electricity suppliers or distribution system operators, in cooperation with the regulatory authority, take the necessary steps to provide their consumers with a copy of the energy consumer checklist and ensure that it is made publicly available.

It is the responsibility of Member States to ensure that the information is com- 7.64 municated to consumers in an effective manner. The creation of a checklist should help to ensure respect for those provisions. Also, the relevant information should be provided to customers in their contracts. Annex I(1)(a) of the Third Electricity and Gas Directives also provide that ‘custom- 7.65 ers . . . have a right to a contract with their electricity service provider that specifies . . . information relating to consumer rights, including on the complaint handling and all of the information referred to in this point, clearly communicated through billing or the electricity undertaking’s web site’. Concerning the billing information and obligations, Annex I(1)(i) of the Directives 7.66 states that consumers must be properly informed of actual electricity/gas consumption and costs frequently enough to enable them to regulate their own electricity/ gas consumption. These provisions are intended to ensure that consumers do not pay an excessive amount as part of a regular payment system and that consumers have access to a range of methods for payment. It is reasonable to assume that consumers should have access to systems that are paid in arrears or in advance and are accessible to all consumers, including those without bank accounts or access to the internet.42

42

Interpretative Note: Retail Markets (n 35), 6.

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Consumer Protection and Public Service Obligations 7.67 The Commission has also noted that the introduction of appropriate smart meters

would greatly assist the fulfilment of this obligation (see the discussion at paras 7.68 ff ). Those measures will protect and help the consumer to know what they should eventually expect to pay for their levels of energy consumption, again facilitating consumer choice between competing suppliers. 7.68 (b) Intelligent metering systems—smart metering: In the context of transpar-

ency and information, an important step has been taken in Annex I(2) of the Third Electricity and Gas IEM Directives. Encouraging the active participation of consumers in the market was identified as a key aspect in the negotiations for the Third Energy Package, and much of this is reflected in the expanded provisions in the Annexes to the two IEM Directives; smart metering was viewed as being of particular significance as a consumer information provision device (as well as a possible means for improving demand-side management in the future).43 The Third Electricity IEM Directive provides that: Member States shall ensure the implementation of intelligent metering systems that shall assist the active participation of consumers in the electricity supply market. The implementation of those metering systems may be subject to an economic assessment of all the long-term costs and benefits to the market and the individual consumer or which form of intelligent metering is economically reasonable and cost-effective and which timeframe is feasible for their distribution. Such assessment shall take place by 3 September 2012. Subject to that assessment, Member States or any competent authority they designate shall prepare a timetable with a target of up to 10 years for the implementation of intelligent metering systems. Where roll-out of smart meters is assessed positively, at least 80 per cent of consumers shall be equipped with intelligent metering systems by 2020. The Member States, or any competent authority they designate, shall ensure the interoperability of those metering systems to be implemented within their territories and shall have due regard to the use of appropriate standards and best practice and the importance of the development of the internal market in electricity.44 7.69 A similar provision has been included in the second paragraph of Annex I to the

Third Gas IEM Directive, with the difference that the timetable for the implementation of intelligent metering systems does not have the same assessed targets: ‘[s]ubject to that assessment, Member States or any competent authority they designate, shall prepare a timetable for the implementation of intelligent metering systems’.

43 In the UK, for example, this has also been seen as a priority of government policy. For recent developments, see Ofgem: ‘Smart Metering Spring Package—Addressing Consumer Protection Issues’ (February 2011) and ‘Commercial interoperability: proposals in respect of managing domestic customer switching where meters with advanced functionality are installed’ (18 August 2011); and Department of Energy and Climate Change, ‘A consultation on draft licence conditions and technical specifications for the rollout of gas and electricity smart metering’ (August 2011). 44 Annex I, para 2 of the Third Electricity IEM Directive.

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C. Description of PSOs A ‘smart meter’ is an electronic device which can measure the consumption of 7.70 energy, providing more information than a conventional meter and transmitting data using a form of electronic communication. A key feature of a smart meter is the ability to provide bi-directional communication between the consumer and supplier/operator. It should also promote services which facilitate energy efficiency within the home.45 With regard to gas, the provisions are similar except for the absence of binding time 7.71 limits on rollout, as a result of the current lower levels of functionality available for smart meters in the field of natural gas.46 (c) Smart grids: Articles 3(11) of the Third Electricity and 3(8) of the Third Gas 7.72 IEM Directives provide that: In order to promote energy efficiency, Member States or, where a Member State has so provided, the regulatory authority must strongly recommend that electricity and gas undertakings optimize the use of energy, for example by providing energy management services, developing innovative pricing formulas, or introducing intelligent metering systems or smart grids, where appropriate.

According to the European Technology Platform SmartGrids, smart grids may be 7.73 defined in the following manner: ‘[a]n electricity network that cost-efficiently can integrate the behaviour and actions of all users connected to it—generators, consumers and those that do both—in order to ensure a sustainable power system with low losses and high levels of quality, security of supply and safety’.47 Concerning the implementation of smart grids, the Commission considers that: the implementation of more active transmission and distribution systems in the form of smart grids is central to the development of the internal market for energy. The development of technology to deliver more efficient management of networks is more commonly known as smart grids. The new systems will improve efficiency, reliability, flexibility and accessibility and are the key next steps in the evolution of the internal market in energy. Member States are encouraged to modernize distribution networks, for example through the introduction of smart grids, which should be built in a way that encourages decentralized generation and energy efficiency.48

EGREG agrees with this statement and has even gone further in its paper on smart 7.74 grids of 10 June 2010: The context for ERGEG’s consideration of smart grids is set by the key energy objectives of the European Union for the year 2020—increasing renewable energy supply to 20 per cent of total demand, reducing energy consumption by 20 per cent

45

Interpretive Note: Retail Markets (n 35), 7 C Jones (n 29), 437. 47 European Technology Platform, ‘SmartGrids, Strategic Deployment Document for Europe’s Electricity Networks of the Future, Final Report’ available at . 48 Interpretive Note: Retail Markets (n 35), 9. 46

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Consumer Protection and Public Service Obligations with respect to 2020 forecasts and reducing greenhouse gas emissions by 20 per cent with respect to 1990 levels—and the more ambitious objectives currently being developed for 2050. The most significant contribution that the electricity supply sector will make to reducing greenhouse gas emissions will be by replacing fossilfired generation with low or zero carbon generation technologies. Nevertheless, the other key components of the supply chain, networks and the demand side, will also have vital roles to play. Smarter networks are expected to be a key facilitator in the transition to a low-carbon energy sector.49 7.75 The initiative for smart grids seems likely to come from the TSOs, DSOs, and sup-

pliers. The transition towards smart grids will be an evolutionary process and new requirements may emerge over time. The allocation of costs should be shown transparently to consumers. As stated by ERGEG, ‘ consumer associations emphasise that higher commodity prices will be another factor affecting the electricity price. Therefore, it is absolutely key [always] to take the price effects into account’.50 (8) Specific customers 7.76 (a) Vulnerable customers: Protection for vulnerable consumers is provided by the

Third Electricity and Gas IEM Directives. Article 3(7) of the Electricity Directive provides that: Member States shall take appropriate measures to protect final customers, and shall, in particular, ensure that there are adequate safeguards to protect vulnerable customers. In this context, each Member State shall define the concept of vulnerable customers which may refer to energy poverty and, inter alia, to the prohibition of disconnection of electricity to such customers in critical times. Member States shall ensure that rights and obligations linked to vulnerable customers are applied. In particular, they shall take measures to protect final customers in remote areas. They shall ensure high levels of consumer protection, particularly with respect to transparency regarding contractual terms and conditions, general information and dispute settlement mechanisms. Member States shall ensure that the eligible customer is in fact able easily to switch to a new supplier. As regards at least household customers, those measures shall include those set out in Annex I.51 7.77 The absence of a clear definition of ‘vulnerable customers’ may result in the meas-

ures taken to protect vulnerable customers being different in each Member State. As Jones et al have noted: There were discussions on what would constitute a vulnerable customer. Standard estimates of the proportion of income spent on electricity and gas to heat and light a home to an unacceptable level were dismissed on two grounds. First, many consumers use fuel sources other than electricity and gas to heat their homes . . . Second, energy prices tend to be more volatile than income levels, therefore

49 ERGEG, ‘Position Paper on Smart Grids, An ERGEG Conclusions Paper’, Ref E10EQS-38-05, 10 June 2010 available through , 6. 50 ERGEG (n 49), 22. 51 See also Art 3(3) of the Third Gas IEM Directive.

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C. Description of PSOs changes in energy prices can significantly alter the number of customers falling into the category.52

When defining vulnerable consumers, Member States will need to consider care- 7.78 fully the groups of consumers that should be protected, remembering that energy/ fuel poverty issues are often addressed via national social security systems or other instruments of social policy, rather than through energy law and policy. Member States were concerned to ensure that interventions via energy policy should neither undermine nor duplicate such other measures.53 These views are now reflected in Articles 3(8) (Electricity) and 3(4) (Gas), which 7.79 state: Member States shall take appropriate measures, such as formulating national energy action plans, providing benefits in social security systems to ensure the necessary electricity supply to vulnerable customers, or providing for support for energy efficiency improvements, to address energy poverty where identified, including in the broader context of poverty. Such measures shall not impede the effective opening of the market set out in Article 33 or market functioning and shall be notified to the Commission, where relevant, in accordance with the provisions of paragraph 15 of this Article. Such notification may also include measures taken within the general social security system.54

Thus the poorest segment of final consumers will be the most relevant. In addition 7.80 to this, specific categories of customers might be identified, such as the handicapped, the elderly and/or other socially assisted customers: ‘[f]or example, elderly consumers on an extremely low income may be considered to be vulnerable during a severe winter if they use electricity to heat their home’.55 The reinforcement of consumer protection and the promotion of retail competi- 7.81 tion were key goals for the European Parliament. The objectives of this consumer protection, as set out by Article 3(7) are the following. First, it obliges Member States to take appropriate measures to protect final custom- 7.82 ers. Each Member State shall ‘define the concept of vulnerable customers which may refer to energy poverty’ and may refer to ‘the prohibition of disconnection of electricity to such customers in critical times’. These obligations are strong obligations and yet they leave discretion to the Member States to define the categories of ‘vulnerable customers’ and to take the appropriate measures they estimate to be the best in order to protect those consumers from ‘disconnection of electricity’ ‘in critical times’. High levels of ‘consumer protection, particularly with respect to transparency regarding contractual terms and conditions, general information and 52

C Jones (gen ed) (n 29), 417. C Jones (gen ed) (n 29), 417. 54 Art 3(8) of the Third Electricity IEM Directive; see, similarly Art 3(4) of the Third Gas IEM Directive. 55 Interpretive Note: Retail Markets (n 35), 6. 53

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Consumer Protection and Public Service Obligations dispute settlement mechanisms’ will be ensured.56 This Article requires Member States to take ‘appropriate measures’ or ‘measures’ and they ‘must ensure’ or they must implement ‘adequate safeguards’. 7.83 This provision imposes obligations but on one hand leaves a very large degree of

discretion to the Member States in choosing the methods to achieve the objectives in question. On the other hand, the issues which must be addressed are rather specific: helping vulnerable customers to avoid disconnection at critical times, providing high levels of consumer transparency, easy switching for customers from one supplier to another, provision of general information, etc. 7.84 Different countries may choose to define these concepts in different ways in this

context. For example: – ‘Poverty’ is traditionally defined as the inability of an individual or a family to command sufficient resources to satisfy basic needs. Basically, it is a condition in which a person’s income or consumption at a certain time falls below a certain threshold, which is referred to as the poverty line.57 – ‘Vulnerability to poverty’ can be defined as the probability that a household will become poor in the near future. This concept deals with probability, that is to say a risk that a currently non-poor household may end up being poor in the near future, due to events such as natural shocks or disasters, economic shocks or crisis, security problems, and others.58 – The calculation of household vulnerability rests in the sustainable livelihoods approach which considers human, financial, social, natural, and physical resources. Gender dimensions (ie male-female splits), production systems, and households’ consumption patterns are considered. The following categories of people are generally considered as ‘poor and vulnerable households’, by order of preference: households headed by women whose male members are either dead or incapacitated through sustainable injuries, unemployed landless households, and small farmers who do not have other supplementary source of incomes.59 7.85 In the context of the energy crisis, the concept of ‘fuel poverty’ emerged in Europe

and drew the attention of the European Parliament: people spending more than 10 per cent of their overall incomes for energy (electricity, gas, heating) should fall

56

Art 3(7) of the Third Electricity IEM Directive. G Fields, ‘Poverty and Income Distribution: Data for Measuring Poverty and Inequality Changes in the Developing Countries’ (1993) Journal of Development Economics 88. 58 AA Perdana, ‘Risk Management for the Poor and Vulnerable’, May 2005, Economic Working Paper Series, available at . 59 Asian Development Bank, ‘Immediate Support to Poor and Vulnerable Households in Inaccessible Areas Devastated by the 2005 Earthquake, Pakistan’ (JFPR-9092). 57

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C. Description of PSOs into the category of ‘fuel poor’.60 The European Parliament underlined, in a report on housing and regional policy, that: This impoverishment is often exacerbated by energy problems. Although growing energy prices may result in a rationalisation of use (the establishment of measures and technologies to help save energy and the introduction of sustainable energy, development of new energy sources, etc.), the combination of low income, high energy prices and inadequate heating and insulation systems resulting in ‘fuel poverty’ and energy exclusion.61

The concept of ‘fuel poverty’ was defined by the European Parliament in this report 7.86 as ‘when more than 10 per cent of income is devoted to paying energy bills’.62 In questions raised by the European Parliament to the European Commission, the latter also underlined that ‘[a] policy response to energy poverty requires the input of most parts of government as it requires the combination of both social and economic policy’.63 The concept of ‘fuel poverty’ emerged in the UK, where it is defined as:

7.87

A household is considered to be in fuel poverty if it needs to spend 10 per cent or more of its income to maintain an adequate level of warmth (usually defined as 21 degrees for the main living area, and 18 degrees for other occupied rooms).64

Social protection legislation generally refers to a list of ‘poor and vulnerable house- 7.88 holds’, taking into account (inter alia): – – – – – – – –

income support; housing support; tax benefit; disability living allowance; large families; minimum revenue; the elderly; long-term sickness and disability, etc.65

60 European Parliament, Report on Housing and Regional Policy (2006/2108(INI)), Committee on Regional Development (28 March 2007), 11; European Parliament, ‘Towards a Common EU Energy Policy’, 5 December 2006. 61 Report of the European Parliament on Housing and Regional Policy (A6-0090/2007, 28 March 2007), 11. 62 Report of the European Parliament on Housing and Regional Policy (A6-0090/2007, 28 March 2007) 11, n 1. 63 Parliamentary Questions, 24 October 2008, Answer given by Mr Piebalgs on behalf of the Commission, E-4841/2008. 64 DEFRA, ‘Fight Must Continue on Fuel Poverty Says Ministers’, 2 October 2008, at . 65 For example, see Department for Communities and Local Government, A Decent Home: Definition and guidance for implementation (June 2006) at , at 6.26, and Department of Energy and Climate Change, The UK Fuel Poverty Strategy: 7th Annual Progress Report 2009 (October 2009) at < http://www.decc.gov.uk/assets/decc/statistics/fuelpoverty/1_20091021091505_e_@@_ ukfuelpovertystrategy7annreport09.pdf >.

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Consumer Protection and Public Service Obligations 7.89 In implementing these Directives, Member States will of course have to inform

the Commission about the measures taken under this provision and will have to demonstrate how they fulfi lled these objectives. Following those reports, the Commission will regularly publish a report analysing measures taken at national level to achieve public service objectives and comparing their effectiveness, with a view to making recommendations as regards measures to be taken at national level to achieve high public service standards.66 According to Jones et al, however, ‘notwithstanding this, the discretion given to Member States is so wide that only if it can be clearly demonstrated that the objectives stated are not met, can an infringement of the Directives be considered to exist’.67 Moreover, such measures may differ from one Member State to the next, according to the particular circumstances in the Member States in question (under the subsidiarity principle) and may include specific measures relating to the payment of electricity bills, or more general measures taken in the social security system.68 7.90 Second, an important point is the possibility for Member States, in the definition

of ‘vulnerable customers’, to refer to the prohibition on disconnection of electricity to such customers in critical times. This possibility is specifically mentioned in Article 3(7) of the Third Electricity IEM Directive, which provides: . . . each Member State shall define the concept of vulnerable customers which may refer to energy poverty and, inter alia, to the prohibition of disconnection of electricity to such customers in critical times. 7.91 In practice, it has to be noted that almost all countries have support systems for

financially weak customers which are not specific to the energy sector. These support systems consist of financial support and mainly involve social allowances. A majority of countries also have non-economic support systems, such as protection against disconnection. 7.92 This protection aims also at the promotion of social and economic cohesion. 7.93 In the context of the protection of specific consumers, it is also worth mentioning

that these measures also seek to promote social and economic cohesion. Article 3(10) of the Third Electricity IEM Directive provides: Member States shall implement measures to achieve the objectives of social and economic cohesion and environmental protection, which shall include energy efficiency/demand-side management measures and means to combat climate change, and security of supply, where appropriate. Such measures may include, in particular, the provision of adequate economic incentives, using, where appropriate, all existing national and Community tools, for the maintenance and

66 67 68

Recital 45 to the Third Electricity IEM Directive. C Jones (n 29), 416. Recital 45 to the Third Electricity IEM Directive.

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C. Description of PSOs construction of the necessary network infrastructure, including interconnection capacity.69

The social and economic cohesion promoted here may lead to measures taken by 7.94 the Member States like ‘means to combat climate change, and security of supply, where appropriate’ and ‘adequate economic incentives’. The question may be asked: which categories of consumers will fall within these ‘objectives of social and economic cohesion and environmental protection’? Who counts in this category? It seems that the national definitions could include legal persons as well as household consumers. Concerning the protection of vulnerable consumers on the gas market, it has to be 7.95 noted that Article 3(3) of the Third Gas IEM Directive, while largely in identical terms, does contain slight differences from Article 3(7) of the Third Electricity IEM Directive. There is no USO in the Gas Directive (with no universal gas (transmission and/or distribution) network coverage in some Member States, this would have made no sense)70 but there is still provision for a supplier of last resort as a consumer protection measure. The protection that will be given to vulnerable consumers and the new measures 7.96 that will have to be taken, also means that the Third Package Directives provide new powers for the NRAs. Thus, Member States should also grant NRAs the power to contribute to: ensuring high standards of universal and public service in compliance with market opening; the protection of vulnerable customers; and the full effectiveness of consumer protection measures.71 (b) Protection of customers in remote areas: Articles 3(7) (Elec) and 3(3) (Gas) 7.97 also provide that, ‘Member States shall ensure that rights and obligations linked to vulnerable customers are applied. In particular, they shall take measures to protect final customers in remote areas.’ There are good reasons to make specific provisions for the protection of customers in remote areas: ‘First, a transmission or distribution system operator might not wish to connect such customers, it being disproportionately expensive to do so. Second, due to transmission and distribution costs, prices may be more expensive in remote areas than in towns.’72 It is important to note that under the Second Package it was optional to protect 7.98 final customers in remote areas; this has been increased to a binding obligation under the Third Package Directives. Customers should be treated on an equal basis irrespective of their location.

69 70 71 72

Art 3(7) of the Third Gas IEM Directive is in identical terms. C Jones (n 29), 422. Recital 37 to the Third Electricity IEM Directive. C Jones (n 29), 420.

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Consumer Protection and Public Service Obligations 7.99 (c) The price of supplies and regulated tariffs: Does this protection for particular

categories of customers extend to allowing Member States to require that supplies be provided at reasonable tariffs? As discussed at para 7.12 in connection with the Federutility case, the starting presumption of the IEM Directives is the development and maintenance of competitive markets: prices should be set in the market (subject to the application of the competition rules) and not by regulators. On the other hand, the transition to a liberalized market may raise important issues concerning energy prices,73 as may the position of certain categories of customer, and Article 3(2) specifically acknowledges that Member States are allowed to impose PSOs ‘which may relate to [the] price of supply’. After Federutility, it is clear that any such PSOs must, as well as meeting the criteria of the last sentence of Article 3(2) (concerning transparency, non-discrimination, and so forth), satisfy the proportionality test. The Commission’s enforcement practice under the Third Package has targeted a number of Member States with regard to their rules regulating prices in general.74 Regulated prices across all customers are likely to hinder severely the development of competitive markets if the price levels are set at or below cost, since this will provide no incentives for new market entrants to offer supply. 7.100 However, more precisely targeted price regulation concerning particular catego-

ries of customer has generally been considered more acceptable and is, indeed, a widespread practice across many Member States: that is why this issue is discussed in detail in this section of the text. First, the Directive expressly requires Member States to ensure the supply of electricity at reasonable prices to household customers and allows them to do so for SMEs. May this be extended to any customer located in a remote area? One set of commentators has argued that this is possible under the Directive and, indeed, that Member States are obliged to do so, subject to meeting the conditions for the imposition of a PSO laid down in Article 3(2) (as previously discussed).75 In favour of this interpretation, it should be pointed out that Article 3(7) (Elec) refers on this point to ‘final customers’, rather than ‘household customers’. Against this, one should point out that this provision generally refers to the protection of ‘vulnerable customers’, within which category it might seem strange to include legal persons beyond SMEs. Also, note that any such obligation with regard to gas supplies would only apply insofar as such customers (however defined) were connected to the gas system (Article 3(3) (Gas)). 73 Eg volatile wholesale markets, underdeveloped competition or over-concentration at various levels of the value chain and fully depreciated assets previously built using State resources: see C Jones (n 29), 409. 74 Against Greece, Lithuania, Poland, Portugal, and Romania, respectively: see generally Commission Press Release IP/09/1035, MEMO/09/296 and 297 (all of 25 June 2009). More recently, the Commission has continued to pressurize Member States on this issue: see Press Releases IP/11/414 (6 April 2011, concerning Italy, Poland, and Romania) and IP/11/950 (19 May 2011, concerning Portugal). 75 C. Jones (n 29), 420–421.

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C. Description of PSOs Second, the combination of such protection with an electricity USO based on 7.101 non-discriminatory prices poses a challenge: how might one ensure such supplies at a reasonable price in remote areas? One key element concerns the reference area by which such non-discrimination is to be assessed. Member States could create a single tariff for each geographic area, which could lead to ‘different [final] prices for the same category of customer on different distribution networks’.76 According to Jones et al, there is nothing in the Third Electricity IEM Directive which would prevent this, and we would respectfully agree. (9) Single points of contact, complaints, and dispute settlement Articles 3(12) of the Third Electricity and 3(9) of the Third Gas IEM Directives 7.102 provide that Member States must put in place single points of contact, in order to facilitate the provision of information to customers. This covers information about their rights, current legislation, and the means of dispute settlement77 available to them should this become necessary: Member States shall ensure the provision of single points of contact to provide consumers with all necessary information concerning their rights, current legislation and the means of dispute settlement available to them in the event of a dispute. Such contact points may be part of general consumer information points.

Annex I(1)(g) of the Third Electricity IEM Directive completes this obligation by 7.103 providing that Member States must ensure that the customers, when having access to universal service under the provisions adopted by Member States pursuant to Article 3(3), are informed about their rights regarding universal service. Moreover, in order to build confidence among consumers so that they will actively 7.104 participate in the internal energy market, it is vital that their concerns and complaints are dealt with in a transparent, effective, and non-discriminatory manner. To this end, Member States must ensure that there is an independent mechanism, such as an energy ombudsman or consumer body, to deal efficiently with complaints and facilitate out-of-court dispute settlements.78 The NRA in each Member State will have the duty of monitoring the level and 7.105 effectiveness of market opening and competition at wholesale and retail levels, including on electricity exchanges, prices for household customers including prepayment systems, switching rates, disconnection rates, charges for and the execution of maintenance services, and complaints by household customers.79 76

C Jones (n 29), 420. Annex I(1)(f) to each of the Th ird IEM Directives expands upon procedures for dealing with complaints and for settling disputes: such procedures must be ‘transparent, simple and inexpensive’. 78 Interpretive Note: Retail Markets (n 35), 6. Under Art 3(9)(c) (Elec), suppliers are also required to provide information to customers, in or with their bills and with any promotional material made available to them, with regard to their rights concerning available means of dispute settlement. 79 Arts 37(1)(j) of the Th ird Electricity and 41(1)(j) of the Th ird Gas IEM Directives. 77

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Consumer Protection and Public Service Obligations (10) Roles of market operators 7.106 The Third Directives impose an additional obligation upon TSOs, DSOs, and

suppliers. This obligation consists in the fact that the roles and responsibilities of TSOs, DSOs, supply undertakings, and customers (and if necessary other market participants) are defined with respect to contractual arrangements, commitment to customers and that those rules shall be made public. Articles 41 (Elec) and 45 (Gas) thus provide that: In order to facilitate the emergence of well functioning and transparent retail markets in the Community, Member States shall ensure that the roles and responsibilities of transmission system operators, distribution system operators, supply undertakings and customers and if necessary other market participants are defined with respect to contractual arrangements, commitment to customers, data exchange and settlement rules, data ownership and metering responsibility. Those rules shall be made public, be designed with the aim to facilitate customers’ and suppliers’ access to networks, and they shall be subject to review by the regulatory authorities or other relevant national authorities. 7.107 Regarding suppliers, a facility is also granted by the Third Package Directives

regarding licensing or authorization regimes. Article 3(4) of the Third Electricity IEM Directive provides that: Member States shall ensure that all customers are entitled to have their electricity provided by a supplier, subject to the supplier’s agreement, regardless of the Member State in which the supplier is registered, as long as the supplier follows the applicable trading and balancing rules. In this regard, Member States shall take all measures necessary to ensure that administrative procedures do not discriminate against supply undertakings already registered in another Member State.80 7.108 This provision does not remove the need for licensing a supplier that is registered

in another Member State, but should ultimately lead to licensing regimes having regard to the licensing or authorization regimes in other Member States, so that it becomes easier for suppliers to enter new markets. 7.109 Regarding large non-household customers, an important step has been taken by

the Commission in opening the market. Article 41 of the Third Electricity IEM Directive provides that ‘[l]arge non-household customers shall have the right to contract simultaneously with several suppliers’.81 While there is no analogous provision in the Third Gas IEM Directive, its preamble states that: ‘to develop competition in the internal market in gas, large non-household customers should be able to choose their suppliers and enter into contracts with several suppliers to secure their gas requirements. Such customers should be protected against exclusivity clauses, the effect of which is to exclude competing or complementary offers.’82 80 81 82

Art 3(5) of the Third Gas IEM Directive is in identical terms. Art 41 of the Third Electricity IEM Directive. Recital 17 to the Third Gas IEM Directive.

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C. Description of PSOs The key practical question will be how the Member States will implement these 7.110 measures. Article 41 of the Third Electricity IEM Directive, it seems, should operate to prohibit exclusivity clauses in contracts with suppliers, given that its 20th Recital is in identical terms to the wording of the preamble to the Third Gas IEM Directive. It is tentatively suggested that, depending upon the precise definition of the market and the other relevant elements, the application of EU (or indeed national) competition law rules may achieve similar results in both sectors, and the right laid down in Article 41 (Elec) would bolster this reasoning. Other technical measures will have to be taken by the Member States in their tech- 7.111 nical codes. The regulatory supervision by the NRAs of suppliers, and in particular of the incumbent supplier, should be watchful on this particular point. (11) Roles of regulators The role of regulators with regard to the operation of national retail markets and 7.112 consumer protection has also been considerably reinforced by the Third Package Directives. NRAs have been given the considerably enhanced role of ensuring that customers benefit from the efficient functioning of their national market, of promoting effective competition, and of helping to ensure consumer protection.83 If the relevant NRA does not have competence to enforce competition law, it will 7.113 have to work in close cooperation with the relevant competition authorities and financial regulators.84 Article 37(1)(j) of the Third Electricity IEM Directive and Article 41(1)(j) of the 7.114 Third Gas IEM Directive provide that the NRA shall have the duty of: monitoring the level and effectiveness of market opening and competition at wholesale and retail levels, including on electricity exchanges, prices for household customers including prepayment systems, switching rates, disconnection rates, charges for and the execution of maintenance services, and complaints by household customers, as well as any distortion or restriction of competition, including providing any relevant information, and bringing any relevant cases to the relevant competition authorities.85

Articles 37(2) of the Third Electricity and 41(2) of the Third Gas IEM Directives 7.115 make clear that ‘where a Member State has so provided, the monitoring duties set out in paragraph 1 may be carried out by other authorities than the regulatory

83 Art 36(1)(g) of the Third Electricity IEM Directive and Art 40(1)(g) of the Third Gas IEM Directive. On NRAs generally, see Ch 5. 84 Interpretive Note: Retail Markets (n 35), 4; with regard to financial regulators, the significance of this cooperation will be enhanced by the advent of the Regulation on Energy Market Integrity and Transparency (REMIT), on which see paras 5.42 ff. 85 Art 37(1)(j) of the Third Electricity IEM Directive and Art 41(1)(j) of the Third Gas IEM Directive.

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Consumer Protection and Public Service Obligations authority. In such a case, the information resulting from such monitoring shall be made available to the regulatory authority as soon as possible’. 7.116 The Commission’s Interpretative Note on the retail markets strongly emphasizes

this enhanced position of the NRAs. As has previously been noted in Chapters 3, 4, and especially 5, the definition of the roles and responsibilities of energy undertakings with regard to various matters86 involves a stronger role for the NRAs. But the Interpretative Note goes further and recommends that ‘[i]nteraction between the organizations should be reinforced by legislation, where appropriate, in order to facilitate the sharing of confidential information and market investigations’.87 7.117 National regulatory authorities will also be responsible for ‘publishing recommen-

dations, at least annually, in relation to compliance of supply prices with Article 3, and providing these to the competition authorities, where appropriate’.88

86

Art 41 of the Third Electricity IEM Directive and Art 45 of the Third Gas IEM Directive. Interpretive Note: Retail Markets (n 35), 4. 88 Art 31(1)(o) of the Th ird Electricity IEM Directive and Art 41(1)(p) of the Th ird Gas IEM Directive. 87

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8 LIBER ALIZATION AND ENERGY CONTR ACTS

A. Introduction (1) The liberalization (2) Law applicable to energy contracts (3) Distinguishing between the energy contracts (4) Evolution in the European rules—law applicable to contract

B. Analysis of the Contracts (1) Regulated contracts

8.01 8.01 8.03 8.07 8.19 8.25 8.25

(2) Supply contracts 8.29 (3) Supply contracts and other agreements—key clauses 8.37 (4) EU energy law and long-term contracts 8.121 (5) Long-term contracts linked to an investment 8.145 (6) Long-term contracts stricto sensu, not linked to an investment 8.154

A. Introduction (1) The liberalization The liberalization of the energy market for natural gas and electricity has wrought 8.01 deep changes to the contractual relationships in these sectors. Market liberalization has brought new players into the energy sector, which was characterized in the majority of Member States by a monopolistic structure. This has had concomitant effects in the development of the unique character of contractual relations within the incumbent operator of the market concerned. Before the liberalization of the energy markets, the transport and distribution 8.02 infrastructures were networks with no network externalities, characterized by a natural (and sometimes legal) monopoly. Before the liberalized market regime, electricity and natural gas companies were both charged with the transmission, distribution, and supply of energy. Today, the liberalization of the market offers to each end user the possibility to choose his or her supplier. The main consequence of the liberalization for contracts in energy has been to break up the formerly single contract concluded between the incumbent operator and the final customer into

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Liberalization and Energy Contracts several different contracts.1 This evolution raises different legal issues which will be analysed in what follows. (2) Law applicable to energy contracts 8.03 As there are no specific ‘energy laws’ applicable to ‘energy contracts’, energy con-

tracts are usually governed by the general civil and commercial law applicable to the relevant contracts and obligations. With the evolution of the law, the Third Electricity and Gas Directives now impose particular obligations on the Member States in the context of consumer protection (see Ch 7). The national regulatory authority (NRA) in a Member State may also impose some obligations in this regard. Otherwise, energy contracts are contracts regulated in most of the Member States by civil and commercial law. 8.04 The contracts between a user of natural gas or electricity and its transmission

system operator (TSO) and/or its supplier will, as any other contract, contain provisions relating to payment options and billing and guarantees (financial) of the parties or the confidentiality of data. In some Member States, these contracts can be explicitly regulated by the Member State and can be submitted to the control of the competent NRA which approves them. These contracts are, in the main, not really negotiable and must be indistinctly applied to the different users of the same network; however, practice has demonstrated that certain clauses, in particular those relating to bank or financial guarantees, are likely to lead to certain differences. 8.05 The contracts between an end user of natural gas or electricity and its supplier will

contain all of the common provisions usual in commercial law and relating to the supply of goods, as well as particular provisions relating to the supply of energy. Those contracts may differ from user to user: these differences will depend upon the bargaining power of the customer vis-à-vis its supplier. 8.06 Therefore, if the matter is not specifically addressed by the ‘energy law’, then com-

mon law or contract law will be applicable to the issues that may arise during the drafting or the renegotiation of energy contracts. However, certain clauses of these contracts should meet the requirements and characteristics specific to these sectors.

1

‘In order to develop competition in the internal market in electricity, large non-household customers should be able to choose their suppliers and enter into contracts with several suppliers to secure their electricity requirements’, Recital 20 of the Third Electricity IEM Directive 2009/72 and ‘Large non-household customers shall have the right to contract simultaneously with several suppliers’, Art 40 of the Third Electricity IEM Directive, and Recital 17 and Art 41 of the Third Gas IEM Directive 2009/73.

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A. Introduction (3) Distinguishing between the energy contracts As contractual freedom is a principle in most of the Member States, a contract shall 8.07 be governed by the law chosen by the parties. By their choice, the parties can select the law applicable to the whole or only to part of the contract:2 A contract shall be governed by the law chosen by the parties. The choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or to part only of the contract.

Also, parties can, by mutual agreement, change the law previously applicable to the 8.08 contract (Article 3(2) of the Rome I Regulation). According to Recital 19 of the same Regulation, if the parties have not made a 8.09 choice of applicable law, the applicable law should be determined by the rule specified for the particular type of contract. As a consequence, each company has developed its ‘own contracts’. In order to 8.10 offer protection for the consumers vis-à-vis big companies, in many Member States new energy contracts have been divided into two categories, one called ‘regulated’ contracts3 and the other ‘non-regulated’ contracts. To protect the rights of the consumer, the supply of goods or services to a person is covered by special provisions, according to the principle of the protection of the weaker party.4 For example, Article 6(1) of the Rome I Regulation protects the consumer by providing that the applicable law to consumer contracts is the law of the country where the consumer has his habitual residence: Without prejudice to Articles 5 and 7, a contract concluded by a natural person for a purpose which can be regarded as being outside his trade or profession (the consumer) with another person acting in the exercise of his trade or profession (the professional) shall be governed by the law of the country where the consumer has his habitual residence.

Because of the natural monopoly of the undertakings (transmission grid operator, 8.11 distribution grid operator, etc) on their grid (only one grid is built and there is no real possibility to build another one in the Member State), the ‘regulated’ contracts are those relating to the grid: grid access contracts, responsible party access contracts, connection contracts, etc. Those contracts require a stronger control and are submitted to the competent NRA’s control. With regard to the second kind of contract, the parties have the possibility to nego- 8.12 tiate because there is less regulation. As for those contracts (contracts of supply, 2

Art 3 of Regulation 593/2008/EC of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (‘Rome I’), [2008] OJ L177/6 (4 July 2008). 3 G Block, L Hage, and J-P Pinon, ‘Electricity and Gas’, RPDB, Bruylant, 2007, n° 1261–1266. 4 Convention on the law applicable to contractual obligations (Rome Convention): see now the Rome I Regulation (593/2008/EC) (n 2).

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Liberalization and Energy Contracts trading, etc) competition is possible and very little regulation or control by the NRA is exercised. 8.13 For instance, supply contracts are not regulated per se. Nevertheless, even if

those contracts are not regulated, the Th ird Electricity IEM Directive provides that: Without prejudice to Community rules on consumer protection, in particular Directive 97/7/EC of the European Parliament and of the Council of 20 May 1997 on the protection of consumers in respect of distance contracts [and] Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, [the measures of Article 3 of the Third Electricity IEM Directive] are to ensure that customers [have specific rights, such as] ‘the right to a contract with their electricity service provider that specifies the identity and address of the supplier, the services provided, the service quality levels offered, as well as the time for the initial connection, . . . the types of maintenance service offered, . . . the duration of the contract, . . . the conditions for renewal and termination of services and of the contract and whether withdrawal from the contract without charge is permitted, . . . any compensation and the refund arrangements, . . . the method of initiating procedures for settlement, [etc].5 8.14 Previously, the EU had already established a general regulated system of consumer

protection against unfair contract terms in the Directive 93/13/EEC,6 Article 3 of which provides that: (1) A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer. (2) A term shall always be regarded as not individually negotiated where it has been drafted in advance and the consumer has therefore not been able to influence the substance of the term, particularly in the context of a pre-formulated standard contract. 8.15 So, this Directive preserves the general principle of contractual freedom, but estab-

lishes a regulated framework for the situation where the consumer is not involved in the drafting and negotiation of contracts. 8.16 Also, Directive 97/7/EC7 regulates some aspects of contracts concluded between

the consumer and the seller. Notably, the contract must contain some prior information, such as the name of the seller or the delivery costs (see its Article 4). These consumer protection questions have been dealt with in Chapter 7.

5

Annex 1 to the Third Electricity IEM Directive. Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, [1993] OJ L95/29 (21 April 1993). 7 Directive 97/7/EC of the European Parliament and of the Council of 20 May 1997 on the protection of consumers in respect of distance contracts, [1997] OJ L144/19 (4 June 1997). 6

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A. Introduction In the gas and electricity sectors, these new contracts may be depicted as shown in 8.17 Figure 5.

Generation Installations

Access responsibility contract Sellers/Suppliers/ Intermediaries

Contract for the injection by generation units

TSO/DSO Transmission contract

Regulatory Authorities

Connection contract Access contract

End-Users

Figure 5 Structure of Energy Contracts and Parties

These distinctions may sometimes be purely theoretical, because practice shows 8.18 that, as between these two categories, resulting from the previous ‘unique’ contract of the former monopolists in the markets of electricity and natural gas, there exist considerable and significant links between such contracts. (4) Evolution in the European rules—law applicable to contract Even if contractual freedom is an important basic principle in most of the 8.19 Member States, with the adoption of the various Packages of electricity and gas Directives, harmonization in the field of energy contracts is slowly, but progressively, occurring. Article 5 TEU lays down the principle of subsidiarity in EU law. This principle 8.20 means that the Member States remain responsible for areas which they are capable of managing more effectively themselves, while the EU is permitted to exercise those powers which the Member States cannot discharge satisfactorily. For example, in a case which concerned the validity of Directive 98/44/EC on the legal protection of the biotechnological inventions, the European Court of Justice pro-

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Liberalization and Energy Contracts ceeded to check the compatibility of the Directive with the principle of subsidiarity and concluded that: The objectives of the proposed action cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the [EU].

The objective pursued by the Directive, to ensure smooth operation of the internal market by preventing or eliminating differences between the legislation and practice of the various Member States in the area of the protection of biotechnological inventions, could not be achieved by action taken by the Member States alone. As the scope of that protection has immediate effects on trade, and, accordingly, on intra-EU trade, it is clear that, given the scale and effects of the proposed action, the objective in question could be better achieved by the EU. 8 8.21 In the energy sector, the latest EU legislation attempts to harmonize the regulation

of energy contracts in different Member States. 8.22 Today, the Agency for the Cooperation of Energy Regulators (ACER) established

by Regulation 173/20099 is charged with the elaboration of Guidelines. These Guidelines aim to harmonize the grid codes of each Member State, which help the NRA to elaborate the terms and conditions of some contracts, such as access contracts or connection contracts. This topic has also been discussed in both the Madrid Forum10 and the Florence Forum.11 8.23 Articles 6 of the Electricity Regulation 714/200912 and 8 of and Gas Regulation

715/200913 provide a list with areas in which framework guidelines and networks codes can be developed. Those areas are third party access rules, capacity allocation and congestion management rules, network security, and reliability rules, etc. On 29 July 2011, Framework Guidelines were adopted by ACER for the capacity allocation and congestion management for electricity14 as well as on 3 August 2011 for

8

Case C-377/98 Netherlands v Parliament & Council [2001] ECR I-7079. Art 7 of Regulation 713/2009/EC of the European Parliament and of the Council of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators [2009] OJ L211/1. 10 On 28 May 2009: see 16th meeting of the European Gas Regulatory Forum, Madrid (14–15 January 2010), at . 11 On 4 June 2009: see 17th meeting of the European Electricity Regulatory Forum, Florence (10–11 December 2009), at . 12 Regulation (EC) No 714/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity and repealing Regulation (EC) No 1228/2003, [2009] OJ L211/15. 13 Regulation (EC) No 715/2009/EC of the European Parliament and of the Council on conditions for access to the natural gas transmission networks and repealing Regulation (EC) No 1775/2005, [2009] OJ L211/36 (13 July 2009). 14 ACER, ‘Framework Guidelines on Capacity Allocation and Congestion Management for Electricity’, FG-2011-E-002 (29 July 2011). 9

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B. Analysis of the Contracts capacity allocation mechanisms for the European Gas Transmission Network.15 This latter Framework Guideline is examined further in the context of third party access and long-term gas contracts (paras 4.163ff ). The Commission can adopt legally binding guidelines under Article 18 of the Electricity Regulation and Article 23 of the Gas Regulation. Article 23(1) of the Gas Regulation 715/2009 provides that: Where appropriate, Guidelines providing the minimum degree of harmonisation required to achieve the aims of this Regulation shall specify: (a) details of third-party access services, including the character, duration and other requirements of those services, in accordance with Articles 14 and 15; (b) details of the principles underlying capacity-allocation mechanisms and on the application of congestion-management procedures in the event of contractual congestion, in accordance with Articles 16 and 17; (c) details of the provision of information, definition of the technical information necessary for network users to gain effective access to the system and the definition of all relevant points for transparency requirements, including the information to be published at all relevant points and the time schedule for the publication of that information, in accordance with Articles 18 and 19; (d) details of tariff methodology related to cross-border trade of natural gas, in accordance with Article 13; (e) details relating to the areas listed in Article 8(6).

The Third Package of energy Directives also reinforces the protection of end-users 8.24 and gives more competences to the NRAs on the different contracts concluded between the energy actors and the end users (see Ch 7 on consumer protection). For instance, Article 40 of the Third Electricity IEM Directive provides that Member States shall require supply undertakings to keep for at least five years the relevant data relating to all transactions in electricity supply contracts and electricity derivatives with wholesale customers and transmission system operators. This must be placed at the disposal of the national authorities, including the NRA, the national competition authorities, and the Commission, to enable them to fulfil their tasks.

B. Analysis of the Contracts (1) Regulated contracts First, the contracts relating to access to the transmission or distribution network 8.25 and its utilization are generally categorized as ‘regulated’ contracts. Indeed, they may be explicitly regulated and may be subjected to the supervision of the NRA.

15 ACER, ‘Framework Guidelines on Capacity Allocation Mechanisms for the European Gas Transmission Network’, FG-2011-G-001 (3 August 2011).

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Liberalization and Energy Contracts 8.26 The regulated contracts may include the following:

(a) for the electricity sector: (i) connection contracts; (ii) access contracts; (iii) access responsibility contracts; (b) for the natural gas sector: (i) connection contracts; (ii) contracts relating to access and transmission services; (iii) natural gas distribution contracts. 8.27 Because these contracts are not negotiable in substance, it is required that they must be applied without distinction to different users of the same network and be non-discriminatory. In practice, however, certain clauses—especially clauses relating to financial and bank guarantees or clauses specific to the site situation of the end user—can lead to some difference and discrimination16 and may be negotiated, sometimes with ex ante or ex post control by the NRA. 8.28 That is why, on the basis of its legal competences, the NRA should exercise its

supervision over these contracts, which are essential for ensuring competition. Ex ante, the NRA may give its approval or ex post it should check the proper functioning of markets, the respect of rights to network access and the opening of the markets to competition. (2) Supply contracts 8.29 The second main kind of contract concerns energy supply. Energy supply contracts

are more easily negotiable between the eligible client and the intermediary/supplier. There are some negotiated contracts relating to energy supply on the markets that existed before the liberalization and others which appeared only after liberalization and the arrival of new stakeholders on the markets (for example, the trading contract). 8.30 Contractual freedom in negotiating supply contracts is not unlimited: such con-

tracts are, like other regulated contracts, subject to some regulatory interference relating to network utilization. The supply contract’s provisions must conform to the applicable regulations in this matter, especially to the technical regulations in gas or electricity. 8.31 The provisions relating to energy metering or to the installation of network con-

nections, as well as these concerning the quality and the continuity of the energy supply, should take into account the particular regulations in this field (grid codes, codes of conduct, electrical and technical codes, etc). 16 See Comm Brussels, RK 17/2002, summary judgment, 16 February 2002, confirmed by the Brussels Court of Appeal on 12 September 2003, case 2003/5399.

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B. Analysis of the Contracts Moreover, from 3 March 2011, for those contracts, Member States will also have 8.32 to respect Annex 1 to the Third Package Directives. Article 1(a) of Annex 1 to the Third Gas and Electricity Directives provides that: the consumer has a right to a contract with their electricity service provider that specifies: – the identity and address of the supplier, – the services provided, the service quality levels offered, as well as the time for the initial connection, – the types of maintenance service offered, – the means by which up-to-date information on all applicable tariffs and maintenance charges may be obtained, – the duration of the contract, the conditions for renewal and termination of services and of the contract and whether withdrawal from the contract without charge is permitted, – any compensation and the refund arrangements which apply if contracted service quality levels are not met, including inaccurate and delayed billing, – the method of initiating procedures for settlement of disputes in accordance with point [1](f), – information relating to consumer rights, including on the complaint handling and all of the information referred to in this point, clearly communicated through billing or the electricity undertaking’s web site. Conditions shall be fair and well-known in advance. In any case, this information should be provided prior to the conclusion or confirmation of the contract. Where contracts are concluded through intermediaries, the information relating to the matters set out in this point shall also be provided prior to the conclusion of the contract . . .

Indeed, the first priority of EU energy regulators is to ensure that energy consum- 8.33 ers get the necessary protection. The proper functioning of competitive energy markets and the rights of energy consumers are closely interlinked. Well-informed and active customers create a well-functioning market. Consumers can force a supplier to deliver a quality service at the best price by the credible threat of moving their business to another supplier.17 In 2005, the European Regulators’ Group for Electricity and Gas (ERGEG) con- 8.34 ducted a survey of the NRAs in its member countries, which included a question on the commercial quality of energy supply: 21 responses to this Consumer Protection Questionnaire were received. ERGEG’s Report on that customer questionnaire concerning customer protection and supply quality concluded that: Commercial quality regulation attempts to ensure standards governing commercial quality. This is achieved through the use of regulations or codes, performance

17

‘Fact sheet: European Energy Regulators put Consumers first’, Ref FS-08-02, October 2008, at .

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Liberalization and Energy Contracts standards, the dissemination of information to promote the quality of services as well as through strategies to encourage customer participation.18 8.35 In this way, the NRAs should set up guaranteed standards and minimum service

levels which must be met in each individual case to assure the commercial quality of supply. 8.36 In addition, the NRA can intervene in energy supply contracts if they contain dis-

criminatory and illegal clauses: eg when the competition rules are not respected. On the role of NRAs more generally, see our discussion in Chapter 5. (3) Supply contracts and other agreements—key clauses 8.37 Since regulated contracts must contain more or less the same types of clauses, and

given that the substance of these clauses may vary from Member State to Member State, it is of some interest to analyse the typical clauses in negotiated contracts. 8.38 Certain contractual provisions concerning the electricity and natural gas market

are usual and are present in most of the contracts and should be analysed. These clauses (without attempting to provide an exhaustive list and acknowledging that such contracts are in constant evolution) are the following: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)

the object of the contract; delivery point; supply type; quality; price; clauses relating to the quantity; billing; liability; force majeure; term/duration; jurisdiction and dispute settlement; confidentiality.

8.39 Some of these clauses are discussed in the following paragraphs. 8.40 (a) Object of the contract: The contract’s object tends to describe what is covered

by the contract, what is committed by the parties and, by signing the contract, what will be done by the parties. The clause on the object of the contract will define the components constituting the service for which the contract is signed.

18 ERGEG, ‘Report on Customer Protection’, Ref E05-CFG-02-05, approved by ERGEG 30 September 2005, at .

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B. Analysis of the Contracts The object of the contact is defined as ‘object of main obligations born from the 8.41 contract’.19 Those obligations consist of the transfer of the right to do or not to do something.20 The contract’s object enumerates each step relating to these commitments. In an energy supply contract, the object for the seller is to provide and supply a 8.42 good quality of energy at the delivery point, and, for the buyer, the object consists in taking delivery of energy and paying the price for it. For example, in a supply contract, the contract’s object may be formulated in various ways: – ‘The contract governs all transactions the Parties shall enter into for the purchase, sale, delivery and acceptance of Natural Gas/Electricity’.21 – ‘By signing the contract, within the limits further described hereafter, to supply energy necessary for the needs of the Site of the client, who accepts the supply. In return, the client commits to pay for this energy, according to the price and invoicing clauses and to the regulation determined in the Contract’. – ‘The supplier agrees to sell and to deliver active electrical energy to the Client in accordance with the terms and conditions of this Contract’. – ‘The client agrees to buy and off-take. He agrees to pay for the active electrical energy delivered at the off-take/delivery point according to the provisions of this Contract’. – ‘This agreement stipulates the mutual rights and obligations of the Parties in connection with the supply of electrical energy by the supplier and the off-take of this energy by the client’. Usually, supply contracts expressly exclude some obligations concerning the con- 8.43 nection, access, and access responsible contracts. For example: – ‘The present contract is not applicable to the network connection modalities. Also, it does not govern the modalities relating to the network use or metering. Other separated contracts between the Network operator and the owner of the power station govern these objects’. – ‘This contract is not applicable to: • the supply of reactive Electrical Energy; • the duty of transport, local transport and/or distribution of the active Electrical Energy on the Network of the Network Operator and the quality of the supplied electricity; • the rent, the upkeep and the maintenance of the measurement instruments; and • the exploitation, the upkeep and the renewal of the Networks’. 19

P van Ommeslaghe, Obligations Law (Brussels: Bruylant, 2010), vol I, 281. B Starck, H Roland, and L Bayer, Obligations: Contracts (4th edn, Paris: Litec, 1993), 211. 21 Article 1, § 1 of General Agreement concerning the delivery and acceptance of Natural Gas, European Federation of Energy Traders (EFET), 11 May 2007; Article 1, § 1, of General Agreement concerning the delivery and acceptance of Electricity, EFET, 21 September 2007. 20

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Liberalization and Energy Contracts 8.44 The determination of the object of the contract is essential for the good perform-

ance of contractual obligations, as it determines what will be performed by the parties and what will not. 8.45 (b) Delivery point/off-take point: The delivery point is the place where the con-

sumer takes off the energy. For example, the delivery point/the off-take point is typically defined as: ‘the physical place and the voltage level of a point at which the power will be supplied from the network (as defined in Annex . . . to the Contract)’. Generally, the delivery point is specified by an EAN (originally, European Article Number, which is a thirteen-digit barcode) code. 8.46 Parties may also negotiate a contract with a delivery point clause at different geo-

graphical sites. They can be established in the same Member State or in different Member States. These are known as ‘multi-site’ contracts or energy invitations for tender, which are created for the supply of different sites (eg sites in Western continental Europe, sites in five countries of Europe, or a combined offer in two sites located in different regions). These invitations for tender can emanate from an industrial group possessing some sites of production or a collective of energyconsumers. As an example, in October 2005 a consortium, including companies representing about 20 per cent of the electricity consumption in the Netherlands, started negotiations with the energy sector for long-term supply at preferential prices (Het Financiële Dagblad, 23 January 2006). The creation of such collective purchasing structures can raise certain questions concerning the relations between the individual buyers, as well as those with one or several supplier(s). 8.47 Then, during the performance of the contract, the agreed price fi xed during the

conclusion of the contract could become, for example after six months of execution of the contract, improperly low, because of the variability of the market. On one hand, in its AKZO judgment the ECJ held that a price is improperly low or predatory if the revenues do not cover the average of the total marginal costs (variable and fixed) directly attributable to the supply of the service.22 In other words, a price, which was not ‘predatory’ at the time of the formation of the contract, could become so during its performance. To avoid this risk, it is sensible to include a contractual clause allowing for the revision or adaption of the price in certain circumstances and thus to maintain the economic balance of the contract. 8.48 (c) Continuity and Quality: One of the essential aspects for a user of energy con-

cerns the modalities of supply and notably, the continuity of supply, especially in a market opened to competition with its multiplicity of stakeholders. 8.49 The continuity and the quality of the supply are essential points in an energy

supply contract. The continuity and the quality of the supply constitute a major

22

Case C-62/86 AKZO v Commission [1991] ECR I-3359.

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B. Analysis of the Contracts preoccupation of the final customer. Indeed, in certain sectors or certain industries in particular (hospitals, chemicals), interruptions of the natural gas supply or in electricity can have disastrous consequences. This is the so-called ‘off-spec clause’ in a gas supply contract. The average consumer also perceives the continuity of the supply to be essen- 8.50 tial. Article 3(3) of the Second Gas IEM Directive (2003/55/EC) developed this concept: Member States shall take appropriate measures to protect final customers and to ensure high levels of consumer protection, and shall, in particular, ensure that there are adequate safeguards to protect vulnerable customers, including appropriate measures to help them avoid disconnection . . . Member States may appoint a supplier of last resort for customers connected to the gas network.

Also, Article 3(3) of the Third Gas IEM Directive provides that:

8.51

Member States shall take appropriate measures to protect final customers, and shall, in particular, ensure that there are adequate safeguards to protect vulnerable customers. In this context, each Member State shall define the concept of vulnerable customers which may refer to energy poverty and, inter alia, to the prohibition of disconnection of gas to such customers in critical times. Member States shall ensure that rights and obligations linked to vulnerable customers are applied. In particular, they shall take appropriate measures to protect final customers in remote areas who are connected to the gas system.

If the law offers protection to the domestic consumers through obligations of pub- 8.52 lic service (see Ch 7), professional customers have to negotiate their level of security of supply (see Chs 9 and 10 on security of supply: the starting presumption of the EU legislation in this area is that market mechanisms will, other things being equal, suffice to secure supplies). A former energy supply contract would have included the principle that ‘the supply 8.53 of energy will be neither interrupted nor reduced by the supplier, except in those cases provided for under this contract’. In this context, two clauses are essential: the definition of force majeure and the penalties to be paid by the supplier in case of supply outages or interruptions in deliveries. The concept of force majeure is discussed at paras 8.100 ff. There was an historic 8.54 tendency in energy contracts to protect the supplier, either by contractually widening the concept of force majeure or by planning a series of circumstances, which did not fall under the common concept of force majeure, but which exonerated the supplier of his liability in the event of interruptions in the continuity of supply. The amount of the penalties constituted the best signal allowing the supplier to decide which measures should be taken to ensure the deliveries. This is true for the supplier-consumer relationship, but also for the relationship between producer and importer.

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Liberalization and Energy Contracts 8.55 Regarding industrial customers, the parties can also agree, in particular because

of the high prices of the balancing services provided by the network, on the flexibility and security of increased supply by planning the possibility of acceding to additional stocks of natural gas (a technique known as ‘extra-balloon’). 8.56 In certain industrial domains, the continuity of the supply is extremely important

as it may be difficult to put in place industrial processes for avoiding ‘micro-cuts or outage’ (cuts of very short duration). Other customers, whose activities can handle such micro-cuts, can conclude a contract in which they accept this type of cut. The contract can contain clauses concerning interruptions in the supply by respecting certain conditions (‘clauses of interruption’), in particular in price rates. So, ‘interruptible’ supply contracts can be negotiated. The firmness of supply criterion can allow purchasers to save up a significant amount on the transport costs of gas, for example by using interruptible capacities: – ‘The electrical energy is supplied in the form of three-phase alternating current of 50 hertz. The nominal tension of delivery is defined in Appendix X. The quality of the supplied electrical energy, as well as the accepted tolerances, is specified in Appendix X’. 8.57 These clauses of interruption will sometimes make the link with the liability of the

parties in that case: eg by stipulating that ‘the interruption being a substantial characteristic of these supplies, a compensation for losses of production or quite other damage is excluded, as far as the interruption or the reduction of supply is made in the limits planned by the contract’. 8.58 But the supplier can also make savings by relying upon this flexibility: interruptible

imports, less need for storage capacity, etc can reduce the supplier’s costs. The consumer who agrees to interruptions in his consumption (for example, by consuming some substitute fuel while the gas is interrupted or by reducing its industrial production), meanwhile, can take advantage by negotiating an interruptible supply contract with reduced prices. 8.59 For that purpose, the grid code and the technical regulations determine the condi-

tions in which the network operators can proceed to interruptions or reductions of supply. 8.60 To frame the process of liberalization, regarding the continuity of the supply, the

regional legislators developed a mechanism called ‘supplier by default’ (a concept also known under the term of ‘default supplier’) intended to ensure that a customer of the distribution network, once eligible, is not deprived of supply in the case where he did not make an explicit choice of a new supplier. 8.61 Moreover, ERGEG’s Customer Protection Best Practice Proposition highlights the

importance of quality supply of energy. Notably, ERGEG insists that distribution network operators should make their best efforts to ensure reliable and continuous

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B. Analysis of the Contracts supply of good quality energy. The uninterrupted supply of energy to customers via networks is a key element of network service.23 (d) Transfer of property, transfer of risks: The parties to an energy supply contract 8.62 decide where the transfer of property/title will occur as between the supplier and industrial consumer. The transfer of property can occur simultaneously or not with the transfer of risks. Generally, the transfer of property and risks occurs at the off-take points, eg: – The property transfer of the delivered electricity is effected at the off-take Point of the Sites as defined at ( . . . ). – The off-take Points are the consumption points. – The transfer of Risks and the transfer of liability are effected at the injection point, as mentioned in ( . . . ) for each Site(s) of the client. – The transfer of liability is effected at the Entry Point of the Transport and Distribution Network. The quantity of gas to be supplied is, of course, crucial to the supplier, and it often 8.63 happens that the contract includes an obligation to take a minimum level of supplies. However, the key figure will rather be the maximum debit to supply, either non-interruptible or interruptible in character. According to these figures, the supplier will determine the capacity of transport services which he will need, and the debits which he will have to command ‘upstream’, namely upstream to the transport network. The delivery point and, thus, the point of risk transfer is determined freely by the parties (eg price ‘ex-Hub’, price ‘border’, etc) as far as this does not conflict with the provisions of the code of conduct or with the applicable technical regulations. Indeed, the transfer of property or risks can be more specifically regulated in certain 8.64 sectors, notably liquefied natural gas (LNG). For example, at the LNG terminal there is a double or triple transfer of risks. Indeed, the shipper bears all risks relating to the LNG until the delivery point. At the delivery point, there is a transfer of risks to the terminal operator. The terminal operator is liable for all processes of transformation on natural gas. The risks pass to the shipper at the redelivery point at the outlet flange of the LNG terminal. A sample clause might read as follows: Custody and all risks, including risk of loss, with respect to all LNG shall remain with Shipper upstream of the Delivery Point and shall pass to Terminal Operator at the Delivery Point. All risks of the LNG received by Terminal Operator and the associated regasified Natural Gas shall remain with Terminal Operator from the Delivery Point to the Redelivery Point. All risks of regasified Natural Gas redelivered to Shipper shall pass to Shipper immediately downstream of the Redelivery Point.

23 ERGEG, ‘Customer Protection Best Practice Proposition’, Ref: E05-CFG-03-06, 21 July 2006, available at .

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Liberalization and Energy Contracts 8.65 Also, a property reservation clause creates a co-ownership between the parties

when the LNG is located in the terminal. Under such a clause, the shipper and/ or the other shippers and/or other users and/or terminal operator shall jointly own the total quantity of the LNG and associated degasified natural gas between the delivery point and the redelivery point and each of them shall have rights for the share of its contribution to the total quantity of LNG. 8.66 To summarize, the parties are free to determine the place of transfer of property or

risks, but in energy contracts some aspects of the transfer have their specificities. 8.67 (e) Price: In the energy market, the regulated or non-regulated aspect of the con-

tract can determine the negotiability of the price for the services rendered. 8.68 Notably, the NRA has the duty to ensure that the tariffs and prices for connection

and other networks are non-discriminatory, reasonable, and transparent.24 The Third Electricity and Gas IEM Directives require that the regulatory authorities shall be responsible for fixing and approving, prior to their entry into force, at least the methodologies used to calculate or establish the terms and conditions for connection and access to national networks, including transmission and distribution tariffs.25 8.69 Also, the Third Gas and Electricity IEM Directives emphasize the importance of

consumer protection (Article 3 of these Directives). Member States should ensure that all consumers have access to universal service, that is the right to be supplied with the electricity of a specified quality within their territory at reasonable, easily and clearly comparable and transparent prices.26 8.70 More specifically, Annex 1 of the Th ird Gas/Electricity IEM Directive pro-

vides measures on consumer protection. The consumer has a right ‘to receive transparent information on applicable prices and tariffs and on standard terms and conditions, in respect of access to and use of electricity services’. 27 Price transparency allows the consumer to choose the supplier or to switch his or her supplier. 8.71 To summarize, the possibility to switch28 to a new supplier, within a short period

of time and without obstacles and disadvantages for the customer, is an essential pre-requisite for a functioning and efficient market.

24

Arts 37 and 41 of the Third Electricity and Third Gas IEM Directives, respectively. ERGEG, ‘Customer Protection: Best Practice Proposition’, Ref: E05-CFG-03-06, 21 July 2006 (n 23), 7. 26 ERGEG, ‘Customer Protection: Best Practice Proposition’, Ref: E05-CFG-03-06, 21 July 2006 (n 23), 4. 27 Art 1(b) of Annex 1 to the Third Gas and Electricity IEM Directives. 28 Art 1(e) of Annex 1 to the Third Gas and Electricity IEM Directives. 25

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B. Analysis of the Contracts For the supply of energy, the final price consists of a fixed fee and a part related to 8.72 the variable component (‘commodity term’). The fixed fee includes the fixed parts of regulated services of transport and distribution. Usually, the contracts refer to the index published by electricity and gas stock mar- 8.73 kets. Certain actors, however, remain reserved compared to these indices because of the liquidity of the energy stock market. Certain suppliers offer a price without transportation and the consumer supports 8.74 the risk of transport and distribution tariffs variation. The term ‘tariff ’ usually concerns regulated prices.29 Price indexation is also an important issue in the negotiated contract. It is even 8.75 more important for medium- or long-term contracts (see paras 8.121–8.171 on long-term contracts). Usually, the taxes, duties, royalties, and other charges are directly charged to the customer. Such a clause might provide that: All existing or new taxes and/or charges and/or expenses of whatever nature (including green energy levies and expenses relating to greenhouse gas emission regulations) increases and levies imposed by a competent public authority and linked to the object of this contract shall be fully borne by the client.

Generally, energy contracts include price clauses.30 These clauses try to find the 8.76 necessary balance between the stability and the foreseeable nature of situations. Notably, hardship clauses are prevalent in energy contracts,31 particularly in longterm energy contracts.32 Unforeseeable events which were excluded from the parties’ forecasts could have the effect of undermining the economic basis of the existing market33 or could make the performance of contractual obligations very difficult or costly.34 Contracts for the import of gas usually contain a clause on renegotiation of prices, named ‘hardship clauses’, in particular ‘when one of the critical parameters for the determination of the price disappears or is modified in a drastic way’. According to this type of clause, the parties will consult, in case of the emergence of economic circumstances having the effect of making the prices or the formulae inequitable or unbearable, to adapt the valuation clause and restore the contractual balance prevailing at the time of the conclusion of the contract. The

29

Lexicon energiemarkt Nederland en België (Utrecht, Lemma 2003), 247. G Block, ‘Arbitration and Changes in the Energy Price. Examination of the Arbitration Case Law of the ICC towards the Clauses of Force Majeure, Indexation, Adaptation, of Hardship and of Take-or-pay’ (2009) 20(2) ICC International Court of Arbitration Bulletin 71. 31 G Block, ‘The Hardship and Adaptation Clauses in the Energy Contracts’, in Europ’Energies, March 2008, 11. 32 G Block, ‘The Hardship and Adaptation Clauses in the Energy Contracts’ (n 31), 11. 33 A Al Faruque, ‘Renegotiation and Adaptation of Petroleum Contracts: The Quest for Equilibrium and Stability’ (2008) 2 Journal of World Investment & Trade 128. 34 F Fucci, ‘Hardship and Changed Circumstances as Ground for Non-Performance or Adjustment of Contract’ (2006) Transnational Dispute Management, 9–11. 30

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Liberalization and Energy Contracts failure of this ‘dialogue’ can lead to arbitration or to the termination of the contract at the request of one of the parties. 8.77 The second kind of price clause is adaptation or indexation clauses. Parties fi x the

price for the duration of the contract and it is reviewed automatically.35 This is the main difference between adaptation and hardship clauses.36 8.78 Finally, the take-or-pay (TOP) clause obliges the buyer to take a minimum quan-

tity of energy and to pay for it, even if he or she does not use it37 (see paras 8.159ff on TOP). 8.79 (f) Billing: The electricity and gas bills are important for proper market function-

ing. Previously, customers had to buy a standard product offered by a sole supplier. Post-liberalization, they can buy different products from different suppliers. These products are variables because of their prices, their quality, or their source of energy for the electricity production. Domestic clients can benefit from reductions if they pay by certain means (such as direct debit). 8.80 To ensure compliance with the competition rules, it is important to have trans-

parent information about different properties and quality of products involved. In this way, the consumer should have the possibility to compare and to choose between different suppliers on the basis of correct and reliable information.38 The bill should provide customers with the up-to-date information on the present price of electricity/gas energy as well as distribution network services. The rules on price information in the bill should be in accordance with the relevant rules on general price information. 8.81 Another dimension of transparency of the price elements in the bill is the accuracy

of the bill. The consumer must pay according to their actual consumption instead of consumption estimates.39 8.82 Traditionally, the supply of energy is invoiced monthly. So, a billing clause may

provide as follows: The (electricity/gas) supply is invoiced monthly. The bill is drawn up on the basis of the monthly consumption and the adaptation of the provisional bill of last month. The first one is calculated on the basis of provisional data and the second one and others thereafter on the basis of definitive data.

35 C Petersen, ‘Gas Natural Aprovisionamientos, SDG, SA v Atlantic LNG Company of Trinidad and Tobago and price reopener clauses in a uncertain environment for LNG pricing’, Paul Hastings, March 2009, 1–5. 36 Judgment CCI n°3344, 1981, Rec. 1974–1985, 442. 37 G Block, ‘Arbitration and Changes in the Energy Price’ (n 30). 38 Art 1(a) of Annex 1 to the Third Gas and Electricity IEM Directives. 39 ERGEG, ‘Transparency of Prices: Best Practice Proposition’, Ref: E05-CFG-03-06, 21 July 2006 (n 23), 8.

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B. Analysis of the Contracts The billing clauses may contain payments monthly, weekly, or according to another 8.83 period. Billing clauses also often contain rules on sanctions in case of non-payment of the bill. (g) Additional contributions, taxes, and surcharges: Before liberalization, an 8.84 energy contract would provide that ‘the price includes all charges, fees and taxes charged by the supplier’. That was an ‘all-in price’ system. Such clauses are no longer applicable in the current energy markets. Indeed, with 8.85 the establishment of competition in the energy market, there were initiatives to create contributions or surcharges on the energy prices for financing funds or generating revenues which may or may not directly concern the energy market. Those surcharges are generally borne by the client according to their consumption, eg: All new taxes or increases in existing surcharges and/or charges and/or expenses of whatever nature imposed by a competent public authority and linked to the object of this contract shall be fully borne by the client and will be calculated on the basis of his consumption.

(h) Liability and compensation clauses: The multiplicity of players in the mod- 8.86 ern electricity and gas market raises the question of liability. Criteria concerning the liability of the parties will be determined according to the applicable law of the contract. Thus, the contract will, in most cases, specify the applicable law. If the contract provides no liability rules, the law of the delivery point will be applicable.40 Thus, the damage caused by negligence or fault will usually have to be compen- 8.87 sated. However, in energy contracts the situation is more complicated because of the tripartite relations between the client, the supplier, and network operator. Moreover, the co-existence of different market actors’ contracts involves the responsibilities of different parties. Sometimes, a party will incur damages as a result of the fault of another party, with whom there is no contract. In these cases, a ‘backto-back’ clause will often be included in the contract in order to cover this chain of responsibility. This will, for instance, be the case for connection contracts, supply contracts, and access contracts. A ‘back-to-back’ clause might read as follows: Network operators are responsible for guaranteeing the quality and the continuity of the provision of active Electrical Energy. As a consequence, the producer of energy cannot be held liable for the consequences related to a failure of the Network such as cuts, voltage level or frequency reduction, damage arising from the malfunctioning of the Network, from the place of connection, from the placement or maintenance of the meters. In case of default or absence of the supply resulting from a failure of the Networks, the client will directly address the Network Operators.

40

Art 4, Rome I Regulation (n 2).

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Liberalization and Energy Contracts 8.88 The consistency of such clauses must be ensured and each party should have a right

of recourse against the responsible party, even if these two parties have no contractual bond with each other; of course, this may be more difficult to achieve in some national legal systems than others. 8.89 In some Member States, it is usual for the limitation on the operator’s liability to

impose upon the operator a duty to act as a reasonable and prudent operator. The liability of the operator or supplier is appreciated on the basis of this standard, eg: ‘Reasonable and Prudent Operator’ as used herein to describe the standard of care to be exercised by a party in performing its obligations hereunder shall mean that degree of diligence, prudence and foresight reasonably and ordinarily exercised by experienced operators engaged in the same line of business under the same or similar circumstances and conditions having due consideration to the interest of the other party under this agreement. 8.90 The operator will be discharged of his liability if he proves that his behaviour con-

forms to the behaviour of a ‘reasonable and prudent operator with experience in this sector’. 8.91 The liability and compensation clauses present three characteristics: the limitation

of liability to gross negligence, the exclusion of indirect damages, and the imposition of caps on liability.41 8.92 The first characteristic consists of the limitation of the supplier’s liability to cases

of gross negligence, eg: The supplier can be held liable in case of gross negligence or wilful misconduct. In this case, the liability of the supplier will be strictly limited to direct and material damages up to an amount of ( . . . ) per cent of the total amount of the Contract. 8.93 The supplier’s liability is excluded for minor fault. Gross negligence involves a con-

scious and voluntary disregard of the need to use reasonable care, which is likely to cause foreseeable grave injury or harm to persons, property, or both. 8.94 The second characteristic is the exclusion of indirect or consequential damages

or losses. Direct damages in contract law are generally the difference between the value of the performance received and the value of the performance promised as measured by contract or market value. Indirect damages are those which are not a direct result of an act, but a consequence of the initial act.42 Indirect damages and losses include, inter alia, the shutdown of production, production losses, and loss of revenues or profit. – ‘The supplier shall be liable to the Client for direct tangible or intangible losses resulting from a wrongful and intentional act or from gross and intolerable

41 42

G Block, ‘Hardship and Adaptation Clauses’ (n 31). G Viney and P Jourdain, The Conditions of the Liability (3rd edn, Paris: LGDJ, 2006), 207.

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B. Analysis of the Contracts negligence, to the exclusion of any indirect losses, including those resulting from a shutdown of production, production losses, loss of revenue and profit and other financial damage.’ – ‘The supplier liability pursuant to the execution of this contract is limited to a maximum amount of € . . . per event for tangible losses and personal injury.’ – ‘Without prejudice to conditions fixed at §x, the liability of the parties shall be limited to paying compensation for direct material damage but under no circumstances for any indirect and subsequent damage, including but not excluding the loss of production, the loss of income or the loss of profit.’ It can be concluded that compensation is possible only for non-supplied energy or 8.95 for the difference between the paid price of energy and the price of energy determined by the contract. Finally, energy contracts include limited liability clauses and clauses which impose 8.96 caps on compensation. It is important to highlight that, according to the nature of contract, a liability exemption clause is typically not effective as between the contract parties. This kind of clause destroys the object of the contract. In the case of limitations or caps, the compensation cannot exceed some amount 8.97 or a multiple of the monthly or annual invoice. Certain contracts contain caps formulated as a multiple of monthly or annual invoice, eg: The supplier liability pursuant to the execution of this contract is limited to a maximum amount of € . . . per event for tangible losses and personal injury and of € . . . per event for intangible losses.

With regard to liability to third parties, it is usually provided that the parties shall 8.98 be liable to third parties for all damages, of whatever nature, resulting from the fulfilment of contractual obligations, eg: The client and the supplier shall bear, each to the extent of its interest, all liability for losses, of whatever nature, caused to third parties during the performance of this Contract.

It should also be remembered that liability clauses should be well-balanced and 8.99 carefully drafted to reflect the risks run by each of the parties. (i) Force majeure: The question of force majeure and its impact plays an important 8.100 role in the application and analysis of energy contracts. Indeed, most of the contracts include force majeure clauses and will often specify the consequences of such incidents. For example: – ‘“Force majeure” means any unforeseen event or circumstance, the occurrence of which is beyond the reasonable control of the affected Party, and which could not be avoided or prevented with due care and at reasonable expenses which have the effect of making impossible or unlawful for the affected Party

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Liberalization and Energy Contracts to perform all or any of its obligations hereunder. Force Majeure events shall include but shall not be limited to the following: . . .’. – ‘For the purposes of this contract, force majeure shall be taken to mean any event outside the control of the Party concerned, which could not reasonably be foreseen or, if foreseen, that could not be reasonably avoided and the consequences of which could not be overcome by the means which should be open to the Parties as prudent and reasonable operators, and which prevents the Party concerned from performing all or part of its obligations under this Contract. Cases of force majeure, when they fulfil the conditions set out above, shall include but not be limited to: . . .’. – ‘Consequences of Force Majeure All Natural Gas, the delivery or taking of which has been prevented by force majeure, shall, unless otherwise agreed, be deducted from the amounts required to be made available and taken under this Agreement’. 8.101 Force majeure clauses are often invoked in energy contracts, but because of their

often rigid application conditions they are rarely accepted as valid by arbitral43 or national jurisdictions.44 However, these clauses are very useful in energy contracts in case of the occurrence of specific events independent of the will of parties. 8.102 Force majeure can be invoked in each relationship between the new players on

the market. But, for the various actors on the energy market, the concept of force majeure has different meanings. Thus, the operator of an electricity transmission network has to manage his network by all means at his disposal. The operator of a gas transmission network should employ best endeavours to ensure the balance on his network. Indeed, the supply contracts usually provide that the liability of the supplier is excluded when the loss is caused by a network failure. Thus, the concept of force majeure is a concept with varying dimensions, depending upon the context. 8.103 On the one hand, a breakdown on the distribution network can be a cause of force

majeure for the supplier, and not for the customer, if the latter is well covered by its supply contract. The same breakdown can also be a cause of force majeure for the distribution network operator, if this breakdown originated on the transmission network. An event can thus be a cause of force majeure for one actor and not for another. These different actors highlight the varying dimensions of this concept. 8.104 On the other hand, if the supplier encounters a case of force majeure that may

have harmful repercussions for the customer, the supplier should give assistance to his customer. Even in a case of force majeure, the customer could be indemnified according to the contractual liability clause. 43 Award n°2216, CCI, Rep of Awards of ICC (1974–1985), 224; or Award 2478, ICC, Rep of Awards of ICC (1974–1985), 233. 44 G Block, ‘Arbitration and Changes in the Energy Price’ (n 30).

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B. Analysis of the Contracts For those reasons, the contract no longer makes reference to the ‘prudent and rea- 8.105 sonable operator’, but instead to a list of events which are considered force majeure cases.45 In the old single energy contract, the force majeure clause was typically drafted in 8.106 the following way: The supplier and the consumer are totally or partially exempted from the supply or take-off obligation: – In cases of force majeure as defined in Article [ . . . ] of the Civil Code; – In the event of: – breakdown of installations resulted from explosion, landslides, earthquakes, fire, floods, washouts, storms, outage of pipelines, equipment or machinery required for the transport of electricity; – strikes, lock out, industrial disturbances, war; – diminution or failure of, or interference with supply of raw materials and utilities.

These contracts also provide that (eg) ‘the supplier is entitled to reduce and inter- 8.107 rupt the supply for the renovation of transport networks. The party wishing to call upon the event of force majeure engages to make as soon as possible all reasonable efforts to restore the normal situation. The supplier must give notice to the client at least one week in advance, except in case of extreme urgency’. In the new energy supply contracts, the events which prevent the supply are con- 8.108 sidered as force majeure. So, if one of these events affects the capacity of the operator to transport or distribute the energy to the delivery point, the suppliers will be discharged of their obligation to their eligible client (the ‘back-to-back’ idea). Also, the client should have the possibility to suspend his off-take obligation. The black-out which occurred on 2 September 2004 across the networks of 8.109 Luxembourg is an example of force majeure. The network of Luxembourg suffered an electrical breakdown ‘imported from the RWE network in the western region of Rhineland-Palatinate’ following a drop in production of wind farms in northern Germany. After describing the network configuration and the blackout steps, the report described actions taken by network operators and concluded that: ‘[r]egarding . . . the technical management of the blackout, there can be no reproach to our network operators. Instead, the officials of the dispatching of CEGEDEL acted in a professional way, made the right decisions and did not commit mistakes’.46 There are other examples of black-outs in Europe. On 4 November 2006, a large 8.110 part of Western Europe experienced a black-out due to a massive power surge from thousands of turbines in Germany into the ‘pan-European grid’. Also, on Sunday

45

G Block, ‘The Force Majeure in the Energy Contracts’, Europ’Energies, May 2007, n° 60, p 10. Report of Grand Duchy of Luxembourg, Economic and external trade ministry, Black-out of 2 September 2004, Report presented by Mr Jeannot Krecké, 9 September 2004, at 2. 46

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Liberalization and Energy Contracts 28 September 2003 the Italian power system faced its worst disruption in fifty years, which also affected parts of Switzerland. A total of 56 million people were affected by this blackout.47 In these cases, the network operator and the supplier can invoke force majeure. To summarize, a force majeure event may be defined as: An event of external nature, that could not be foreseen or prevented; it renders performance of a contractual obligation impossible at all or for a certain time.48 8.111 Generally, the contracts provide a detailed description of the circumstances that

can constitute a condition of force majeure. For example: – The execution of the obligations under the Contract will be temporarily suspended for the duration of the event causing force majeure and/or emergency situation. – The parties agree that the following situations will be considered as such type of events: –a war, declared or not, a war threat, an invasion, an armed conflict, a blockade; –a revolution, an insurrection . . . ; –an explosion, a sabotage, terrorist actions, damages caused by criminal actions . . . ; –a nuclear explosion . . . ; –a natural disaster, including earthquakes, floods . . . ; –serious accidents of individuals . . . 8.112 The list consists of three types of potential risks: natural risks, technical risks, and

political events. 8.113 Usually, the occurrence of a qualifying force majeure event has important impacts

upon the reciprocal obligations of contracting parties. The incidence of force majeure suspends the affected contractual obligations, except in the face of a contrary proposition of the contract.49 Some network operators oblige customers to continue to pay at the fixed term, notwithstanding the force majeure situation. Also, the incidence of force majeure suspends the off-take obligation (under the ‘back-to-back’ clause). 8.114 A force majeure clause may specify a time frame for the suspension of a contract,

beyond which the contract becomes terminable. Another question may be raised: in case of disruption of supply resulting from negligence or fault, can the client be supplied by other sources or can he or she sell his or her capacity reservations? 47 Antti Silvast and Joe Kaplinsky, Project UNDERSTAND White Paper on Security of European Electricity Distribution at . 48 W Melis, ‘Force majeure and Hardship Clauses in International Commercial Contracts in View of the Practice of the ICC Court of Arbitration’ (1984) 1 J Int’1 Arb 213, 220–21. 49 Mahmoud Reza Firoozmand, ‘Force Majeure Clause in Long-Term Petroleum Contracts: Key Issues’ (2006) 24(3) Drafting in Energy and Natural Resources Law 435.

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B. Analysis of the Contracts Or, reciprocally, can the supplier sell his non-delivered quantity to other clients? All of these aspects should be covered by the contract or at least a mechanism for addressing them should be provided. (j) Jurisdiction and dispute settlement: Energy contracts contain generally classic 8.115 clauses relating to jurisdiction and dispute settlement, eg: The law of [ . . . ] applies to the performance, validity and interpretation of this contract. Any dispute in respect of this contract which cannot be resolved by the parties themselves will be submitted to the jurisdiction of the national court.

In the energy sector, specific arbitration clauses are employed. The Parties can also 8.116 appeal to new jurisdictional instances organized by the NRA for the settlement of disputes.50 For example: The parties shall agree to try to settle by amicable means any dispute arising between them regarding the validity, interpretation or performance of the agreement. Should it prove impossible to settle the dispute amicably, a definitive ruling shall be made in accordance with the regulations of [ . . . ] by three arbitrators appointed in compliance with these regulations.

When the contract in question is not a ‘regulated contract’, the parties can choose 8.117 the place of arbitration or jurisdiction. For the rest, negotiated contracts and regulated contracts will also include particu- 8.118 lar clauses, including: – the identity of the contracting parties; – changing the designation of the access responsible and/or the designation of the supplier; – the duration of the contract; – the financial guarantees; – the connection or access procedures, and designation of access responsibilities; – fees, surcharges, taxes, and VAT payable by the customer; – the provisions relating to the suspension and/or termination of the contract; – the procedure for data protection; – the liability of the parties (limitation of liability, warranty, obligation of limitation of damage, etc); – the insurances; – the additional provisions (amendment of general conditions, contacts and notification, transfer of obligations, continuity, etc). (k) Duration: Long-term contracts have played and continue to play an impor- 8.119 tant role in the construction and the development of the European energy markets.

50 Eg Recitals 38, 42, and 54, Art 37(10) and Annex I, para 1(f) of the Third Electricity IEM Directive.

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Liberalization and Energy Contracts Such contracts show how conflicting principles could influence the position of the European institutions. On the one hand, long-term contracts are a cornerstone of the EU’s security of supply,51 supporting necessary investments for the development of electricity and/or gas grids as well as the building of new production units. On the other hand, such contracts may have foreclosure effects on the liberalized energy markets by impeding the access of new entrants or alternative operators to customers and/or to infrastructures such as interconnections.52 Thus, balancing the three main objectives of EU energy policy (competition, environment, and security of supply) will prove challenging, both in general and on a case-by-case basis. 8.120 Long-term contracts in the liberalized energy markets must be assessed in the light

of both the EU energy legislation and EU competition law, most of the scrutiny being provided under the latter. (4) EU energy law and long-term contracts 8.121 The potential conflicts between security of supply and opening of the energy market

are evident from the evolution of EU energy legislation regarding long-term contracts. The three major steps in this evolution are: (1) the Second Energy Package; (2) the results of the Energy Sector Inquiry carried out by the Commission’s Competition Directorate General (DG COMP), published in the final report of 10 January 2007;53 and (3) the Third Energy Package. 8.122 EU energy legislation regarding long-term contracts principally focuses on the

internal gas market,54 little attention having been given in the legislative texts to the electricity market. 8.123 (a) The Second Energy Package: Long-term contracts were addressed differently

for the electricity and the gas markets in the Second Energy Package. For the electricity market, the Annex of Regulation 1228/2003/EC provided guidelines on the management and allocation of available transfer capacities of interconnections between national systems, specifying that: – long-term contracts cannot be assigned priority access rights to an interconnection capacity if they are in breach of the competition rules (Articles 101 and 102 TFEU);

51

See Chs 9 and 10 for general discussion of security of supply. H Nyssens and D Schnichels, ‘Energy’, in J Faull and A Nikpay (eds), Th e EC Law of Competition (2nd edn, OUP, 2007), ch 12, para 12.213. 53 Communication from the Commission of 10 January 2007—Inquiry pursuant to Article 17 of Regulation (EC) No 1/2003 into the European gas and electricity sectors (final report) COM(2006) 851 final and DG Competition Report on Energy Sector Inquiry, 10 January 2007, SEC(2006) 1724, hereafter ‘Energy Sector Inquiry’. 54 For recent discussion, see K Talus, Vertical Natural Gas Transportation Capacity, Upstream Commodity Contracts and EU Competition Law (Alphen aan den Rijn: Kluwer Law International, 2011), ch 3. 52

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B. Analysis of the Contracts – existing long-term contracts have no pre-emption rights at the time of their renewal. For the gas market, long-term contracts were addressed directly by Directive 8.124 2003/55/EC. Their necessity to ensure the security of gas supply in the EU, as long as they were compatible with the objectives of the Directive and with the rules of the Treaty (particularly regarding competition) was highlighted in Recital 25: Long-term contracts will continue to be an important part of the gas supply of Member States and should be maintained as an option for gas supply undertakings in so far as they do not undermine the objectives of this Directive and are compatible with the Treaty, including competition rules. It is therefore necessary to take them into account in the planning of supply and transportation capacity of gas undertakings.

According to Article 18(3) of Directive 2003/55/EC, the ‘provisions of this 8.125 Directive shall not prevent the conclusion of long-term contracts in so far as they comply with Community competition rules’. As already highlighted,55 Article 32(1) of this Directive furthermore expressly 8.126 maintained the validity of long-term gas contracts concluded before the liberalization of the internal market in natural gas in accordance with the Transit Directive.56 No similar mechanism was provided for the electricity sector. The preparatory documents which led to Directive 2003/55/EC provide evidence 8.127 that the EU institutions were divided on these competition and security of supply concerns. In its first proposal for the directive, the Commission underlined that competition on the energy markets could be hindered by long-term energy contracts.57 It also proposed (as previously discussed) to repeal the Transit Directive, regardless of the long-term transit contracts concluded within its framework. In its first reading, the European Parliament recommended that regulatory author- 8.128 ities be entrusted with the competence to call into question long-term contracts.58 This recommendation, although underlining the possible benefits of long-term contracts for security of supply, was justified by the possible barriers to competition due to such contracts.59

55

See Ch 4, at paras 4.136 ff. Directive 91/296/EEC [1991] OJ L147/37. 57 Proposal for a Directive of the European Parliament and of the Council amending Directives 96/92/EC and 98/30/EC concerning common rules for the internal market in electricity and natural gas, 13 March 2001, COM(2001) 125 final, 31. 58 Report on the Proposal for a Directive of the European Parliament and of the Council amending Directives 96/92/EC and 98/30/EC Concerning Common Rules for the Internal Market in Electricity and Natural Gas, 1 March 2002, A5-0077/2002, 57. 59 Report on the Proposal for a Directive of the European Parliament and of the Council amending Directives 96/92/EC and 98/30/EC Concerning Common Rules for the Internal Market in Electricity and Natural Gas, 1 March 2002, A5-0077/2002 (n 58), 58. 56

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Liberalization and Energy Contracts 8.129 The Council departed from the positions of both the Commission and the

European Parliament: it considered in its first reading that third party access had to take into account the specificity of long-term transit contracts concluded under the framework of the Transit Directive.60 It accordingly underlined in its common position of 3 February 2003, that the Transit Directive ‘should be repealed without prejudice to the continuity of the contracts concluded under the said Directive’.61 Following this common position, the Commission declared to the European Parliament that the repeal of the Transit Directive ‘shall not affect’ the legal framework for future long-term gas contracts, considering their importance for Europe’s security of supply.62 8.130 The European Parliament accordingly suggested, in its second reading, that the

proposed new Gas Directive should clarify that the repeal of the Transit Directive should not call into question the conclusion of future long-term contracts considering their importance for the security of supply.63 Although this suggestion was not followed, it expresses the position of the European Parliament and of the Council at the time of the adoption of the Second Energy Package to protect the essential role of long-term contracts in the security of supply. 8.131 (b) Energy Sector Inquiry 2005 to 2007: As a result of the slow progress in intro-

ducing competition into energy markets, in 2005 the Commission’s Competition Directorate General (DG COMP) launched a sector inquiry into those markets. The final report of this inquiry was published on 10 January 2007.64 The Energy Sector Inquiry final report highlighted the potential competition barriers raised by long-term energy contracts, both for the electricity and natural gas markets: – such contracts hinder the access of new entrants to access upstream markets and hamper the level of liquidity on the electricity and gas markets;65 60

2394th Council Meeting—Energy/Industry, Brussels, 4 and 5 December 2001. Common position (EC) No 6/2003 adopted by the Council on 3 February 2003 with a view to the adoption of the Directive 2003/ . . . /EC of the European Parliament and of the Council of . . . concerning common rules for the internal market in natural gas and repealing Directive 98/30/ EC, [2003] OJ C50/3, [2003] OJ C50/36 (4 March 2003), Recital 30. 62 Communication from the Commission to the European Parliament concerning the common position of the Council on the adoption of a Directive of the European Parliament and of the Council concerning common rules for the internal market in electricity and repealing Directive 96/92/EC and concerning the common position of the Council on the adoption of a Directive of the European Parliament and of the Council concerning common rules for the internal market in natural gas and repealing Directive 98/30/EC, SEC/2003/0161 final, 7 February 2003. 63 Recommendation for second reading on the common position adopted by the Council with a view to adopting a European Parliament and Council Directive on common rules for the internal market in natural gas and repealing Directive 98/30/EC, 28 April 2003, A5—0135/2003, 19 and 20: ‘The repeal of Directive 91/296/EEC does not call into question the legal framework of longterm contracts, important to ensure European security of supply.’ 64 Communication from the Commission, Inquiry into the European Gas and Electricity Sectors (Final Report), SEC(2006) 1724, COM(2006) 851 final, 10 January 2007 (hereafter, ‘Sector Inquiry: Final Report’). 65 Sector Inquiry: Final Report (n 64), 6, point 20. 61

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B. Analysis of the Contracts – long-term contracts hamper the access to interconnections;66 – long-term contracts have the effect of tying customers (usually) to incumbent operators;67 – long-term contracts may have foreclosure effects.68 In parallel to the Energy Sector Inquiry Final Report, the Commission’s regula- 8.132 tory proposals (for the Th ird Energy Package) to address the shortcomings of the energy markets were presented to the Council and to the European Parliament in its communication on ‘Prospects for the Internal Gas and Electricity Market’.69 The Commission pointed to long-term contracts as one of the main deficiencies of the internal energy markets.70 The Commission’s proposals thus focused on long-term gas transmission and downstream contracts. First, the importance of long-term contracts for the EU security of supply was stressed; then, the Commission aimed to develop the guidelines provided by Regulation 1775/2005/EC regarding congestion management and to increase the scrutiny of long-term contracts: The Commission has repeatedly acknowledged the role of long-term contracts between external producers (i.e. upstream) and companies supplying customers in the European Union. These long-term contracts reflect the need for upfront investments to be undertaken and have an important role to play as regards access to cost-effective energy inputs. However, such agreements are often extended downstream and serve to foreclose the downstream market via priority transmission contracts and disproportionately long term supply contracts with either local suppliers or directly with final customers. This often results in market foreclosure within the European Union. The gas Regulation already imposes strict use-it-or-lose-it conditions regarding transmission contracts. This includes contracts which were concluded under Directive 91/296/EEC on the transit of natural gas through grids. These requirements, when combined with additional investment in gas networks, may help overcome the current blockages to meaningful competition. Further development of use-it-or-lose-it guidelines would also help competition develop more rapidly. The Commission will strictly monitor compliance with the requirements of Regulation (EC) No 1775/2005. It will further develop the guidelines under the Regulation. It also considers that any regulatory decisions relating to such contracts should be subject to Commission scrutiny . . . 71

The Report of the European Parliament on the Commission’s Communication 8.133 stressed the need for long-term contracts, particularly in the gas sector, to ensure

66

Sector Inquiry: Final Report, (n 64), 6 and 7, point 23. Sector Inquiry: Final Report, (n 64), 8, points 31 and 32. 68 Sector Inquiry: Final Report, (n 64), 12 and 13, points 46 and 48. 69 Communication from the Commission to the Council and the European Parliament, ‘Prospects for the Internal Gas and Electricity Market’, COM(2006) 841 final, 10 January 2007 (hereafter, ‘Communication: Prospects (2006)’). 70 Communication: Prospects (2006) (n 69), 6. 71 Communication: Prospects (2006) (n 69), 16. 67

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Liberalization and Energy Contracts security of supply and it entrusted the Commission with providing clear guidance regarding such contracts, so as to reduce uncertainty:72 The European Parliament . . . 26. Recognises that upstream long-term contracts, in particular in the gas sector, are necessary to provide a positive investment climate, contribute significantly to security of supply and do not harm the integration of the internal energy market, provided that new entrants are not excluded; 27. Believes that balanced, effective application of the ‘use-it-or-lose-it’ principle must be ensured so that new entrants may access the networks where capacity is not utilised; 28. Believes downstream bilateral long-term contracts allow, as long as they do not take up a significant percentage of the market and do not prevent customers from switching suppliers, energy-intensive industries to negotiate more competitive and stable energy prices with the supplier of their choice and should therefore be allowed, assuming that they are properly supervised by the relevant authorities, and as long as they do not create additional costs for the networks, to close the market to new entrants or hamper market development; 29. Requests the Commission to propose a definition of what constitutes a high energy user; also requests the Commission to give special consideration to high energy users in the EU that are competing in the global economy; 30. Asks the Commission to provide clear guidance on downstream bilateral longterm contracts in order to reduce uncertainty in the market and to move towards standardization of contracts; 31. Recalls that energy generation, transmission, storage and distribution facilities are critical infrastructures the safety and security of which must be fully preserved and ensured under all circumstances . . . 8.134 (c) The Third Energy Package: Long-term contracts are addressed for both the

electricity and the gas markets in the new Third IEM Directives concerning common rules for the internal energy market, namely Directives 2009/72/EC (Elec) and 2009/73/EC (Gas). 8.135 Most of the emphasis is upon the gas market, under the Third Gas IEM Directive

2009/73/EC. This Directive reaffirms the possibility of concluding long-term contracts as long as they are compatible with the competition rules73 and also compels NRAs to respect long-term contracts as long as they are compatible with European competition rules: The regulatory authority shall have the following duties: . . . (1) respecting contractual freedom with regard to interruptible supply contracts as well as with regard to long-term contracts provided that they are compatible with Community law and consistent with Community policies.74 72 Report of the European Parliament on ‘Prospects for the Internal Gas and Electricity Market’ (2007/20089(INI)), 26 June 2007, A6-0249/2007, 10, paras 26–31. 73 Art 32(3) of the Third Gas IEM Directive 2009/73/EC: ‘[t]he provisions of this Directive shall not prevent the conclusion of long-term contracts in so far as they comply with [EU] competition rules.’ 74 Art 41(1)(l) of Directive 2009/73/EC.

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B. Analysis of the Contracts A similar duty was imposed upon NRAs for the electricity market.75 Besides this 8.136 provision, long-term contracts in the electricity market are not further addressed in the Third Energy Package. It follows from the provisions of the Third Energy Package regarding long-term 8.137 contracts that such contracts are acceptable as long as they comply with EU competition rules. Such limited acceptance of long-term contracts is evident from the preparatory work of the Third Energy Package. In its first proposals for the new directives, dated 19 September 2007, the Commission underlined—for both the electricity 76 and gas77 markets—that: . . . downstream bilateral supply agreements provide an opportunity to energy intensive industries to obtain more predictable prices. However, such agreements risk foreclosing the downstream market by preventing consumers from switching and thus limiting competition.

The Commission also announced that it would provide guidance about the com- 8.138 pliance of downstream bilateral long-term supply agreements with EU competition law. The risks of long-term contracts for competition were also underlined by the 8.139 European Economic and Social Committee in its opinion of 22 April 2008:78 Identifying downstream bilateral long-term supply agreements that comply with EU competition law. The degree of competition on retail markets is very limited. The cumulative effect of long-term contracts, open-ended contracts, contracts with tacit renewal clauses and long termination periods could be a substantial barrier to competition. Contractual obligations binding industrial end users and producers (incumbent companies) in the long term differ from country to country. However, there is growing demand for more competitive supply, from companies other than the incumbent companies.

75

Art 37(1)(l) of Directive 2009/72/EC. Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/54/EC Concerning Common Rules for the Internal Market in Electricity, COM(2007) 528 final, 19 September 2007, 18. 77 Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/55/EC Concerning Common Rules for the Internal Market in Natural Gas, COM(2007) 529 final, 19 September 2007 (n 76), 18. 78 Opinion of the European Economic and Social Committee on the ‘Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/54/EC Concerning Common Rules for the Internal Market in Electricity’, ‘Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/55/EC Concerning Common Rules for the Internal Market in Natural Gas’, ‘Proposal for a Regulation of the European Parliament and of the Council Establishing an Agency for the Cooperation of Energy Regulators’, ‘Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EC) No 1228/2003 on Conditions for Access to the Network for Cross-Border Exchanges in Electricity’, and ‘Proposal for a Regulation of the European Parliament and of the Council Amending Regulation (EC) No 1775/2005 on Conditions for Access to the Network for Cross-Border Exchanges in Natural Gas’, 2008/C 211/06, 22 April 2008, [2008] OJ C 211/30, 19 August 2008, point 7.12. 76

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Liberalization and Energy Contracts 8.140 Departing from the Commission and the European Economic and Social

Committee, in its first reading, the European Parliament recommended giving national regulatory authorities the duty to promote long-term contracts, where they ‘contribute to the improvement of the energy production and distribution and, at the same time, allow consumers to share the resulting benefits, provided that such agreements can contribute to an optimal level of investment in the energy sector’.79 8.141 This recommendation was not followed by the Commission, which considered

that even if long-term contracts were ‘acceptable’, they should not be ‘encouraged’, given the foreclosure risks which they posed for the opening of the market.80 8.142 (d) Conclusion on EU energy legislation and long-term contracts: Long-term con-

tracts illustrate the evolution of EU energy law before the conflicting principles of security of supply and the opening of the energy market. While at the time of the adoption of the Second Energy Package and in the context of the Energy Sector Inquiry, long-term contracts were highlighted as amongst the main deficiencies of the liberalized electricity and gas markets, the position towards such contracts has warmed in the recent years, in the face of the increase of prices on the liberalized electricity and gas markets in the absence of the stabilizing effect of long-term contracts. 8.143 The examination and assessment of long-term contracts within the liberalized elec-

tricity and gas markets was instead left to the application of the European competition rules: long-term contracts are accepted as long as they are compatible with European competition rules (or, indeed, with the national competition law, where no cross-border trade effects could be shown). 8.144 The compatibility of long-term contracts with EU competition law is thoroughly

scrutinized by the Commission’s Competition Directorate General (DG COMP).

79

For electricity, see the position of the European Parliament adopted at first reading on 18 June 2008 with the view to the adoption of Directive 2008/ . . . /EC of the European Parliament and of the Council amending Directive 2003/54/EC concerning common rules for the internal market of electricity, TA(2008)0294, proposed new Art 22c(1)(n); for gas, see the position of the European Parliament adopted at first reading on 9 July 2008 with the view to the adoption of Directive 2008/ . . . /EC of the European Parliament and of the Council amending Directive 2003/55/EC Concerning Common Rules for the Internal Market of Natural Gas, TA(2008)0347, proposed new Art 24c(1)(l). 80 For electricity, see Communication from the Commission to the European Parliament concerning the common position of the Council on the adoption of a Directive of the European Parliament and of the Council repealing Directive 2003/54/EC concerning common rules for the internal market in electricity, 12 January 2009, COM(2008) 906 final, 6, point 3.4.1; for gas, see Communication from the Commission to the European Parliament concerning the common position of the Council on the adoption of a Directive of the European Parliament and of the Council repealing Directive 2003/55/EC concerning common rules for the internal market in natural gas, 12 January 2009, COM(2008) 907 final, 6, point 3.4.1: ‘Long-term contracts are acceptable provided they comply with competition rules, but they will not be encouraged as they have a potential foreclosing effect on the market.’

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B. Analysis of the Contracts In the Commission’s decisional practice, a distinction appears to be drawn between: (i) long-term contracts linked to an investment; and (ii) long-term supply contracts stricto sensu, that is to say not linked to any investment. (5) Long-term contracts linked to an investment Contracts of 15 years’ duration have been accepted in the past when they concerned 8.145 contracts linked to an investment, usually in new electricity production units. Five cases dealt with by the DG COMP are particularly relevant: Scottish Nuclear, Electricidade de Portugal/Pego, REN/Turbogás, 81 Synergen, and Distrigaz.82 In the Scottish Nuclear case, a contract had been concluded between Scottish 8.146 Power, Hydro Electric, and Scottish Nuclear for an initial duration of 30 years (‘the Nuclear Energy Agreement’). By this agreement, Scottish Power and Hydro Electric were bound, through a TOP clause, to acquire most of the electricity produced by Scottish Nuclear at its production units at Hunterston and Torness. The Commission reduced the duration of this agreement to 15 years, considering that this shorter duration was sufficient to allow the necessary return on investment as well as the competitiveness of Scottish Nuclear: The agreement, which was originally to apply for a period equivalent to the remaining lifetime of the nuclear power stations, i.e. 30 years, has, at the Commission’s request, been limited to 15 years. Th is period of validity provides the stability and guarantee necessary for long-term planning and allows the necessary adjustments to be made to the new situation after a reasonable start-up period. However, this period seems necessary to allow Scottish Nuclear to attain full profitability and become competitive.83

The Electricidade de Portugal/Pego case 84 concerned a 28-year contract for the sale 8.147 of the entire electricity output produced by a coal-fired power plant to the incumbent Portuguese electricity operator, EDP. The plant was in construction at the time of the case. The Commission refused to accept that duration, considering that, during that time, no electricity produced by the power plant in project could be delivered to consumers other than EDP either in Portugal or in other Member States. The duration of the contract was accordingly reduced to 15 years. A first option system was authorized for the remaining thirteen years in order to allow producers to sell to third parties where there was excess capacity not required by the grid.

81 PD Cameron, Competition in Energy Markets: Law and Regulation in the European Union (2nd edn, Oxford: OUP, 2007), 331 and 332. 82 Adrien de Hauteclocque, ‘EC Antitrust Enforcement in the Aftermath of the Energy Sector Inquiry: a Focus on Long-Term Supply Contracts in Electricity and Gas’, in B Delvaux, M Hunt, and K Talus (eds), EU Energy Law and Policy Issues (Rixensart (Belgium): Euroconfidentiel, 2008), 106. 83 Commission Decision 91/329/EEC of 30 April 1991, para 40. 84 Case No IV/34.598, [1993] OJ C265/3.

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Liberalization and Energy Contracts 8.148 In the REN/Turbogás case, 85 a power purchase agreement of 25 years had been con-

cluded to supply the Portuguese system manager and operator of the national grid with the electricity from a combined cycle gas turbine power station. The contract was reduced to 15 years’ duration by the Commission.86 8.149 More recently, in the Synergen case, 87 the Commission accepted an exclusive gas

supply contract of 15 years between Statoil and Synergen in the frame of the construction and operation of a gas power plant belonging to Synergen. The Commission considered that the Irish gas market was still dominated by the incumbent gas supplier BGE and that the fifteen-year contract would ensure Statoil’s long-term presence in the Irish gas market. The special price formulae offered by Statoil for its gas were also taken into account by the Commission, considering that they would not have been offered in the absence of long-term exclusivity.88 8.150 Finally, the Distrigaz case 89 is also noteworthy. In this case, the Commission

required Distrigaz to commit to limit its new downstream gas supply contracts with industrial users and electricity producers to five years. This commitment, however, was not extended to contracts concluded with electricity producers buying gas for new installations exceeding 10 MW:90 The proposed commitments specifically do not apply to gas supply agreements with customers which are for the supply of gas for new investment in electricity generation capacity of over 10 MW. Such agreements are subject to a case-by-case basis appreciation taking into account that the investment might not go ahead, unless greater predictability of prices and possibly increased security of supply is guaranteed for the investor. 8.151 The need to take into account investments in the assessment of long-term con-

tracts is supported by the Guidelines on the application of Article 101(3) TFEU (previously Article 81(3) EC).91 The application of Article 101(3), allowing for possible exemptions for otherwise anti-competitive agreements from the prohibition of Article 101(1), needs to ‘take into account the initial sunk investments made by any of the parties and the time needed and the restraints required to commit and recoup an efficiency enhancing investment’. The Commission considers that: Article [101] cannot be applied without taking due account of such ex ante investment. The risk facing the parties and the sunk investment that must be committed to implement the agreement can thus lead to the agreement falling outside Article

85 [1996] OJ C118/7, (1996) 4 CMLR 881. See also J Ratliff, ‘Major Events in EC Competition Law 1996: Part 2’ (1997) 8(3) ICCLR 75, 82 ff. 86 Ratliff, ‘Major Events’ (n 85), 82ff. 87 Commission Press Release, IP/02/792, 31 May 2002. 88 XXXIInd Report on Competition Policy 2002, Commission, 192–193. 89 Commission Decision of 11 October 2007, case COMP/B-1/37966, Distrigaz . 90 Commission Decision, Distrigaz (n 89), para 37. 91 Communication from the Commission, Notice, Guidelines on the application of Article 81(3) of the Treaty, [2004] OJ C101/8.

224

B. Analysis of the Contracts [101](1) or fulfilling the conditions of Article [101](3), as the case may be, for the period of time required to recoup the investment.92

The recently updated Guidelines of the Commission on vertical restraints93 are 8.152 also relevant: In the case of a relationship-specific investment made by the supplier . . . a noncompete or quantity forcing agreement for the period of depreciation of the investment will in general fulfil the conditions of Article 101(3) . . . A relationship-specific investment could, for instance, be the installation or adaptation of equipment by the supplier when this equipment can be used afterwards only to produce components for a particular buyer. General or market-specific investments in (extra) capacity are normally not relationship-specific investments. However, where a supplier creates new capacity specifically linked to the operations of a particular buyer, for instance a company producing metal cans which creates new capacity to produce cans on the premises of or next to the canning facility of a food producer, this new capacity may only be economically viable when producing for this particular customer, in which case the investment would be considered to be relationshipspecific. 94

From those cases, one may deduce that a 15-year duration may appear to be a 8.153 ‘standard’ term for contracts linked to investments, thereby securing investors’ long-term commitments.95 (6) Long-term contracts stricto sensu, not linked to an investment In the absence of investment in new infrastructure, the duration of energy con- 8.154 tracts seems generally to be limited to five years where the beneficiary of the contracts is in a dominant position on the relevant market. This tendency is supported by the recent cases Distrigaz96 and EDF—Long-term contracts France.97 In the Distrigaz case, contracts of beyond five years’ duration had been concluded 8.155 by Distrigaz with large customers on the Belgian gas market. After having noted the dominant position of Distrigaz on the market for the supply of gas to large customers in Belgium, the Commission underlined that ‘with very few exceptions, customers only have one gas supplier and therefore competition in the gas supply market only takes place when a contract expires and a new contract is concluded’.98 The Commission accordingly considered that the long-term contracts concluded

92

Guidelines on the Application of Article 81(3) of the Treaty, para 44. Commission, Guidelines on Vertical Restraints, [2010] OJ C130/01. 94 Commission, Guidelines on Vertical Restraints, [2010] OJ C130/01, para 146. One can easily see how such arguments might be applied to new electricity generation or gas pipeline capacity in some circumstances. 95 Cameron (n 81), 332. 96 Commission Decision, Distrigaz (n 89). 97 Decision of the Commission of 17 March 2010, Case COMP/39.386, EDF—Long-term contracts France. 98 Commission Decision, Distrigaz (n 89), 2, para 2. 93

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Liberalization and Energy Contracts by Distrigaz had a potential foreclosure effect since they ‘would prevent customers from switching supplier and would thereby limit the scope for other gas suppliers to conclude contracts with customers and so foreclose the access to the market’.99 8.156 The potential foreclosure effect of Distrigaz’s long-term contracts was assessed on

the basis of the proportion of the relevant market tied by existing contracts on 1 January 2005 for various dates in the future.100 It appeared that the proportion of the market already tied to Distrigaz under the contracts in force on 1 January 2005 was between 50 and 60 per cent in the six months from their conclusion and between 20 and 30 per cent in the three years following their conclusion. On this basis, the Commission considered that ‘the contracts concluded by Distrigaz significantly foreclosed the relevant market in a way that could constitute an abuse of its dominant position’.101 8.157 To address this concern, Distrigaz committed to limit its new contracts with

industrial users and electricity producers to five years, except where the gas was to supply new installations exceeding 10 MW, as has been highlighted previously. For existing customers with contracts whose duration was five years or more, Distrigaz committed to grant them a unilateral termination right with prior notice and without indemnity.102 8.158 The case EDF—Long-term contracts France103 occurred in the context of the consti-

tution of a purchase consortium, Exceltium. In this case, the Commission considered that EDF may have abused its dominant position on the market for the supply of large industrial customers by concluding contracts hindering access to this market, in particular given the duration of those contracts. To address the issues raised by the Commission, EDF committed to not conclude any new contracts with large industrial customers which had a duration beyond five years. 8.159 (a) Take-or-pay clauses: According to a take-or-pay (TOP) clause, a client com-

mits to pay an amount equal to a determined volume of energy (contractual yearly quantity), irrespective of its off-take at the agreed price.104 The volume not taken

99

Commission Decision, Distrigaz (n 89), 2, para 2. Commission Decision, Distrigaz (n 89), 7, para 23. 101 Commission Decision, Distrigaz (n 89), 7, para 24. 102 Commission Decision, Distrigaz (n 89), 7 and 8, para 27. 103 Commission Decision, EDF—Long-term contracts France (n 97). 104 G Block, ‘Arbitration and Changes in Energy Prices’ (n 30); G Block, ‘Les clauses take-or-pay dans les ventes d’énergie’ [2007] Europ’Energies 12; G Block et al, ‘Le consommateur industriel’, in Le nouveau marché de l’ énergie, Partie III, subsection 7: ‘les clauses liées à la quantité: clauses take-or-pay, take-and-pay et certaines variantes contractuelles’, (Louvain-la-Neuve, Anthémis, 2007), 263; P Griffin, ‘Take-or-pay contracts in liberalized markets’ (1999) 15(10) Natural Gas 8; P Hodges, ‘“Take-or-pay” and “send-or-pay”—a perspective on recent litigation’ [1997] OGLTR 469; H Davey, ‘“Take-or-pay” and “send-or-pay”: a legal review and long-term prognosis’ [1997] OGLTR 419; E Marseglin, ‘Take-or-pay litigation—the producer’s perspective’ (1987–1988) 6 OGLTR 125. 100

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B. Analysis of the Contracts is subject to a TOP penalty agreed by the parties in the power purchase agreement (PPA) or supply contract. A TOP clause could be drafted as follows: If during a Contractual year, the Buyer takes off a quantity of natural gas from the Seller inferior to the yearly contracted quantity, he shall pay the Seller for the quantities below the yearly contracted quantity after deduction of the quantities not made available by the Seller or not taken off by the Buyer for reasons of force majeure or for reasons of planned or unplanned maintenance, at the agreed Penalty, calculated in accordance with Article . . .

The objective of such clauses is to ensure that producers and/or suppliers receive 8.160 a steady and reliable cash flow to allow them to invest in production and network facilities. Risks related to prices and volumes are shared between producers and suppliers, on the one hand, and consumers (mainly industrials), on the other hand: the contract price is determined according to subscribed volumes, irrespective of its off-take. TOP clauses first appeared in the gas sector, due in part to the complexity of the 8.161 supply chain (from upstream natural gas fields to downstream customers’ off-take points) as well as the need to invest in production and network facilities. Nowadays, TOP clauses have been extended to the electricity sector, notably for electricity produced from natural gas or by new entrants, so as to establish the necessary client portfolio for the conclusion of upstream supply contracts. TOP clauses may have a deterrent effect: they may restrain the access of alternative 8.162 producers/suppliers to customers bound by TOP clauses. Such risks of deterrent effect were underlined by DG COMP during the public consultation launched under the framework of the Energy Sector Inquiry: Regarding the take-or-pay obligations, which constitute a characteristic feature of upstream long-term contracts, one vertically integrated gas market player argued that such flexibility is a necessary part of their long-term contracts since it takes into account the volume risk taken by them as a buyer and provides them with an alternative source of flexibility to balance their portfolio. Contrary to this view, entrants noted that take-or-pay obligations effectively internalize the role of wholesale markets in managing price and volume risks with the harmful consequence of impeding the development of more effective and efficient wholesale markets. They argued that liquid wholesale markets would obviate the need for such flexibility since the market could then be used to hedge the price exposures and provide flexibility to match customers’ and suppliers’ evolving requirements.105

TOP clauses are accordingly under close scrutiny with regard to the EU competi- 8.163 tion rules. The first element of scrutiny is the duration of TOP clauses: the criteria taken into account by DG COMP were highlighted at paras 8.145 ff in the discussion of the duration of power purchase agreements and supply contracts.

105 DG Competition Report on Energy Sector Inquiry—Second phase (public consultation), 10 January 2007, SEC(2006) 1724, para 639.

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Liberalization and Energy Contracts 8.164 The second element in the scrutiny of TOP clauses is their flexibility. The impor-

tance of such flexibility was underlined in the first phase of the report on the Energy Sector Inquiry of 10 January 2007:106 (121) Long-term contracts generally offer buyers a substantial degree of flexibility in terms of off-take. Incumbents can use this contractual arrangement to provide ready-made flexibility. They can also, despite take-or-pay obligations, avoid buying more gas than they need, which limits their need to buy and sell on hubs . . . (125) The exact nature of flexibility provisions varies greatly between import contracts and between regions . . . Many contracts establish an ‘annual contractual quantity’ but allow the buyer to take a defined percentage less or more than this over the course of a year. Many contracts also specify monthly or daily maximum or minimum quantities . . . (127) These contracts typically provide specific rules for the situation where the buyer does not take the whole of the gas required in a given year. In these circumstances, the buyer may be able to defer delivery by one or more years, or delivery obligations might be averaged over a number of years. Alternatively, the buyer might be required to pay for gas not taken. (128) It is, however, extremely rare for suppliers to pay for gas not taken . . . (130) By far the most common scenario is that flexibility inherent in long-term contracts has been sufficient, so that take-or-pay provisions have not been used. 8.165 Three mechanisms are generally used to provide flexibility to TOP clauses. The

first of these mechanisms is the possibility for the buyer of energy to be supplied for part of its needs in electricity and/or gas by an alternative supplier. A TOP clause provided by an energy producer and/or supplier in a dominant position on the relevant market and covering, on an exclusive basis, the entire need of a customer, is indeed likely to be considered as foreclosing the access of other producers and/ or suppliers, notably new entrants, to the customer concerned. In the above-mentioned EDF—Long-term contracts France case,107 EDF’s customers were bound by exclusive volume clauses covering all their needs. The Commission considered that such TOP clauses could lead to an abuse of dominant position.108 EDF accordingly committed to give the option to its customers of choosing between an exclusive offer and a non-exclusive offer, so as to allow them to access supplies from other suppliers in an effective manner.109 8.166 The second mechanism allowing flexibility in TOP clauses is the provision for

compensation when the relevant volumes are not taken by the buyer: this compensation comes in the form of ‘carry forward’ or ‘carry backward’ clauses. A ‘carry forward’ clause postpones a TOP penalty to one or several future contractual years.

106 DG Competition Report on Energy Sector Inquiry—First phase (Gas), 10 January 2007, SEC(2006) 1724. 107 See Commission Decision, EDF—Long-term contracts France (n 97). 108 Commission Decision, EDF—Long-term contracts France (n 97), paras 30–35. 109 Commission Decision, EDF—Long-term contracts France (n 97), paras 82–86.

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B. Analysis of the Contracts The penalty may have to be paid immediately or may constitute a down-payment for postponed volumes, regardless of the price to be agreed for future years. Such a clause could be drafted as follows: Where the yearly consumption is inferior to the yearly contractual quantity for a year (N), such difference does not lead to payment provided that in the following year (N+1), the Buyer consumes a quantity at least equal to the yearly contractual quantity surcharged with this difference.

A ‘carry backward’ clause has the reverse effect: the buyer is entitled to cover a 8.167 deficit in the pending year (N) by relying upon an excess from previous years (eg N-1). Such clauses are rarer in practice and are usually limited to a return on the previous year only. The third mechanism of flexibility in TOP clauses is the ‘resale clause’. Such a 8.168 clause allows the customer to resell the quantities it has bought but does not in fact need. The condition regarding off-take is accordingly fulfilled. Such resale can be realized with the assistance of the trading platform of the seller, with or without a trading fee. Such clause could be drafted as follows: The Supplier will use his best endeavours to sell on behalf of the Buyer the off-take below the contractually agreed volume. Any profit or loss will be passed on to the Buyer and no trading fee will be applied.

(b) Destination clauses: Historically, natural gas supply contracts have often con- 8.169 tained a clause which, either explicitly or by its effect,110 aims to ensure that the gas supplied is only sold to consumers within a given territorial area (typically a given Member State), known under the general heading of ‘destination clauses’. For example: ‘the natural gas supplied under this contact shall only be used in [ . . . ] and shall not be re-exported’. Such clauses were to be found in various contracts concluded by Russian (Gazprom),111 Algerian (Sonotrach),112 and Norwegian gas producers.113 These clauses aimed to restrict the importer to marketing within their national territory and restricted competition between such importers for the sale of such gas to end users. They also reinforced the pre-existing division of the EU into national, or 110 eg via: ‘profit-splitting’ mechanisms which require the importer to pass on a share of the profits generated from any sales outside of the importer’s traditional market; and customer or use restrictions, such as requiring the purchaser to use the gas only for its own purposes. See L Kjølbye, ‘Vertical agreements’, in C Jones (gen ed), EU Energy Law, Volume II: EU Competition Law and Energy Markets (3rd edn, Leuven: Claeys & Casteels, 2011), Part 3, ch 3, 271–276 for discussion. 111 See the various Commission Press Releases concerning ENI/SNAM (IP/03/1345, 6 October 2003), OMV (IP/05/195, 17 February 2005), Ruhrgas (IP/05/710, 10 June 2005); Gasunie’s contract with Gazprom was also investigated and found to involve no territorial restrictions (see H Nyssens et al, ‘The Territorial Restrictions Case in the Gas Sector: A State of Play’ (2004) 1 Competition Policy Newsletter 48, at 51). 112 See Nyssens et al (n 111), at 51 and Commission Press Release IP/07/1074 (11 July 2007). 113 See the settlement in the GFU case with regard to Norwegian gas supplies from Statoil and Norsk Hydro, where a promise not to include such clauses was made: M Lindroos et al, ‘Liberalization of European Gas Markets—Commission Settles GFU Case with Norwegian Gas Producers’ (2002) 3 Competition Policy Newsletter 50, at 51.

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Liberalization and Energy Contracts at least territorially restricted, vertically organized markets, and may also have prevented competitive pressure on gas prices charged by suppliers to different importers, thus allowing producers to differentiate their prices per buyer (and therefore territory) due to the inability of importers to engage in price arbitrage inter se. 8.170 Such territorial restrictions in these ‘vertical’ supply contracts (within the meaning

of EU competition law’s policy concerning vertical restraints in relations between parties operating at different levels of the value/supply chain) amount to a hardcore restriction under Article 4(b) of the Vertical Agreements Block Exemption Regulation 330/2010/EU.114 This would deprive those contracts of the benefit of that exemption as a matter of course, and are also highly unlikely to be exempted under Article 101(3) TFEU. The Commission’s approach to these contracts was to investigate, then invite the producers to remove such clauses from all new gas supply contracts—which they duly did. Pre-existing contracts containing such clauses, meanwhile, were not immediately or formally115 condemned: instead, the parties were given the opportunity to remove the offending clause(s) and to amend their contracts in the light of that removal. This preserved the integrity of the underlying long-term contracts involved and gave the parties a chance to adapt those contracts to the new situation, finding a ‘commercial solution for the competition problem’ identified.116 As Commissioner Monti said at the time: [D]uring the initial delicate transition phase from monopolised to liberalised energy markets, the focus should lie, [on] some occasions, on [the] Commission’s interventions improving effectively the market structure, rather than on formal procedures imposing fines.117 8.171 However, now that the basic principles have been clarified by this series of set-

tlements, the Commission will be unlikely to operate so informally or leniently in future, especially since the advent of the Third Package legislation has accelerated the pace of that liberalization. Certainly, the Commission’s more recent competition law practice in the energy sector suggests a trend towards the use of competition law as an accompaniment to the regulatory regime laid down in the Directives, often with far-reaching consequences.118

114

[2010] OJ L102/1 (20 April 2010). The exception was the pair of cases involving Gaz de France and Italian importers: Case COMP/38.662 GDF/ENEL and EDF/ENI (26 October 2004), which both led to the adoption of formal Decisions by the Commission, with a view to clarifying the position for other market players in the future (see, eg, Press Release IP/04/1310, 26 October 2004): no fines were imposed. Note that these cases also involved gas transport and service, as well as supply, contracts. 116 M Monti, ‘Applying EU Competition Law to the Newly Liberalized Energy Markets’, World Forum on Energy Regulation (Rome, 6 October 2003). 117 M Monti, ‘Applying EU Competition Law to the Newly Liberalized Energy Markets’ (n 116). 118 See, eg, the discussion concerning competition law and ownership unbundling at paras 3.125 ff. 115

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Part III ‘ENERGY SECURITY’ AND ‘SECURITY OF SUPPLY’

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9 INTRODUCTION TO ENERGY SECURITY AND SECURITY OF SUPPLY

A. Definitional Difficulties: a Multifaceted 9.01 and Amorphous Concept (1) (2) (3) (4) (5) (6)

Economic Environmental Social Foreign policy Technical ‘Security’ stricto sensu

9.07 9.08 9.09 9.10 9.11 9.12

B. Definitional Attempts

9.16

C. A Recent Return to the Top of the EU Energy Policy Agenda D. Security of Supply as a Justification under EU Law

9.24

(1) Source of the security of supply justification (2) Free movement law (3) Services of general economic interest (4) Competition law

9.25 9.27 9.34 9.44

9.21

A. Definitional Difficulties: a Multifaceted and Amorphous Concept Security of Supply is a complicated topic due to the wide variety of goals often 9.01 subsumed under this heading. It is important to try to separate out these goals, otherwise, there are serious risks of substantive confusion due to issues such as semantic imprecision, over- and/or under-inclusive definitions, and so on. From a legal perspective, this is particularly important given that security of supply will often be relied upon to justify exemptions or derogations from prima facie applicable legal rules: successful reliance upon such a justification will inevitably focus closely upon precisely which goal(s) of supply security are pursued and whether the relevant measure is necessary and proportionate to so doing.1 Even in an academic study 2 which explicitly limited itself to examining energy 9.02 security in the context of oil and gas, various distinctions had to be made between the different security-related characteristics of the two, eg:

1

See, further at paras 9.24 ff. SS Haghighi, Energy Security: The External Legal Relations of the European Union with Major Oil and Gas Supplying Countries (Oxford: Hart Publishing, 2007), ch 1. 2

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Introduction to Energy Security and Security of Supply – storage: gas is relatively hard to store (and of course electricity is harder still: in the absence of efficient and cost-effective batteries, pumped storage hydropower is the nearest proxy), whereas oil is not; – transportation infrastructure for gas is relatively rigid, in spite of growth in liquefied natural gas (LNG) (and again electricity transmission infrastructure is even more so), whereas oil shipments can relatively easily be redirected (by diverting ships, etc); – the geographic market for oil is global, gas is regional (as, at its widest, is electricity: indeed, it is often more localized): hence, supply disruptions in the former have global resonance, while the latter tend to be regional and even local in effect; – switching to alternative energy supplies: demand can often move from gas to coal or oil (or to electricity for heating), yet often (especially for transport) there is no substitute for oil in times of shortage. For electricity, back-up generators are often the only option (although if connected to the gas grid then heating and cooking can sometimes shift to using gas, although this will depend upon available appliances, etc). 9.03 Further, there will be long-term (meeting consumer demand over time) and short-

term (quality and regularity) issues in any analysis of security of supply. In the long term, access to energy supplies (raw materials, etc) may lead to questions about diversification of energy sources (to reduce risks of disruption in one supply source, thus linking into geopolitical and diplomatic questions) as well as consideration of the adequacy of long-term capacity (in generation, transmission, and distribution: raising questions about signals to encourage investment in relevant new capacity, etc). Some of these long-term issues may resonate in the short-term too: for example, electricity supply interruptions (black-outs, intermittency of supply, etc) may relate to one-off events (storms, technical failures, human error) but may also indicate the need to put in place longer-term strategies with regard to capacity, maintenance, etc. 9.04 Under the more general notion of ‘security’, meanwhile, the protection of energy

infrastructure from attack and physical damage has become an important issue in recent years: eg a recent Commission Communication3 and the subsequent Directive 2008/114/EC 4 have included coverage of energy installations and networks as ‘critical infrastructure’.5 Such damage can be caused by simple human error (fitting the incorrect fuse in a back-up device—London power outage, 2003),

3

Critical Infrastructure Protection in the fight against terrorism, COM(2004) 702. On the identification and designation of European Critical Infrastructure and the assessment of the need to improve their protection [2008] OJ L345/75. 5 Haghighi (n 2), 31–32. See, further, AEA, Study on Risk Governance of European Critical Infrastructures in the ICT and Energy Sector (Report to the European Commission, 4 September 2009), proposing a Risk Governance Framework. 4

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A. Definitional Difficulties: a Multifaceted and Amorphous Concept natural forces (falling trees damaging power transmission cables and causing power failure throughout Italy, 2003), or intentional interference (terrorist attacks, protesters occupying power plants, government decisions to restrict transit flows into the EU). Finally, a key issue which resonates throughout the EU law and policy in this area 9.05 is whether the notion of ‘security of supply’ intends to ensure the availability of supplies pure and simple, regardless of their price, or whether it includes a requirement that energy prices be affordable. Thus, under the general heading of security of supply, a wide range of issues will 9.06 need to be addressed: very often, the analysis under these headings will not all be for or against greater energy supply security. (1) Economic Many take the view that better-functioning markets (via the promotion of free 9.07 trade and competition) will enhance security of supply, by ‘sending the right signals to industry participants’.6 Thus, some argue that such supply security can best be left to the markets.7 This, certainly, is the starting point of most EU legislation and policy documents in the energy field; others would argue that government interference in the sector is endemic, market forces in the area are patchy and nascent, and the sheer importance of the policy area to national economic well-being and security will render it impossible to avoid such government intervention.8 Difficult questions concerning supply contracts will arise in this context, since some may cover large parts and/or shares of relevant markets and/or be of lengthy duration: in some areas, such contracts may be important to securing supplies,9 yet at the same time they may foreclose new entry and competition on such markets (or, up- and/ or downstream therefrom), raising competition law concerns.10 (2) Environmental This may be an element supporting security through promotion of indigenous pri- 9.08 mary energy sources (such as renewables), or an element threatening security, eg by undermining the economic viability of the nuclear- and/or coal-based generation

6 Commission, Green Paper: A European Strategy for Sustainable, Competitive and Secure Energy, COM(2006) 105 (8 March 2006), 8. 7 Eg C Robinson and E Marshall, ‘Competitive Markets—Not Governments—Enhance Energy Security’, in Economic Research Council, The New Economics of Energy Security (ERC, London, Research Paper No 22, July 2006). 8 Eg D Helm, ‘Energy Policy: Security of Supply, Sustainability and Competition’ (2002) 30 Energy Policy 173. 9 See, eg, The IEA Natural Gas Security Study (Paris: IEA, 1995), and Recital 11 to Directive 2004/67/EC [2004] OJ L127/92, discussed at paras 10.29 ff. 10 See paras 4.136 ff and 8.121–8.171.

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Introduction to Energy Security and Security of Supply required for base-load electricity supply.11 Similarly, environmental (or safety) decisions to shut down nuclear power might have (negative) security of supply implications in some countries, and indeed may conflict with other environmental goals (like emissions reductions, where nuclear power is replaced by fossil fuel generation).12 Measures may also be taken to encourage demand side management (efficiency, taxation, subsidies (both their provision and removal)13), aiming to shape behaviour and reduce demand: these can clearly be of environmental significance, but are also more generally relevant to security of supply issues (eg the required transport, storage, and/or back-up capacities, etc).14 (3) Social 9.09 As energy prices have risen in some countries, concerns have grown with regard

to vulnerable consumers, affordable supplies, and ‘energy poverty’ (some of this is reflected in public service obligations (PSOs), etc in the Third Package).15 (4) Foreign policy 9.10 To address many energy security concerns, a focus will be required, not just upon

commercial aspects (investment, transit, trade), but also upon economic development of energy-producing countries (tying into EU development cooperation policy). In this context, the interdependence between energy exporting and energy importing countries becomes important (the former need security of demand to ensure cash flows to support investment in new facilities and, typically, to advance social and economic development in their countries).16 Yet for many years this element was ignored or only paid lip-service in EU policy discussions and proposals,17 which tended to focus more upon the ‘internal’ perspective of the EU’s supply security. More recent Commission documentation suggests that EU awareness 11 See, eg, SY Noé and G Pring, ‘The “Fear Factor”: Why We Should Not Allow Energy Security Rhetoric to Trump Sustainable Development’, in B Barton et al (eds), Energy Security: Managing Risk in a Dynamic Legal and Regulatory Environment (OUP, 2004), ch 18. 12 For discussion in light of the recent German decision not to extend the life of a number of its nuclear plants, see: F Kunz et al, ‘Security of Supply and Electricity Network Flows After a PhaseOut of Germany’s Nuclear Plants: Any Trouble Ahead?’ (WP-EM-44a, June 2011) (available at ). 13 eg re coal in the EU: see the discussion at Ch 13.B. 14 See SPA Brown and HG Huntington, ‘Energy Security and Climate Change Protection: Complementarity or Tradeoff ?’ (2008) 36 Energy Policy 3510 and C Adelle, M Pallemaerts, and J Chiavari, ‘Climate Change and Energy Security in Europe: Policy Integration and its Limits’ (Swedish Institute for European Policy Studies, Report No 4, June 2009, available through ). 15 See paras 7.76 ff. 16 For an early recognition of this point, see Implications and Lessons of Suez (Paris: OEEC, 1958), although its impact at the time was drowned out by the focus on the perceived future significance of nuclear power: see, eg, Th ird General Report of the European Atomic Energy Community, 12 April 1960. 17 Haghighi (n 2), eg at 36.

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A. Definitional Difficulties: a Multifaceted and Amorphous Concept of such issues is now much stronger.18 There is thus a perceived need to establish a common EU foreign policy with regard to those countries, not on every point, but on issues of common concern so as to bring stability to such relations, which is crucial for energy security.19 (5) Technical Various problems of operational capacity, coordination, and inter-operability of net- 9.11 works will be raised by growing trade and cross-border interaction in the energy sector. Such issues will need to be addressed by technical experts in the field: issues might include odorification of natural gas, the bi-directional flow capability of gas pipelines, voltage and current compatibility issues between different electricity networks. (6) ‘Security’ stricto sensu As previously adverted to, questions of protest and indeed terrorism may threaten the 9.12 integrity and continued operation of energy infrastructure, prompting domestic reactions to endeavour to safeguard the availability of such infrastructure. Such policies are not, perhaps, classically considered part of ‘energy law’, yet their successful operation may be crucial to protecting the operation of key energy systems in the future. The key, and extremely difficult, challenge is how to assess the relative significance 9.13 of each of these factors in any given place and at any given time, especially given the temporal dimension: the dynamic implications of changing circumstances will always render planning and reaction difficult, particularly where events are sudden and/or unpredictable. A logical subsequent question to the proper scope and definition of ‘security of 9.14 energy supply’ concerns the method by which we should assess the suitability of measures to achieve security. One approach is to identify, as comprehensively as possible, the range of relevant risks associated with the various aspects of energy supply and then endeavour to assess the likelihood of such risks eventuating and the extent of their consequences if and when they occur.20 A narrower approach to identifying such risks would focus only on specifically energy-related factors, while a broader approach might treat any force majeure-type event or issue as relevant. 18 See, eg, Recital 10 to Directive 2004/67/EC [2004] OJ L127/92 (see paras 10.30 ff ) (viz: the EU has ‘a strong common interest with gas supplying and transit countries in ensuring continued investment in gas supply infrastructures’) and Commission, Green Paper: Towards a Secure, Sustainable and Competitive European Energy Network, COM(2008) 782 (13 November 2008), esp paras 2.1, 3.1.4, and 4. 19 See, generally, Haghighi (n 2), chs 1 and 7. 20 J Stern, Security of European Natural Gas Supplies: The Impact of Import Dependence and Liberalization (London: RIIA, 2002), as developed by Haghighi (n 2), 18–32, who uses Stern’s framework to identify risk factors for oil and gas as: (1) reserve depletion; (2) structure of supply contracts; (3) investment regime; (4) insecurity of energy sources; (5) insecurity of energy transit routes; and (6) insecurity of energy facilities. For an index examining short-term risks to external supplies into the EU, see C Le Coq and E Paltseva, ‘Measuring the Security of External Energy Supply in the European

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Introduction to Energy Security and Security of Supply For the purposes of legal analysis, for the most part the narrower approach is to be preferred so as to give the concept some tangible meaning and grip: otherwise, there is a serious danger that ‘security of supply’ would encompass both everything under the sun, and yet nothing specific.21 9.15 It is thus suggested that, in spite of the presentation of this issue under the com-

monly recognized overall heading of ‘Energy Security and Security of Supply’, it would actually be preferable both to separate out the various goals discussed, and to give them more specific labels so as accurately to reflect their proper aims and functions. At the very least, whenever a security of supply argument is offered to support a particular rule or policy, precision is required as to exactly how a given measure will promote, encourage, or safeguard supply security.

B. Definitional Attempts 9.16 In an earlier Commission document concerning security of supply, 22 it was stated

that: The European Union’s long-term strategy for energy supply security must be geared to ensuring, for the well-being of its citizens and the proper functioning of the economy, the uninterrupted physical availability of energy products on the market, at a price which is affordable for all consumers (private and industrial), while respecting environmental concerns and looking towards sustainable development ... Security of supply does not seek to maximize energy self-sufficiency or to minimize dependence, but aims to reduce the risks linked to such dependence. Among the objectives to be pursued are those balancing between and diversifying of the various sources of supply (by product and by geographical region). 9.17 Cameron, meanwhile, has proposed the following working definition for the

EU:23 . . . we may define ‘energy security’ as the ability of the energy industries, primarily in electricity and gas, to provide their respective services throughout the EU to Union’ (2009) 37 Energy Policy 4474. See also A Checchi, A Behrens, and C Egenhofer, ‘Long-term Energy Risks for Europe: A Sector-Specific Approach’ (CEPS Working Document No 309, January 2009) and the earlier C Egenhofer et al, ‘Market-based Options for Security of Energy Supply’ (FEEM Working Paper No 117, September 2004, available at ). 21 K Talus, ‘Energy Security in European Energy Law’, in N Hunt and K Talus (eds), EU Energy Directory (Rixensart: Euroconfidentiel, 2008), Part 3, 88, citing various authors. See also E LiebDóczy, A-R Börner, and G MacKerron, ‘Who Secures the Security of Supply? European Perspectives on Security, Competition and Liability’ (2003) 16(10) Electricity Journal 10. 22 Commission, Green Paper: Towards a European Strategy for the Security of Energy Supply, COM(2000) 769 (29 November 2000), 2. The document also stressed the need to control demand as a vital policy element (at 47, 56, and 82). For discussion of EU measures to date on energy efficiency, see Ch 17. 23 P Cameron, Competition in Energy Markets (2nd edn, OUP, 2007), para 18.01 (footnote omitted).

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C. A Recent Return to the Top of the EU Energy Policy Agenda a high standard and at a reasonable cost in a competitive, fully liberalised, panEuropean market.

Another group of learned authors has suggested the following definition of security 9.18 of energy supply: The conditions under which a country and its citizens (or at least most of them) and companies have access to sufficient energy resources at reasonable prices for the foreseeable future without a serious risk of major disruption of services.24

Yet, as we shall see in the remainder of our discussion of the concept, there has 9.19 been almost no attempt in EU legislation to provide a legal definition of security of supply. In particular, this has led to speculation on the place, if any, for the reasonableness or affordability of energy prices within the EU law conception of security of supply. Instead, various measures have been developed which often focus on specific elements of those identified as relevant to, or important for, security of supply, imposing various obligations on Member States, regulators, and market actors to consider, and take action to ensure, supply security in their respective roles and activities. From this piecemeal approach, we would suggest that a broad distinction should be 9.20 drawn in EU Law between measures aiming to ensure and improve ‘Quality and Continuity’ of energy supply, on the one hand, and ‘Genuine’ Security of Supply (covering long-term, geopolitical strategy), on the other. This is not to suggest that the former category is less important than the latter; rather, it is to highlight the various different purposes and goals which can often confusingly be subsumed under a single heading. Insofar as such distinctions are helpful, it is submitted that this division will generally direct the reader to the appropriate clusters of security of supply issues and, crucially, the entities (both governmental and private) responsible for them.

C. A Recent Return25 to the Top of the EU Energy Policy Agenda One must also emphasize the recent and very strong focus upon the security 9.21 of supply in EU energy law and policy, concerning both reliability and supply sources. Fears about supply interruptions, diversity of energy sources and the like, have revived debates concerning nuclear power and encouraged support for

24

B Barton et al, ‘Introduction’, in B Barton et al (eds), Energy Security: Managing Risk in a Dynamic Legal and Regulatory Environment (OUP, 2004), ch 1, at 5. 25 As will be clear from the discussion on oil stocks (paras 10.01 ff ), energy security was once one of the major elements of a then much narrower, shallower, and less well developed EEC energy policy.

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renewables (and were previously used to justify coal subsidies, perhaps now on the wane).26 Pressures in this direction have come from reactions to various electricity blackouts and gas supply interruptions (eg the Russia–Ukraine disputes)27 leading to serious shortages during winter months (eg in Bulgaria and other Central and Eastern European (CEE) countries), forcing the issue onto the EU political agenda. Nevertheless, it must be acknowledged that a growing focus on supply security had been the direction of travel in much Commission documentation since 2000 in any case: Commission publications from 2006 and 200728 had highlighted the three priorities of EU energy policy: competition, environment/ sustainability, and security (of supply). Perhaps most significantly, the twin publications in mid-November 2008—a Green Paper29 and the Second Strategic Energy Review 30 —placed security of supply at the heart of EU policy-making in this area. 9.22 The Lisbon Treaty inserted a new Title XXI on Energy into the TFEU, which

specifically makes it part of EU energy policy to ‘aim, in a spirit of solidarity between Member States, to . . . ensure security of energy supply in the Union’ (Article 194(1)(b)). Similarly, the new wording of Article 122(1) TFEU takes particular account of situations where inter-Member State solidarity may be required in the energy field: Without prejudice to any other procedures provided for in the Treaties, the Council, on a proposal from the Commission, may decide, in a spirit of solidarity between Member States, upon the measures appropriate to the economic situation, in particular if severe difficulties arise in the supply of certain products, notably in the area of energy. 9.23 As will be discussed at paras 10.12 ff and 10.29 ff, the coordination between

Member States (including NRAs, TSOs, and other actors) inter se and with the Commission, which is required to generate the information needed to make such proposals is now institutionalized on a largely ex ante basis, thanks to a series of monitoring, reporting, and cooperation measures laid down by the most recent EU energy legislation. 26 See the discussion at paras 13.04 ff on coal subsidies, and Ch 14 on nuclear power; although note that the recent German decision, in the wake of Fukushima, not to extend the life of their nuclear power plants may lead to a return to fossil fuel-based generation. 27 See Commission Staff Working Document, The January 2009 gas supply disruption to the EU: an assessment, SEC(2009) 977 (16 July 2009), which accompanied the proposal for what is now the Gas Security of Supply Regulation (discussed at paras 10.29 ff ). 28 Green Paper, A European Strategy for Sustainable, Competitive and Secure Energy, COM(2006) 105 final (8 March 2006); Communication, An Energy Policy for Europe, COM(2007) 1 (10 January 2010). 29 Commission, Green Paper: Towards a Secure, Sustainable and Competitive European Energy Network, COM(2008) 782 (13 November 2008). 30 Commission, Communication: Second Strategic Energy Review: An EU Energy Security and Solidarity Action Plan, COM(2008) 781 (13 November 2008), discussed by J Henningsen, ‘Second Strategic Energy Review and Energy Security: An Assessment’ in MM Roggenkamp and U Hammer (eds), European Energy Law Report VI (Antwerp: Intersentia, 2009), ch XIII.

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D. Security of Supply as a Justification under EU Law

D. Security of Supply as a Justification under EU Law This is potentially an enormous topic, given the close connections between security of 9.24 supply, on the one hand, and markets and supply and demand, infrastructure capacity and access, and regulatory rules,31 on the other. Many national rules which seek to promote security of supply may raise questions under the rules of the TFEU concerning free trade and competition: such rules will thus need to be justified as necessary and proportionate under EU law. Here, we will examine the case law of the ECJ in which such security of supply justifications have been relied upon by Member States.32 (1) Source of the security of supply justification There is no specific reference to security of supply as an express derogation from 9.25 the application of the free movement or competition rules in the TFEU. Instead, the goals of security of supply have been examined under more general headings such as ‘public security’ (see Articles 36, 52, 62, and 65(1)(b) TFEU) or ‘services of general economic interest’ (Article 106(2) TFEU). Further, with regard to national measures which do not discriminate directly against foreign goods, companies or capital, the ECJ has developed a series of so-called ‘mandatory’ or ‘imperative’ requirements which may justify prima facie trade restrictions.33 Such measures must, however, pursue non-economic goals. Successful reliance upon such justifications will also require that the national rules respect the principle of proportionality: they must not go further than is necessary in achieving the justifiable goal of security of supply. This re-emphasizes the need (highlighted at paras 9.16 ff ) carefully to define the goal(s) being pursued and to design the national measures precisely to aim to achieve that, and no more.34 It is clear that national measures which aim to protect network security and integ- 9.26 rity may qualify as a mandatory requirement under Article 34 TFEU,35 while in 31

See, eg, T Jamasb and M Pollitt, ‘Security of Supply and Regulation of Energy Networks’ (2008) 36 Energy Policy 4584. 32 See, generally: L Hancher and S Janssen, ‘Shared Competences and Multi-Faceted Concepts: European Legal Framework for Security of Supply’, in B Barton et al (eds), Energy Security: Managing Risk in a Dynamic Legal and Regulatory Environment (OUP, 2004), ch 5; K Talus, Vertical Natural Gas Transportation Capacity, Upstream Commodity Contracts and EU Competition Law (Alphen aan den Rijn: Kluwer Law International, 2011), 51–60 and ch 6. 33 See the seminal Case 120/78 Rewe-Zentral AG v Bundesmonopol für Branntwein (‘Cassis de Dijon’) [1979] ECR 649, and, from a voluminous literature, see P Oliver (gen ed), Oliver on Free Movement of Goods in the European Union (5th edn, Oxford: Hart Publishing, 2010), ch 8 and the references cited therein. 34 See Case C-347/88 Commission v Greece [1990] ECR I-4747 and Case C-398/98 Commission v Greece [2001] ECR I-7915: on both occasions, the Court found the Greek measures to go further than was required to achieve the security of supply goals pursued. In the first case, eg, the production capacity of the two refineries which held the exclusive import and commercialization rights exceeded Greece’s minimum needs in the event of a crisis. 35 In the telecommunications sector, see Case C-18/88 RTT v GB-Inno [1991] ECR I-5941, which must by analogy also apply to energy networks.

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Campus Oil 36 the ECJ acknowledged that security of supply could fall within the notion of ‘public security’ under what is now Article 36 TFEU, and later cases (discussed in paras 9.27–9.28) have applied this conclusion to the other relevant free movement provisions of the TFEU. (2) Free movement law 9.27 In Campus Oil , the relevant Irish measure required all petroleum importers to

purchase a significant proportion (around a third) of their requirements from the national refinery (the only refinery in Ireland, the share capital of which was held by the Irish State), at a pre-determined price enabling the refinery to cover its costs and ensure its continued viability. On the face of it, these provisions amounted to a restriction upon the free movement of goods, since they directly denied importers the option of meeting all of their requirements themselves instead of using the Irish refinery. The ECJ, however, was prepared to accept that these provisions were necessary to protect the Irish public security interest in maintaining that refinery capacity, which was indispensable for security of supply in Ireland. 9.28 However, the clear analysis provided by Advocate General Cosmas in his Opinion

on the Energy Import-Export Cases37 has emphasized the strict limits to the step which the Court had taken in Campus Oil in allowing security of supply within the concept of public security under Article 36. The public security justification could only be relied upon if there was a ‘genuine and sufficiently serious threat to a fundamental interest of society’.38 The emphasis in the ECJ’s Campus Oil judgment was upon the interruption of supplies (paragraphs 39–40) and the resulting dangers for the country’s very existence (paragraph 34) as the issues which could affect a country’s public security. This, coupled with the Court’s tolerance of the Irish rules on obtaining oil supplies to ensure a minimum supply to maintain its public security (in particular the operation of its essential public services: paragraph 47), should lead to the conclusion that the exception of Article 36 could apply only to ensure that minimum. Once those rules could be justified by objective public security considerations, the fact they also made it possible to achieve other objectives of an

36 Case 72/83 Campus Oil v Ministry for Industry and Energy [1984] ECR 2727; confirmed for minimum oil stocks in Case C-398/98 Commission v Greece (n 34), para 29. 37 Opinion in Cases C-157/94 Commission v Netherlands, 158/94 Commission v Italy, 159/94 Commission v France and 160/94 Commission v Spain [1997] ECR I-5699, I-5789, I-5815, and I-5851 (respectively), 5740–5748, esp 5746 ff. The Opinion of Advocate General Jacobs in Case C-379/98 PreussenElektra v Schleswag [2001] ECR I-2099 is fully consistent with the line of AG Cosmas on security of supply. 38 The classic and limited formulation adopted by the court in public security cases: see, eg, Case C-54/99 Église de scientology [2000] ECR I-1335, para 17. This does have teeth: eg in Case C-274/06 Commission v Spain [2009] ECR I-165, the mere acquisition of more than 10 per cent of the share capital of the national energy company is not sufficient to establish a serious threat to national energy supply security (paras 38 and 51).

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economic nature did not exclude the applicability of Article 36 thereto (paragraph 79).39 In the Energy Import-Export cases of 1997, the difficulty of finding a balance was 9.29 highlighted. On the one hand, it could not be denied that a continuous, uninterrupted supply of electricity, like oil in Campus Oil, is vital for the functioning of all modern States and their economies. On the other hand, to allow measures which have ‘the object of bringing about favourable conditions of supply from the viewpoint of cost, quality and selective management’ to fall within the Article 36 exception would give ‘almost unlimited scope for potential exceptions to the principle of free movement of goods . . . [I]n practice that would be tantamount to setting apart energy policy as a special ground which could justify derogating from Articles [34] and [36] of the Treaty’.40 Thus, this justification would not extend to the object of creating favourable supply conditions with regard to cost considerations: that would be a purely economic aim and would not fall within the public security justification. To this, we must add that the EU legislation on minimum oil stocks (and, indeed, security of supply more generally) now provides more detailed and far-reaching provisions in this area (see Ch 10) than under the legislation applicable at the time of Campus Oil. Even though the latest legislation still amounts in most cases to minimum harmonization measures, this depth and detail reduces the scope for autonomous national measures still further: showing the necessity and proportionality of future national measures in this area will thus be difficult. The recent European case law on golden shares and the free movement of capital, 9.30 under what is now Article 63 TFEU, shows a similarly stringent approach by the ECJ to the potential scope of justifications based upon security of supply. The Court has acknowledged that security of supply may be a potential justification for prima facie restrictions on free movement of capital,41 but has stressed that such derogations from fundamental principles of the Treaty are to be construed strictly and are subject to proportionality: does ‘the legislation in issue [enable] the Member State concerned to ensure a minimum level of energy supplies in the event of a genuine and serious threat, and [does] it [go] beyond what is necessary for that purpose’?42 Here, too, purely economic goals cannot be pursued by Member States under this heading: thus, the Portuguese rules which allowed the government to prevent a foreign company from acquiring an interest in a strategic national firm were unacceptable.43

39

See, further, Case C-398/98 Commission v Greece [2001] ECR I-7915, para 30. Commission v Greece (n 39), 5746–5747, para 82 of the Opinion. 41 See Cases C-483/99 Commission v France [2002] ECR I-4781 and C-367/98 Commission v Portugal [2002] ECR I-4731: see H Fleischer, ‘Annotation’ (2003) 40 CMLRev 493. 42 Case C-483/99, para 48. 43 Case C-367/98, para 52. 40

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Introduction to Energy Security and Security of Supply 9.31 To date, the ECJ has found that justification successfully to apply only in

Commission v Belgium:44 Belgian legislation allowed the government to use its golden share to block certain decisions of Distrigaz, but only if a series of strict conditions were met; it was these conditions which saved the Belgian rules. Thus: (i) strict time limits applied within which any such decision had to be taken; (ii) only a clearly defined and limited range of Distrigaz decisions could be blocked: they had to concern the company’s strategic assets (which were specifically listed in the legislation) and could only be challenged where there was a risk of compromising national energy policy objectives (which objectives were clearly defined and published in advance);45 (iii) any such decision was required by that national legislation to give a statement of the reasons for its adoption; and (iv) the decision was subject to effective review before the national court. 9.32 Any blocking decision would only be taken ex post facto and did not involve a sys-

tem of prior authorization to be granted by the national government,46 by contrast with the regime applicable in many of the other cases, which the Court has considered of itself to be more restrictive of free movement of capital.47 9.33 The ECJ has consistently been strict in its judgments in requiring the Member

States to have adopted detailed and objective criteria for the exercise of rights attached to such golden shares: this has led to the failure of a number of subsequent attempts to rely upon the security of supply justification. Typically, the lack of precision as to when the government could use its powers has been the problem, leading to excessive discretion for the authorities and uncertainty for those dealing with the entity in which the State held the golden share or similar rights of control.48 A question which remains open is the extent to which, after the advent of both the Third Package IEM Directives and the latest legislation on security of energy supply, Member States’ ability to pursue such goals via golden shares will be limited still further.49

44

Case C-503/99 Commission v Belgium [2002] ECR I-4809. This compared unfavourably with the rules in Case C-483/99 Commission v France, where wide discretionary powers were made available to the relevant Minister, providing no clear and specific indications of the objective circumstances in which prior authorization would be given or withheld (paras 50–53). 46 Case C-503/99 (n 44), paras 48–52. 47 See, eg, Case C-463/00 Commission v Spain [2003] ECR I-4581, para78. 48 Cases C-463/00 Commission v Spain [2003] ECR I-4581, C-274/06 Commission v Spain [2008] ECR I-165 and C-326/07 Commission v Italy [2009] ECR I-2291. 49 eg, in Case C-503/99, the Court rejected the Commission’s argument that Member States were limited to using the measures contemplated by the First Gas Directive 98/30/EC, holding that, at the time of the case, that Directive was not yet required to have been implemented (para 54). 45

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(3) Services of general economic interest 9.34

Article 106(2) TFEU50 provides that: Undertakings entrusted with the operation of services of general economic interest . . . shall be subject to the rules contained in this Treaty in so far as the application of those rules does not obstruct the performance in law or in fact, of the particular tasks assigned to them. The development of trade must not be affected contrary to the interests of the Union.

It is thus clear that it may serve as a derogation from other rules of the Treaty, 9.35 including but not limited to the competition rules, and may be relied upon by Member States to justify exemptions for undertakings from the rules of the TFEU, or by undertakings in their operations which might otherwise be in breach of the rules of the Treaty. However, it will apply only insofar as the application of those Treaty rules would be such as to obstruct the performance (in law or in fact) of the tasks assigned to such undertakings. Further, it has direct effect,51 which allows undertakings to rely upon it in national courts when faced with claims relying upon other directly effective provisions of EU law. For our purposes here, the significance of Article 106(2) TFEU is that security of 9.36 supply considerations have been held, in principle, to be capable of falling within its scope. Thus, in Almelo52 the exclusive supply and purchasing obligations imposed by the regional distribution company, IJsselmij, upon a local electricity distributor (the municipality of Almelo) were prima facie contrary to (what are now) Articles 101 and 102 TFEU because they prevented the local distributors from importing electricity from other Member States and thus affected cross-border trade and restricted competition on the Dutch market. These breaches might, however, be justified under Article 106(2) because the defendant, IJsselmij, had been entrusted with the task of ensuring the uninterrupted supply of electricity to all customers53

50

Note also Art 14 TEU: ‘Without prejudice to Article 4 [TEU] or to Articles 93, 106 and 107 [TFEU], and given the place occupied by services of general economic interest in the shared values of the Union as well as their role in promoting social and territorial cohesion, the Union and the Member States, each within their respective powers and within the scope of application of the Treaties, shall take care that such services operate on the basis of principles and conditions, particularly economic and financial conditions, which enable them to fulfil their missions. The European Parliament and the Council, acting by means of regulations in accordance with the ordinary legislative procedure, shall establish these principles and set these conditions without prejudice to the competence of Member States, in compliance with the Treaties, to provide, to commission and to fund such services’. (See also Art 36 of the EU Charter of Fundamental Rights.) The precise ramifications of this provision remain the subject of debate. For discussion, see M Ross: ‘Article 16 and Services of General Economic Interest: from Derogation to Obligation’ (2000) 25 ELRev 22 and ‘Promoting Solidarity: from Public Services to a European Model of Competition?’ (2007) 44 CMLRev 1057. 51 Case C-260/89 ERT v DEP [1991] ECR I-2925. 52 Case C-393/92 Gemeente Almelo v Energiebedrijf IJsselmij [1994] ECR I-1477. 53 In detail, the PSO elements were obligations to: ensure supplies in its territory; supply all customers; ensure uninterrupted supplies to safeguard equal treatment of customers; and ensure low and uniform tariffs.

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within its part of the Netherlands, which amounted to the task of providing a service of general economic interest within Article 106(2). It was for the national court to determine whether an exemption from the competition rules was necessary for IJsselmij to perform those public service functions, and on the return of the case to the Arnhem Court of Appeal, it ruled that the conditions of Article 106(2) were not satisfied, since IJsselmij had failed to provide convincing evidence that it would be unable to perform those tasks in the absence of the restrictions.54 9.37 The Energy Import-Export cases of 1997 also raised important issues with regard to

the place of security of supply within the Article 106(2) analysis. The Commission brought enforcement proceedings against a number of Member States to challenge their grant of exclusive import and/or export rights to certain undertakings in electricity and natural gas. These rights were found to be in breach of what is now Article 37 TFEU,55 but capable of justification under Article 106(2): the Commission had argued that this justification could only apply insofar as it was necessary to ensure the financial equilibrium of the undertaking granted those rights, and that the Member State (and/or the undertaking) bore the burden of establishing the necessity and proportionality of the grant of such rights to achieving the goal of supply security.56 In the context of this action, brought under what is now Article 259 TFEU, the Court rejected the Commission’s analysis. The standard to be applied was whether the exclusive rights were necessary for that undertaking to perform those tasks under ‘economically acceptable conditions’, not that the very existence of that undertaking itself be threatened.57 It was for the Commission to address the argument raised that such exclusive rights were a key part of the national system designed to provide secure and low-cost energy supply: until the Commission met its burden of proof in assessing the justifiability of the Member State’s claim and its operation in practice, it was not necessary to assess the proportionality of the national measures.58 Of course, as we have discussed at paras 4.06 ff, such exclusive rights would not survive the third party access requirements under the internal energy market legislation: at the time of the Court’s judgments in these cases, those Directives had yet to enter into force. But now, as made clear by the VEMW judgment,59 under the regime of the Third Energy Package with its specific derogation regimes, the harmonized rules seem likely to apply to many of these attempts to rely upon Article 106(2), rendering direct recourse to its more general provisions far more difficult than the rather permissive language of the 54 See ED Cross et al, ‘EU Energy Law’, in MM Roggenkamp et al (eds), Energy Law in Europe: National, EU and International Regulation (2nd edn, OUP, 2007), ch 5, at 276. 55 On which see P Oliver (n 33), ch XII. 56 See, eg, Case C-157/94 Commission v Netherlands [1997] ECR I-5699. 57 Commission v Netherlands (n 56), para 51; see also Case C-320/91 Corbeau [1993] ECR I-2533. 58 Commission v Netherlands (n 56), para 64. 59 Case C-107/03 Vereniging voor Energie, Milieu en Water v Directeur van de Dienst uitvoering en toezicht energie [2005] ECR I-4983: see paras 4.143 ff.

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judgments in the Energy Import-Export cases might have suggested.60 In particular, with regard to taking into account the ‘Community/EU interest’ in the analysis of such national measures, it is clear from Article 3(8) of the two IEM Directives that this includes compliance with full competition, which may limit Member States’ freedom of action significantly. A further issue with regard to services of general interest concerns national regimes 9.38 which seek to provide payment to undertakings in return for performing such services. Indeed, the Third Electricity and Gas IEM Directives specifically contemplate the possibility of providing incentives to undertakings to encourage them to achieve security of supply goals (see Recital 48 and Article 3(10) (Elec) and Recital 45 and Article 3(7) (Gas)). On the face of it, such support would seem likely to be classified as State aid under Article 107 TFEU and would thus require notification to, and approval by, the Commission before it could be implemented.61 However, in its Altmark judgment,62 the ECJ laid down a series of criteria under which compensation for the performance of such services would not amount to State aid: (i) the undertaking must actually have been entrusted with clearly defined PSOs; (ii) the parameters for the calculation of such compensation must have been established in advance and in a manner which is objective and transparent; (iii) the level of compensation must not go beyond what is required to cover all or part of the costs incurred by the undertaking in fulfilling those PSOs; and (iv) where a public procurement procedure is not used to select the undertaking in question, then compensation levels must be determined on the basis of the costs which would have been incurred by a typical undertaking performing those PSOs.63 In effect, this amounts to a kind of ex ante exemption from the State aid rules and 9.39 in fact seems rather similar to the analysis which might have applied ex post via the use of Article 106(2), effecting a partial importation of procurement-like criteria into the analysis of PSOs and payment for their performance.

60

See, eg, Hancher and Janssen (n 32), at 115–116. See the Commission Decision on the application of Article 106(2) TFEU to State aid in the form of public services compensation granted to certain undertakings entrusted with the operation of services of general economic interest [2005] OJ L312/67 and the ‘Community Framework for State aid in the form of public service compensation’ [2005] OJ C297/4 (the latter covering situations not within the scope of the former Decision). 62 Case C-280/00 Altmark Trans GmbH and Regierungspräsidium Magdeburg v Naherkehrgesellschaft Altmark GmbH [2003] ECR I-7747, paras 89–93. 63 It seems that, taking into account any income received by the undertaking in performing the PSOs and a reasonable profit, the amount of compensation offered might reasonably and proportionately exceed the strict costs necessary to provide the service: see, eg, Commission Decision C49/2006, Poste Italiane [2007] OJ C31/11 and Case T-354/05 TFI v Commission [2009] ECR II-471. 61

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Introduction to Energy Security and Security of Supply 9.40 These criteria have now been applied by the Commission in the energy sector. Its

CADA Decision64 concerned an Irish measure specifically aimed at improving security of supply by encouraging the construction of new electricity generation capacity to meet growing demand. A tender for new capacity was to be launched by the regulator, with any generator offering to build new generation being granted a CADA (a Capacity and Differences Agreement) of up to 10 years’ duration, which entitled them to capacity payments for providing that generation capacity. This was a financial instrument, because the electricity itself was to be sold to and bought from the market in the normal way. The key element of this scheme was the role played by the incumbent and dominant company, ESB, which was charged with managing those instruments, making capacity payments, and collecting any reimbursements due under the CADA. Performing that management function imposed certain costs upon ESB (specifically, the extent to which the capacity payments exceeded the reimbursements received), for which it was to be compensated through a levy charged to electricity consumers. The Commission accepted that this scheme would provide and protect reserve capacity to ensure uninterrupted electricity supplies, which amounted to a service of general economic interest. The Altmark criteria were satisfied and the measure thus did not amount to State aid. 9.41 In the Commission’s more recent Decisions concerning the Polish and Hungarian

long-term power purchase agreements (PPAs),65 it was faced with the argument that those contracts conferred upon the generators the obligation to perform certain services of general economic interest (SGEI), including security of supply, so that the revenue guaranteed to them to cover the costs of the PPAs amounted to compensation for the performance of such services and thus did not amount to aid under Article 107(1) TFEU. While acknowledging that security of supply could indeed be such an SGEI in principle, its application was rejected by the Commission on the facts for various reasons, including that the relevant plants were simply ordinary plants on the network and thus made no particular contribution to security of supply. Further, the Commission found that the Altmark criteria were not satisfied by the PPAs: any PSOs involved under the PPAs were not defined with any clarity or precision, which also made it impossible to establish parameters for the compensation received or to assess whether the amounts involved were excessive. 9.42 Even if the Altmark criteria are not satisfied, however, it is clear that a measure can

still be notified to the Commission and approved under Article 106(2) TFEU where 64 Commission Decision, ‘State aid N475/2003—Ireland; Public Service Obligation in respect of new electricity generation capacity for security of supply’, C(2003) 4488 (16 December 2003). 65 Commission Decision of 25 September 2007 on State aid awarded by Poland as part of power purchase agreements (etc) [2009] OJ L83/1 and Commission Decision of 4 June 2008 on the State aid awarded by Hungary through power purchase agreements [2009] OJ L225/53. The Hungarian Decision was recently upheld by the General Court in Joined Cases T-80/06 and T-182/09 Budapesti: Erömü v Commission (judgment of 13 February 2012).

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its conditions are satisfied.66 This was also argued in the Polish and Hungarian PPA Decisions, but rejected by the Commission due to the failure adequately to define the relevant PSOs and entrust them to the undertakings involved.67 Finally, it should be noted that in its recent Federutility judgment,68 the ECJ ruled 9.43 that price security could form part of the public service obligations which Member States were permitted to impose upon undertakings under the internal energy market Directives, while leaving the question of the proportionality of the relevant Italian legislation to the national court to determine (see the discussion at para 7.12). (4) Competition law There exists a lively debate concerning the appropriate place and the proper manner 9.44 in which to raise arguments concerning security of supply under EU competition law:69 it forms part of a wider discussion concerning the scope of Article 101(1) and (3) TFEU,70 as well as the role played by objective justifications under Article 102 TFEU, in particular with regard to reasons for agreements which are difficult to formulate in the economic terms traditionally applied under those provisions.71 This is not the place to resolve these arguments; what is clear is that there are Commission competition law decisions where security of supply has played an important, justificatory role. Here, therefore, we wish to highlight those areas where security of supply has been addressed and/or could be envisaged as part of the competition law analysis. In so doing, it is worth remembering that the competition law provisions under the TFEU have direct effect: thus, while they clearly can be applied by the Commission in the performance of its role under the Treaty and Regulation 1/2003/ EC,72 these provisions may also be relied upon by national competition authorities (NCAs), and before those NCAs and national courts by private parties. An early example is provided by the Commission’s Jahrhundertvertrag Decision.73 9.45 This involved the conclusion of long-term minimum purchasing contracts, 66

Case T-354/05 TFI v Commission [2009] ECR II-471. See n 65. 68 Case C-265/08 Federutility et al v Autoritá per l’energia elettrica e il gas (ECJ, judgment of 20 April 2010). 69 Leaving aside the application of Art 106(2) TFEU to prima facie breaches of competition law, discussed in the preceding section. 70 See, eg, O Odudu, The Boundaries of EC Competition Law: The Scope of Article 81 (OUP, 2006). 71 For a useful summary and analysis, see K Talus, Vertical Natural Gas Transportation Capacity, Upstream Commodity Contracts and EU Competition Law (Alphen aan den Rijn: Kluwer Law International, 2011), ch 6 and the various references cited therein. See, further, L Kjølbye, ‘Vertical agreements’, Part 3, ch 3 in C Jones (gen ed), EU Energy Law, Volume II: EU Competition Law and Energy Markets (3rd edn, Leuven: Claeys & Casteels, 2011), who discusses security of supply arguments under headings relating to ‘efficiencies’, reflecting an attempt to conceptualize security of supply arguments under a perhaps broader notion of economic efficiencies. 72 [2003] OJ L1/1. 73 [1992] OJ L50/14. 67

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obliging electricity generators to buy (uncompetitive) German coal for power generation, thus restricting competition by reducing competition among those generating companies for primary energy sources and inhibiting electricity imports from other Member States in breach of what is now Article 101(1) (paragraph 24 of the Decision). This restriction was, however, justified by virtue of its contribution to maintaining the availability of domestic coal supplies (up to a certain level (20 per cent) of overall domestic power supplies): this safeguarded procurement of primary energy sources and, thereby, secure supplies of electricity (paragraphs 31 and 33). But this did not extend, however, to purchasing commitments going beyond the actual requirements of generators, thus excluding the carrying forward of any purchasing commitments from one period to the next (paragraph 34). The Commission’s Decision to permit this arrangement was taken under the analogous provisions to the current Article 101(3) TFEU. 9.46 More recently, in the Electrabel case,74 the Commission was faced with a series

of arrangements for the supply of electricity in Belgium, which had the effect of granting to Electrabel the exclusive right to supply distribution companies with electricity for resale to final consumers for a period of between 20 and 30 years (depending upon the agreement with the particular distribution company involved). Ultimately, the Commission accepted proposals which reduced levels of exclusivity over time (25 per cent of distribution companies’ requirements would be released after nine years, ultimately leading to total removal of Electrabel’s exclusive supply rights in 2011) while allowing that exclusivity to remain for a period. To a significant extent, this was due to the great importance attached to security and regularity of electricity supply by the local areas (‘communes’) being supplied under the exclusivity arrangements (on the understanding that that security would be closely monitored by the national authorities). It has been emphasized that the Commission’s acceptance should be understood in the context of 1997, where the First Electricity IEM Directive had only just been adopted and no date had been fixed for full market opening.75 Thus, the changes wrought to these agreements in fact made progress in market opening and customer choice beyond that which obtained under the EU legislative framework then in force. 9.47 A key area for future development is likely to concern the status of long-term supply

contracts76 under competition law. As discussed elsewhere in this work (see paras 4.136 ff and paras 8.121 to 8.171), long-term contracts are recognized as potentially

74 Electrabel/Mixed intercommunal electricity distribution companies in Belgium, Commission, XXVIIth Competition Policy Report (1997) (1998), 127 ff, and Press Release IP/97/351 (25 April 1997). 75 L Kjølbye (n 71), 266. 76 As Talus has noted (n 71), at 263 ff, as a result of the detailed rules in the Third Package it seems less likely that a persuasive case can be made for long-term capacity contracts to escape the competition rules on security of supply grounds, except insofar as a specific exemption under Art 36 of the Third Gas IEM Directive has been secured for a new pipeline or other major infrastructure.

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important contributors to security of natural gas supplies: indeed, Annex II to the Gas Security of Supply Regulation77 specifically recognizes that both short- and long-term contracts as possible supply-side measures to enhance security of gas supply shall be taken into account by national competent authorities when drawing up their national plans under that Regulation (see further, paras 10.29 ff ). Yet the precise contribution of any individual supply or purchasing contract to overall supply security may be extremely difficult to assess and quantify with the degree of precision often required by the Commission in deciding whether to allow any exemption from Article 101(1) TFEU or justification under Article 102 TFEU using economic efficiencies-based reasoning. One commentator has suggested that the key to this analysis concerns the identification of concrete risks which threaten energy supplies and then justify why restrictions (such as non-compete obligations) mitigate those risks.78 He argues that this will be likeliest to succeed where the arrangement is between an upstream producer and operators on the downstream EU network, and is tied to large-scale investment by such producers in exploration and production, and/or pipeline construction to link such production to European markets. Meanwhile, the use of such clauses is said to be unlikely to succeed on security 9.48 of supply grounds with regard to downstream distribution and supply contracts under the regime of the new Third Package, principally due to the difficulties of proving any causal link between such long-term contracts and improved supply security.79 Others have challenged this analysis, arguing that it must have been clear under the previous Gas Security of Supply Directive that many such longterm contracts did not relate specifically to such upstream investments, and yet the contribution of such contracts to security of supply was acknowledged. Rather, any such security of supply benefits must have been understood to relate to more general benefits deriving from steady long-term availability of gas supplies. Thus, on this reasoning, security of supply should be treated as a ‘non-economic and non-quantifiable gain’ within the rubric of Articles 101(3) and/or 102 TFEU and effectively treated as a defence against the application of the competition rules, allowing the interest of supply security to be balanced against the benefits of free competition.80 It remains to be seen which of these approaches is followed in the future by the Commission, national competition authorities, and national and EU courts when such difficult issues of security of supply are raised in the context of the EU competition rules.

77 78 79 80

Regulation 994/2010/EU [2010] OJ L295/1 (12 November 2010). L. Kjølbye (n 71), 258. L. Kjølbye (n 71), 258–260 (see also 289–290). Talus (n 71), at 258–263 and 266–268.

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10 EU LEGISLATION ON SECURITY OF SUPPLY

A. Minimum Oil Stocks

10.01 (1) History 10.01 (2) Current position 10.04 (3) The position after the 2009 Directive enters into force 10.07

B. Security of Supply in the Th ird IEM 10.12 Electricity and Gas Directives (1) Provisions common to the Electricity and Gas IEM Directives 10.13 (2) Specific provision in the Electricity Directive: tendering for new capacity 10.22

(3) Specific provisions in the Gas Directive 10.26 (4) Security of supply in the Electricity & Gas Cross-border Network Access Regulations 10.28

C. Specific EU Security of Supply Legislation

10.29 (1) The Gas Security of Supply Legislation 10.29 (2) Electricity Security of Supply Directive 10.67

D. Trans-European Energy Networks and Investment in Energy Infrastructure 10.79

A. Minimum Oil Stocks (1) History Oil supply security as a European concern first arose in the context of the first 10.01 Suez crisis in 1956 and its implications for oil shipments, and then again in the context of the second Suez blockade during the Arab-Israeli six-day war. The first Suez blockade had had significant consequences for EEC Member States and others in Europe: some industries were badly affected (car manufacturing, glass production, building materials, and maintenance), leading to reductions in working hours and growing unemployment. Alternative oil suppliers did not seem plausible replacements and balance of payments problems had been experienced due to higher oil prices. The second Suez crisis had been less damaging, due to stockpiles which had been built up in Europe and the emergence of other suppliers (such as Iran and Venezuela) with ships too large to use the Suez Canal in any case. Directive 68/414/EEC1 was the product of this recent and often painful 1 [1968] OJ Spec Ed 586 ([1968] OJ L308/14). In Council Decision 68/416/EEC [1968] OJ Spec Ed 591 ([1968] OJ L308/19), the Commission was given a role (by Art 1) in facilitating agreements

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experience; it laid down important stockpiling obligations for Member States. They were required (Article 1) to maintain stocks equivalent to at least 65 days’ average internal daily consumption2 (using the previous year as a base) in three categories of petroleum products (Article 3).3 Member States were required to submit a statistical summary of such stocks at the end of each quarter (Article 4), drawn up in accordance with the detailed rules laid down in Articles 5 and 6. Such stocks could then be drawn upon in the event that ‘difficulties4 arise with regard to Community oil supplies’ (Article 7), although Member States were to refrain from drawing thereon (except in very limited circumstances) until consultations between the Member States had taken place. The 1968 Directive was subsequently amended by Directives 72/425/EEC5 (which increased the obligation to cover 90 days’ worth of such products) and 98/93/EC 6 (which aimed to take account of the advent of the internal market legislation, as well as making other amendments), and eventually the effects of this collection of instruments were codified by Directive 2006/67/EC.7 10.02 The first Minimum Oil Stocks Directive was followed by the Commission’s

1972 Communication on the Necessary Progress in Community Energy Policy, 8 which emphasized the external relations dimension of securing oil supplies and suggested various positive measures which could be pursued in developing good relations with oil exporting countries. But differences among the Member States on how best to pursue such objectives (at the time and subsequently), as well as other foreign policy pressures concerning the attitude of various European countries and the USA to Israel and the Middle East, meant that European-level action on such matters would remain a long way off. This remained the case even in the face of the serious price rises and supply shortages experienced9 in Europe during between Member State governments under Art 6(2) of the first Oil Stocks Directive and, if no such agreement could be reached, the Commission was empowered by Art 2 of that Decision to propose a Directive or any other appropriate measure to address the situation. 2 With an exception for that part of production covered by indigenous production within a Member State, where the obligation could be reduced by up to a maximum of 15 per cent: Art 1, second para. This figure is now 25 per cent, by virtue of Art 1 of Directive 98/93/EC [1998] OJ L358/100. 3 Viz: ‘motor spirit and aviation fuel (aviation spirit and jet-fuel of the gasoline type); gas oil, diesel oil, kerosene and jet-fuel of the kerosene type; and fuel oils’. 4 What such ‘difficulties’ might be was not defined in the Directive; Recital 2 to Directive 98/93/ EC, however, explained that this may be both supply shortages and significant price increases on the international markets. By contrast, the IEA regime discussed at para 10.03 only relates to supply shortfall. 5 [1972] OJ L291/154. 6 [1998] OJ L358/100. 7 [2006] OJ L217/8. For discussion, see paras 10.07 ff. 8 Communication of 13 October 1972, [1972] 11 Supplement to the Bulletin of the European Community. 9 OPEC exports were cut to different extents for different European countries, as a result of their (perceived) positions concerning Israel.

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the oil crisis which began in 1973 and, indeed, only a few substantive steps were taken10 in the light of the oil shocks at the end of the 1970s in the wake of the Iranian revolution and the subsequent war between Iran and Iraq (1979–1981). Thus, under Directive 73/238/EEC11 Member States were required to designate competent authorities (Article 2) and empower them to act when faced with oil supply difficulties: such powers were to include drawing upon the stocks set aside under the 1968 Directive, imposing consumption restrictions and giving priority to certain groups of users, and regulating prices to prevent abnormal price rises (Article 1). Meanwhile, under Council Decision 77/706/EEC,12 in the event of oil supply difficulties the Commission was charged, after consultation with the Member States, with setting ‘a target for reducing consumption of petroleum products in the Community as a whole by up to 10 per cent of normal consumption’ (Article 1(1)). During the same period, as a direct response to the oil crisis, in 1974 the International 10.03 Energy Agency (IEA) was set up, within the context of the OECD. A range of oilconsuming countries13 committed to maintain 90 days’ worth of oil stocks to cover shortfalls in the event of a supply crisis. These countries also agreed a mechanism for coordinated reaction in such circumstances under the 1974 Agreement on an International Energy Program, triggered by a disruption of at least 7 per cent of normal supply levels. The key additional element to that of the European regime was the inclusion of a mechanism to secure equitable distribution of such stocks among the member countries. This regime was later added to in 1984 after the experience of the 1979–1981 oil crisis, and the new scheme is known as the ‘Coordinated Emergency Response Mechanism’ (CERM): this may be used without oil-sharing between member countries and even if the trigger level for the other measures is not reached. Under the CERM, member countries must make an effort to restore market balance, although it is up to each country to decide upon which (combination) of measures it employs (drawing on stocks, reducing demand, etc). The EU regime, even after the 1998 amendments, lacked such a mechanism, although the 2009 Directive aims to remedy this (see paras 10.07 ff ). Other differences between the two regimes included the way in which the storage obligation was calculated (the IEA used total net imports, whereas the EU focused upon inland consumption), and the EU regime allowing a Member State to hold stocks in the territory of another Member State (provided that an agreement between the two governments had been concluded to that effect, holding those stocks at the disposal of the first 10 See also Council Decision 77/186/EEC [1977] OJ L61/23, as amended by Decision 79/879/ EEC [1979] OJ L270/58, which allowed Member States to impose various export restrictions on oil and petroleum products where supply difficulties arose. 11 [1973] OJ L228/1. 12 [1977] OJ L292/9, implemented by Commission Decision 79/639/EEC [1979] OJ L183/1. 13 Originally, all of the then EEC Member States except France were members of the IEA: France joined only in 1992.

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Member State). The operation of the IEA regime is significant,14 because it was one of the reasons which led to the most recent changes in the EU regime in Directive 2009/119/EC.15 (2) Current position 10.04 The current legislation in force is contained in the codifying Directive 2006/67/

EC, but with effect from 31 December 2012,16 Directive 2009/119/EC17 will replace both it and also Directive 73/238/EEC and Decision 68/416/EEC. 10.05 As a result of the 1998 amendments, the minimum stock obligation in the 2006

Directive now stands at 90 days’ worth of internal consumption (subject to a 25 per cent reduction for oil-producing Member States) (Article 1). Member States may hold such stocks in a stock-holding body or entity (Article 3(3)), and they must ensure that fair and non-discriminatory conditions apply with regard to stockholding arrangements, in particular making transparent the cost burden imposed by such arrangements (Article 3(2)). This change was to ensure compatibility with the requirements of a liberalized market. The provisions concerning bilateral agreements between Member States are now to be found in Article 7, and these were strengthened by the revisions in 1998 (particularly with regard to the reporting obligations of the Member State on whose territory the stocks are held pursuant to such an agreement, and concerning the issue of ownership of such stocks and how that may be acquired by the relevant body from the Member State on whose behalf the stocks are being held). The Directive also requires Member States to institute a system to ensure the control and supervision of stocks (including inspections) (Article 8) and to provide for effective, proportionate and dissuasive penalties for breach of the national provisions adopted thereunder (Article 9). Given that some Member States have long had a stock-holding body, while others have relied upon the industry to keep such stocks, the practical implementation of such supervisory and enforcement mechanisms may be difficult in some Member States, particularly with regard to differentiating stocks held for the purposes of the 2006 Directive from those held for the normal operations of the relevant undertaking.

14 For details, see and R Willenborg, C Tönjes, and W Perlot, Europe’s Oil Defences: An Analysis of Europe’s Oil Supply Vulnerability and its Emergency Oil Stockholding Systems (The Hague: Clingendael Institute, 2004). 15 See Commission, Proposal for a Council Directive imposing an obligation on Member States to maintain minimum stocks of crude oil and/or petroleum products (2008/0220 (CNS)) COM(2008) 775 (13 November 2008), esp at 2. 16 Although by virtue of Art 25(1), second para: ‘Member States that are not members of the IEA by 31 December 2012 and cover their inland consumption of petroleum products fully by imports shall bring into force the laws, regulations and administrative provisions necessary to comply with Art 3(1) of this Directive by 31 December 2014. Until those Member States have brought into force such measures, they shall maintain oil stocks corresponding to 81 days of average daily net imports.’ 17 [2009] OJ L265/9.

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On the Commission’s website (Market Observatory, Oil Stocks),18 the oil stocks 10.06 position in each Member State is now published regularly (both as tabulated data and as maps showing both overall stocks and stocks under each relevant category in each country). The Commission has also published a table showing the position of intergovernmental agreements (both reciprocal and asymmetrical) concluded between Member States under the auspices of Article 7 of Directive 2006/67/EC. (3) The position after the 2009 Directive enters into force One of the specific aims of the latest Directive is to achieve greater convergence and 10.07 coordination between the EU and IEA systems (Recitals 4 and 28), while greater convergence is also sought in the standards secured by the stockholding mechanisms in the various Member States. Further, the role of Central Stockholding Entities (CSEs) is clearly enhanced by the 2009 Directive, although there is still no absolute obligation upon Member States to create such a body.19 It remains possible for Member States to impose stockholding obligations upon economic operators, but the new Directive seeks to allow such operators to delegate such functions to at least some extent, to limit the risks of discriminatory national practices (Recital 10). The concept of ‘specific stocks’ is also introduced by the Directive, and it is designed to allow Member States to designate certain stocks over which they would have greater control, thus ensuring their accessibility in times of shortage; but the new Directive stops short both of obliging Member States to designate stocks in this manner and of specifying the constituent elements of such stocks.20 More generally, enhanced and more frequent reporting obligations are a feature of the new Directive, as is a stronger Commission role in reviewing Member States’ stockholding and emergency preparedness, including the use of inspections. Provision is also made for the use of the comitology procedure to introduce future amendments and adjustments to the methods used for calculating various quantities and for preparing statistical summaries, as well as to clarify and expand upon the definitions contained in Article 2. This aims to maintain coordination with international developments and to allow technical aspects of the Directive to be updated as required. Under Article 3(1) the obligation to hold ‘emergency stocks’ now covers ‘90 days of 10.08 average daily net imports or 61 days of average daily inland consumption, whichever of the two quantities is greater’, and methods for the relevant calculations of

18

See . Compare the Commission’s 2002 proposal: 2002/0220 (COD), annexed to Communication: The internal market in energy: Coordinated measures on the security of energy supply, COM(2002) 488 (11 September 2002). 20 Compare: Commission, Consultation Document on the Revision of the Emergency Oil Stocks Regime in the EU—’Towards a Modern and Effective System of Oil Stocks in Europe’ (22 April 2008) (available at: ) and COM (2008) 775, at 5. 19

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imports and consumption are included in Annexes I and II respectively. Further, the methods for calculating stock levels are given more detailed specification than previously and are laid down in Annex III. 10.09 Article 7 lays down detailed conditions to be applied to CSEs, which are to be not-

for-profit entities acting in the general interest and whose ‘main purpose . . . shall be to acquire, maintain and sell oil stocks for the purposes of this Directive or for the purpose of complying with international agreements concerning the maintenance of oil stocks’. A CSE may have minimum stocks obligations delegated to it by commercial operators in return for payment covering no more than the full costs of providing such services and on objective, non-discriminatory, and transparent conditions (Article 7(4)). While there is no obligation upon Member States to set up such a body, a Member State must do so if it wishes to impose restrictions upon commercial operators’ ability to delegate their stockholding obligations, since such operators must be guaranteed the right to delegate at least 10 per cent of such obligations to a CSE (Article 8(2)). 10.10 Statistical summaries of emergency, specific, and commercial stocks must be sub-

mitted by Member States to the Commission on a monthly basis (Articles 12, 13, and 14), according to the register of emergency stocks. This register must be maintained and continually updated by Member States pursuant to Article 6, and must be used as the basis for an annual report to the Commission on such emergency stocks. The Commission’s enhanced supervisory role is laid down in Article 18, under which it may carry out reviews of a Member State’s emergency preparedness and, if appropriate, its related stockholding (Article 18(1)). Member States are obliged to grant access to all relevant information (documents, registers, etc)21 and sites where such information may be held (Article 18(3)). The Commission is subject to an obligation of confidentiality with regard to the information gathered or exchanged when conducting such reviews, insofar as it involves matters of professional secrecy (such as the identity of owners of the stocks) (Article 18(5)). Personal data must not be gathered, and if this has been done accidentally, then it cannot be considered and must be destroyed (Article 18(6)). 10.11 Finally, the new Directive introduces its version of an emergency procedure in

Article 20, which aims both to coordinate with the IEA mechanisms where appropriate (Article 20(3) and (4)) and also to establish an EU procedure allowing the Commission to determine whether a major supply disruption has occurred and to authorize use of emergency stocks (Article 20(4) and (5)), as well as to determine a reasonable timeframe within which the Member State(s) concerned must return stocks to the minimum levels laid down in the Directive (Article 20(6)). Both these emergency and review functions of the Commission under the new Directive are to be conducted in consultation with the ‘Coordination Group for oil and petroleum 21

This information must be held by Member States for at least five years: Art 18(7).

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products’ established under Article 18. The Group’s function is to ‘contribute to analysing the situation within the Community with regard to security of supply for oil and petroleum products and facilitate the coordination and implementation of measures in that field’ (Article 18(1)). It will be chaired by the Commission and will consist of representatives of the Member States, although representative bodies from the sector will, at the Commission’s invitation, be able to take part in the group’s work (Article 18(2)).

B. Security of Supply in the Third IEM Electricity and Gas Directives Despite the clear differences in the detail of analysis of supply security in the elec- 10.12 tricity and natural gas sectors, the EU’s legislative framework recognizes a number of common situations and legal issues which may arise when considering supply security within the internal energy market. We will first treat those issues where similar provisions apply to both sectors, before highlighting additional provisions in the Gas IEM Directive and the two Regulations on cross-border exchanges of gas and electricity. (1) Provisions common to the Electricity and Gas IEM Directives (i) Security of supply arguments are used in both Directives (see Recital 25 (Elec) 10.13 and Recital 22 (Gas)) to justify the imposition of the unbundling requirements of both Directives upon attempts by undertakings from third countries to acquire transmission system operators (TSOs) in the EU. When a third country entity seeks certification as a TSO,22 Article 11 in each Directive requires a detailed assessment by the national regulatory authority (NRA) to ensure that the unbundling obligations are met and that supply security will not be put at risk in each individual case. A prior Commission opinion must be sought before certification, and the NRA must take ‘utmost account’ of that opinion (Article 11(8)) when adopting its final decision. It is significant that refusal to certify is also possible where that would put at risk the supply security of another Member State. (ii) Article 3 in each Directive concerns public service obligations (PSOs), various 10.14 provisions of which relate directly to security of supply issues. In general, Article 3(2) clarifies that PSOs relating to ‘security, including security of supply, regularity, quality and price of supplies and environmental protection’ may be imposed upon undertakings by Member States, having full regard to the requirements of Article 106(2) TFEU. To achieve these goals, Member States may introduce long-term planning (Article 3(3)) and economic incentives for the maintenance

22

For discussion of the certification procedure, see paras 3.99 ff.

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and construction of network infrastructure (Article 3(10)). A specific example is Article 3(3) in both Directives, where suppliers of last resort may be appointed by a Member State to ensure the provision of a universal service.23 10.15 (iii) Both Directives (Article 4 and Recital 44 (Elec) and Article 5 and Recital 40

(Gas)) contain a specific provision requiring Member States to ensure the monitoring of security of supply issues. This task can be delegated by a Member State to its NRA if it considers this appropriate, and the monitoring report must be published by 31 July each year and forwarded to the Commission. Monitoring must cover: – the balance of supply and demand on the national market; – the level of expected future demand and envisaged additional capacity being planned or under construction; – the quality and level of maintenance of the networks; and – measures to cover peak demand and to deal with shortfalls of one or more suppliers. 10.16 Article 5 of the Gas Security of Supply Directive24 provided further details which

were required to be included in the gas monitoring report, but this has now been superseded25 by the detailed obligations under the new Gas Security of Supply Regulation (on which see paras 10.40 ff ). Under both Directives, TSOs are obliged to monitor, and take actions, to safeguard security of supply (see Article 12(a) and (c) (Elec) and Article 13(1)(a) and (2) (Gas)). 10.17 (iv) Member States and their NRAs have obligations to cooperate at regional level

to ensure, inter alia, the security of the network (see Article 6(3) (Elec) and Article 7(3) (Gas)). The second paragraph of each of these Articles makes explicit the link between these obligations and the role of the Agency for the Cooperation of Energy Regulators (ACER) and its tasks.26 10.18 (v) ‘In the event of a sudden crisis in the energy market, or where the physical

safety or security of persons, apparatus or installations or system integrity is threatened’, safeguard measures may be adopted by Member States (Article 42 (Elec) and Article 46 (Gas)). Any measures taken must be limited to remedying the particular difficulties which have arisen and must be no more restrictive and disruptive of trade and competition than is necessary to do so. They must be notified to the

23 On suppliers of last resort, see T Vermeir, ‘Electricity Market Liberalisation and Supplier of Last Resort in Belgium’ and H Knops, ‘Securing Dutch Electricity Supply: Towards a Supplier of Last Resort?’ in MM Roggenkamp and U Hammer (eds), European Energy Law Report I (Antwerp: Intersentia, 2004). Art 3(3) in both Directives also refers to vulnerable customers and customers in remote areas. 24 Directive 2004/67/EC, [2004] OJ L127/92: see paras 10.29 ff. 25 As, one might argue, has Art 5 of the Gas IEM Directive, although this has not been repealed by the new Regulation (whereas the old Gas Security of Supply Directive has: see Art 15 of Regulation 994/2010/EU [2010] OJ L295/1). 26 See the discussions at paras 5.02 ff and 5.48 ff.

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Commission and other Member States; the Commission will evaluate the necessity and proportionality of such measures, taking into account the EU interest in the internal market and solidarity between Member States.27 Again, while the point is not made explicit in these provisions, there would seem to be a potential link to the role of ACER and, indeed, the Gas Coordination Group (under the new Gas Security of Supply Regulation: see paras 10.41 ff ), concerning the possible coordination of such crisis management measures by Member States and perhaps the adoption of guidance on appropriate and proportionate measures which might be taken. (vi) Both Directives require the Commission to publish an annual report (Article 10.19 47 (Elec) and Article 52 (Gas)), drawing on reports submitted by the NRAs: the Commission is specifically required to address various details on security of supply (see Articles 47(1)(c) and (d) and 52(1)(d) and (e) respectively) in these annual reports to the European Parliament and the Council. (vii) In the Second Gas IEM Directive, Recital 5 highlighted the need for the EU to 10.20 consider initiatives and measures to encourage reciprocal arrangements for access to third-country networks, ‘in view of the anticipated increase in dependency as regards natural gas consumption’. Now Recital 22 in the Third Gas IEM Directive encourages the Commission to submit recommendations to negotiate agreements on security of energy supply to the EU; identical wording on this issue can be found in Recital 25 of the Third Electricity IEM Directive. (viii) More generally, it is clear from the description of the tasks of TSOs and dis- 10.21 tribution system operators (DSOs) in both the electricity and natural gas sectors, that the internal energy market Directives invest a goodly degree of responsibility in the TSOs and DSOs to monitor security of supply and ensure the ability of the system to meet the demands placed upon it (see Articles 12 and 25 (Elec) and 13 and 25 (Gas)). This conception of a shared responsibility for security of supply is also developed in the new Gas Security of Supply Regulation (in its Article 3(1), discussed at paras 10.42 ff ). (2) Specific provision in the Electricity Directive: tendering for new capacity 28 Under the EU’s energy legislation, the starting presumption is that new electricity 10.22 generation capacity should be created by investments made by market participants, 27 Commission, Note of DG Energy & Transport on Directives 2003/54/EC and 2003/55/EC on the Internal Market in Electricity and Natural Gas—Measures to Secure Electricity Supply (16 January 2004), 8–9 (available at ). This remains the most recent Commission guidance on this topic. 28 For analysis and critique, see H Bjørnebye, ‘Electricity Generation Capacity Tenders in the Security of Supply Interest: It’s All Wrong, But It’s All Right’ (RSCAS Working Paper 2007/06,

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responding to market signals and authorized (under Article 7 of the Third Electricity IEM Directive) by NRAs. In a competitive market, however, it will be rare that the maintenance of sufficient reserve capacity29 to cover will be sufficiently profitable that market forces will ensure its provision, given that, by its very nature, such capacity will only be called upon in extremis.30 Furthermore, the economics of competition between different sources of electricity generation will tend, at certain times, to favour particular types of generation capacity (eg natural gas-based) over others (eg renewables). This, too, may create or exacerbate security of supply issues (as well as undermining other energy policy goals, like environmental sustainability). More generally, risks of supply disruptions or a desire to increase the overall aggregate generation capacity (eg if expected merchant investment is not eventuating) may lead Member States to seek other ways to encourage the construction of new generation units. 10.23 As a result, an important policy tool for Member States is the possibility of putting

out a tender for undertakings to provide new capacity to address these potential difficulties: this option is provided by Article 8(1) of the Third Electricity IEM Directive.31 At the same time, it is important that such tenders are limited to exceptional circumstances and do not become the norm, otherwise this would have a disincentive effect upon the market responding to economic signals and building new merchant capacity. As a result, the tendering process under the Directive will be available ‘only where . . . the generating capacity to be built or the energy efficiency/ demand-side management measures to be taken are insufficient to ensure security of supply’ (Article 8(1)). The precise interpretation of these criteria will depend upon the specific security of supply reasons given by a Member State for such a tender,32 as well as the evidence used to support the reasons chosen.33 Moreover,

2007) (available at ) (developed in ch 19 of the same author’s Investing in EU energy security—Exploring the regulatory approach to tomorrow’s electricity production (Alphen aan den Rijn: Kluwer Law International, 2010)): this discusses the forerunner provision—Art 7 of the Second Electricity IEM Directive—but the substance of the provision is identical to that of the current Art 8. 29 Discussed in Commission Decision, Ireland, Public Service Obligations in respect of new electricity generation capacity for security of supply (State aid N 475/2003) C(2003) 4488 (16 December 2003) (known as ‘Irish CADA’). 30 See, eg, P Joskow, ‘The Difficult Transition to Competitive Electricity Markets in the United States’, in JM Griffin and SL Puller (eds), Electricity Deregulation—Choices and Challenges (University of Chicago Press, 2005), 31–97, at 80–86, providing empirical analysis of US markets to show that such reserve capacity investments would not be profitable. 31 Art 8(2) also makes the tendering procedure available for new capacity ‘in the interests of environmental protection and the promotion of infant new technologies’. 32 eg great care must be taken concerning the possible impact of actual or feared price rises: sudden price spikes or consistently rising prices may indicate sufficient supply security fears to justify recourse to the Art 8 procedure, but more general price signals are essential to the assumption that the market will react to a growth and demand and build or source new generation capacity accordingly (see Bjørnebye (2007) (n 28), at 7–8). 33 Here, considerations of subsidiarity and proportionality will play a strong role, particularly in light of the wording of the new Article 194(2) TFEU, where a Member State’s right to determine ‘its choice between different energy sources and the general structure of its energy supply’ is not to be

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it is not clear whether a Member State will be required first to consider demandmanagement measures before resorting to tenders for new capacity: in its Irish CADA decision,34 the Commission emphasized the need to focus on the demand side35 first before resorting to more intrusive supply-side State intervention (via public service obligations, although the same could apply to tendering). Yet Article 8 clearly provides a choice to Member States with regard to supply- or demand-side measures.36 Also, as interconnection capacity grows and/or is allocated more effectively, the potential for integration between (national) energy markets may make it more difficult for Member States to justify recourse to the tendering procedure, when imports might be a satisfactory solution to supply problems;37 again, however, no clear priority in favour of interconnector development or investment exists in the EU’s energy legislation. With regard to supply-side measures which Member States might adopt to secure 10.24 energy supply under this procedure, the Commission made the following suggestions in early 200438 (which still seem to apply today): – Keeping capacity standby for reserve purposes. Member States can decide to oblige a central body, most appropriately the TSO, to contract capacity for reserve purposes . . . – Capacity payments. Member States may also decide to reward generators for having capacity available . . . – Capacity requirements. This option obliges suppliers to buy a certain percentage of reserve capacity. This reserve capacity can be tradable, and can also be made up of interruptible contracts . . . – Reliability contracts. In this case, the transmission system operator is obliged to buy call options from the generators. Upon calling of the options, the generators have to pay the difference between the market and the strike price. . . . – Capacity subscriptions . . . In this option each customer needs to buy an electronic fuse which potentially limits his or her electricity consumption. The affected by EU legislative measures. On proportionality and intensity of EU review of such national measures in the tendering context, see Bjørnebye (2007) (n 28), at 8–13. 34 Commission Decision, Irish CADA (n 29). 35 Including measures such as interruptible load, licence conditions requiring suppliers to achieve a certain percentage of energy savings, generation plant efficiency measures, and metering to allow customers to adapt consumption patterns to respond to higher prices: see Commission, Note—Measures to Secure Electricity Supply (n 27), 7-8. 36 Likewise, Arts 3(3)(c) and 5(2)(d) and (e) of the Electricity Security of Supply Directive provide that Member States may take account of demand-side measures but does not set up any hierarchy. The strongest statement appears in Art 7(1) of the Cogeneration Directive 2004/8/EC [2004] OJ L52/50. 37 C Jones (gen ed), EU Energy Law—Volume I: Th e Internal Energy Market—Th e Third Liberalisation Package (Leuven: Claeys & Casteels, 2010), para 13.31; and see the Irish CADA decision (n 29), para 32. 38 Commission, Note—Measures to Secure Electricity Supply (n 27), 6–7; the Note also considers long-term contracts between suppliers and generators, albeit not very favourably (at 7).

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fuses are activated by the TSO in times of scarcity. Fuses will come in different sizes, signalling the price at which the consumer is still willing to pay for his or her electricity. They put a price on reliable supplies for individual consumers. The generators sell the fuses and can do so only if these are covered by available capacity. 10.25 The procedure for Member States to follow in launching such tenders is laid down

in Article 8(3) to (5). Those provisions aim to ensure that such tenders are operated in a transparent and non-discriminatory fashion, appointing a body (typically the NRA) which is independent from commercial activities of generation, transmission,39 distribution and supply to run the tendering process. Typically, such tenders will provide a degree of subsidy to attract bidders to provide the new capacity: any such State aid must, of course, comply with the EU rules on this subject in Articles 107 and 108 TFEU. That said, it seems likely that if the criteria of Article 8 are followed assiduously then such subsidy will satisfy the Altmark criteria40 and thus avoid being classified as State aid under the EU rules (thus avoiding the need for its notification to the Commission and possible justification). (3) Specific provisions in the Gas Directive 10.26 (i) Article 6 imposes an obligation upon Member States to cooperate to promote

regional and bilateral solidarity, for the purpose of securing supply on the internal market for natural gas. Specifically, Article 6(2) envisages the development and upgrading of interconnections where necessary 41 and the evolution of conditions and modalities concerning mutual assistance (although some of these details concerning coordination have now been superseded by the more extensive obligations in the new Gas Security of Supply Regulation).42 Article 6(4) empowers the Commission to adopt guidelines for regional cooperation on a basis of solidarity, following the strongest comitology procedure (regulatory committee with scrutiny). 10.27 (ii) Exemptions for new infrastructure from various provisions43 of the Gas

IEM Directive under its Article 36 are subject to the central condition that the

39 Unless the TSO is fully ownership unbundled, as per Art 9 of the Th ird Electricity IEM Directive: see paras 3.16 ff for discussion. 40 CaseC-280/00AltmarkTransGmbHandRegierungspräsidiumMagdeburgvNaherkehrgesellschaft Altmark GmbH [2003] ECR I-7747, paras 89–93; see A Bartosch, ‘Clarification or Confusion? How to reconcile the ECJ’s rulings in Altmark and Chronopost ?’ (CLaSF Working Paper No 02, 2003) and L Hancher and F Salerno, ‘Part 5—State aid’ in C Jones (gen ed), EU Energy Law, Volume II: EU Competition Law and Energy Markets (Leuven: Claeys & Casteels, 2011), at paras 5.157–5.166. 41 Th is is reinforced by the obligations imposed upon the network of TSOs (ENTSO) by the Gas and Electricity Regulations in their Art 8(10)(a) and (c): a network development plan must be adopted, identifying in particular investment gaps in cross-border transmission capacities. 42 See paras 10.40 ff. 43 Specifically, Arts 9 (TSO unbundling), 32 (TPA), 33 (access to storage), 34 (access to upstream pipeline networks), and 41(6), (8), and (10) (concerning tariffs, access conditions, and balancing obligations imposed by the NRA).

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investment must enhance security of supply.44 It is notable that no explicit reference is made to security of supply as a criterion in the analogous Article 17 of the Electricity Regulation concerning new interconnectors. In Article 17(1)(a), it refers to the enhancement of competition in electricity supply being a precondition for the grant of such exemptions, and while this may well improve supply security, this is not necessarily inevitable. (4) Security of supply in the Electricity & Gas Cross-border Network Access Regulations Both of the Regulations on access to the cross-border gas (Regulation 715/2009/ 10.28 EC)45 and electricity (Regulation 714/2009/EC)46 networks contain provisions of significance for security of supply. In both Regulations, Article 8(6) imposes obligations upon the European Network of Transmission System Operators (ENTSO) to develop network codes for the security of supply (addressing issues of network security and reliability, as well as emergency operational rules). Further, Article 8(10) in each Regulation requires ENTSO to establish a network development plan, identifying investment gaps in cross-border transmission capacities: this aims to assist in ex ante identification of potential risks to supply security caused by the state of the network, and dovetails with the responsibilities of Member States, NRAs, and TSOs in fulfilling their various security of supply obligations under the IEM Directives and the specific EU legislation on security of supply in both sectors (discussed at paras 10.29 ff ).

C. Specific EU Security of Supply Legislation (1) The Gas Security of Supply Legislation It is important to present the first specific Gas Security of Supply Directive in some 10.29 detail here before discussing its successor Regulation of 2010. The Regulation builds directly upon many of the concepts and bodies developed by the earlier Directive, and to understand the impact of the new Regulation, an understanding of the Directive is required. (a) The 2004 Directive: The Gas Security of Supply Directive47 was adopted on 26 10.30 April 2004 and its provisions were to be implemented by Member States by 19 May

44 The provisions in the Th ird Gas IEM Directive make some important changes from the previous regime: these are discussed in the relevant chapters on unbundling (Ch 3), TPA (Ch 4) and regulatory authorities (Ch 5). 45 [2009] OJ L211/36. 46 [2009] OJ L211/15. 47 Directive 2004/67/EC, [2004] OJ L127/92.

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2006. According to its Article 1, the Directive aims to create a common framework under which Member States: (1) define security of supply policies which are general, transparent, non-discriminatory, and compatible with a competitive internal gas market; (2) clarify the roles and responsibilities of the various market players; and (3) implement specific non-discriminatory procedures to safeguard supply security. 10.31 The first point to note is that no clear definition of ‘security of supply’ was pro-

vided in the Directive. Instead, various elements of significance were referred to in its recitals and the substantive provisions, from which a picture emerges of a measure mainly focused on managing internal supply security and the internal consequences of significant shortages.48 Recital 11 to the Directive noted that: [l]ong-term contracts have played a very important role in securing gas supplies for Europe and will continue to do so. The current level of long term contracts is adequate on the Community level, and it is believed that such contracts will continue to make a significant contribution to overall gas supplies as companies continue to include such contracts in their overall supply portfolio. 10.32 Yet no clear explanation was provided of exactly how such contracts have played

or will continue to play this role. Under Article 101(3) (and by extension under possible objective justifications under Article 102) TFEU, Commission decisions in general have considered both economic gains (new infrastructure leading to greater capacity, new market entry, etc) and non-economic gains (not just linked to a specific investment, but providing vaguer and more general gains, such as the general security benefit provided by steady, long-term availability of gas via longterm contracts).49 Ultimately, the only concrete measure in the Directive concerning long-term contracts is to be found in requiring the Commission to monitor the ‘degree of new long-term gas supply import contracts from third countries’ (Article 6(a)). 10.33 Article 3(1) required that Member States were to establish ‘the roles and

responsibilities of the different gas market players’50 in achieving security of supply

48 Eg SS Haghighi, Energy Security—The External Legal Relations of the European Union with Major Oil and Gas Supplying Countries (Oxford: Hart Publishing, 2007), 154. 49 For discussion, see K Talus, ‘Long-Term Upstream Natural Gas Contracts and EC Competition Law—Efficiencies Under Article 81(3) and Objective Justifications Under Article 82’, in B Delvaux, M Hunt, and K Talus (eds), EU Energy Law and Policy Issues (2nd edn, Rixensart (Belgium): Euroconfidentiel, 2009); and for a fuller and updated version, see ‘Security of Supply Argument in the Context of EU Competition Law’ (2010) 1 OGEL. 50 The national implementation of both overall responsibility for gas supply security and the individual roles of the various actors differed widely. This emphasized the differences between national markets, tended to focus NRAs, TSOs (etc) on activity within their national market and thus created the potential for coordination difficulties between Member States on various topics of potentially common interest (SEC(2009) 978, 8–13 and Annex 1).

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policies and had to specify the minimum security of supply standards with which those players had to comply on that Member State’s market. These standards had to be published and were to be implemented in a non-discriminatory and transparent fashion; they were required not to place ‘an unreasonable and disproportionate burden on gas market players’ and to respect ‘the requirements of a competitive internal gas market’ (Article 3(2)). But no obligation was imposed upon Member States to establish minimum levels of gas stocks: although they can lay down or require the industry to set ‘indicative minimum targets’ for future storage contributions (whether within or outside the Member State) (Article 4(6)),51 it is not clear what this added to the Directive, other than to serve as a reminder to Member States of actions that they might take. Article 4(1) laid down ‘security of supply standards’, requiring Member States to 10.34 protect supplies for household customers52 to ‘an appropriate extent’ in respect of: (a) partial disruption of national gas supplies during a given period (determined by each Member State according to national circumstances); (b) extremely cold temperatures during a nationally determined peak period; (c) periods of exceptionally high gas demand during the coldest weather periods. This was augmented by the non-exhaustive list of instruments53 for enhancing 10.35 gas supply security, laid down in the Annex to the Directive. The exact choice and design of national measures and the extent of protection which is ‘appropriate’ are left to be determined by the Member State on implementation.54 Article 5 imposed the reporting requirements to be met by the competent authori- 10.36 ties in the Member States, by adding duties to those laid down in Article 5 of the Gas Internal Market Directive (on which, see paras 5.21 ff ).55 These had to include:

51 Although ‘[i]t is understood that this should not create any additional investment obligations’ (Recital 7). 52 Which Member States could choose to extend to SMEs and others unable to switch to alternative energy sources: Art 4(2): a small number of Member States did so, for a variety of reasons (SEC(2009) 978, 19–20). 53 eg diversion of gas supplies to affected areas, system and import flexibility, long-term contracts, etc. The Commission provides a detailed discussion of the range of measures in its 2009 assessment (SEC(2009) 978, 21–42), noting that the most frequently used measures are gas storage, long-term contracts, production flexibility, and imports and diversifications of gas supplies (at 41, and see Annex 3). 54 The Commission found that Member States had ‘set very heterogeneous security of supply standards’ under Art 4, ranging from no definition of standards at all to varying durations of disruption and the use of vague and general terminology (SEC(2009) 978, 14–19 and Annex 2). 55 The Commission lamented (SEC(2009) 978, 53–56) that Member States have not prepared their annual reports under the IEM and Gas Security of Supply Directives properly, leading to the Commission sending further questionnaires: only three Member States provided complete reporting in the period to mid-2009.

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(a) the competitive impact of the measures . . . on all gas market players; (b) the levels of storage capacity; (c) the extent of long-term gas supply contracts concluded by companies established and registered on their territory, and in particular their remaining duration . . . and the degree of liquidity of the gas market; (d) the regulatory frameworks to provide adequate incentives for new investment in exploration and production, storage, LNG and transport of gas . . . 56 10.37 Article 6 laid down the scope of the Commission’s overall monitoring tasks. It

was to receive reports from the Member States57 and then had to balance necessity of gas supply based upon various factors (viz: projections of existence of gas supplies in the market; the degree of contracts with third countries; level of gas interconnections; and available sources of supply in specific geographic areas). The Commission’s role58 involved consultation, reporting,59 issuing proposals, and convening the Gas Coordination Group (see Article 7, discussed at para 10.38). The Commission has argued that even if Member States did submit all of the information required under the two gas Directives, this would not be sufficient to assess the current long- and short-term, nor indeed future, security of supply situation and the effectiveness of tools for mitigating risks posed to such security, due both to the range of information available and to the fact that the annual reporting obligations on Member States are rather infrequent when compared to the potential supply fluctuations which might raise security of supply concerns.60 10.38 Article 7 established the Gas Coordination Group,61 under the chairmanship

of the Commission and ‘composed of the representatives of Member States and

56

Subject to the rules on new infrastructure laid down in the Th ird Gas IEM Directive: see the discussion at paras 4.98 ff. 57 Art 5, juncto Art 5 Gas IEM Directive. 58 N.B. the European Parliament rejected the Commission’s proposal (2002/0220 (COD), annexed to Communication: The internal market in energy: Coordinated measures on the security of energy supply, COM(2002) 488 (11 September 2002)) to establish a European Observation System for monitoring effective functioning of the internal market in gas. The proposal would have made the Commission responsible for monitoring supplies of hydrocarbons and strategic stocks, including creation of a reliable, objective, and comparable databank. This would have given the Commission the possibility to require Member States to include a minimum share of new gas supply from non-EU countries, based on LTCs, and that Member States ensured development of adequate and transparent gas supplies. The Commission would also have been empowered to address recommendations to Member States to assist other Member States affected by supply disruptions. 59 On both the experience it has gained from this monitoring role and on the operation of measures adopted pursuant to Arts 3 and 4: Art 10(1). For its first report, see Communication on the Directive 2004/67/EC of 26 April 2004 concerning measures to safeguard security of natural gas supply, COM(2008) 769 (13 November 2008), which led to the proposal to replace the Directive with the current Regulation on gas supply security: see paras 10.40 ff. 60 SEC(2009) 978, 53–56. 61 Its composition was formally established by Commission Decision 2006/791/EC [2006] OJ L319/49, but the group had already met informally on a number of occasions prior to the expiry of the Directive’s transitional period (eg in response to the Russo-Ukrainian dispute of January 2006).

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representative bodies of the industry concerned and of relevant consumers’. Its role is to facilitate the coordination of security of supply measures, in particular in the context of the mechanism laid down in Article 9, which concerns the handling of a ‘major supply disruption’62 or a situation where a Member State indicates that events of great magnitude and exceptional character have created a gas supply situation which cannot be managed by national measures alone (Articles 8(3) and 9(1)). The procedure laid down in Article 9 involved three stages: first, the Group was to examine and, where appropriate, assist the Member State in coordinating its national measures (Article 9(2)), taking into account both industry and Member State measures in response to the supply disruption (Article 9(3)). If these proved inadequate, then in stage two the Commission, after consultation with the Group, might offer guidance to Member States affected (Article 9(4)), while the third stage might be reached if these further measures also proved inadequate, at which point the Commission could submit proposals for further measures to the Council (Article 9(5)).63 Prior to the activation of the Article 9 procedure, however, under Article 8(1) Member 10.39 States had to prepare and publish, and update where necessary, national emergency measures; these measures were then to be notified to the Commission. Such measures were required, where appropriate, to allow market players sufficient opportunity to provide an initial response to any emergency situation (Article 8(2)). Member States took various different approaches to the definition and detail of such measures, and when they were to apply: some developed a gas emergency scale using various levels of gas consumption, others went further and created national emergency plans which laid down pre-set responsibilities for market actors and regulators.64 (b) The new Regulation:65 Directly after the Commission’s first report on the opera- 10.40 tion of the Directive was published,66 the EU experienced gas supply interruptions See, generally, , where the industry and consumer association members and observers to the Group are listed. On its operation, see SEC(2009) 978, 43–45. And see para 10.57, for its current legal basis under Art 12 of the new Gas Security of Supply Regulation 994/2010/EC. 62 Defined in Art 2(2) as a risk of the EU losing more than 20 per cent of its gas supply from third countries, where the EU-level situation is unlikely to be managed by using national measures. Th is supply disruption should cover a significant period: Recital 17 to the Directive indicates a minimum of eight weeks. The January 2009 crisis lasted only fourteen days and yet caused significant disruption: as a result, the Commission concluded that the threshold in Art 2(2) was set at too high a level to be appropriate as a trigger for EU-level action (SEC(2009) 978, at 6–7). 63 NB EU-level proposals are required (Art 9(6)) to ‘contain provisions aimed at ensuring fair and equitable compensation of the undertakings concerned by the measures to be taken’. Insofar as any such measures at EU or national level affect the undertakings’ property rights, it would seem that such compensation would in any case be required by virtue of Art 1 of the First Protocol to the ECHR and/or national constitutional provisions. 64 See SEC(2009) 978, 48–52, for details on various Member States’ implementation of Art 8. 65 Regulation 994/2010/EU [2010] OJ L295/1 (12 November 2010). For so long as no gas is supplied on their territories, the Regulation does not apply to Cyprus or Malta: see Art 16 for details. 66 COM(2008) 769.

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in January 2009 as a result of disputes between Russia and the Ukraine. The EU was also engaged in the process of amending and augmenting the EU legislation on the internal energy market. In that context, the Commission proposed67 the adoption of a Regulation to safeguard gas security of supply, and that Regulation was adopted on 20 October 2010. 10.41 The Regulation repealed the 2004 Directive with effect from 2 December 2010

(subject to some transitional arrangements).68 According to its Article 3(1): Security of gas supply is a shared responsibility of natural gas undertakings, Member States, notably through their competent authorities, and the Commission, within their respective areas of activities and competence. Such shared responsibility requires a high degree of co-operation between them. 10.42 It is also clear that the starting point for the Regulation is that the market should be

the first place to look to provide secure energy supplies. Market-based measures are to be the primary tool (Article 5(3)) and measures to ensure supply security: shall be clearly defined, transparent, proportionate, non-discriminatory and verifiable, shall not unduly distort competition and the effective functioning of the internal market in gas . . . 69 10.43 (i) Competent Authority: As soon as possible (and no later than 3 December 2011),

each Member State must designate a ‘Competent Authority’ to perform the functions required by the Regulation (Article 3(2), as defined in Article 2(2)).70 Specific tasks of that authority may be delegated, although the Competent Authority must supervise the performance of any such delegated tasks (Article 2(2)). The roles and responsibilities of the different actors must be specified to ensure a ‘three-level approach’ (first industry, then Member States, then the EU) (Article 3(4)). It is envisaged that the Commission will play a role in coordinating the activities of the Competent Authorities at both EU and regional levels (via the Gas Coordination Group under Article 11(4) or when operating the crisis management mechanisms under Article 11(1) and (4)). 10.44 The Competent Authority’s key roles will be to: conduct a full Risk Assessment

of the factors affecting gas supply security (Article 9); and draw up both a ‘Preventive Action Plan’ (PAP) (to remove and/or mitigate the risks identified) and an ‘Emergency Plan’ (to address supply disruption) (Article 4). Consultations

67 Proposal for a Regulation concerning measures to safeguard security of gas supply and repealing Directive 2004/67/EC, COM(2009) 363, accompanied by an extensive impact assessment (SEC(2009) 979), its Assessment report of Directive 2004/67/EC on security of gas supply, SEC(2009) 977 and its Staff Working Report, The January 2009 Gas Supply Disruption to the EU: an Assessment, SEC(2009) 977 (all published 16 July 2009). 68 Art 15. 69 Art 3(6). See also Art 10(4) and (7). 70 ‘[T]he national governmental or regulatory authority designated by each Member State to be responsible for ensuring the implementation of the measures set out in this Regulation’, a reassuringly self-referential definition.

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are required among Competent Authorities at regional level, and with the Commission, before the adoption of such national plans (Article 4(2)), and this may lead to the adoption of joint plans at regional level involving more than one Member State, in addition to those adopted at national level (Article 4(3)). Once adopted, the plans are notified (under Article 4(5)) to the Commission for it to assess (according to the procedure and criteria laid down in Article 4(6) to (8)) whether they are: – effective to mitigate the risks identified (Article 4(6)(b)(i)); – inconsistent with the risk scenarios or plans of another Competent Authority (Article 4(6)(b)(ii)); – likely to endanger the gas security of supply of another Member State or of the EU as a whole (Article 4(6)(b)(iii)). If difficulties are identified by the Commission, it may require the amendment 10.45 or review of the PAP and/or Emergency Plan, and may in certain circumstances (under Article 4(6)(b)(iii)) even present specific amendment recommendations. During an emergency, the Competent Authority will receive on a daily basis the 10.46 information which natural gas undertakings are obliged to provide under Article 13(2), including gas supply and demand forecasts for the next three days, daily gas flows (at cross-border connections, points connecting a production, storage, or LNG facility to the network) and the number of days for which supplies to protected customers can be ensured. Once an emergency has passed, the Competent Authority must within six weeks report to the Commission, assessing the emergency, measures taken to address it, and their impact (generally including economically and on the electricity sector) (Article 13(5)). (ii) National and regional plans: The Regulation also specifies the necessary content 10.47 of a Risk Assessment (Article 9), a PAP (Article 5), and an Emergency Plan (Article 10) in some detail. This is clearly a reaction to the difficulties experienced by the Commission under the Gas Security of Supply Directive, when faced with a wide variety of styles, methodologies, and contents of the different national reports. Use of common provisions for drawing up these plans will facilitate both comparison between national plans and coordination of the approaches of the Member States to supply security issues. The PAP is to be updated every two years, unless circumstances require more 10.48 frequent amendments; and those plans are to be made public71 (Article 5(4)). According to Article 5(3), such plans (national and regional) must be based primarily on market measures and: shall take into account the economic impact, effectiveness and efficiency of the measures, the effects on the functioning of the internal energy market and the 71 Along with all pre-existing Member State PSOs relating to security of gas supply; subsequently adopted PSOs must be published when adopted (Art 13(1)).

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EU Legislation on Security of Supply impact on the environment and on consumers, and shall not put an undue burden on natural gas undertakings, nor negatively impact on the functioning of the internal market in gas. 10.49 Needless to say, taking all of this into account and coming up with a coherent

plan that will also meet supply security obligations will prove a tall order: these requirements, however, might cause Member States to think carefully about the identity, competence, and expertise required of the national Competent Authority designated under the Regulation. 10.50 (iii) Minimum Security of Supply Standards: Infrastructure standard: Article 6 lays

down a so-called ‘Infrastructure standard’ to be met by national systems. By 3 December 2014 at the latest, a Member State’s infrastructure should be capable of supplying the total demand for gas during a day of exceptionally high demand72 even if the single largest gas infrastructure were disrupted (known as the ‘N-1’ formula, where ‘N’ is the total number of infrastructure assets, minus the ‘one’, which is the single largest infrastructure asset).73 This obligation can be met by using a variety of supply- and demand-side measures (indicative and non-exhaustive lists of which are provided in Annexes II (market-based) and III (non-market-based)), including alternative pipeline or LNG capacity, extra production capacity, fuel switching, and interruptible contracts. 10.51 The drafting of Article 6 is slightly clumsy: under Article 6(1), a Member State can

decide not to give the task of meeting the infrastructure standard to the Competent Authority, yet much of the rest of the provision is predicated upon the Competent Authority having that responsibility to at least some degree (see Article 6(2), (3), (4), and (9)). It may be that, in practice, given the responsibilities of the Competent Authority under other provisions of the Regulation, Member States will find it easier to grant responsibility under Article 6(1) to the Competent Authority as well, since it will have much of the relevant information at its disposal in any case, as well as an overview of the market and the various actors involved. Express exemptions from the Article 6(1) obligation are provided for Luxembourg, Slovenia, and Sweden (Article 6(10)). 10.52 Specific obligations are imposed on TSOs by Article 6(5) to ensure that permanent

bi-directional capacity on cross-border interconnections is available as early as possible and in any case by 3 December 2013 (subject to limited exceptions for crossborder connections to production or LNG facilities and to distribution networks (Article 6(5)(a) and (b) respectively), and on a case-by-case basis: a procedure for enabling such capacity, or for seeking an exemption from a requirement to provide it, is laid down in Article 7).

72 73

Occurring with a statistical probability of once in every 20 years: Art 6(1). Annex I to the Regulation provides the methodology for the calculation of the N-1 formula.

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A direct link is made to the NRA’s role in tariffs/methodologies under the Third 10.53 Gas IEM Directive (see its Article 41(8)): the market must be tested to assess whether the market actually requires the investment in infrastructure to meet the Article 6(1) obligations. If so, then the NRA must take into account the efficiently incurred costs of achieving this standard and of enabling permanent bi-directional capacity (Article 6(8)):74 this is to ensure appropriate incentives when fixing tariffs or methodologies under Article 41(8) of the Third Gas IEM Directive (on which see paras 6.24 ff ). (iv) Supply standard: The Regulation also lays down a ‘Supply standard’ in Article 10.54 8, under which the Competent Authority shall require those natural gas undertakings which it identifies ‘to ensure gas supply to the protected customers of the Member States’ during a seven-day extreme weather period,75 or for at least thirty days during an extreme demand event,76 or where the single largest gas infrastructure is disrupted.77 ‘Protected customers’ covers all household customers, and Member States may under certain conditions also choose to include within this category small and medium-sized enterprises, essential social services, and district heating installations.78 Member States may seek to impose lengthier supply standards beyond the thirty-day period, but only where (inter alia) this is based on the risk assessment and where this does not lead to competition distortions, or hamper the functioning of the internal market in gas, or have a negative impact upon any other Member State’s ability to supply its own protected customers (Article 8(2)). Natural gas undertakings subjected to such obligations are specifically permitted 10.55 to meet those obligations at a regional or even EU level where this is appropriate, and no Competent Authority may prevent such undertakings from relying upon infrastructure based in another Member State to do so (Article 6(3)). This seems to be designed to encourage more effective use of existing interconnections, and indeed to incentivize market-led expansion in such capacity to meet security of supply goals. These supply standards must be non-discriminatory and may not impose an undue 10.56 burden upon those undertakings (Article 8(4)); supplies to protected customers must be achieved without prejudice to the functioning of the internal market in gas and at a price which respects the market value of the supplies (Article 8(6)). This last point suggests that the concept of ‘security of supply’ which is being safeguarded under the Regulation—as with the Electricity Security of Supply Directive (see paras 10.67 ff ) and in spite of the absence of any definition thereof

74 Provision is also made in Art 6(8) for joint decisions to be taken between NRAs on cost allocation where the costs or benefits are felt in more than one Member State. 75 Art 8(1)(a). 76 Art 8(1)(b). 77 Art 8(1)(c). 78 Art 2(1).

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in the Regulation—is not one which incorporates a notion of the reasonableness or affordability of such supplies alongside their availability. 10.57 (v) EU-level coordination and responses: The Gas Coordination Group is re-founded

by Article 12 (having previously been created under Article 7 of the Gas Security of Supply Directive) to facilitate the coordination of gas security of supply measures, both generally and particularly in times of emergency.79 It is composed of representatives from Member States (in particular from the Competent Authority), ENTSO, ACER, and industry and customer representative bodies, and is chaired by the Commission. 10.58 The Commission has the power under Article 11 to declare a ‘Union emergency’

or a ‘regional emergency’: it may do so at the request of one Competent Authority which has declared an emergency, and shall do so where two such Competent Authorities so request (following verification under Article 10(8)). At this stage, the Commission has a coordinating role and some decision-making powers: in particular, the Commission is to coordinate the action of Competent Authorities, facilitating information exchange, ensuring consistency of internal EU actions and coordinating actions vis-à-vis third countries (Article 11(3)). Under Article 11(6), where Member State measures or actions by natural gas undertakings run contrary to the requirements of Article 11(5) (unduly restricting gas flows, endangering the gas supply situation in another Member State, or restricting access to cross-border infrastructure) the Commission may request that Member State or Competent Authority to take action to remedy the situation within three days. No details are provided of sanctions or penalties which might be applied. 10.59 During such a regional or EU-wide emergency, under Article 13(3) the Commission

can require the Competent Authority to provide it with a range of information, including the daily updates under Article 13(2) and measures planned and/or implemented by that Competent Authority to address the situation. In such circumstances, both the Commission and the Competent Authorities are required to preserve the confidentiality of any commercially sensitive information acquired (Article 13(4)). 10.60 For the Commission to acquire a general overview of the security of supply situa-

tion at EU level, under Article 13(6) there must be supplied: – to the Commission by the Member States (by 3 December 2011) the details of all inter-governmental agreements concluded with third countries which affect gas infrastructures and supplies; and – to Competent Authorities by natural gas undertakings the details80 of contracts (both pre-existing (by 3 December 2011) and as adopted subsequently) of more

79

A full list of issues is provided in Art 12(2). Specifically: contract duration; total contracted volumes (annually and per month); contracted maximal daily volumes in the event of an emergency; and contracted delivery points (Art 13(6)(b)(i)–(iv)). 80

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than one year in duration which are concluded with third country suppliers. These data are then to be supplied in aggregate form to the Commission by the Competent Authority. Finally, under Article 14, the Commission is charged with the continuous moni- 10.61 toring of, and reporting on, gas supply security measures, through annual assessment of the national reports submitted and other measures taken under the Third Gas IEM Directive and on the basis of the information provided to it under this Regulation. This will lead, no later than 3 December 2014, to Commission conclusions on the possible means to enhance supply security at the EU level, including reports to the Council and Parliament on the implementation of this Regulation and on the consistency and effectiveness of Member State PAPs and Emergency Plans. (vi) Preliminary assessment:81 The Regulation marks a profound shift to the EU 10.62 level in the field of gas supply security. Binding standards have been set in EU law for infrastructure and supply security, a stronger role has been developed for the Commission in general, and in emergency situations in particular, and the detail of the obligations and requirements imposed by EU law upon national authorities and undertakings has increased markedly. Indeed, the Regulation focuses much more strongly on natural gas undertakings and their role in securing supplies than did the Directive: the insistence upon market-based measures and the need not to distort competition and the functioning of the internal gas market is referred to repeatedly throughout the Regulation, yet the costs which many such measures may impose upon those undertakings, and their effects upon the market as a result, could yet be significant. The nature and scope of the Regulation are clearly a reflection of the difficulties experienced during recent gas supply interruptions, allied with the Commission’s frustration at the diversity of national approaches (both in substance and diligence) to the 2004 Directive.82 This led to a desire to use a Regulation to avoid the vagaries of national implementation, in terms of dilatoriness, substantive uniformity, comparability, and coordination.83 The national Risk Assessments and other information exchange provisions, and 10.63 the facilitation of coordination and cooperation between Member States all have the potential to be very beneficial in improving our knowledge about the actual

81 For critique during the negotiation and development of the Regulation, which remains relevant to the Regulation as adopted, see P Noël and S Findlater, ‘On the Draft Regulation on Gas Supply Security’ (Cambridge: EPRG, 3 July 2009) (available at: ) and P Noël, ‘Ensuring Success for the EU Regulation on Gas Supply Security’ (European Council on Foreign Relations, 9 February 2010) (available at: ). Many of the comments in this section are based on these papers. 82 See, generally, SEC(2009) 363. 83 See, eg, SEC(2009) 980, esp at 7–8.

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supply situation in the Member States, and in particular concerning their ability to handle gas supply disruptions. Further, regional cooperation across Member States is clearly supported and encouraged by the Regulation, which is a positive development in preparing the EU and its Member States for dealing with future possible disruptions. 10.64 At the same time, it is strongly arguable that the imposition of a single set of stand-

ards upon all Member States is not an appropriate approach to gas supply security in the EU. Different Member States find themselves in radically different situations with regard to gas supplies and infrastructure in general, and concerning their ability to deal with supply disruptions in particular. Thus, the cost to each Member State of achieving these uniform levels of supply security varies dramatically, and may in any case (given other factors) be excessive for a given State’s genuine needs: indeed, the results of the Risk Assessments and the design of the PAPs in each Member State should demonstrate just that. Thus, the ‘one-size-fits-all’ approach effectively requires Member States to ensure a supply security level without specific reference to the probability of the supply risks eventuating and the likely duration of any disruption in a given Member State. These considerations raise serious questions about the compliance of the Regulation with the principles of subsidiarity and proportionality under Article 5 TEU. 10.65 Furthermore, the original standards proposed by the Commission84 were watered

down significantly during the negotiations: as a result, almost all of the Member States already satisfy the levels set by the Regulation, and those which do not have secured exemptions (see Article 6(10) concerning Luxembourg, Slovenia, and Sweden). In substance, therefore, one might question whether in many Member States these standards make a significant contribution to improving the security of gas supply in the EU. 10.66 Finally, there are provisions under the Regulation where there is a lack of clarity

with regard to the location of the final decision-making power on certain issues. Thus, under Article 4 the national PAP notification process requires the national Competent Authority at various stages to take ‘full’ or ‘the utmost account’ of the Commission’s position, recommendations, or opinion, yet that Competent Authority would seem to have the final power to decide on that PAP. At the same time, it may be difficult to justify much deviation from the Commission’s view on the matter, suggesting the possibility of significant deference to (perhaps to the point of simple agreement with and adoption of) that view. Similar difficulties apply to the Article 7 procedure concerning the enabling of bi-directional capacity, or the grant of an exemption from an obligation to enable bi-directional capacity. Under Article 7(5), the Commission may ‘require that the authority concerned 84 See, eg, the originally proposed Art 7 and its 60-day period (now only 30 in the Regulation): COM(2009) 363, at 13.

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amend its decision’, which the competent authority must do within four weeks. However, there is no detail on whether the Commission’s requirement of such amendment also dictates what the substance of that Competent Authority’s subsequent decision must be. The failure to provide a more clearly structured decisionmaking procedure for such matters in the Regulation is regrettable. (2) Electricity Security of Supply Directive 85 The adoption of the Electricity Security of Supply Directive in early 2006 was 10.67 aimed at improving security of electricity supply while accommodating such concerns within the framework of the internal market: measures to enhance supply security could distort competition if national supply security policies lacked transparency and were discriminatory in their aims or effects (Recital 3). Thus, the roles and responsibilities of Member States, NRAs (as designated under the electricity internal market legislation), 86 and market players87 needed to be clarified, with a particular focus on improving inter-TSO coordination where ‘operational network security’ was concerned (Recital 7) and creating a stable climate for infrastructure investment (Recital 12): these obligations on Member States are contained in Article 3(1). Given the detailed regulation of such roles in the Third Electricity IEM Directive, 88 it is questionable how much leeway remains to Member States in defining such roles; meanwhile, the nature of an obligation ‘to take measures to facilitate a stable investment climate’ is vague and amorphous in nature, and reads more like a policy aspiration than a concrete legal obligation.89 Unlike the old Gas Security of Supply Directive and now the new Gas Regulation, 10.68 its Electricity counterpart Directive does include a definition of security of supply (Article 2(b)): ‘the ability of an electricity system to supply final customers with electricity’. This seems a narrow definition: it takes no explicit stance on environmental issues or the affordability of energy supplies.90

85 Directive 2005/89/EC [2006] OJ L33/22. For critical discussion, see H Bjørnebye, ‘The Security of Electricity Supply Directive—The Right Aims but the Wrong Means?’, in B Delvaux, M Hunt, and K Talus (eds), EU Energy Law and Policy Issues—ELRF Collection (1st edn, Rixensart, 2008), 173–188. 86 See the discussion at paras 5.02 ff. 87 Which will obviously include TSOs, DSOs, generators, suppliers, and final customers. 88 On which see paras 5.02 ff. 89 Bjørnebye (2010) (n 28), at 185 suggests that this provision may have implications for Member State measures which undermine such a stable climate, such as price caps in wholesale markets, although such national measures have usually been challenged under other EU provisions (State aids, competition law, and the Electricity IEM Directive provisions on public service obligations): see Communication: Prospects for the Internal Electricity and Gas Market, COM(2006) 841 (10 January 2007), 8–9. 90 Environmental policy considerations should be integrated into other EU policies (Art 11 TFEU), but are typically treated in EU energy legislation as a separate concept from security of supply (see, eg, Art 8(1) and (2) of the Electricity IEM Directive). Reasonable or affordable prices are included in many definitions of supply security (see paras 9.08 and 9.16 ff ), but here the focus is on

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EU Legislation on Security of Supply 10.69 According to its Article 1, the Directive aims to ensure: an adequate (a) level of

generation capacity; (b) balance between supply and demand; and (c) an appropriate level of inter-Member State interconnection for development of the internal market.91 Member State measures aimed at meeting these objectives are required to take into account the criteria laid down in Article 3(2): (a) the importance of ensuring continuity of electricity supplies; (b) the importance of a transparent and stable regulatory framework; (c) the internal market and the possibilities for cross-border cooperation in relation to security of electricity supply; (d) the need for regular maintenance and, where necessary, renewal of the transmission and distribution networks to maintain the performance of the network; (e) the importance of ensuring proper implementation of the Directives on Renewables and Cogeneration, insofar as their provisions are related to security of electricity supply; (f) the need to ensure sufficient transmission and generation reserve capacity for stable operation; and (g) the importance of encouraging the establishment of liquid wholesale markets. 10.70 In so doing, Member States may also take account of the factors listed in

Article 3(3): (a) the degree of diversity in electricity generation at national or relevant regional level; (b) the importance of reducing the long-term effects of the growth of electricity demand; (c) the importance of encouraging energy efficiency and the adoption of new technologies, in particular demand management technologies, renewable energy technologies, and distributed generation; and (d) the importance of removing administrative barriers to investments in infrastructure and generation capacity. 10.71 It is important to stress that such national measures must be non-discrimina-

tory, cannot place an unreasonable burden upon market actors (including new entrants and those with small market shares) and must consider before implementation what the impact of such measures will be upon the cost of electricity to final customers (Article 3(4)). the balance between supply and demand and avoiding rationing (Art 1(1)): this would seem to rule out reasonable prices as a relevant element (see Bjørnebye (2010) (n 28), 176–177). 91 In meeting this last objective, Art 3(5) requires Member States to give ‘special consideration’ to: ‘(a) each Member State’s geographical situation; (b) maintaining a reasonable balance between the costs of building new interconnectors and the benefit to final customers; and (c) ensuring that existing interconnectors are used as efficiently as possible.’

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The issue of network security is then addressed by Article 4, under which Member 10.72 States must ensure that TSOs set the minimum operational rules and obligations concerning network security, consulting with the relevant actors in other systems with which that Member State has interconnections (Article 4(1)(a)). Member States may require submission of such rules to the NRA for approval (Article 4(1) (b)) and must ensure that TSOs and, where appropriate, DSOs respect those rules once they are in force (Article 4(1)(c)). TSOs must also maintain an ‘appropriate level’ of operational network security, to which end they are required to maintain technical transmission reserve capacity for such security, and must cooperate with TSOs with which they are interconnected (Article 4(1)(d)). Quality of supply and network security performance objectives must also be met by TSOs and, where appropriate, DSOs: such objectives must be approved and monitored by the Member State or its NRA, and must be objective, transparent, and non-discriminatory (Article 4(2)). To facilitate the achievement of these tasks, timely and effective information exchange is crucial, and Member States must ensure that TSOs and, where appropriate, DSOs do this (Article 4(1)(e)). Where safeguard and/or congestion management measures are employed (under the Electricity Internal Market Directive or the Electricity Regulation),92 Member States must ensure that there is no discrimination between domestic and cross-border contracts (Article 4(3)). And in the event that supplies must be curtailed in an emergency situation, Member States must ensure that there are predefined criteria for TSO management of imbalances, and such curtailment must be conducted in close consultation with other relevant TSOs and must respect any relevant bilateral agreements between them (including information exchange) (Article 4(4)). Member States are also obliged by the Directive to take measures to maintain 10.73 the balance between supply and demand (Article 5(1)): any such measures are to be published and must be disseminated as widely as possible by the Member State (Article 5(3)). Such measures shall include: (a) encouragement to establish a wholesale market framework that provides suitable price signals for generation and consumption; and (b) a requirement that TSOs must ensure that an appropriate level of generation reserve capacity is available for balancing purposes and/or to adopt equivalent market-based measures (Article 5(1)).93 Article 5(2), meanwhile, provides an indicative (but non-exhaustive) list of other measures which Member States may take to achieve this goal: (a) provisions facilitating new generation capacity and the entry of new generation companies to the market; 92

On which see paras 4.147 ff, 4.162 ff, 5.72 to 5.73 and 8.23. Which raises questions concerning the extent of the TSO’s possible role with regard to reserve capacity: eg can a TSO itself acquire and operate reserve generation capacity? This would appear to be excluded by the unbundling requirements under the Electricity IEM Directive (paras 3.09 ff ), yet might be a way for TSOs to secure long-term reserve capacity within the terms of the Electricity Security Directive (see Bjørnebye (2010) (n 28), at 181). 93

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(b) removal of barriers that prevent the use of interruptible contracts; (c) removal of barriers that prevent the conclusion of contracts of varying lengths for both producers and customers; (d) encouragement of the adoption of real-time demand management technologies such as advanced metering systems; (e) encouragement of energy conservation measures; (f) tendering procedures or any procedure equivalent in terms of transparency and non-discrimination in accordance with Article 8(1) of Directive 2009/72/ EC. 10.74 Any such measures remain subject to the State aid rules under Articles 107 and 108

TFEU: thus, again, cross-references must be made to other elements of EU law for a full appreciation of the permissible scope of such measures. 10.75 Article 6(1) requires that Member States set up a regulatory framework which

includes incentives for network development and also facilitates maintenance. This, however, is more easily said than done, and many believe that one of the great difficulties with the current liberalization framework has been its inability to send appropriate signals to market actors concerning investment in transmission networks.94 10.76 The reporting requirements imposed upon Member States under Article 7 are

extensive and are dovetailed with those required by Article 4 of the Third Electricity Internal Market Directive concerning security of supply. The report to be submitted under the latter provision must be prepared in close consultation with the relevant TSO(s) (Article 7(2)) and must now include the details required by the former, which cover: (a) operational network security; (b) the projected balance of supply and demand for the next five-year period; (c) the prospects for security of electricity supply for the period between five and fifteen years from the date of the report; and (d) the investment intentions, for the next five or more calendar years, of transmission system operators and those of any other party of which they are aware, as regards the provision of cross-border interconnection capacity.95

94

See, eg, IEA, Lessons from Liberalised Electricity Markets (Paris: OECD/IEA, 2005), at 160. According to Art 7(3), these interconnection details shall take account of: (a) the principles of congestion management set out in the Electricity Regulation; (b) existing and planned transmission lines; (c) expected patterns of generation, supply, cross-border exchanges and consumption, allowing for demand management measures; and (d) regional, national, and European sustainable development objectives, including priority TEN-E projects. TSOs must provide information on their investment intentions or of any other party of which they are aware concerning interconnections and may also be required to provide information concerning internal lines which may materially affect cross-border interconnections (Art 7(3)). 95

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D. Trans-European Energy Networks and Investment in Energy Infrastructure

TSOs and NRAs must be ensured access to the relevant information to enable 10.77 them to conduct such reporting, subject to preventing the disclosure of any confidential information (Article 7(4)). Using the information concerning interconnections, under Article 7(5) the Commission then submits a report to the Member States, NRAs, and ERGEG on these planned investments and their contribution to the objectives laid down in Article 1(1) of the Electricity Security Directive. More generally, under Article 8, the Commission must submit a progress report on the application of the Directive to the Council and the European Parliament.96 The Commission’s market observatory on electricity uses (inter alia) the informa- 10.78 tion submitted to it in the regular reports from Member States and their NRAs to publish a quarterly report on European electricity markets, analysing the drivers behind developments in prices and volumes and paying particular attention to interactions between countries.97 These regular reports have the potential to contribute towards our understanding of a number of issues relevant to the EU’s energy acquis, including security of supply.

D. Trans-European Energy Networks and Investment in Energy Infrastructure Availability of infrastructure capacity is clearly an important issue for the develop- 10.79 ment of trade, competition, and markets in the EU,98 but it is also crucial for securing supplies, both within the EU and into the EU from third States.99 For fuller discussion of this topic, see Chapter 6. It should be noted that, while the EU’s Trans-European Energy Networks (TEN- 10.80 E) measures make regular references to the importance of security of supply as an element in eligibility for aid thereunder, nowhere do they provide any definition of what they take ‘security of supply’ to involve. Unless one reasons by analogy from the Electricity Security of Supply Directive and/or the ECJ’s case law concerning security of supply,100 this would seem to leave a substantial discretion to the

96 This should have been submitted by 24 February 2010 but does not, at the time of writing, seem to have appeared. Brief references to security of electricity supply can be found in the Commission’s Communications which provide a ‘Report on progress in creating the internal gas and electricity market’: COM(2009) 115 (11 March 2009), at 12; and COM(2010) 84 (11 March 2010), at 12. 97 See . 98 See, for an early recognition, Commission, White paper: Towards an EU Energy Policy, COM(1995) 682 (13 December 1995). 99 This combination of goals is recognized and discussed in the Commission’s Green Paper: Towards a Secure, Sustainable and Competitive European Energy Network, COM(2008) 782 (13 November 2008). 100 See paras 9.24 ff.

281

EU Legislation on Security of Supply Commission in deciding what this involves under the TEN-E programme, and whether any given project makes a sufficient contribution thereto to be eligible.101 10.81 We should also note the relevance of Regulation 617/2010102 to security of sup-

ply issues. It requires Member States to notify the Commission of energy infrastructure investment projects and aims to provide a consistent overall view to the Commission of such projects by harmonizing the reporting requirements for production, transmission, and storage projects. Article 3 imposes the reporting obligation on the Member States from 1 January 2011 and then every two years, while Article 5 specifies the required contents of such reports, by cross-reference to the types of projects detailed in the Annex. The Commission is then, under Article 10, to publish a report every two years which is to provide a cross-sector analysis of the structural evolution of the EU’s energy system, aiming at: (a) identifying potential future gaps between energy demand and supply that are of significance from an energy policy perspective of the Union; (b) identifying investment obstacles and promoting best practices to address them; and (c) increasing transparency for market participants and potential market entrants. 10.82 The Commission is to report on the operation of this Regulation by 23 July 2015,

examining inter alia the possible extension of its regime to cover projects for the extraction of gas, oil, and coal (Article 11).

101 K Talus, ‘Energy Security in European Energy Law’, in N Hunt and K Talus (eds), Th e EU Energy Directory (Rixensart (Belgium): Euroconfidentiel, 2008), 105. 102 Regulation 617/2010/EU, Euratom [2010] OJ L180/7.

282

11 CROSSEUROPEAN INITIATIVES

A. The European Energy Charter and the 11.01 Energy Charter Treaty (1) (2) (3) (4) (5) (6)

Investment Trade Transit Dispute settlement mechanisms Energy efficiency Conclusion

B. The INOGATE Process

11.05 11.34 11.37 11.42 11.52 11.55

(1) Background (2) ‘Baku Initiative’ and ‘Astana Energy Road Map’ (3) Institutional structure of INOGATE (4) Areas of cooperation (5) Conclusion

11.56 11.56 11.57 11.63 11.65 11.70

A. The European Energy Charter and the Energy Charter Treaty The European Energy Charter was adopted on 17 December 19911 with the aim 11.01 of establishing cooperation in the energy sector between the EU and the eastern European and former Soviet Union countries. It originated in the years after the collapse of the Soviet Union and was viewed as a vehicle for East-West energy cooperation, supporting the transition of the central and eastern European countries to becoming market economies, encouraging investment flows eastwards to develop eastern economies, and improving energy supply security for the West. The Charter concept was proposed and developed by the European Commission and amounted to a series of key principles to be pursued by later formal instruments (a Basic Agreement, which became the Energy Charter Treaty, also envisaging Protocols attached to it to address various specific topics).2 The Energy Charter Treaty (ECT) was adopted on 17 December 1994.3 The ECT was signed by all 27

1

Text available at . For discussion of the origins and development of the Charter and the ECT, see TW Wälde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade (The Hague: Kluwer Law International, 1996). 3 (1995) 33 ILM 360. 2

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EU Member States and the EU,4 and the parties also include most countries of Central Asia and the Caucasus, but not Russia or Belarus.5 It entered into force in April 1998. 11.02 The ECT is the only major multilateral treaty in the energy sector. With regard

to investment protection, it is the multilateral treaty with the largest geographical scope.6 The ECT is an international legal instrument providing: – protection and facilitation for the international energy cooperation for investment, trading, and transit; – assistance in guiding internal reforms of the energy sector in its Member States, especially the post-Soviet States in their transition to the market economy; – improvement of the security of supply; and – promotion of the energy efficiency. 11.03 The ECT aims to build a legal framework for global energy security, based on the

principals of open, transparent, and non-discriminatory energy markets and transit systems.7 Its energy security focus explains its inclusion in this section, although (as will become clear in the following discussion) its various goals stretch beyond that specific context. 11.04 The ECT’s provisions focus on five main areas. Those areas are:

(1) protection of foreign investments; (2) non-discriminatory conditions for trade in energy materials, products, and energy-related equipment; (3) reliable cross-border energy transit flows; (4) dispute settlement mechanisms between participating States and between investors and host States; and (5) promotion of energy efficiency. All of these aspects are examined in outline.8 4

Council and Commission Decision of 23 September 1997 on the conclusion, by the European Communities, of the Energy Charter Treaty and Energy Charter Protocol on energy efficiency and related environmental aspects (98/181/EC, ECSC, Erratum) [1998] OJ L69 (9 March 1998). 5 For the full list of ratifications, see . 6 A Konoplyanik and T Wälde, ‘Energy Charter Treaty and its Role in International Energy’ (2006) 24(4) Journal of Energy and Natural Resources Law 523, at 526. 7 G Block, L Hage, and A Boute, V° Electricité et Gaz, Répertoire pratique du droit belge (RPDB) (Brussels: Bruylant, 2007), 407, see also A Boute, The Modernization of the Russian Electricity Production Sector, Regulatory Risks and Investment Protection (Groningen Centre of Energy Law, 2011), 294. 8 For detailed consideration, see, eg, TW Wälde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade (The Hague: Kluwer Law International, 1996); C Bamberger and T Wälde, ‘The Energy Charter Treaty’, in MM Roggenkamp et al (eds), Energy Law in Europe: National, EU and International Regulation (2nd edn, OUP, 2007), ch 3; and The Energy Charter Treaty—A Reader’s Guide, available at .

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A. The European Energy Charter and the Energy Charter Treaty

(1) Investment The ECT establishes a mechanism for the protection and the promotion of invest- 11.05 ments. The main objective of the ECT’s provisions on investments is to reduce the non-commercial risks relating to the energy sector. The ECT aims to create an appropriate investment climate and protects the foreign energy investments on the basis of the principle of non-discrimination. The notion of investment is defined by Article 1(6) ECT as: every kind of asset, owned or controlled directly or indirectly by an Investor and includes notably: (a) tangible and intangible, and movable and immovable, property, and any property rights such as leases, mortgages, liens, and pledges; (b) a company or business enterprise, or shares, stock, or other forms of equity participation in a company or business enterprise, and bonds and other debt of a company or business enterprise; (c) claims to money and claims to performance pursuant to contract having an economic value and associated with an Investment; (d) Intellectual Property; (e) Returns; (f) any right conferred by law or contract or by virtue of any licenses and permits granted pursuant to law to undertake any Economic Activity in the Energy Sector.

The ECT protects Investments in the energy sector only. Article 1(6), paragraph 3 11.06 provides that: ‘Investment’ refers to any investment associated with an Economic Activity in the Energy Sector and to investments or classes of investments designated by a Contracting Party in its Area as ‘Charter efficiency projects’ and so notified to the Secretariat.

The ECT has adopted a broad definition of investments. The broad nature of 11.07 the definition of investments under the ECT has been emphasized in Plama v Bulgaria, the first decision rendered under the auspices of International Center for Settlement of Investment Disputes (ICSID) on questions of jurisdiction under the ECT. The Plama Tribunal held that the list in Article l(6) constitutes: ‘a broad, non-exhaustive list of different kinds of assets encompassing virtually any right, property or interest in money or money’s worth . . .’.9 The ECT distinguishes between two stages in the investment process: the ‘pre- 11.08 investment stage’ and the ‘post-investment stage’. The first stage concerns access for foreign investors and constitutes a set of soft law obligations, because contracting parties are obliged ‘to encourage and create stable, equitable, favorable and transparent conditions’ for foreign investors to make investments in their areas. The 9 Plama Consortium Limited v Bulgaria (ICSID Case No ARB/03/24) (hereinafter ‘Plama v Bulgaria (Jurisdiction)’), Decision on jurisdiction, 8 February 2005 (available on the ICSID website at , or directly at http://tinyurl.com/plamavbulgaria>), para 125.

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post-investment stage begins when the investment has already been committed. All of the hard law obligations of the ECT apply to this stage. 11.09 The pre-investment phase does not provide a legally binding framework, but it

does provide an objective, transparent, and non-discriminatory standard for all investments.10 11.10 For the post-investment stage, the ECT imposes four obligations upon Contracting

States: (1) (2) (3) (4)

the protection of property; the respect of contractual obligations; the obligation to offer ‘equitable and fair treatment’; and the obligation of national treatment (non-discrimination).

11.11 (a) The protection of property: Article 13 ECT protects the property of investors.

It provides that: (1) Investments of Investors of a Contracting Party in the Area of any other Contracting Party shall not be nationalized, expropriated or subjected to a measure or measures having effect equivalent to nationalization or expropriation (hereinafter referred to as ‘Expropriation’) except where such Expropriation is: (a) for a purpose which is in the public interest; (b) not discriminatory; (c) carried out under due process of law; and (d) accompanied by the payment of prompt, adequate and effective compensation . . . 11.12 Thus, the investment is protected against the expropriation by the obligation to pay

prompt, adequate, and effective compensation. 11.13 Nevertheless, direct expropriations are very rare because of the impact on the repu-

tation of host Investment State. Consequently, the number of indirect expropriations, having an equivalent effect, has increased.11 11.14 Article 13 ECT is frequently invoked by Investors against their co-contractors,

because the act of the opposing party may in fact have constituted an indirect expropriation leading to the substantial loss of benefits to the Investor. A notable example is the adoption by the host State of measures influencing the tariffs which can be charged by the Investor,12 thus reducing the value of the investment (often substantially).

10

Konoplyanik and Wälde (n 6), 533. C Schreuer, The Concept of Expropriation under the ECT and other Investment Protection Treaties (20 May 2005) (available at ), 3. See also A Boute (n 7), 303. 12 Nykomb Synergetics Technologie Holding AB v Republic of Latvia (2003), . 11

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A. The European Energy Charter and the Energy Charter Treaty

Arbitral tribunals have adopted different interpretations of the concept of ‘expro- 11.15 priation’. In the case Nykomb v Latvia,13 the Arbitral Tribunal considered that an expropriation measure is determined by the degree of possession taken or control exercised over the investment by the other contractual party. In the absence of any taking of possession of the enterprise or its assets, and given that there had been no interference with the shareholders’ rights or with the management’s control over and running of the enterprise, the Tribunal found that ordinary regulatory provisions laid down in the production licence did not amount to an expropriation measure. In Petrobart Ltd v Kyrgyzstan,14 the Arbitration Institute of the Stockholm Chamber 11.16 of Commerce concluded that measures taken by the State or State authorities cannot be considered to be expropriation measures if they are not directed specifically against the investor or do not have the aim of transferring economic values from the investor to the other contracting party. In CMS v Argentina,15 the ICSID denied the existence of an expropriation as the 11.17 investor had not been deprived of the enjoyment of its property and retained full control and ownership of the investment. In the Plama Consortium Ltd v Bulgaria case,16 the ICSID recognized that expro- 11.18 priation can result from State conduct, even where that does not amount to taking physical control or loss of title over the asset(s), but nevertheless has adverse effects upon the economic use or value of the investment. In conclusion, the ECT protects investments against direct expropriation. 11.19 Nevertheless, it is clear from international arbitral practice that Tribunals can also extend this protection to cover indirect expropriation. This means that the effect of the ECT’s protection consists of the payment of adequate and effective compensation in cases of lawful or unlawful expropriation. Where lawful expropriation has occurred, compensation is a condition for the lawfulness of the expropriation. In cases of unlawful expropriation, meanwhile, compensation is effectively equivalent to the payment of damages for the loss suffered by the investor.17 (b) Respect for contractual obligations: The ECT obliges contractual parties to 11.20 observe contractual obligations. The final sentence of Article 10(1), provides that: Each Contracting Party shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party. 13

Nykomb Synergetics Technologie Holding AB v Republic of Latvia (2003) (n 12), 44. Petrobart Ltd (Gibraltar) v Kyrgyzstan (2005), 77, . 15 CMS Gas Transmission Company v Argentina (2005), para 260, . 16 Plama Consortium Ltd (Cyprus) v Bulgaria (Award), 2008, 59, . 17 K Hobér, ‘Investment Arbitration and the Energy Charter Treaty’ (2010) 1(1) Journal of International Dispute Settlement 153, 161, see also Boute (n 7), 284. 14

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Cross-European Initiatives 11.21 This article reaffirms the obligation of governments imposed by international law

to respect contracts concluded with foreign investors:18 a breach of a State’s obligations towards an Investor under a contract will thus place that host State in breach of its ECT obligations. This was explicitly acknowledged by the Arbitral Tribunal in the case of Eureko v Poland.19 Where a State has revoked a contract with an Investor, compensation must be paid. 11.22 (c) Obligation to offer ‘equitable and fair treatment’ and ‘most constant protec-

tion and security’: The ECT contains an obligation on Contracting States to offer ‘fair and equitable treatment’ and ‘most constant protection and security’. Article 10(1) of the ECT provides: Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area. Such conditions shall include a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment. Such Investments shall also enjoy the most constant protection and security and no Contracting Party shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment or disposal. 11.23 This standard of ‘fair and equitable treatment’ is an important principle of invest-

ment protection. 11.24 But the exact and detailed implications of this principle are still open to inter-

pretation, even if in arbitral practice some principles have been developed (good faith, protection of legitimate expectations, due process, proportionality, etc).20 The application of this principle is often fact-specific and requires the application of a ‘good-government’ conduct standard.21 11.25 The scope of this principle has been clarified in various arbitral awards. 11.26 In Petrobart Ltd v Kyrgyzstan, the Arbitration Institute of the Stockholm Chamber

of Commerce considered that the restructuring of some activities on the energy market must be carried out with respect for investors.22

18

Konoplyanik and Wälde (n 6), 534. Eureko BV v Republic of Poland, Partial Award (2005). 20 Hober (n 17), at 157. See, eg, ICSID Case No ARB/01/7 MTD, Equity Sdn Bhd & MTD Chile SA v Chile (Malaysia/Chile BIT) (25 May 2004); ICSID Case No ARB (AF)/00/3 Waste Management, Inc v Mexico (Number 2) (NAFTA) (30 April 2004); ICSID Case No ARB/01/8 CMS Gas Transmission Company v Argentina (United States/Argentina BIT) (12 May 2005); ICSID Case No ARB(AF)/97/2 Azinian, Davitian & Baca v Mexico (NAFTA) (1 November 1999); ICSID Case No ARB(AF)/97/1 Metalclad Corporation v Mexico (NAFTA) (30 August 2000); ICSID Case No ARB (AF)/00/2 Tecnicas Medioambientales Tecmed, SA v Mexico (Spain/Mexico BIT) (29 May 2003). 21 Konoplyanik and Wälde (n 6), at 538. 22 Petrobart Ltd (Gibraltar) v Kyrgyzstan (2005), 74, . 19

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A. The European Energy Charter and the Energy Charter Treaty

The ICSID clarified the meaning of the concept of ‘fair and equitable treatment’ in 11.27 Plama Consortium Ltd v Bulgaria. This principle includes the protection of legitimate investor expectations with respect to the maintenance of a stable and predictable legal environment.23 Legitimate expectations include reasonable and justified expectations that were taken into account by the foreign investor when making the investment. In AES Summit Generation Limited and AES-Tisza Erömü Kft v Republic of 11.28 Hungary,24 an Arbitral Tribunal considered for the first time that the protection of investments does not cover luxury profits. The Tribunal stated that: [it] is [a] perfectly valid and rational policy objective for a government to address luxury profits. And while such price regimes may not be as desirable in certain quarters, this does not mean that such a policy is irrational. One need only recall recent wide-spread concerns about the profitability level of banks to understand that so-called excessive profits may well give rise to legitimate reasons for governments to regulate or re-regulate.

The concept of ‘most constant protection and security’ has yet to be clearly devel- 11.29 oped, but it is argued that it includes physical and legal security.25 (d) Obligation of national treatment (non-discrimination)—most favoured 11.30 nation treatment: The obligation of national treatment (NT) ensures that the government does not favour some national or other foreign investors over foreign investors from ECT Contracting States. In the case of Nykomb v Latvia, the Tribunal found that Latvia had breached its 11.31 obligation under the ECT not to discriminate against the foreign investors, by offering higher tariffs for electricity to other companies and failing to present any evidence as to why those companies were different.26 The non-discrimination obligation also concerns State enterprises and private 11.32 enterprises within a Contracting State. It means that that State has a responsibility to ensure the non-discriminatory treatment of the investor within their territory under their legal system. The obligation to provide most-favoured nation (MFN) treatment implies the incor- 11.33 poration of standards and rights, which are contained in other treaties or legislation afforded to investors, into the protection offered to investors by the ECT.27 23 ICSID Case No ARB/03/24 Plama Consortium Ltd (Cyprus) v Bulgaria (Award) (27 August 2008), 53–54, . 24 ICSID Case No ARB/07/22, AES Summit Generation Limited and AES-Tisza Erömü Kft v Republic of Hungary (2010). 25 Hobér (n 17), at 158; see also Plama Consortium Ltd (Cyprus) v Bulgaria (Award) (n 16). 26 Nykomb Synergetics Technologie Holding AB v Republic of Latvia (2003), . 27 Hobér (n 17), 160.

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(2) Trade 11.34 With the aim of creating open and non-discriminatory energy markets within the

energy market process, the framers of the ECT have endeavoured to design a stable and non-discriminatory regime for the trade of energy materials and products between ECT contracting parties, drawing upon the provisions of the General Agreement on Tariffs and Trade (GATT) and its related instruments, even if those ECT contracting parties are not yet parties to the GATT and to the rules in the World Trade Organization (WTO). 11.35 In April 1998 an amendment to the trade-related provisions of the ECT was

adopted by the Treaty’s Contracting Parties and signatories.28 The effect of this amendment was to update the ‘by reference’ approach that the trade rules of the WTO are automatically applied to energy-related trade with and among those countries that have signed the ECT but are not yet members of the WTO. 11.36 The Treaty thus also serves as a ‘stepping stone’ towards full WTO membership for

all of its signatories: by implementing the applicable WTO provisions under the ECT, such countries become more familiar with the requirements and disciplines of WTO membership.29 (3) Transit 11.37 The transit rules of the ECT were a key element in its negotiation, given that

many of the major producing countries (like Kazakhstan and Turkmenistan) are relatively remote and do not enjoy ready access to the areas where major oil and gas consumers are located. Article 7 ECT is thus a vital element of the Treaty and it lays down far-reaching rights and obligations concerning the transit of energy through the territory of any Contracting State. Article 7 ECT sets out the rules concerning the authorization and facilitation of energy transit, including a soft law obligation to favour the modernization and construction of infrastructure or new facilities, to ensure the non-interruption of transit in case of dispute. Article 7 ECT provides that: (1) Each Contracting Party shall take the necessary measures to facilitate the Transit of Energy Materials and Products consistent with the principle of freedom of transit and without distinction as to the origin, destination or ownership of such Energy Materials and Products or discrimination as to pricing on the basis of such distinctions, and without imposing any unreasonable delays, restrictions or charges. (2) Contracting Parties shall encourage relevant entities to cooperate in: (a) modernising Energy Transport Facilities necessary to the Transit of Energy Materials and Products;

28 PD Cameron, Competition in Energy Markets: Law and Regulation in the European Union (2nd edn, Oxford: OUP, 2007), 82. 29 See .

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A. The European Energy Charter and the Energy Charter Treaty (b) the development and operation of Energy Transport Facilities serving the Areas of more than one Contracting Party; (c) measures to mitigate the effects of interruptions in the supply of Energy Materials and Products; (d) facilitating the interconnection of Energy Transport Facilities.

Under Article 7, ‘transit’ involves ‘carriage through the Area of a Contracting Party, 11.38 or to or from port facilities in its Area for loading or unloading, of Energy Materials and products originating in the Area of another State and destined for the Area of a third State, so long as either the other state or the third State is a Contracting Party’. Further detailed provisions are contained in Article 7 concerning national treat- 11.39 ment, construction of new transit capacity and, notably, an obligation not to interrupt the existing flow of energy products or materials in the event of a dispute, until the dispute resolution procedures laid down in Article 7(7) have been concluded.30 Article 7 ECT thus obliges the Contracting Parties to facilitate transit. However, the 11.40 term ‘facilitate’ is a weak formulation of this obligation, and ECT Contracting States often have not implemented it in any meaningful way in their national legislation. This explains why a consensus emerged that there was a need to enhance the ECT’s transit provisions: negotiations on the text of the Transit Protocol commenced in early 2000. Agreement was reached at the end of 2002, but some outstanding issues31 still remain to be resolved before the Protocol can be finalized: these have been the subject of lengthy discussion ever since between the EU and Russia. Bamberger and Wälde have noted that the position of the EU as a party to the 11.41 ECT raises interesting questions concerning the obligations of the EU in the event that disruptions to transit are threatened, given that the provisions of Article 7 impose duties on the ‘Contracting Parties’. For example, will such obligations be triggered whenever transit through one EU Member State is involved, or is the EU to be treated as a whole so that the transit would have to be through ‘the EU’ and destined for a non-EU Member State?32 (4) Dispute settlement mechanisms By providing an alternative means of dispute resolution, the ECT ensures the strength- 11.42 ening of legality and aims to improve the confidence of investors and to minimize the risks involved in making energy investments. Such provisions are essential to confidence-building.33 The ECT includes two basic forms of binding dispute settlement: 30 For details, see: MM Roggenkamp, ‘Transit of Network-bound Energy: the European Experience’, in T Wälde (ed) (n 8), ch 22; and R Liesen, ‘Transit under the 1994 Energy Charter Treaty’ (1999) 17 Journal of Energy and Natural Resources Law 59. 31 For more details, see Konoplyanik and Wälde (n 6), at 543. 32 Bamberger and Wälde (n 8), at 175. 33 See Title I, European Energy Charter 1991.

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– Investor-to-State arbitration for investment disputes (Article 26 ECT); and – State-to-State arbitration for all disputes arising under the ECT (Article 27 ECT), except those concerning competition (Article 6(7) ECT) and the environment (Article 19(2) ECT). 11.43 The ECT also contains special provisions for the resolution of disputes in the area

of trade (Article 29, Annex D) and transit (Article 7). With regard to transit disputes, Article 7(7) ECT provides a specialized conciliation mechanism for transit disputes, allowing for a quicker and less formal procedure. The ECT does not establish binding arbitration procedure for disputes concerning the competition and environment, but instead provides for ‘softer’ and less formal dispute resolution mechanisms in those fields.34 11.44 The dispute resolution mechanisms under ECT can be summarized as follows:35

Investement

Trade

Transit

Competition

Environment

Consultations

Consultations

Consultations

Consultations

Consultations

Investor-State DS

State-State DS

State-State DS (WTO model)

Dispute settlement

Conciliation (if DS not available)

Charter Conference

Figure 6 Dispute Resolution Mechanisms under the Energy Charter Treaty 11.45 (a) Investor-to-State arbitration: The ECT creates a dispute resolution mechanism

to deal with disputes involving investors and the host State. Its Article 26 covers ‘disputes between a Contracting party and an Investor of another Contracting party relating to an Investment of the latter in the Area of the former, which concerns an alleged breach of an obligation of the former under Part III of the ECT ’ (emphasis added). 11.46 Article 26(1) provides that investment disputes must, if possible, be settled ami-

cably. Consequentially, the Investor may not submit a dispute for settlement within three months from the date either party requested negotiations (cooling-off period).36 It seems to result from general arbitral practice, however, that Investors 34

Konoplyanik and Wälde (n 6), at 547. G Coop and C Ribeiro (Energy Charter Secretariat), Dispute Settlement Mechanisms under the Energy Charter Treaty (2005): . 36 S Jagusch and A Sinclair (Allen & Overy LLP), ‘The Energy Charter Treaty: Settlement of Disputes between an Investor and a Member State’, . 35

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A. The European Energy Charter and the Energy Charter Treaty

can evade this cooling-off period and begin arbitration by relying upon the MFN treatment obligation. In Biwater Gauff v Tanzania,37 the Tribunal decided that: In the Arbitral Tribunal’s view, however, properly construed, this [cooling-off ] period is procedural and directory in nature, rather than jurisdictional and mandatory. Its underlying purpose is to facilitate opportunities for amicable settlement. Its purpose is not to impede or obstruct arbitration proceedings, where such settlement is not possible. Non-compliance with the [cooling-off ] period, therefore, does not preclude this Arbitral Tribunal from proceeding.

In accordance with Article 26(2) the investor has a choice of forum for dispute 11.47 resolution. It is possible to submit disputes: – to the courts or administrative tribunals of the contracting party to the dispute; – in accordance with any applicable, previously agreed dispute settlement procedure; or – international arbitration in accordance with the Article 26 ECT. Investors can choose between ICSID, the United Nations Commission on 11.48 International Trade Law (UNCITRAL), or the Arbitration Institute of the Stockholm Chamber of Commerce. Pursuant to Article 26(3), each contracting party gives unconditional consent to 11.49 international arbitration. However, this provision also includes two exceptions: – the so-called ‘fork in the road’:38 the consent of contracting parties listed in Annex ID is subject to a limitation where the investor has previously submitted the dispute for resolution to the national courts of the host State or to the competent body under another previously agreed dispute settlement procedure; and – the ‘umbrella clause’,39 which limits the consent of the contracting parties listed in Annex IA40 with respect to a dispute arising under the last sentence of Article 10(1) ECT concerning contractual obligations. (b) State-to-State arbitration: Article 27 ECT provides for State-to-State arbitra- 11.50 tion; it has a wider scope than Article 26 ECT, because it includes all disputes related to the application and interpretation of the Treaty as a whole, except

37 ICSID Case No ARB/05/22 Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania (24 July 2008) (the period under the relevant Bilateral Investment Treaty there was six (rather than three) months, but the principle involved is identical). See also ICSID Case No ARB/97/7 Maff ezini v Kingdom of Spain (25 January 2000), and compare Plama v Republic of Bulgaria (n 16). 38 S Jagusch and A Sinclair (Allen & Overy LLP), ‘The Energy Charter Treaty: Settlement of Disputes between an Investor and a Member State’, . 39 S Jagusch and A Sinclair (n 38). 40 Austria, Hungary, and Norway.

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those concerning competition and environmental issues (Articles 6 and 19) and contractual obligations of States listed in Annex IA (Article 10(1)). 11.51 Article 27 encourages contracting parties to resolve disputes through diplomatic

channels and only in case of failure to submit the case to an international ad hoc tribunal. (5) Energy efficiency 11.52 The ECT encourages the contracting parties to minimize the environmental

impacts arising from energy use. Thus, Article 19 ECT provides: In pursuit of sustainable development and taking into account its obligations under those international agreements concerning the environment to which it is party, each Contracting Party shall strive to minimize in an economically efficient manner harmful Environmental Impacts occurring either within or outside its Area from all operations within the Energy Cycle in its Area, taking proper account of safety. In doing so each Contracting Party shall act in a Cost-Effective manner . . . 11.53 The Energy Charter Protocol on Energy Efficiency and Related Environmental

Aspects (PEEREA) entered into force at the same time (16 April 1998) as the ECT. Building on the provisions of the ECT, PEEREA requires its participating States to formulate clear policy aims for improving energy efficiency and reducing the energy cycle’s negative environmental impact.41 11.54 PEEREA does not contain legal obligations, but it provides examples of good

practice and a forum in which to share experiences and policy advice on energy efficiency. (6) Conclusion 11.55 The ECT has been treated here in overview due to the potential of its provisions to

contribute towards the protection of various important investments, trading and transit relationships between Russia, the former Soviet republics, and the Member States of the EU, in particular in the context of the security of energy supplies to the EU. As the events of 2006 and 2009 showed,42 these relationships play a significant role in the security of the EU’s energy supplies. At the same time, Russia’s recent confirmation on 20 August 2009 that it did not intend to ratify the ECT may serve to restrict its practical impact in some cases in future. Further, recent cases43 on the 41

See . See, eg, J Stern, ‘The Russian-Ukrainian gas crisis of January 2006’ (2006) 4 OGEL 1 and S Pirani, J Stern, and K Yafimava, ‘The Russo-Ukrainian Gas Dispute of January 2009: A Comprehensive Assessment’ (Oxford Institute for Energy Studies, NG27, February 2009). 43 Case C-205/06 Commission v Austria [2009] ECR I-1301; Case C-249/06 Commission v Sweden [2009] ECR I-1335; Case C-118/07 Commission v Finland [2009] ECR I-10889. See further: E Denza, ‘Bilateral Investment Treaties and EU rules on free transfer: Comment on Commission v. Austria, Commission v. Sweden and Commission v. Finland ’ (2010) 35 ELRev 263; N Lavranos, 42

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relationship between BITs and EU law44 have begun to refer to the ECT as well,45 raising questions about its potential impact in protecting investment contracts which might otherwise be found contrary to EU law rules on free movement or competition.46

B. The INOGATE Process (1) Background Interstate Oil and Gas Transport to Europe (INOGATE) was launched in 1995 11.56 and it aims to: promote regional integration of the European pipeline system; support investments in the energy sector; and facilitate the transport of oil and gas to Europe. This programme was launched to counter the difficulties raised concerning the management of the formerly unified energy transportation system after the dissolution of the Soviet Union,47 with funding for various activities provided by the EU. Participating countries are Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkey, Turkmenistan, Ukraine, and Uzbekistan, while the Russian Federation has observer status. At its inception, the project had a limited scope; the expansion of INOGATE’s activities began on 13 November 2004 with an Energy Ministerial Conference held in Baku, Azerbaijan, known as the ‘Baku Initiative’.48

‘Case-note on BITs judgments’ (2009) 103 AJIL 716; and P Koutrakos, ‘Case-Note on BITs judgments’ (2009) 46 CMLRev 2059. 44 For discussion, see C Söderlund, ‘Intra-EU BIT investment protection and EC Treaty’ (2007) 24 Journal of International Arbitration 455; H Wehland, ‘Intra-EU Investment agreements and arbitration: Is EC law an obstacle?’ (2009) 58 ICLQ 297; T Eilmansberger, ‘Bilateral Investment Treaties and EU Law’ (2009) 46 CMLRev 383; M Burgstaller, ‘European Law and Investment Treaties’ (2009) 26 Journal of International Arbitration 181; N Lavranos, ‘Bilateral Investment Treaties (BITs) and EU law’ (ESIL Conference 2010, available at ). 45 Opinion of AG Jääskinen in Case C-264/09 Commission v Slovakia (15 March 2011), paras 60 ff; in its judgment of 15 September, the ECJ chose to rely only upon the 1990 Investment Protection Agreement between the Czech and Slovak Federative Republic and the Swiss Confederation (although the ECT was relied upon by Slovakia in its defence). 46 For discussion, see J Kleinheisterkamp, ‘The Next 10 Year ECT Investment Arbitration: A Vision for the Future—From a European Law Perspective’ (LSE Law, Society and Economy Working Paper 7/2011). 47 EU/NIS, ‘Another Milestone for INOGATE Energy Programme’, European Report No 2383 (17 February 1999). 48 INOGATE Programme, Annual Report 2009 (June 2010) (available at: ).

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(2) ‘Baku Initiative’ and ‘Astana Energy Road Map’ 11.57 The Baku Initiative is a policy dialogue on energy cooperation between the EU and

the littoral states of the Black Sea and their neighbours. The objectives of the Baku Initiative are to: – harmonize legal and technical standards to create a functioning integrated energy market in accordance with those existing at EU and international level; – enhance the safety and security of energy supplies by extending and modernizing existing infrastructure, replacing old and dangerous power generation infrastructures with environmentally friendly ones, developing new infrastructures and implementing modern monitoring systems of their operation; – improve energy supply and demand-side management through the integration of efficient and sustainable energy systems; and – promote the financing of commercially and environmentally viable energy projects of common interest, which will be identified according to pre-defined criteria. 11.58 In this way, the INOGATE programme aims to create predictable and transparent

energy markets. 11.59 The most significant project realized under the INOGATE programme is the con-

struction of the second longest gas pipeline in the Former Soviet Union, the BakuTbilisi-Ceyhan (BTC) pipeline, completed in 2005. The BTC oil export pipeline transports crude oil from offshore oil fields in the Caspian Sea to the Turkish coast of the Mediterranean from where the oil is further shipped via tankers to European markets.49 11.60 To achieve the objectives established by the ‘Baku initiative’, a ‘road map’ was

adopted at the Astana Ministerial Conference in 2006. This Energy Road Map sets out a plan of action for enhanced energy cooperation between all partners involved and thus extended still further the scope and the objectives of the INOGATE programme.50 11.61 The four following priority areas were identified for the energy cooperation bet-

ween the EU and the littoral states of the Black and Caspian Seas and their neighbouring countries:51 (1) convergence of energy markets on the basis of the principles of the EU internal energy market, taking into account the particularities of the participating countries; 49 Spanning three countries from the Caspian Sea to the Mediterranean coast: . 50 See . 51 See the INOGATE programme website for details: .

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(2) enhancing energy security by addressing energy exports/imports, supply diversification, energy transit, and energy demands; (3) sustainable energy development, including the development of energy efficiency, renewable energy, and demand-side management; (4) attracting investment for energy projects of common and regional interest. In 2007, the Commission released a Communication concerning ‘Black Sea 11.62 Synergy’ in the energy sector, in which it called for greater cooperation.52 (3) Institutional structure of INOGATE The institutional structure of INOGATE includes a Secretariat based in Kiev, with 11.63 a branch office in Tbilisi, country coordinators nominated in each of the participating countries, Working Groups established for each of the four priority areas, and the participation of representatives from the regulatory authorities of the participating countries. The INOGATE Secretariat has an important role in ensuring the visibility, coordination, coherence, and sustainability of the programme as a whole as well as the pursuit of individual projects.53 The EU is represented in INOGATE meetings by the European Commission. The country coordinators meet at least twice a year. Working Group members 11.64 and the representatives of the national energy regulatory authorities are invited to these meetings, depending upon the topics on the agenda. These meetings serve to monitor the progress made in the four priority areas, as well as to monitor the implementation of the projects under the INOGATE programme and to define collectively the needs that can be addressed within the programme. (4) Areas of cooperation54 In the framework of INOGATE, Member States focus their cooperation in four 11.65 main areas: (1) (2) (3) (4)

convergence of energy markets; energy security; sustainable energy development; and improvement of the investment climate.

52 European Commission, Communication from the Commission to the Council and the European Parliament, ‘Black Sea Synergy—a New Regional Cooperation Initiative’, COM(2007), 160 (11 April 2007). 53 ‘Concept Note: New INOGATE Programme and Secretariat 2011’ (16 December 2010) (available at ). 54 ‘Ministerial Declaration on Enhanced energy cooperation between the EU, the Littoral States of the Black and Caspian Seas and their neighbouring countries’ (17 June 2009) (available at ).

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Cross-European Initiatives 11.66 (a) Convergence of energy markets: Under this area of cooperation, a series of

short- and medium-term, and long-term objectives have been established. The short- to medium-term objectives aim at the convergence of energy markets with the principles of the EU internal energy market, the introduction and development of fair competition and the promotion of higher environmental, efficiency, and safety standards, taking account of each partner country’s internal policies. In the long term, this area’s objective is to create integrated regional energy markets and aims ultimately at their progressive integration with the EU internal energy market. The areas of work pursued to achieve these objectives are: – gradual opening of the partner countries’ internal electricity, oil, and gas markets; – establishing independent energy regulators; – establishing common methodologies for tariff setting policy for gas and electricity; – ensuring full, effective, and transparent implementation of relevant legislation; – converging technical rules and creating compatible electricity markets; – monitoring progress; and – capacity-building for energy authorities. 11.67 (b) Energy security: The objective of this heading is to enhance energy security in

the region by addressing energy exports, energy transit, and energy demand issues. To achieve this goal, INOGATE aims at: – enhancing cooperation on open and non-discriminatory access to energy resources and networks; – minimizing deterioration of energy networks, developing appropriate network maintenance practices, and enhancing network safety and security; and – supporting and actively promoting rehabilitation of existing energy infrastructures and development of new ones. 11.68 (c) Sustainable energy development: Under this INOGATE project area, the

aims are to: diversify the energy mix; increase the use of renewable energy sources; and promote the energy demand management, including the implementation of energy efficiency and energy-saving measures. The areas of work to achieve this objective are described as: – promoting the development of the energy sector based on the principles of security of supply, competitiveness, and environmental sustainability; – building stable, sustainable energy policy frameworks; – developing legal, institutional, and financial frameworks to promote energy efficiency and renewable energy; – fostering market penetration of renewable energy; 298

B. The INOGATE Process

– enhancing institutional capacity; – anticipating international initiatives. (d) Improvement of the investment climate: In seeking to improve the invest- 11.69 ment climate in INOGATE member countries, it is hoped that this will facilitate investment in the energy sector and the attraction of investments to support the development of energy production, transmission, and distribution infrastructure. The areas of work under INOGATE to achieve this objective are: – developing transparent, equitable, and stable frameworks for attracting investments; – promoting investment to ensure the sustainable development of the energy sector; – improving medium- to long-term investment planning procedures and multicountry investment coordination, in particular with the aim of developing cross-border energy interconnections; – enhancing cooperation with international financial institutions; – identifying projects of common interest, following commonly accepted criteria, as set out in the Astana Ministerial Declaration. (5) Conclusion INOGATE is an instrument, launched under the umbrella of the EU, which aims 11.70 to ensure rapprochement between the countries of the Caspian Sea region. Such an approach is based upon the standards of the Third Electricity and Gas IEM Directives (2009/72/EC and 2009/73/EC), while leaving the necessary room for manoeuvre to take into account the specificities of the markets of INOGATE member countries. The European Directives therefore act as a model for the opening of the electricity 11.71 and gas markets of the INOGATE members, paving the way to the acceptance of fundamental principles, such as: the unbundling of vertically integrated undertakings; consumer protection; and the independence of the national authority of regulation. It should, however, be noted that some have queried whether the programme 11.72 has been effective: ‘whenever some of the major energy companies have undertaken projects, they would probably have been implemented even in the absence of EU support. In cases where projects have not found a strong company sponsor, EU support has done little to make them happen’.55 Others would disagree vehemently. Fotiadis, the Director General of DG EuropeAid, Development and Cooperation has recently asserted that INOGATE ‘has changed the mindset of 55 G Luciani, ‘Security of Supply for Natural Gas Markets: What is it and what is it not?’ (2004) FEEM Working Papers, no 119/04, at 15 (available at ).

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Cross-European Initiatives partner countries because it has shown that it is only by mutual trust and cooperation that you can resolve energy issues’ and has praised the contribution of INOGATE training programmes in developing leaders of energy institutions in their home countries.56

56 Statement of 15 June 2011, available at .

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Part IV ENERGY SOURCES

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12 RENEWABLES

A. Introduction B. Overview of EU Renewables Legislation and Policy

12.01

(1) Renewables Directive 2009/28/EC (2) Cogeneration (3) Intelligent Energy—Europe programme (2007–2013)

C. Support for Renewable Energy

12.18 12.18 12.95 12.116

(1) Introduction (2) Assessment of support schemes (3) Co-existence or harmonization of support schemes (4) The general rules of the TFEU and support schemes for renewables

12.118 12.118 12.121 12.142 12.151

A. Introduction As the European Commission has emphasized,1 renewable sources of energy— 12.01 wind power, solar power (thermal, photovoltaic, and concentrated), hydro-electric power, tidal power, geothermal energy, and biomass—are essential alternatives to fossil fuels. Renewable energies can play a major role in tackling the twin challenges of energy security and global warming because their use reduces our greenhouse gas emissions, diversifies our energy supply, and reduces our dependence upon unreliable and volatile fossil fuel markets (in particular oil and gas). The growth of renewable energy sources also stimulates employment in Europe, the creation of new technologies and improves our trade balance. Since the energy crises of the 1970s, several industrial nations have launched pro- 12.02 grammes to develop renewable energy solutions, but the return of low oil prices prevented renewable energies from picking up on a large commercial scale.2

1 2

See . See, eg, .

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Renewables 12.03 In the 1996 Commission Green Paper on Renewable Energy 3 the Commission

suggested an indicative target for renewable energy of 12 per cent for 2010, equivalent to a doubling of the share of renewable energy at the time. This target was endorsed by the Council in its Resolution4 on the matter from June 1997. For its part, the European Parliament proposed a goal of a 15 per cent share of renewables by 2010 and also called upon the Commission to submit specific measures, including the setting of targets by Member States.5 12.04 In 1997 the Commission published a White Paper on Renewable Energy6 which

announced a target to double the EU’s renewable energy share to 12 per cent by 2010. The creation of this renewable energy policy was founded on the need to address sustainability concerns surrounding climate change and air pollution, to improve the security of Europe’s energy supply, and to develop Europe’s competitiveness as well as industrial and technological innovation.7 12.05 On 29 November 2000, the European Commission adopted a Green Paper on

Security of Energy Supply;8 this Green Paper was the response to Europe’s growing future energy dependence.9 The Green Paper sketched out the bare bones of a long-term energy strategy. The Union needed to rebalance its supply policy by clear action in favour of demand-side policies. With regard to demand, the Green Paper called for a real change in consumer behaviour. It highlighted the value of taxation measures to steer demand towards consumption which was better-controlled consumption and showed greater respect for the environment. With regard to supply, priority was to be given to the fight against global warming. The development of new and renewable energies (including biofuels) was seen as the key to effecting such change. Doubling the share of renewables in energy quota from 6 per cent to 12 per cent and raising their part in electricity production from 14 per cent to 22 per cent was proposed as the objective to be obtained between then and 2010.10 12.06 The White Paper led to the proposals for, and subsequent adoption of, Directives

promoting renewable energy through the setting of national sectoral targets, one in the electricity sector and one in the transport sector. Regarding the electricity sector,

3 Green Paper: Energy for the future: renewable sources of energy, COM(96) 576 (20 November 1996). 4 Council Resolution on renewable sources of energy [1997] OJ C210/01 (27 June 1997). 5 PE 221/398 final. 6 Commission, Energy for the future: renewable sources of energy, COM(1997) 599 (26 November 1997). 7 Commission, The Renewable Energy Progress Report: Commission Report in accordance with Article 3 of Directive 2001/77/EC, Article 4(2) of Directive 2003/30/EC and on the implementation of the EU Biomass Action Plan, COM(2005)628, COM(2009) 192 (24 April 2009). 8 Commission, Green Paper—Towards a European strategy for the security of energy supply, COM(2000) 769 (29 November 2000). 9 Green Paper (n 8), 10. 10 Green Paper (n 8), 3.

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the First Renewables Directive, namely Directive 2001/77/EC,11 was adopted on 27 September 2001. It laid down national indicative renewables targets, consistent with the global indicative target of 12 per cent of gross national energy consumption by 2010 and in particular with the 22.1 per cent indicative share of electricity produced from renewable energy sources in total EU electricity consumption by 2010.12 The second piece of legislation flowing from the White Paper and related to the 12.07 transport sector was the 2003 ‘Biofuels’ Directive.13 This Directive required Member States to set targets, by ensuring that a minimum proportion of biofuels and other renewable fuels was placed on their markets. The reference value for these targets was 2 per cent of all petrol and diesel for transport purposes placed on Member States’ markets by 31 December 2005 and 5.75 per cent by 31 December 2010.14 These targets were not, however, binding upon Member States. In 2003, the Cogeneration Directive15 was adopted with the aim of increasing 12.08 energy efficiency and improving security of supply by establishing a transparent common framework to promote and facilitate the installation of cogeneration plants where demand for useful heat exists or is anticipated. The Commission adopted a progress report16 on renewable energy (in the electric- 12.09 ity and transport sectors) in 2009, highlighting the patchy progress made and the EU’s likely failure to reach the 2010 indicative targets. Indeed, Commission reports over the years had indicated that many Member States, and thus the EU as a whole, were unlikely to meet their targets by 2010; a result of 4.2 per cent had been considered more likely.17 Following the period when these Directives were adopted, the EU’s energy position 12.10 changed considerably. Although groundbreaking at the time, it rapidly became clear that these measures were wholly inadequate to meet the needs of Europe’s

11 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 [2001] OJ L283/33 (27 October 2001), hereafter ‘Directive 2001/77/EC’. 12 Directive 2001/77/EC, Art 3(4). 13 Directive 2003/30/EC of the European Parliament and of the Council of 8 May 2003 on the promotion of the use of biofuels or other renewable fuels for transport [2003] OJ L123/42 (17 May 2003), hereafter ‘Directive 2003/30/EC’. 14 Directive 2003/30/EC, Art 3(1). 15 Directive 2004/8/EC of the European Parliament and of the Council of 11 February 2004 on the promotion of cogeneration based on a useful heat demand in the internal energy market and amending Directive 92/42/EEC [2004] OJ L52/50 (21 February 2004), hereafter ‘Directive 2004/8/EC’, discussed further at paras 12.95 ff. 16 Commission, Communication: The Renewable Energy Progress Report: Commission Report in accordance with Article 3 of Directive 2001/77/EC, Article 4(2) of Directive 2003/30/EC and on the implementation of the EU Biomass Action Plan, COM(2005) 628, COM(2009) 192 (24 April 2009). 17 The Renewable Energy Progress Report (n 16).

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energy and climate policy for the twenty-first century. Three developments in particular can be identified as leading to this change. 12.11 First, the price of oil increased from $23 per barrel in 2001 when the Renewable

Electricity Directive was adopted, to between $50 and $65 per barrel in the period 2005 to 2007, then increasing to $126 per barrel in June 2008. Since then, prices have continued to fluctuate. 12.12 Second, it was increasingly evident that the EU was becoming overwhelmingly

dependent upon imports, especially of oil and gas, for its energy; and rising prices and volatility of imports were more and more viewed as a threat to the EU’s prosperity. 12.13 On 8 March 2006, the European Commission published a Green Paper on

Developing a Common, Coherent European Energy Policy.18 In order to complete the internal energy market, the Green Paper identified six priority areas: (i) energy for growth and jobs in Europe: completing the internal European electricity and gas markets; (ii) an Internal Energy Market that guarantees security of supply: solidarity between Member States; (iii) tackling security and competitiveness of energy supply: towards a more sustainable, efficient, and diverse energy mix; (iv) an integrated approach to tackling climate change; (v) encouraging innovation: a strategic European energy technology plan; (vi) moving towards a coherent external energy policy. 12.14 In its fourth action area, the Commission suggested a series of measures to address

the challenges of global warming. In particular, it put forward possible contents for an Action Plan on energy efficiency to be adopted by the Commission later that year. This Action Plan would identify the measures necessary for the EU to save 20 per cent of the energy that it would otherwise consume by 2020. In addition, it proposed that the EU prepared a new ‘Road Map’ for renewable energy sources in the EU, with possible targets to 2020 and beyond in order to provide a stable investment climate to generate more competitive renewable energy in Europe. On the basis of replies and comments to a public consultation, as well as the conclusions of the European Council and Parliament, the Commission would propose a series of concrete measures.19

18 ‘A European Strategy for Sustainable, Competitive and Secure Energy’ COM(2006) 105 (8 March 2006). 19 ‘A European Strategy for Sustainable, Competitive and Secure Energy’ COM(2006) 105 (8 March 2006).

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In the light of the information received during the public consultation and the 12.15 impact assessment, in its Renewable Energy Roadmap20 the Commission proposed a binding target of increasing the level of renewable energy in the EU’s overall mix from less than 7 per cent in 2006 to 20 per cent by 2020.21 Since the Renewable Electricity Directive 2001/77/EC had proven to be inad- 12.16 equate in reaching the renewable energy objectives set forth (mainly due to a lack of binding targets), in March 2007 European leaders signed up to a binding EU-wide target to source 20 per cent of their energy needs from renewables, including biomass, hydro, wind, and solar power, by 2020. To meet this objective, EU leaders agreed on the adoption of a new Directive promoting renewable energies, to set individual targets for each Member State.22 This new Directive was adopted by the European Parliament and the Council on 12.17 23 April 2009.23

B. Overview of EU Renewables Legislation and Policy (1) Renewables Directive 2009/28/EC The new Renewable Energy Directive 2009/28/EC (‘the Second Renewables 12.18 Directive’) sets ambitious targets for all Member States, such that the EU will reach a 20 per cent share of energy from renewable sources by 2020 and a 10 per cent share of renewable energy specifically in the transport sector. It also: improves the legal framework for promoting renewable electricity; requires national action plans which establish pathways for the development of renewable energy sources including bio-energy; creates cooperation mechanisms to help to achieve these targets cost-effectively; and establishes EU sustainability criteria for biofuels. The new Directive was required to be implemented by Member States by 5 December 2010.24 The key elements of the Second Renewables Directive are: – an EU-level commitment to ensure that, by 2020, 20 per cent of the EU’s total energy needs are met from renewable energy sources (RES);

20 Commission, Renewable Energy Road Map—Renewable energies in the 21st century: building a more sustainable future, COM(2006) 848 (10 January 2007). 21 Commission, An energy policy for Europe, COM(2007) 1 (10 January 2007). 22 See . 23 Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directive 2001/77/EC and 2003/30/EC [2009] OJ L140/16 (5 June 2009), hereafter ‘Directive 2009/28/EC’. 24 Art 27(1) of Directive 2009/28/EC.

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Renewables

– an obligation on all Member States to ensure that at least 10 per cent of their energy needs for road transport are met through renewable energy sources; – the division of this target between the EU’s twenty-seven Member States in the form of separate, legally binding minimum renewable energy targets, established on an individual basis for each Member State to achieve the overall EU target; – a method to permit one Member State to invest in the production of renewable energy in another Member State or a third country, so that the resulting renewable energy would count towards the investing Member State’s target; – rules to overcome administrative barriers to the development of renewable energy and to ensure access to the grid, in particular for electricity from renewable energy sources (RES-E); – rules for the calculation of the share of renewable energy for all these purposes;25 and – EU-level sustainability criteria for biofuels and bioliquids. 12.20 Unlike the mandatory target of a 20 per cent share of energy from renewable

sources in overall EU energy consumption by 2020, the national targets derived from the 10 per cent target for the share of biofuels in transport petrol and diesel consumption by 2020 are set at the same level for each Member State. 12.21 (a) Definition of ‘renewables’: Article 2(a) of the Renewable Energy Directive

defines energy from renewable sources as ‘energy from renewable non-fossil sources, namely wind, solar, aerothermal, geothermal, hydrothermal and ocean energy, hydropower, biomass, landfill gas, sewage treatment plant gas and biogases’. The list of specific elements is not an open-ended list of examples and may be considered conservative in the sense that even if a hypothetical new energy source could be said to be both renewable and non-fossil, it would not qualify as renewable energy unless it is a variant of the energy forms listed in the definition. 12.22 Even though the above definition should be interpreted in a restrictive way, multi-

fuel plants using renewable and conventional sources of energy (so-called ‘hybrid plants’) can also be added to this list. This follows from the second paragraph of Article 5(3) on the calculation of the share of energy from RES, which stipulates that, in multi-fuel plants, the part of electricity produced from RES shall be taken into account. 12.23 To maximize continuity with respect to the existing legislation, the definition was

derived from a similar definition in Directive 2001/77/EC, under which RES was defined as ‘renewable non-fossil energy sources (wind, solar, geothermal, wave, tidal, hydropower, biomass, landfill gas, sewage treatment plant gas and biogases)’.

25 C Jones (gen ed), EU Energy Law—Volume III, Book One: Renewable Energy Law and Policy in the European Union (Leuven: Claeys & Casteels, 2010), 23–24.

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The most notable difference is the addition in the Renewable Energy Directive of ‘aerothermal’ and ‘hydrothermal’ energy and the replacement of ‘wave’ and ‘tidal’ with ‘ocean energy’. The addition of the terms ‘aerothermal’ and ‘hydrothermal’ energy represents a rather substantial change compared to the definition in the First Renewables Directive, a change which relates to the extension of the scope of the EU legislation to cover not just electricity and transport fuels from renewable energy sources but also heat. By contrast, the inclusion of a broader range of oceanrelated energy sources is likely in practice to have less significant implications given the early stage of development of the technologies necessary to exploit them and/or the limited potential present in the EU (notably for ocean thermal gradients).26 Binding targets and national action plans (a) Mandatory national overall targets and measures for the use of renewa- 12.24 ble energy: Each Member State has a target calculated according to the share of energy from renewable sources in its gross final consumption for 2020. This target is in line with the overall ‘20-20-20’ goals for the EU. The national targets for each Member State are set out in the third column of the table in part A of Annex I (Article 3(1)). Member States shall introduce measures effectively designed to ensure that the 12.25 share of energy from renewable sources equals or exceeds their national targets (Article 3(2)). In order to reach their national targets Member States may, inter alia, apply:

12.26

– support schemes (see paras 12.118 ff ); – measures of cooperation between different Member States and/or with third countries for achieving their national overall targets (Article 3(3)). Moreover, the share of energy from renewable sources in the transport sector (bio- 12.27 fuels) must amount to at least 10 per cent of final energy consumption in the sector by 2020 (Article 3(4)). (b) National renewable energy action plans: The Member States are to establish 12.28 national action plans which set out national targets for the share of energy from renewable sources consumed in transport, as well as in the production of electricity and heating, for 2020. These action plans must take into account the effects of other energy efficiency measures on final energy consumption (the higher the reduction in energy consumption, the less an increase (in absolute terms) in energy from renewable sources will be required to meet the target). These plans will also establish procedures for the reform of planning and pricing schemes and access to electricity networks, aimed at promoting energy from renewable sources (Article 4(1)).

26

C Jones (n 25), 31–32.

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Renewables 12.29 Member States were required to notify their national renewable energy action

plans (NREAPs) to the Commission by 30 June 2010 (Article 4(2)).27 12.30 Each Member State shall publish and notify to the Commission, six months before

its national action plan is due, a forecast document indicating its estimated excess production of energy from renewable sources compared to the indicative trajectory which could be transferred to other Member States, as well as its estimated potential for joint projects and its estimated demand for energy from renewable sources to be satisfied by means other than domestic production until 2020 (Article 4(3)). 12.31 A Member State whose share of energy from renewable sources has fallen below

the indicative trajectory in the immediate preceding two-year period shall submit an amended NREAP to the Commission by 30 June of the following year (Article 4(4)). 12.32 The Commission shall evaluate the national action plans, in particular the ade-

quacy of the measures envisaged by the Member State to meet their national targets under the Directive. In response to an (amended) NREAP, the Commission may issue a recommendation (Articles 4 and 5). The Commission is required to send to the European Parliament the NREAPs and forecast documents, as well as any recommendation that the Commission might issue (Article 4(6)). Achievement of the objectives through participation in flexibility mechanisms 12.33 The Second Renewables Directive innovates by introducing ‘flexibility mecha-

nisms’; these mechanisms are: – statistical transfers between Member States (Article 6); – joint projects between Member States (Articles 7 and 8); – joint projects between Member States and third countries (Articles 9 and 10); and – joint support schemes (Article 11). 12.34 Such mechanisms typically have two objectives:

(1) allowing Member States to reach their national targets for the overall share of energy from renewable sources in gross final consumption of energy by 2020 at a lesser cost;28 and

27 For details of those NREAPs received by the Commission, see: . 28 Commission Staff Working Document, ‘Review of European and national fi nancing of renewable energy in accordance with Article 23(7) of Directive 2009/28’, Accompanying the Communication, ‘Renewable Energy: Progressing towards the 2020 target’, COM(2011) 31 (31 January 2011), 7.

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(2) cooperating to enhance the development of third countries, notably in the Mediterranean Basin.29 Before examining the characteristics of each of these flexibility mechanisms (paras 12.35 12.47 ff ), the evolution of such mechanisms in the context of the adoption of the Directive 2009/28 is first addressed (paras 12.36 ff ). Evolution of the flexibility mechanisms in Directive 2009/28 The idea of ‘flexibility mechanisms’ first emerged in the European Commission’s 12.36 proposal for a Directive of 23 January 2008.30 The mechanisms proposed were based upon guarantees of origin (GO) and distinguished between cooperation with third countries and cooperation among Member States. On the question of cooperation with third countries, electricity produced from 12.37 renewable energy sources in third countries could be counted towards the target of a Member State provided the relevant electricity was ‘issued with a guarantee of origin that forms part of a system of guarantee of origin equivalent to that laid down by this Directive’.31 Regarding cooperation among EU Member States, two options were proposed: 12.38 namely the exchange of GOs between Member States inter se, and the exchange of GOs between persons established in Member States.32 The exchange of GOs between Member States was to be conditional upon the transferring Member State meeting its indicative trajectory target. The trade of GOs between private persons, meanwhile, could be subjected to prior authorization by Member States, such option being left to the discretion of Member States. Under the private GO trading scheme proposed, private persons could, to a certain extent, choose the support scheme of a given Member State. Such characteristics generated criticism, notably:33 – the risk of incompatibility between the possibility left to Member States to subject the trade of GOs between private persons to prior authorization and the fundamental EU law principle of the free movement of goods; 29 Recitals (37)–(39) of Directive 2009/28/EC. The cooperation with countries from the Mediterranean Basin fits into the scheme of the Mediterranean Solar Plan developed in the frame of the Union for the Mediterranean which aims, by 2020, at the construction in the Mediterranean Basin of 20GW of new capacity for the production of electricity from renewable sources, mostly solar. 30 Proposal for a Directive on the promotion of the use of energy from renewable sources, COM(2008) 19 (23 January 2008). 31 Proposal for a Directive on the promotion of the use of energy from renewable sources (n 30), Arts 5(9) and 25. 32 Proposal for a Directive on the promotion of the use of energy from renewable sources (n 30), Arts 9, 27–28. 33 C Klessmann, ‘The Evolution of Flexibility Mechanisms for Achieving European Renewable Energy Targets 2020—Ex ante Evaluation of the Principal Mechanisms’ (2009) 37(11) Energy

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– the risk of negative consequences for national support schemes, both: given the choice left to private parties with regard to national support schemes; and the fear of some Member States that this would (in itself or as an inevitable future development), as a matter of competence under EU law, preclude the continuation of national RES support regimes; – whether the proposals would provide adequate flexibility and investment security.34 12.40 Following those criticisms, three Member States (namely Germany, the UK, and

Poland) proposed alternative mechanisms.35 These proposals focused on cooperation between Member States, no attention being given to possible cooperation with third countries. Two types of cooperation between Member States were envisaged: statistical transfers and joint projects. Those cooperation mechanisms had the following characteristics: – exclusive competence for Member States to use the flexibility mechanism to achieve their national targets and for the control of their implementation; – the removal of any possibility for private persons to use flexibility mechanisms; – suppression of the use of GOs to limit administrative costs and to maintain GOs in their initial role of certification of the quality of electricity produced. 12.41 In its Opinion of 8 October 2008, the Committee of the Regions suggested that

the European Commission should come forward with a new and clearer proposal, stating that the Committee:36 believes that the use of Guarantees of Origin also for trading and accounting is overcomplicated and suggests the Commission reconsiders and clarifies it, with a view to better guaranteeing the transparency and legal certainty of the system.

Policy 4966; see also Preparation of the Council (Environment) Meeting on 5 June 2008 and of the TTE Council (Energy) Meeting on 6 June 2008 Climate-Energy Legislative Package: (a) Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community; (b) Proposal for a Decision of the European Parliament and of the Council on the effort of Member States to reduce their greenhouse gas emissions to meet the Community’s greenhouse gas emission reduction commitments up to 2020; (c) Proposal for a Directive of the European Parliament and of the Council on the geological storage of carbon dioxide and amending Council Directives 85/337/EEC, 96/61/EC, Directives 2000/60/EC, 2001/80/EC, 2004/35/EC, 2006/12/EC, and Regulation (EC) No 1013/2006; and (d) Proposal for a Directive of the European Parliament and of the Council on the promotion of the use of energy from renewable sources—Progress report— Policy debate, 26 May 2008, 9448/08. 34 Note, however, that there were also strong arguments that some of these criticisms were overstated: see A Johnston et al, ‘The Proposed New EU Renewables Directive: Interpretation, Problems and Prospects’ (2008) 17(3) European Energy and Environmental Law Review 126. 35 Non-paper, ‘Proposal by Germany, Poland and the United Kingdom on an Alternative Renewable Flexibility Mechanism’ (June 2008) (available at: ). 36 Opinion of the Committee of the Regions on the ‘Promotion of Renewable Energy’, 8 October 2008, 2008/C 325/03, [2008] OJ C325/15 (19 December 2008), point 2.4.

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The Committee of Regions recommended the creation of a separate certificate for 12.42 voluntary exchanges that could occur in the frame of flexibility mechanism, in line with its previous Opinion of 2007 on ‘Limiting Global Climate Change to 2 degrees Celsius’ and ‘The inclusion of aviation in the emission trading system’.37 The flexibility mechanisms were further amended by the European Parliament 12.43 in its Resolution of 17 December 2008.38 The following amendments should be pointed out: – confirmation of the voluntary character of the flexibility mechanism;39 – regarding cooperation with third countries, maintaining the use of GOs and reinforcing the requirements regarding traceability (examined at paras 12.53 ff );40 – regarding cooperation between Member States, removing counting on the basis of GOs and possibility for Member States to allow transfer between private parties on the basis of ‘accounting certificates’;41 – promotion of cooperation with countries from the Mediterranean Basin, particularly with regard to the construction of interconnectors.42 The final text of the Second Renewables Directive, as adopted on 23 April 2009, 12.44 retains the following characteristics (following the discussions about the design of the flexibility mechanisms during the preparatory works): – confirmation of the voluntary character of recourse to flexibility mechanisms (Article 3(3)(b)); – regarding cooperation with third countries: • suppression of the use of GOs and the introduction of a new criterion related to the absence of aid other than for investment (Article 9(2));

37 Opinion of the Committee of the Regions on ‘Limiting Global Climate Change to 2 degrees Celsius’ and ‘The inclusion of aviation in the emission trading system’, 10 October 2007, 2007/C 305/04, OJEU, 15 December 2007, C 305/15: ‘takes the view that Member States which have only limited possibilities to produce energy from renewable sources should be given the option of achieving their target on renewable energy through trade, either within an EU-wide green-energy certificate system, or through bilateral contracts with other States which have a more abundant supply of renewable energy. The aim here is to reduce the overall costs of meeting the targets on renewable energy’. 38 European Parliament legislative resolution of 17 December 2008 on the Proposal for a Directive of the European Parliament and of the Council on the promotion of the use of energy from renewable sources (COM(2008) 0019—C6-0046/2008—2008/0016(COD)); Position of the European Parliament adopted at first reading on 17 December 2008 with a view to the adoption of Directive 2009/ . . . /EC of the European Parliament and of the Council on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC; and Report of 26 September 2008 on the Proposal for a Directive of the European Parliament and of the Council on the promotion of the use of energy from renewable sources (2008/0016(COD)). 39 European Parliament: Legislative Resolution (2008) (n 38), 61. 40 European Parliament: Legislative Resolution (2008) (n 38), 72 and 73. 41 European Parliament: Legislative Resolution (2008) (n 38), 27–28, 75–77, and 84–88. 42 European Parliament: Legislative Resolution (2008) (n 38), 106–107.

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• obligations to notify such cooperation to the European Commission (Articles 9(5) and 10); • specific provisions concerning the construction of interconnectors (Article 9(3)); – regarding cooperation between Member States: • suppression of the possibility of transfers between private persons and the linked accounting certificates; • suppression of the condition that Member States must have achieved their trajectory targets before being allowed to use statistical transfers inter se. 12.45 This analysis of the evolution of the flexibility mechanisms underlines their volun-

tary character, and shows that the Directive has retained maximum flexibility in their design and implementation by Member States. 12.46 It also opens the way for Member States to strengthen cooperation further, for

instance through bilateral or multilateral agreements. Design and characteristics of the flexibility mechanisms 12.47 (a) Statistical transfer (Article 6): Under the system of ‘statistical transfers’, a

Member State virtually purchases (‘Purchaser Member State’) a determined quantity of renewable energy from another Member State (‘Seller Member State’). 12.48 The electricity so purchased is added to the quantity of electricity produced from

renewable energy sources taken into account to assess whether the purchaser Member State has met its target, whereas it is deducted from the quantity of energy produced from renewable energy sources taken into account when assessing the seller Member State’s achievement of its target. Energy as such is not physically exchanged, since only the credit for having invested in renewable energy is effectively transferred. 12.49 A Member State could be encouraged to become a ‘seller’ when (considering its tar-

get, the support mechanism it implements for the promotion of renewable energy as well as its available resources potential) it is able to produce electricity below the average price on the European level. Such a Member State could accordingly achieve its target and even have at its disposal an excess of renewable energy at a low cost per unit. This excess could then be put at the disposal of another Member State via a ‘statistical transfer’ under Article 6. 12.50 The Member State with that excess supply could also be interested in the income

flows which a statistical transfer with another Member State could generate, therefore allowing for additional financial resources to promote renewable energy sources in its territory. 12.51 Regarding the purchaser Member State, it could be confronted with a national

support mechanism which proves inefficient, an excessive target or relatively high costs for the production of RES-E and/or from a specific type of RES (for instance, 314

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photovoltaic). Such a Member State could be interested in assisting the development of projects for the production of RES-E at more reasonable prices in another Member State and then benefiting from counting that production against its own national target. Article 6 of Directive 2009/28 implements the flexibility mechanism as soon as 12.52 a seller and a purchaser are interested in cooperating. The two Member States concerned must then formally notify to the European Commission their agreement to cooperate. Such notification is required annually, namely ‘three months after the end of each year in which they have effect’.43 In practice, a letter is sent by the governments of the Member States concerned to describe the quantity of electricity and the price of the renewable energy to be transferred (the price is usually determined per MWh or any other relevant energy unit).44 Except for these details concerning the quantity and price of the energy involved, no format is prescribed by the Directive for the notification of a statistical transfer to the European Commission. (b) Joint Projects between Member States (Articles 7 and 8): The flexibility 12.53 mechanism of Article 7 of Directive 2009/28, concerning ‘joint projects between Member States’, is a variation of the flexibility allowed in the framework of the statistical transfers between Member States. This mechanism also relies upon the principle of reciprocal benefits, although in this case the agreements for flexibility are not limited to governmental entities, but may also include private operators. In line with the preparatory works of the Second Renewables Directive, however, this mechanism cannot be carried out solely by private operators: they may only intervene following an agreement with a Member State’s governmental entities. A renewable energy project generally emanates from a commercial initiative. A 12.54 potential producer of RES-E comes forward with an idea for a beneficial project which could accordingly be commercially developed. In the face of such projects, a national government could determine whether they are in line with its strategy for renewable energy and whether they could thus be eligible to a possible support. Should a Member State so decide, it could accordingly pay an undertaking to produce electricity, heating, or cooling from RES in another Member State. With the agreement of this latter Member State, (part of) the energy produced by the joint project could be counted in the trajectory and for the target of the Member State funding the project. Where the support offered is insufficient to allow the implementation of the 12.55 envisaged project, the private entity or the government could suggest to another Member State that it could also participate in that project, under a ‘joint project’ in

43 44

Art 6(2) of Directive 2009/28/EC. Art 6(2) of Directive 2009/28/EC .

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accordance with Article 7 of the Second Renewables Directive. The notion of ‘joint project’ is wide. It applies to electricity, heating, and cooling. It covers the construction and the co-funding of production units or of infrastructures, as well as access to the RES-E support mechanism of another Member State. Such projects could involve a new installation for the production of electricity, heating, or cooling from RES operational after 25 June 2009 or the increased capacity of an installation that was refurbished after that date. 12.56 The Member States involved are entitled to determine among them how the elec-

tricity, heating, or cooling produced from renewable energy under the joint project is divided and accounted between them. 12.57 Joint projects are subject to two notifications to the European Commission by the

Member State where the joint project is taking place. The project per se first has to be notified, with: – a description of the proposed installation or refurbishments; – the proportion of electricity, heating, or cooling produced by the installation which is to be counted towards the national target of another Member State than the one in which the installation is located; – the identification of the Member State in favour of which the notification is made; and – the specification of the period during which the electricity produced by the concerned installation is to be counted towards the national target of the other Member State.45 Regarding such period, the Directive 2009/28 clearly states that it cannot extend beyond 2020, although the duration of a joint project may extend beyond this date.46 12.58 A notification by a Member State in which a joint project is located may only be

withdrawn or amended with the joint agreement of the Member State in favour of which the notification was made.47 12.59 Besides the notification of the joint project as such, an annual notification must be

made to the European Commission, again by the Member State in which the joint project is located.48 Such notification is to be made within three months of each year falling within the period of the joint project. The annual notification must include the following information: – the total amount of electricity, heating, or cooling produced by the installation concerned by the joint project; and

45 46 47 48

Art 7(3) of Directive 2009/28/EC. Art 7(4) of Directive 2009/28/EC. Art 7(5) of Directive 2009/28/EC. Art 8 of Directive 2009/28/EC.

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– the amount of electricity, heating, or cooling produced during the relevant year by this installation and which is counted towards the national target of another Member State, in accordance with the terms of the notification of the project. (c) Joint Projects between Member States and third countries (Articles 9 and 10): 12.60 The joint projects provided for by Articles 9 and 10 of the Directive 2009/28 pave the way for cooperation in the field of the energy with third countries, such as countries from the Mediterranean Basin, since they allow Member States of the EU to take into account in their energy consumption figures RES-E imported from third countries. For the energy generated under such third country joint projects to be taken into 12.61 account by a Member State, it must fulfil several conditions, namely it must:49 (i) have been produced under a joint project between one or several Member States from the EU, on the one hand, and one or several third countries, on the other; (ii) effectively be consumed in the EU; (iii) be produced by a newly constructed installation which became operational after 25 June 2009 or by the increased capacity of an installation refurbished after that date within the framework of a joint project; (iv) be shown that the quantity of electricity produced in the third country and imported into the EU for its consumption did not receive any support from a support scheme of a third country other than investment aid granted to the installation. The evidence of the consumption of the electricity in the EU implies the provision 12.62 of traceability requirements in order to guarantee both the quality of the electricity produced from RES in the third country and its physical export to the EU for consumption within its territory. Article 9(3) of Directive 2009/28 also allows an EU Member State to take into 12.63 account the RES-E produced and consumed in a Member State as soon as it registered in the context of a relatively long-term project for the construction of an interconnector, provided that the following conditions are fulfilled:50 (a) (b) (c) (d)

49 50

the construction of the interconnector is to start by 31 December 2016; the interconnector will not be operational by 31 December 2020; the interconnector can be operational by 31 December 2022; once it is operational, the interconnector is used for the export of electricity to the EU, so as to fulfil the criteria related to consumption within the EU (as examined); and

Art 9(2) of Directive 2009/28/EC. Art 9(3) of Directive 2009/28/EC.

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(e) the other criteria of Article 9(2) of Directive 2009/28 are fulfilled, as previously discussed. 12.64 For the implementation of a flexibility mechanism with a third country, the

European Commission has to be notified ex ante, prior to the implementation of the project, as well as ex post, on an annual basis, following the implementation of the project. 12.65 The ex ante notification must include: the quantity of RES-E produced in a third

country which will be counted towards the national target of a Member State; the description of the envisaged production unit; an indication, subject to confidentiality requirements, of the applicable financial modalities; the period during which the electricity produced is to be counted towards the national target of the Member State concerned; and a written declaration from the relevant third country acknowledging its participation in the project as well as the modalities of the project.51 12.66 The annual ex post notification serves to notify the European Commission of: the

quantity of electricity produced by the joint project production unit (whose operation was already subject to ex ante notification), the share of this electricity to be counted towards the target of the concerned Member State; and evidence that the criteria of Article 9(2) of the Second Renewables Directive have been satisfied.52 12.67 Apart from these provisions concerning notification, the Directive does not pre-

scribe any specific form with regard to joint projects between Member States and third countries. Since they imply cooperation between States, such projects should therefore probably take the form of agreements between governments. 12.68 At this stage, several Member States have expressed in their NREAPs their inten-

tion to have recourse to joint projects with third countries. Italy, for example, is considering such cooperation, notably with Tunisia (in the construction of an interconnector), Albania, and Macedonia.53 France has also expressed an intention to consider the use of cooperation mechanisms with third countries (even though its national target could be achieved internally) with the intention of promoting cooperation with countries from the Mediterranean Basin within the framework of the Mediterranean Solar Plan.54 12.69 The implementation of joint projects between Member States and third countries

raises the question of their compatibility with the Clean Development Mechanism 51

Art 9(4) and (5) of Directive 2009/28/EC. Art 10 of Directive 2009/28/EC. 53 Italian National Renewable Energy Action Plan, 30 June 2010, 159–161, available through: . 54 National Action Plan for the Promotion of Renewable Energies 2009–2020, 94, at http:// ec.europa.eu/energy/renewables/transparency_platform/doc/updated_nreap_france_en.pdf. See para 12.34 for the Mediterranean Solar Plan. 52

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(CDM) governed by the Kyoto Protocol.55 CDMs aim at the implementation in developing countries of projects allowing for a reduction of greenhouse gas emissions, entitling the project developer (located in a developed country) to the grant of certified emission reduction units (CERs) which can be applied to its greenhouse gas emission quota. To be eligible, a CDM project must fulfil the following conditions: – ‘additionality’: the project must reduce emissions compared to a business-asusual scenario; – in the absence of CERs, the project would not be financially viable, or not sufficiently financially viable to attract investors; – it must make a contribution to the development of the developing host country. Considering those conditions, it appears that the eligibility under the CDM of 12.70 a joint project between a Member State and a third country in accordance with Articles 9 and 10 of the Second Renewables Directive should be limited. With regard to the electricity produced in the third country but consumed in the EU, the fulfilment of the additionality and development criteria under the CDM seems highly unlikely; such electricity should therefore not be entitled to a grant of CERs. Such CERs could accordingly be reserved to the electricity produced and consumed in the third country. A joint project between a Member State and a third country could be combined 12.71 with another flexibility mechanism as provided under the Second Renewables Directive by Article 6 (statistical transfer) and Articles 7 and 8 (joint projects between Member States). For instance, a Member State could consider the implementation of a joint project with a third country, allowing it to count towards its national target the RES-E produced in a third country and consumed in the EU, and then to transfer statistically such electricity or a part of it to another Member State, so that it can be counted towards the target of this latter Member State. (d) Joint Support Schemes (Article 11): The last flexibility mechanism introduced 12.72 by Directive 2009/28 allows Member States to join or partly to coordinate their support schemes for the promotion of energy from renewable sources. Two options are open for the allocation of the energy produced from renew- 12.73 able energy sources between the Member States participating in a joint support scheme:56 (1) the implementation of a statistical transfer, in accordance with Article 6 of the Second Renewables Directive;

55 56

Art 12 of the Kyoto Protocol. Art 11(1) of Directive 2009/28/EC.

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(2) the setting-up of distribution rules between the participating Member States. Such rules must be notified to the European Commission no later than three months after the first year in which they take effect. An annual notification is also to be made to the European Commission to state the total amount of electricity, heating, or cooling from renewable energy sources produced during a given year and which is allocated according to the distribution rule. Such notification is to take place within three months of the end of each year.57 Administrative barriers 12.74 The Commission has emphasized that, however good a support scheme is, its

effectiveness may be hindered by a host of non-cost barriers. The major role that administrative, physical, social, and financial barriers play in discouraging the development of renewable energy is known. Under Article 6 of the First Renewables Directive 2001/77/EC, Member States were instructed to assess their legislative and regulatory requirements with regard to authorization procedures. The idea was to encourage the removal and/or lowering of unnecessary barriers, both regulatory and non-regulatory, which prevented or discouraged electricity production from renewable energy. Sadly, however, these processes did not generate significant reforms at national level.58 12.75 The Second Renewable Energy Directive 2009/28/EC again requires Member

States to reduce administrative barriers (Articles 13 and 14), but provides substantially more detail on what is to be done.59 The simplification of administrative procedures is laid down in Article 13(1): – Member States shall ensure that the rules concerning the authorisation, certification and licensing procedures are proportionate and necessary; – Member States shall, in particular, take the appropriate steps to ensure that: (a) the responsibilities of administrative bodies for authorisation, certification and licensing procedures are clearly coordinated and defined; (b) comprehensive information on processing of applications is made available; (c) administrative procedures are streamlined;

57

Art 11(2) of Directive 2009/28/EC. The inadequate progress made in reducing these barriers in most Member States was assessed by the Commission in its ‘Green Paper follow up action: Report on progress in renewable electricity’, COM(2006) 627 (10 January 2007), in which the Commission made five precise recommendations: one-stop authorization agencies; clear guidelines for authorization procedures; pre-planning mechanisms; lighter procedures for small projects; and guidance on the relationship with European environmental legislation. 59 For discussion, see E Kottasz, ‘Administrative Barriers’, in C Jones (gen ed), EU Energy Law— Volume III, Book One: Renewable Energy Law and Policy in the European Union (Leuven: Claeys & Casteels, 2010), ch 5. 58

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(d) rules governing authorisation, certification and licensing are objective, transparent, proportionate, do not discriminate and take fully into account the particularities of individual renewable energy technologies; (e) administrative charges are transparent and cost-related; and (f) authorisation procedures are simplified and less burdensome. Guarantees of origin Each Member State must be able to guarantee the origin of electricity, heating, and 12.76 cooling produced from renewable energy sources. For the purposes of proving to final customers the share or quantity of energy from 12.77 renewable sources in an energy supplier’s energy mix, Member States shall ensure that the origin of electricity produced from renewable energy sources can be guaranteed, in accordance with objective, transparent, and non-discriminatory criteria (Article 15(1)). To that end, Member States shall ensure that a guarantee of origin is issued in response to a request from a producer of electricity from renewable energy sources. Member States may arrange for guarantees of origin to be issued for heating and cooling from renewable energy sources. A guarantee of origin shall be of the standard size of 1 MWh. Only one guarantee of origin shall be issued for each unit of energy produced (Article 15(2)). Any use of a guarantee of origin shall take place within twelve months of produc- 12.78 tion and shall be cancelled once it has been used (Article 15(3)). Member States or designated competent bodies shall supervise the issue, transfer, 12.79 and cancellation of guarantees of origin (Article 15(4)). Member States or designated competent bodies shall put in place appropriate mechanisms to ensure that guarantees of origin shall be issued, transferred, and cancelled electronically and are accurate, reliable, and fraud-resistant (Article 15(5)). The minimum information required to be contained in these guarantees of origin 12.80 is harmonized (Article 15(6)), including: energy source; identity, location, type, and capacity of generating installation; any investment or other national support enjoyed; date and country of issue, and a unique identification number. Where an electricity supplier is required to prove the share or quantity of energy from renewable sources in its energy mix, it may do so by using its guarantees of origin (Article 15(7)). A Member State may introduce objective, transparent, and nondiscriminatory criteria for the use of guarantees of origin in compliance with the obligations laid down in what is now Article 3(6) of the Third Electricity IEM Directive 2009/72/EC, ie information to final customers about the contribution of each energy source to the overall fuel mix of the supplier (Article 15(11)). Guarantees of origin should be recognized in all Member States. A Member State 12.81 may refuse to recognize a GO only when it has well-founded doubts about its accuracy, reliability, or veracity. The Member State shall notify the Commission of such 321

Renewables

a refusal and its justification (Article 15(9)). If the Commission finds that a refusal to recognize is unfounded, it may adopt a decision requiring the Member State in question to recognize the GO (Article 15(10)). 12.82 Guarantees of origin may also be used to provide consumers with information on

the composition of the different electricity sources (Article 15(12)). 12.83 The Cogeneration Directive 60 for its part provides for guarantees of origin for prov-

ing the origin of electricity produced from high-efficiency cogeneration plants. Such guarantees of origin cannot be used when disclosing the use of energy from renewable sources, as this might result in double counting and double disclosure (Recital 55 to the Second Renewables Directive). Access to and operation of the grids 12.84 The electricity grid is a highly capital-intensive natural monopoly. In most Member

States it has been developed under public ownership over decades, and for the conventional energy sector. It is therefore not surprising that access to the grid for new, private sector renewable energy producers is problematic. Article 7 of the First Renewables Directive addressed the legal framework to facilitate the integration of renewable electricity into the grid. The provisions in the Directive required guaranteed access, rules for sharing and bearing the costs of various grid investments (connections, reinforcements, and extensions) necessary to integrate renewable electricity into the grid, and the use of system charges. Member States were also specifically allowed to give priority access to networks (see Article 7(1) of that First Renewables Directive). 12.85 The Commission’s ‘Renewable Energy Progress Report’ in 2009 revealed that, in

spite of the requirements of the First Renewables Directive, project developers still face different grid-related barriers, which vary greatly in number and seriousness from one Member State to the next.61 These problems mainly concern insufficient available grid capacity, non-objective and non-transparent procedures for grid connection, and high grid connection costs, as well as long lead times in obtaining authorization for grid connections. 12.86 The provisions of Article 16 of the Second Renewables Directive concerning elec-

tricity infrastructure draw upon those of the First Renewables Directive and have also taken into account the developments in the EU’s internal electricity market legislation.62 Member States should build the necessary infrastructures to allow the secure operation of the electricity system as it accommodates the further

60

Directive 2004/8/EC. See, generally, COM(2009) 192 (24 April 2009). 62 Directive 2009/72/EC concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC, [2009] OJ L211/55 (14 August 2009) (the ‘Third Electricity IEM Directive’). For discussion, see A Herscuth, ‘Grid Issues’, in C Jones (gen ed) (n 59), ch 6. 61

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development of electricity production from renewable energy sources, including interconnection between Member States and between Member States and third countries (Article 16(1)). To this end, Member States are required to: – ensure that TSOs and DSOs guarantee the transport and distribution of electricity from renewable sources; – provide for priority or guaranteed access for this type of energy; – ensure that, when dispatching electricity generating installations, TSOs shall give priority to generating installations using renewable energy sources using transparent and non-discriminatory criteria.63 Where appropriate, Member States may require TSOs and DSOs to bear, in full 12.87 or in part, the costs of technical adaptations that are necessary in order to integrate new producers feeding electricity produced from RES into the interconnected grid (Article 16(3), (4)). This sharing of costs shall be enforced by a mechanism based on objective, transparent, and non-discriminatory criteria taking into account the benefits which initially and subsequently connected producers as well as TSOs and DSOs derive from the connections (Article 16(6)). Member States shall ensure that the charging of tariffs does not discriminate 12.88 against electricity or gas from renewable energy sources (Article 16(7)). They shall also ensure that tariffs charged by system operators for the transmission and distribution of electricity from RES reflect realizable cost benefits resulting from the plant’s connection to the network (Article 16(8)). Public transparency platform The Commission shall, in conformity with Article 24 of the Second Renewables 12.89 Directive, establish an online public transparency platform that shall serve to increase transparency, and facilitate and promote cooperation between Member States, in particular concerning statistical transfers (Article 6) and joint projects (Articles 7 and 9). In addition, the platform may be used to make public any relevant information which the Commission or a Member State deems to be of key importance to this Directive and to the achievement of its objectives. Biofuels The Second Renewables Directive lays down a mandatory target to be achieved 12.90 by Member States: under Article 3(4), the share of energy from renewable sources in the transport sector (ie biofuels) must amount to at least 10 per cent of final

63 Article 16(2); NB that this obligation extends ‘insofar as the secure operation of the national electricity system permits’, and if such renewables are curtailed in the interests of system security and security of energy supply, the system operators must report this to the NRA, along with corrective measures which they intend to take to prevent inappropriate curtailments.

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energy consumption in the sector by 2020. It applies to energy from biofuels 64 and bioliquids,65 which will be taken into account for the purposes of measuring compliance with the Directive’s targets and eligibility for financial support for consumption of such fuels, irrespective of whether the raw materials were cultivated inside or outside the territory of the EU. However, such biofuels will qualify under the Directive only if they fulfil the extensive sustainability criteria (Article 17(1)).66 It is also clarified by Article 17(8) that Member States are not free to lay down stricter sustainability criteria (for taking biofuels into account) than those contained in the Directive, although national support schemes may take into account benefits going beyond the minimum levels laid down by the Directive (Recital 95). 12.91 With regard to the sustainability criteria, those biofuels should contribute to a

reduction of at least 35 per cent of greenhouse gas emissions in order to be taken into account. From 1 January 2017, their share in emissions savings should be increased to 50 per cent and from 1 January 2018 that greenhouse gas emission saving shall be at least 60 per cent for biofuels and bioliquids produced in installations in which production started on or after 1 January 2017 (Article 17(2)). 12.92 Biofuels and bioliquids which can be taken into account by the Directive should

not be produced using raw materials from land with a high biodiversity value, with high carbon stock, or from land that was peatland as of January 2008 (Article 17(3)–(5)). Agricultural raw materials cultivated in the EU and used for the production of biofuels and bioliquids taken into account by the Directive must be qualified as ‘sustainable’ in accordance with the Directive’s criteria (Article 17(6)). 12.93 However, failure to meet these criteria does not render such biofuels unusable

within the EU; rather, they simply will not qualify as part of any Member State’s binding target under the Directive, nor will they be eligible to benefit from certain kinds of national support schemes (such as tax relief or fuel obligations). 12.94 Finally, it should be emphasized that the Member States’ national targets under

the Directive’s overall 10 per cent transport renewables target are all set at the same 10 per cent level for each Member State (by contrast with the differentiated general renewables targets for each Member State under Article 3(1) and Annex I, part A). This 10 per cent transport renewables target sets a minimum goal for

64 Which are ‘liquid or gaseous fuel for transport produced from biomass’ (Art 2(i)). Note also that, for target compliance purposes, ‘the contribution made by biofuels produced from wastes, residues, non-food cellulosic material, and ligno-cellulosic material shall be considered to be twice that made by other biofuels’ (Art 21(2)). 65 Defined as ‘liquid fuel for energy purposes other than for transport, including electricity and heating and cooling, produced from biomass’ (Art 2(h)). 66 For detailed discussion, see P Hodson, ‘Renewable energy in transport (including biofuels)’, in C Jones (gen ed) (n 59), ch 7.

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Member States, which can thus set national targets that go beyond this minimum requirement.67 (2) Cogeneration (a) Cogeneration Directive 2004/8/EC: Cogeneration is a technique allowing 12.95 the production of heat and electricity in a single process. The heat is in the form of high pressure water vapour or hot water. An electricity/heat cogeneration plant operates by means of gas turbines or engines. Natural gas is the form of primary energy most commonly used to fuel cogeneration plants. However, RES and waste can also be used. Unlike traditional power stations where exhaust gases are directly evacuated by the chimney, the gases produced by cogeneration are first cooled before being evacuated by the chimney, releasing their energy into a hot water/steam circuit. The current average electricity generation efficiency from conventional thermal 12.96 power plants is about 40 per cent68 in the EU. If the heat generated in parallel could be used, the overall efficiency of the combined production plant could almost be doubled.69 The benefits in terms of energy saving from cogeneration are estimated to be around 35 Mtoe per annum in the EU27, and the CO2 savings are about 100 Mt per annum.70 The development of cogeneration could avoid the emission of some 120 million tonnes of CO2 in the EU in 2010 and 250 million tonnes in 2020.71 Nearly 40 per cent of the electricity produced from cogeneration is produced for public supply purposes, often in connection with district heating for urban heat supply;72 the remaining 60 per cent is generated by auto-producers, normally for industrial processes.73 In 1997, the Commission published a Communication on combined heat and 12.97 power (CHP)74 which set an overall indicative target of doubling the share of electricity production from cogeneration to 18 per cent by 2010. The Commission sees CHP as an important contributor to the realization of the EU’s Kyoto targets. As 67

P Hodson (n 66), 174–175. Commission, ‘Communication: Europe can save more energy by combined heat and power generation’ COM(2008) 771 (13 November 2008), 2. 69 COM(2008) 771 (n 68). 70 COM(2008) 771 (n 68), 3. 71 See . 72 District heating (DH) is a widespread application of cogeneration. DH is a convenient way to heat spaces and tap water. In many processes, for instance when electricity is generated, large parts of the energy are set free in the form of surplus heat. The fundamental idea behind modern DH is to recycle the surplus heat which otherwise would be wasted from electricity production. The recycled heat is used to heat water which is transported to the customer via a well-insulated network of pipes. DH can serve residential, public, and commercial buildings as well as meeting industrial demands for low-temperature heat; see . 73 See . 74 ‘A Community strategy to promote combined heat and power (CHP) and to dismantle barriers to its development’, COM(97) 514 (15 October 1997). 68

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well as having great energy-saving potential, CHP can help to avoid network losses, reduce emissions, and increase the security of supply. To this end, the Cogeneration Directive75 was adopted in 2004. 12.98 The objective of the Cogeneration Directive is to increase energy efficiency and

improve security of supply by establishing a transparent common framework to promote and facilitate the installation of cogeneration plants where demand for useful heat exists or is anticipated (Article 1). The key features of this Directive are as follows: – a system of guarantee of origin for cogenerated electricity has to be established; – Member States have to analyse the national potential for cogeneration; – Member States must report every four years on the progress made towards increasing the percentage of energy production accounted for by cogeneration; – support schemes for cogeneration have to be based on useful heat demand and primary energy savings. 12.99 In accordance with Article 4 of the Directive and with the committee procedure76

referred to in Article 14(2), the Commission has established harmonized efficiency reference values for separate production of electricity and heat77 and was due to review these harmonized values for the first time on 21 February 2011, and every four years thereafter, to take account of technological developments and changes in the distribution of energy sources. 12.100 Member States shall ensure, on the basis of the harmonized efficiency reference

values and within six months of their adoption, that the origin of electricity produced from high-efficiency cogeneration can be guaranteed according to objective, transparent, and non-discriminatory criteria laid down by each Member State. They must ensure that this guarantee of origin (‘CHP-GO’—to distinguish them from GOs under the Second Renewables Directive) of the electricity enables producers to demonstrate that the electricity they sell is produced from high-efficiency cogeneration (Article 5(1)). The Commission highlighted in its Communication on CHP78 that CHP-GOs should be mutually recognizable between countries and that harmonization of CHP-GOs still requires further efforts but their format and responsibilities for issuing them still need to be defined.

75

Directive 2004/8/EC. The committee procedure (also referred to as ‘comitology’) is described in Arts 5a(1)–(4) and 7 of Council Decision 1999/468/EC (as amended by Council Decision 2006/512/EC), having regard to the provisions of Art 8 thereof. It refers to the committee system which oversees the delegated acts implemented by the European Commission; the European Parliament can delegate detailed implementing measures to the Commission and the latter must act in conjunction with committees of representatives of Member States who often have the power to block the Commission and refer the matter to the Council. 77 Commission Decision 2007/74/EC [2007] OJ L32/183 (21 December 2006). 78 COM(2008) 771 (n 68), 4. 76

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B. Overview of EU Renewables Legislation and Policy 12.101

A CHP guarantee of origin must: – specify the lower calorific value of the fuel source from which the electricity was produced, specify the use of the heat generated together with the electricity and the dates and places of production; – specify the quantity of electricity from high-efficiency cogeneration that the guarantee represents (this quantity being calculated in accordance with Annex II); and – specify the primary energy savings calculated in accordance with Annex III based on harmonized efficiency reference values established by the Commission (Article 5(5)).

Article 6 of the Directive provides that Member States shall analyse the national 12.102 potential for the application of high-efficiency cogeneration. Following a request by the Commission at least six months before the due date, Member States must evaluate progress towards increasing the share of high-efficiency cogeneration, for the first time by 21 February 2007 at the latest, and thereafter every four years. With regard to support schemes for CHP, the Cogeneration Directive provides that 12.103 Member States shall ensure that support for cogeneration is based on the useful heat demand and primary energy savings, in the light of opportunities available for reducing energy demand through other economically feasible or environmentally advantageous measures like other energy efficiency measures. The Commission is to evaluate the application of the support schemes used in Member States and analyse the experience gained with the application and coexistence of the different support mechanisms (Article 7). Furthermore, Member States may particularly facilitate access to the grid system 12.104 of electricity produced from high-efficiency cogeneration from small scale and micro-cogeneration units (Article 8(3)). Regarding administrative procedures, Article 9 of the Cogeneration Directive 12.105 requires Member States or the competent bodies designated by the Member States to evaluate the existing legislative and regulatory framework with regard to authorization procedures. Such evaluation is carried out with a view to: – encouraging the design of cogeneration units to match economically justifiable demands for useful heat output and avoiding production of more heat than is useful; – reducing the regulatory and non-regulatory barriers to an increase in cogeneration; – streamlining and expediting procedures at the appropriate administrative level; and – ensuring that the rules are objective, transparent, and non-discriminatory. Article 10 of the Cogeneration Directive requires the Member States to report 12.106 on the cogeneration potential and the established administrative structures to 327

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promote combined heat and power. In addition, they have to report on the progress of cogeneration and provide relevant statistics every four years. 12.107 On the basis of the Member States’ reporting under Article 10, the Commission

shall review the application of the Directive and submit to the European Parliament and Council a progress report on the implementation of the Directive (Article 11). The Commission reported on the application of the Cogeneration Directive on 13 November 2008.79 In its Communication, the Commission underlined the obstacles impeding the development of cogeneration and stated that further efforts were still required. It therefore invited Member States to apply the Directive as a matter of urgency. 12.108 Finally, it should be noted that the Second Renewables Directive will also have an

impact upon combined heat and power production in the EU. The Renewables Directive provides for European legislation covering heating and cooling from renewable sources. The NREAPs under this Directive should include targets for the shares of energy from renewable sources in heating and cooling in 2020. Cogeneration should be included in Member States’ strategies to achieve these targets.80 12.109 Recently, on 22 June 2011, the Commission published a Communication on

energy efficiency, 81 making a proposal for a Directive on energy efficiency and repealing Directives 2004/8/EC and 2006/32/EC. 12.110 (b) Proposal for a Directive on Energy Efficiency: On 22 June 2011, the European

Commission has submitted a proposal for a Directive on energy efficiency and repealing Directives 2004/8/EC and 2006/32/EC to the European Parliament and the Council. 12.111 As far as the guarantee of origin and the support mechanism are concerned, the

proposal recalls all the obligations laid down in the Directive 2004/8/EC and

79

COM(2008) 771 (n 68). A relatively new form of cogeneration is the so-called integrated solar combined cycle (ISCC) technology, which aims to draw the environmental benefits of solar energy together with the operational advantages of a ‘conventional’ gas turbine-steam turbine combined cycle plant. While the solar resource partially substitutes fossil fuels, the installation can also supply energy to the grid whenever it is required. In addition, by taking advantage of the existing infrastructure associated with the development of a conventional thermal power plant—including but not limited to site access, power transmission links, and a steam turbine power island—the economics of the concentrating solar thermal component are likely to be significantly enhanced. The world’s first ISCC plant is being constructed at Ain Beni Mathar, in Morocco. This 470 MW plant uses parabolic trough technology to provide an additional solar thermal component to a conventional gas-fired power island. The world’s second ISCC plant is being constructed in Algeria; see . 81 ‘Proposal for a Directive of the European Parliament and of the Council on energy efficiency and repealing Directives 2004/8/EC and 2006/32/EC’, COM(2011) 370 (22 June 2011). 80

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discussed at paras 12.95 ff. The new proposal would provide binding instruments in order for Member States to ensure the development of high-efficiency cogeneration. All new thermal electricity generation installations with a total thermal input 12.112 exceeding 20 MW would have to be provided with equipment allowing the recovery of waste heat by means of a high efficiency cogeneration unit and would be required to be sited in a location where waste heat can be used by heat demand points. Member States would be obliged to lay down authorization criteria to ensure this. Certain exemptions could be open to Member States: if they wished to do so, they would have to notify the European Commission. Furthermore, whenever an existing electricity generation installation with a total 12.113 rated thermal input exceeding 20 MW is substantially refurbished or its permit is updated in accordance with Directive 2010/75/EU,82 conversion to allow its operation as a high-efficiency installation would be set as a condition in the new or updated permit or licence, provided that the installation is located where the waste heat can be used by heat demand points. Again, exemptions from this obligation could be established by Member States, subject to notification to the Commission. Also, the proposal would affect all industrial installations with a total thermal 12.114 input exceeding 20 MW, which generate waste heat and are either new-build or substantially refurbished. They would be required, once Member States have adopted suitable authorization or equivalent permitting criteria, to capture and make use of their waste heat. Overall, the proposal for a Directive sets clear objectives, targets, and means of 12.115 reaching them, instead of only laying down guidelines. If and when the proposed Directive is adopted, Member States would be required to implement these concrete measures, alongside further national measures promoting the use of cogeneration. The proposal has, however, been subject to criticism: some of this is analysed in Part V. (3) Intelligent Energy—Europe programme (2007–2013) The Intelligent Energy—Europe (IEE) programme is the EU’s tool for funding 12.116 action to improve market conditions to save energy and encourage the use of renewable energy sources in Europe and move towards a more ‘energy-intelligent’ Europe. In October 2006, Member States’ energy ministers approved a continuation of the IEE programme for the support of sustainable energy for the period 2007– 2013. It includes the old SAVE and ALTENER programmes 82 Directive 2010/75/EU on industrial emissions (integrated pollution prevention and control) [2010] OJ L334/17 (24 November 2010).

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for non-technical support for energy efficiency and renewable energy, and is itself part of the new large ‘Competitiveness and Innovation Framework Programme’ (CIP). The annual budget for the new IEE programme is on average €91 million for each of the seven years for which it will run. Th is is substantially more than the €50 million per year under the previous IEE programme for 2003 to 2006. 12.117 The new IEE is intended to support more rational, efficient, and sustainable pat-

terns in energy use, by identifying and removing administrative, communication, and other non-technological barriers. As a part of the global CIP, the IEE also targets sustainable economic growth with job creation, greater social cohesion and higher quality of life, while preventing waste of natural resources. Thanks to pressure from the European Parliament, eco-innovation will also be supported. The following projects will thus be eligible for support: – strategic studies on energy trends for the preparation of future legislative measures as well as the development of standards, labelling, and certification systems; – creation, enlargement, or reorganization of structures and instruments for sustainable energy development. This includes local and regional energy management, and the development of adequate financial products and market instruments; – promotion of sustainable energy systems and equipment in order to accelerate their penetration of the market and stimulate investment. Awareness campaigns and the creation of institutional capabilities should also be supported; – development of information, education, and training structures; and – promotion of know-how and best practices through operational transnational networks.83

C. Support for Renewable Energy (1) Introduction 12.118 To achieve energy policy goals, renewable energy is promoted across Europe. On

the EU level, the First Renewables Directive 2001/77/EC provided an important framework for national support schemes. Partly induced by this legislation, Member States have put in place a range of support measures for promoting renewable energy, instruments that compensate for the various market failures that leave renewable energy at a competitive disadvantage compared to conventional energy, in particular the negative externalities of fossil fuels and security of energy supply.

83 Read more about the new Intelligent Energy-Europe 2007–2013 at: .

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According to the Commission, 84 the different support schemes which have been implemented by the Member States can be divided into four main categories: (i) (ii) (iii) (iv)

quota obligations; tendering; feed-in tariffs and premia; and fiscal incentives.

In 2005, in accordance with the First Renewables Directive, the European 12.119 Commission reported on the application and coexistence of the different support mechanisms for RES-E.85 The report found that, in general, the effectiveness and efficiency of support schemes differed widely across the Member States. Whilst harmonization of support schemes was considered a long-term objective, persistent barriers to the development of RES-E and the low level of competition in the electricity market implied that such harmonization would be premature. The report concluded that the Commission should closely monitor support schemes and report again in 2007. On 23 January 2008, the European Commission presented an updated review of 12.120 the performance of support schemes.86 This report, however, revealed that, ‘despite the requirements of Directive 2001/77/EC and the efforts of Member States, major barriers to the growth and integration of renewable electricity remain’. The harmonization of support schemes remained a long-term goal on economic efficiency, single market and State aid grounds, but according to the Commission ‘harmonisation in the short term is not appropriate’.87 Finally, this analysis suggested that a high priority should be given to removing administrative barriers and improving grid access for renewable energy producers: the contribution of the Second Renewables Directive to these goals has been outlined at paras. 12.19 and 12.74 ff ). (2) Assessment of support schemes The instruments which governments use to subsidize RES-E can be divided into 12.121 investment support (capital grants, tax exemptions, or reductions on the purchase of goods) and operating support (price subsidies, green certificates, tender schemes, and tax exemptions or reductions on the production of electricity). Operating support—support per MWh generated—for RES-E is in practice far more important than investment support. Market-based instruments providing operating support can be divided into instruments which fix a quantity of RES-E to be produced

84 ‘Staff Working Paper: The support of electricity from renewable energy sources’, SEC(2008) 57 (23 January 2008). 85 ‘Communication: The support of electricity from renewable energy sources’, COM(2005) 627 (7 December 2005). 86 SEC(2008) 57 (n 84). 87 SEC(2008) 57 (n 84), 17.

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(quantity-based market instruments) and in instruments that fix a price to be paid for RES-E (price-based market instruments, such as feed-in tariffs). The overview in Table 2 represents the different support schemes for renewable energy in the EU:

Table 2 Member State Support Schemes for Renewable Energy Member State

Feed-in Tariff

Austria Belgium Bulgaria Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Poland Portugal Romania Slovak Republic Slovenia Spain Sweden United Kingdom

X

Quotas

Tradable Green Certificates

X

X

Tax Incentives/ Investment Grants

X X X X X

Other systems

X X

X X X X X X X X X X X

X

X X

X X X

X

X

X X X X X X

X X

X X

12.122 This illustrates that, increasingly, Member States are employing a wide range

of schemes within one country to support different types of RES-E, depending upon national circumstances (funds, natural resources, etc): the discussion below highlights these different types of scheme, noting in outline some of those pursued by different Member States.88

88 For detailed coverage of all Member States, see D Fouquet and C Jones (eds), EU Energy Law—Volume III, Book Two: Renewable Energy in the Member States of the European Union (Leuven: Claeys & Casteels, 2011), Parts 1 and 2.

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(a) Quantity-based market instruments: Quota obligations are used in seven 12.123 Member States.89 Under a quota obligation, governments impose an obligation on consumers, suppliers, or producers to source a certain percentage of their electricity from renewable energy. This obligation is usually facilitated by tradable green certificates (TGCs). Accordingly, RES-E producers sell their electricity at market price, but can also sell green certificates, which serve as proof of the renewable source of the electricity. Suppliers prove that they have met their obligation by buying these green certificates, or else they pay a penalty to the government. This support mechanism principally rests on the so-called ‘traceability’ of the RESE: the regulatory authority declares that the electricity has been produced from renewable sources and thus qualifies to generate TGCs. Experience has shown that TGCs offer two major advantages: they are bankable; 12.124 and the resources which they transfer do not derive from the State budget. With regard to the bankability of TGCs, three main characteristics can be identi- 12.125 fied: TGCs are tradable, assignable, and they can be used as the basis for a mortgage or warranty for the purpose of financing renewable energy projects. A TGC is a financial asset which can be traded independently from the physical 12.126 generation of electricity. The physical supply of electricity is generally traded on the electricity spot market so that a renewable producer receives the spot price plus the TGC price per MWh of generation. The TGCs are issued by the relevant body (often the NRA or the TSO) at the moment that a producer registers the production of actual green electricity. They are later withdrawn from circulation when suppliers account for their obligations by presenting the certificates to the NRA, or when the certificate’s period of validity expires. Between issue and withdrawal, the TGCs are accounted for and can be traded.90 The TGCs can be assigned to the bank or financing party which financed the 12.127 renewable energy project. Consequently, the money which these TGCs represent will be assigned irrevocably to the bank accounts of the financing party. This assignment can concern the whole amount of future TGCs or just a part of these revenues. This can facilitate the financing of renewable energy projects, for which sufficient financial means are often otherwise not available. Another of the main advantages of TGCs is that, in case of the bankruptcy of the property developer, the bank or financing party to which the TGCs have been assigned will not be at risk and will be a preferential creditor because of the fact that the right has already been required.

89

Namely: Belgium, Italy, Latvia, Poland, Romania, Sweden, and the UK. K Vogstad, I Kristensen, and O Wolfgang, Tradable Green Certificates: The Dynamics of Coupled Electricity Markets (Norwegian University of Science and Technology and Sintef Energy Research, 2003), 41. 90

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Renewables 12.128 Finally, TGCs can serve as mortgage and/or warranty for the loans which finance the

renewable energy project. In this regard, the Belgian regional regulatory authority for the Flemish energy market (VREG) has reported that, for the financing of solar panels (and by extension other renewable energy projects), theoretically three different pledge constructions are possible: (1) a mortgage on the solar panels; (2) pledging of the TGCs themselves; and (3) pledging of the claim of the person entitled to the TGCs to the government (in the case of the Flanders Region in Belgium, this would pledge the claim to the DSO). The VREG concluded that not all of these constructions are practicable and thus recommends the pledging of the claim to the DSO: (i) in theory, the creation of a mortgage on the solar panels is possible, but, given the cost (notary public, entry in the mortgage register), will not occur in practice; (ii) another theoretical possibility is the pledging of the TGCs. In this hypothesis, a pledge deed will be concluded between the financial institution and the person entitled to the TGCs, which consequently will be notified to the NRA. These TGCs will consequently be blocked in the records of the regulatory authority, thus preventing their sale. Subsequently, the TGCs will periodically be released every time that the account is supplemented with TGCs. This construction is inadvisable because of the significant range of administrative formalities involved; (iii) the option that is most straightforward to realize (and most common in practice, according to VREG) is the pledging to the DSO of the claim of the person entitled to the TGCs. Principally, the TGCs are immediately and automatically sold to the DSO at the guaranteed minimum price. In practice, most financial institutions make use of a pledge construction, under which three goods are pledged: (a) the TGCs claim to the DSO; (b) the claim on the electricity supplier which buys the electricity produced; and (c) the possible (future) compensation for breach to which the owner of the solar panels would be entitled in the event of the termination of the rental of, or other access right to, the roof surface on which the solar panels are installed. The pledging of the claim of the person entitled to the TGCs to the government is, according to the VREG, the most advisable warranty construction; this method has no impact on the actual allocation and automatic sale of the TGCs, and only affects the payment by the DSOs (since payment can only be discharged on the account appointed by the financial institution). 12.129 All three characteristics of TGCs facilitate the financing of renewable energy

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The second main advantage of TGCs is that the resources which they use to sup- 12.130 port the RES-E producer do not derive from the State budget. Thus, following an economic crisis, the TGC scheme will not be influenced by this, even when a new government is elected. Belgium, for instance, was one of the first Member States to use quota obligations, 12.131 facilitated by TGCs. Energy suppliers delivering electricity to end users located on the Belgian territory are required annually to submit a number of TGCs to the regional regulatory authority, which number must correspond to a percentage of the quantity of electricity supplied to end users (quota). If the supplier should fail to meet its quota obligation, it has to pay a penalty to the regulatory authority for every missing TGC. The TGCs are assigned to the producers of RES-E per MWh of RES-E produced. These producers can either sell these TGCs to the suppliers of electricity (through bilateral contracts or an electronic trade platform) or to the DSO at a legally fixed minimum price.91 The minimum price per certificate acts as the lower price boundary and the penalty per missing TGC as the maximum; otherwise, the market price for a TGC depends upon supply and demand. The price which the supplier pays for the TGCs will be incorporated in its client’s energy bills, so that the costs of RES-E support under this scheme are basically passed on to the end users. Romania, on the other hand, is one of the Member States to have opted most 12.132 recently for a TGC mechanism. The objectives of its scheme are clearly identified by the Romanian law: the aim is by 2020 to reach 38 per cent of energy produced from renewable sources in Romania’s final energy consumption.92 In order to achieve these targets, not only renewable energy will be taken into account, but also the energy which is produced by hydroelectric plants with installed capacity greater than 10 MW. For the beneficiaries of the Romanian TGC system, annual quotas of energy 12.133 produced from renewable sources are provided by the law until 2020.93 For the 2020–2030 period, the quotas are to be established by the Minister in charge and

91 The amount of the minimum price depends on the production technology used: eg in the Flanders Region, the minimum aid for solar power is €450/TGC, whilst for wind energy only €80/ TGC is granted (for production installations commissioned before 1 January 2010). Thus, the TGC scheme involves ‘banding’ for different technologies: this has also recently been introduced under the UK’s Renewables Obligation scheme. 92 33 per cent, 35 per cent, and 38 per cent respectively for 2010, 2015, and 2020: Art 4(2) Legea 220/2008 pentru stabilirea sistemului de promovare a producerii energiei din surse regenerabile de energie. 93 Under Art 4(4) Legea 220/2008, the quotas are the following: 2010: 8.3 per cent; 2011: 10 per cent; 2012: 12 per cent; 2013: 14 per cent; 2014: 15 per cent; 2015: 16 per cent; 2016: 17 per cent; 2017: 18 per cent; 2018: 19 per cent; 2019: 19.5 per cent; 2020: 20 per cent.

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approved by the government. In any case, those quotas beyond 2020 cannot fall below the levels of the current quota, meaning a minimum of 20 per cent.94 12.134 The Romanian regulator (ANRE) is to play a major role in reaching the objec-

tives fixed by the law and in the organization of the green certificates scheme. The ANRE has several missions. It determines who can benefit from the TGCs95 and the methodology for establishing the annual TGC quotas.96 It also checks every year whether each supplier and producer has reached their TGC obligation.97 12.135 The green certificates are issued by the transmission system operator (TSO) once a

month. The granting of certificates is organized by Article 6 of the law. The number of certificates issued depends upon: (a) the type of energy produced; (b) the quantity of MWh generated; and (c) the age of the installation. There is a minimum and a maximum price provided to ensure price stability and an attractive balance between supply and demand for investors.98 12.136 If the green certificate quotas have not been filled by the producer and/or supplier,

they will have to pay a corresponding penalty for every green certificate below the quota at a higher price: ie €110 per certificate. The Romanian TGC mechanism has recently been approved by the European Commission.99 12.137 Under tendering, used in the past in three Member States100 on a broader scale, a

tender is announced for the provision of a certain amount of electricity from a certain technology source, and the bidding should ensure that the cheapest offer is accepted. 12.138 (b) Price-based market instruments: Feed-in tariffs and premia are used in

eighteen Member States.101 Feed-in tariffs and premia are granted to operators of renewable electricity plants for the electricity which they feed into the grid. The preferential, technology-specific feed-in tariffs and premia paid to producers are regulated by the government. Feed-in tariffs take the form of a total price per unit of electricity paid to the producers, whereas the premia are paid to the producers on top of the electricity market price. An important difference between the feed-in tariff and the premium payment is that the latter introduces competition between

94

Art 4(5) Legea 220/2008. Art 4(6) Legea 220/2008. 96 Art 4(8) Legea 220/2008. 97 Art 12(1) Legea 220/2008. 98 Romania has set a minimum TGC price of €27 per certificate and a maximum price of €55 per certificate, and has limited the trading to an internal TGC market (Art 10(3) Legea 220/2008). 99 ‘Commission approves Romanian Green Certificates renewable energy support scheme’, Press Release IP/11/867 (13 July 2011). 100 Denmark is currently using tendering for the operation of its off-shore wind farms and France uses tenders for large projects. 101 Namely: Austria, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, France, Germany, Greece, Hungary, Ireland, Italy for photovoltaics, Latvia combined with quotas, Lithuania, Luxembourg, Malta for solar, Netherlands, Portugal, Slovak Republic, Spain, and the United Kingdom for small-scale (up to 5 MW) installations. 95

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C. Support for Renewable Energy

producers in the electricity market. The cost for the grid operator is normally covered through the tariff structure. The tariff or the premium is normally guaranteed for a period of ten to twenty years. In addition to the level of the tariff or premium, this guaranteed duration provides a strong long-term degree of certainty which lowers the market risk faced by investors. Both feed-in tariffs and premia can be structured to encourage specific technology promotion and cost reduction.102 The main advantages of feed-in tariffs and premia are that they are fairly easy to 12.139 implement and are relatively straightforward to operate, in the sense that market players can easily understand the functioning of these support mechanisms. The downsides of these mechanisms, however, are that: they raise the need for regular adjustments; they involve the risk of modification of the mechanisms following government decisions (often known as ‘regulatory risk’), resulting in a lack of certainty over the longer term; and these supports are granted on a personal basis, thus preventing them from being traded and rendering them difficult to bank. Another often quoted downside of feed-in tariffs and premia is the fact they are often103 paid for by the government, thus deriving from the State budget.104 As pointed out by the Commission,105 the effectiveness of national policies pro- 12.140 moting wind energy, biogas, and photovoltaic technologies has been greatest in those countries using feed-in tariffs as their main support scheme. In France, for instance, RES-E is promoted through a price regulation system based upon a feedin tariff. Electricity suppliers (EDF and private suppliers) and DSOs are obligated to conclude a contract with the operators of systems which generate RES-E, on the purchase of and payment for electricity at a price fixed by an Order (‘obligation to conclude a contract’, Article 10 of Loi n°2000-108). Fiscal incentives are used as the main support scheme in two Member States and as 12.141 supplementary instruments in others. Producers of renewable energy are exempted from certain taxes in order to compensate them for the unfair competition which they face due to the failure of the conventional energy sector to internalize the external costs (such as environmental damage) incurred in electricity generation.

102

SEC(2008) 57 (n 84), 5. Although see the discussion of the German feed-in tariff system in the light of Case C-379/98 PreussenElektra v Schleswag [2001] ECR I-2099, at paras 12.154 ff. 104 Although one could argue that the fact the whole of the society is financing these support mechanisms, rather than a limited group of end users, could be considered to be an upside of these support mechanisms. In Belgium, in the Flanders Region, for instance, it recently became clear that, due to the enormous success of photovoltaic installations because of the high minimum price that was being paid by the DSOs for the TGCs granted to these installations, the energy bill would considerably increase in the following year; this increase mainly affecting financially disadvantaged end users, that did not benefit from the aforementioned support mechanism. 105 SEC(2008) 57 (n 84), 8. 103

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Renewables (3) Co-existence or harmonization of support schemes 12.142 As the European Commission pointed out in its Staff Working Document of 23

January 2008,106 currently twenty-seven different support schemes exist in the twenty-seven Member States. This multitude of support schemes raises a concern from the perspective of a single market. The harmonization of support schemes could simplify the regulatory environment, allow industrial growth and boost economies of scale, and provide a clearer framework for the efficient exploitation of renewable energy across the Union. The Commission’s report of December 2005107 considered that harmonization of support schemes would be premature, as the internal electricity market was not functioning properly, greater interconnector capacity was needed, national support to conventional electricity producers continued to distort the market, and there had not been sufficient experience accumulated to determine the best choice of support scheme. Instead, the Commission recommended that Member States cooperate more and improve their existing support schemes. 12.143 An interesting private initiative with regard to the harmonization of support

schemes is RECS (Renewable Energy Certificates), a European non-profit association. Its members are renewable electricity producers, traders, suppliers, and facilitating organizations like consultancies, research institutes, and brokers, who either have a certificate account at their national issuing body and/or wish to influence policy-making on a governmental and system level concerning renewable electricity certificate trading in Europe. It acts as the representative of its members towards national and European authorities and facilitate all possible events and activities that enhance its mission, namely to promote a pan-European renewable electricity market, facilitated by a commonly accepted and harmonized European information system. 12.144 The main activities of RECS focus upon:

– cooperating with the Association of Issuing Bodies (AIB) to improve the standardized certificate system—the Guarantee of Origin (GO) as part of the European Energy Certificate System (EECS)—and stimulate its use all over Europe; – influencing policymakers and governments to introduce proper regulations on the use of the GO; – communicating with end users to ensure proper claims are made after consumption of renewable electricity; and – creating a professional network where people from all European countries active in the electricity industry interact.108 106 107 108

SEC(2008) 57 (n 84), 13. COM(2005) 627 (n 85). More information on RECS can be found at: .

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(a) Cooperation: Following the Commission’s 2005 recommendations, there have 12.145 been several efforts to cooperate in accordance with Articles 5 to 11 of the Renewable Energy Directive 2009/28/EC, such as the German, Spanish, and Slovenian feed-in cooperation, which aims to promote the use of feed-in regimes through the exchange of information and experiences, and the Norwegian–Swedish attempt to establish a bilateral green certificate regime.109 The International Feed-In Cooperation is a joint project between—to date—Germany, Spain, and Slovenia. It was initiated by the governments of Germany and Spain at the International Conference for Renewable Energies (Renewables 2004) in June 2004 in Bonn, Germany. On 6 October 2005, representatives from Spain and Germany signed a Joint Declaration in Madrid, giving a more formal basis to the cooperation and defining the main goals and activities of their collaboration. Slovenia officially joined the cooperation on 29 January 2007 in Brussels at the European Renewable Energy Policy Conference. (b) Optimization: The Commission’s evaluation of national actions in this area 12.146 has revealed that, although the basic nature of the existing support schemes in place and the level of support given to different technologies vary between Member States, there are clear signs that a degree of convergence is emerging with regard to certain important properties of their policy measures. Several Member States have reformed their support schemes to differentiate between technologies to encourage technological diversity. Support schemes have also been reformed to introduce market signals through the incorporation of market prices using premia rather than feed-in tariffs, thus improving the compatibility of RES-E support with internal market rules and making adjustments to tariffs to reflect decreasing production costs. As a result of incorporating elements of the different support schemes, the clear distinctions between those schemes are fading and their known problems appear to be diminishing; Member States are aware of, and are learning from, the experiences (both successes and failures) of their own support schemes and the best practices developed in other Member States. (c) Harmonization: As already mentioned, the Commission considers that it is cur- 12.147 rently inappropriate to harmonize the European support schemes for four reasons: (1) quantity-based and price-based instruments have the same economic efficiency and can be designed in conformity with the rules on the internal market for electricity, the free movement of goods and the EU State aid rules; (2) the introduction of one harmonized system would create a lot of uncertainty and disruption in the market for renewables, as it would abolish well-established national support schemes; (3) it might be difficult to differentiate between different costs for different technologies in different countries in a harmonized system; and

109

SEC(2008) 57 (n 84).

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(4) national support schemes are often designed to promote regional development: harmonization might oblige Member States to find other ways to promote regional development. 12.148 The Commission pointed out that this does not preclude Member States from tak-

ing measures to harmonize support schemes from the ‘bottom-up’. A reduction in the number of different support schemes could generate substantial economies of scale, simplify the regulatory environment and increase transparency for investors and allow a more cost-effective achievement of the renewable targets. 12.149 It should also be noted that, as a result of the fears expressed during the legisla-

tive process which led to the adoption of the Second Renewables Directive,110 the final text of the Directive contains a number of provisions which appear designed to safeguard Member States’ autonomy in the framing of their national support measures. Thus, Recital 25 emphasizes that: for the proper functioning of national support schemes it is vital that Member States can control the effect and costs of their national support schemes according to their different potentials. One important means to achieve the aim of this Directive is to guarantee the proper functioning of national support schemes . . . 12.150 Further, Article 23 underlines that any Commission proposals based upon its

report evaluating the implementation of the Directive shall ‘neither affect the 20 per cent target nor Member States’ control over national support schemes and cooperation measures’.111 It seems that this can only be bolstered by the introduction of Article 194(2) TFEU, which provides that EU measures in the sphere of energy ‘shall not affect a Member State’s right to determine the conditions for exploiting its energy resources [or] its choice between different energy sources’.112 (4) The general rules of the TFEU and support schemes for renewables 12.151 (a) Free movement of goods: According to EU case law, electricity is a good, cov-

ered by the Treaty provisions on the free movement of goods.113 This raises potential questions for the compatibility of Member State RES-E promotion measures with the rules on the free movement of goods.

110

See the discussion at paras 12.38 ff. Indeed, the European Council’s Conclusions of 4 February 2011 invited the Commission ‘to strengthen its work with Member States on the implementation of the [Second Renewables Directive], in particular as regards consistent national support schemes and co-operation mechanisms’ (CO EUR 2, CONCL 1; 8 March 2011; ), para 9 (emphasis added). 112 See also Art 192(2)(c) TFEU, which provides for unanimity in Council decision-making on ‘measures significantly affecting a Member State’s choice between different energy sources’. 113 See Case 6/64 Costa v ENEL [1964] ECR 585 for the earliest assertion of this position. 111

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(b) Internal taxation: Article 110 TFEU: In Outokumpu,114 the Court had to 12.152 assess the compatibility of the Finnish taxation system for electricity with EU law. The Finnish rules provided different rates of taxation for electricity according to the source of production; thus, environmentally friendly electricity benefited from a lower tax rate than electricity produced from polluting sources. Imported electricity was subject to only one rate, calculated having regard to the average tax rates applied internally: this method was chosen because it was allegedly not possible for the authorities to assess the way the electricity had been produced. Outokumpu thus complained that the system of taxation was discriminatory. Indeed, the effect of the average single tax rate was that electricity produced from polluting energy sources abroad would benefit from a reduced level of taxation in comparison with the equivalent domestic production, whilst non-domestic, environmentally friendly imported electricity would be subject to a higher tax rate than domestically produced electricity. However, the system would still maintain the competitive advantage of domestically produced green energy vis-à-vis all other types of energy, even if imported. The main issue was whether such a differentiated system of taxation must be consid- 12.153 ered discriminatory and thus inconsistent with what is now Article 110 TFEU (ex 90 EC). Advocate General Jacobs found that the difference in treatment was justified because it was in pursuance of environmental policy and because there was no reasonable alternative. The Court, on the other hand, found that the Finnish rules did breach Article 110, since the rules at issue did not even allow the importer the opportunity to demonstrate that the energy had been produced according to a particular method. The purpose of the Finnish system of taxation was to ensure that green electricity would not suffer a competitive disadvantage vis-à-vis imported non-green energy, which is cheaper to produce. The system put in place by Finnish law was rather draconian, in that it did not allow the importer the possibility to prove that the energy had indeed been produced in an ‘expensive’ manner and that it should accordingly benefit from a lower tax rate. If such a possibility had been given to importers then the system would have achieved its goal. Indeed, the EU law requirement (first laid down by Article 5(1) of the First Renewables Directive115 and now to be found in Article 15 of the Second Renewables Directive)116 that Member States must provide for the certification of the origin of electricity now serves to facilitate this process. Thus, it is suggested that the apparent harshness of the Court’s judgment in Outokumpu is unlikely to cause great difficulty in modernday practice; nevertheless, the case serves as a salutary warning to Member States that domestic tax differentiation must be carefully assessed against the requirements of Article 110 TFEU if it is to survive a challenge under EU law. National tax

114 115 116

Case C-213/96 Outokumpu Oy [1998] ECR I-1777. Directive 2001/77/EC (n 11). Discussed at paras 12.76 ff.

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rebates, incentives and the like may also raise State aid questions under EU law:117 the general State aid rules relevant to the environmental sector are outlined below (at paras 12.173 ff ). 12.154 (c) Measures having equivalent effect to a quantitative restriction: Article 34

TFEU and the PreussenElektra judgment: In some Member States, support schemes impose a purchase obligation, which obliges suppliers to purchase all renewable electricity produced in a certain region at a fixed price (ie a feed-in tariff, as discussed).118 In 1998, a German court referred three questions regarding the interpretation of what was then the EC Treaty to the European Court of Justice (ECJ).119 These questions were raised in proceedings between PreussenElektra AG and Schleswag AG, two German electricity suppliers, concerning the German RES-E feed-in tariff rules. The German Stromeinspeisungsgesetz (StrEG)120 laid down a system to ensure that energy produced from renewable sources can gain access to the grid and thus to the national market. In line with the policy to support renewable energy, all ‘electricity supply undertakings which operate a general supply network’ were obliged to purchase all of the renewable electricity121 produced within their area of supply.122 Furthermore, they had to pay a fixed minimum price for that electricity, calculated on the basis of the average nationwide sales price for electricity. These prices were set at such a level as to provide, in effect, a subsidy to generators of renewable electricity. Under the original incarnation of this law in 1990, price levels had been set at 90 per cent of the average sales price for windgenerated electricity123 and 75 per cent for other sources (increased to 80 per cent by an amendment passed in 1994).124 Over time, the level of subsidy in real terms had risen as production levels and efficiency, particularly in the wind power sector,

117 See, eg, Commission Decision C7/2005, Slovenia: Slovenian Electricity Tariff s [2007] OJ L219/9 (24 April 2007). 118 SEC(2008) 57 (n 84), 12. 119 Case C-379/98 PreussenElektra v Schleswag [2001] ECR I-2099; discussed inter alia in: M Bronckers and R van der Vlies, ‘The European Court’s PreussenElektra judgment: Tensions between EU principles and national renewable energy initiatives’ [2001] ECLR 458; J Baquero Cruz and M de la Torre, ‘A Note on PreussenElektra’ (2001) 26 ELRev 489; E Durand, G Block, and D Haverbeke, ‘L’arrêt PreussenElektra de la Cour de Justice du 13 mars 2001: une étape décisive dans la promotion de l’électricité produite à partir de sources d’énergie renouvelables’ (2002) Revue juridique de l’Entreprise publique: Cahiers juridiques de l’Electricité et du gaz 117; and A Johnston et al (n 34), esp at 131–137. 120 Gesetz über die Einspeisung von Strom aus erneuerbaren Energien in das öff entliche Netz, 7 December 1990, BGBl. I pp 2633 ff; 1994 pp 1618 ff; 1998 pp 730 ff; see . See now the Erneuerbareenergiengezetz 2009 (Renewable Energies Law), to be amended by its 2011 incarnation, which enters into force in January 2012 (for a consolidated version (in German), see: ). 121 From specified sources: water, wind, sun, and biomass (para 1 StrEG 1998). 122 Para 2(1), StrEG 1998 (BGBl 1998 I, 730). 123 Para 3(2), StrEG 1990 (BGBl 1990 I, 633). 124 BGBl 1994 I, 1618.

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had increased. The Commission had been keeping a close eye on these developments and had voiced its concerns that the German system was incompatible with EU State aid law. It had even suggested changes to the method for the calculation of the subsidies involved.125 Changes wrought by the 1998 legislation126 implementing Directive 96/92/EC provided for a new compensation mechanism for the distributor in cases of ‘hardship’. The ECJ had to decide whether the German law was in line with the Treaty rules on quantitative restrictions on imports and measures having equivalent effect (now Article 34 TFEU) and State aid (now Article 107 TFEU). The State aid issues are discussed below (see paras 12.173 ff ). With regard to Article 34 TFEU, the original legislation referred only to the obli- 12.155 gation on the electricity suppliers to purchase electricity generated from renewable sources ‘within their area of supply’: as drafted, this could only cover power produced in Germany. The introduction in 1998 of a new rule concerning ‘off-shore installations’ seems to underline the national focus of this obligation: renewable electricity produced in an installation situated outside a supplier’s area must be purchased by the operator of the network located closest to that installation.127 When read with the new paragraph 1 of the 1998 law, it is clear that the obligation applies only to electricity that has been generated in Germany. There are some significant difficulties in making an assessment of the purchasing obligation under Article 34 TFEU: the exact impact of the 1998 law on the importation of electricity from other Member States was at best unclear; it was difficult to establish whether imports of renewable electricity were even technically feasible and it was especially tricky to distinguish such power from that generated from conventional sources.128 (i) Difficulties posed by the Court’s previous case law: PreussenElektra raises some 12.156 important questions in that it constitutes a further threat to the already shaky consistency of the Court’s case law on discriminatory restrictions to trade. As is well known, the ECJ has introduced a double system of justifications: indistinctly applicable rules—capable of hindering trade—may be justified according to the mandatory requirements of public interest, whilst discriminatory restrictions may be justified only according to the (exhaustively listed) Treaty derogations. However, environmental protection was not a matter of sufficient concern when the Treaty was drafted and is thus not mentioned as one of the grounds which allows a departure from the Treaty.

125 Letter to the German Government, 25 October 1996, following complaints by the electricity supply undertakings about the impact of the renewables purchasing obligation upon them. 126 Gesetz zur Neuregelung des Energiewirtschaftsrechts (Law reforming the Law on the Energy Supply Industry) (BGBl 1998 I, 730). 127 Para 2(2), StrEG 1998. 128 Para 195 of the Opinion of Advocate General Jacobs in PreussenElektra , delivered on 26 October 2000 (hereafter, ‘the Opinion’). The Court made a similar point in para 79 of its judgment.

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Renewables 12.157 The Court, however, has found that environmental protection was to be consid-

ered as one of the mandatory requirements: usually mandatory requirements may be invoked only to justify non-discriminatory restrictions;129 however, this was not the position in the Walloon Waste130 case. Here, the Commission attacked a discriminatory measure aimed at avoiding waste dumping in one of the Belgian regions. Belgium argued that the measure was justified on environmental protection grounds, whilst the Commission argued that such measure, being discriminatory, could not be so justified. Environmental protection might very well be a mandatory requirement of public interest, but it is not listed in what is now Article 36 TFEU and thus could not be invoked to justify discriminatory restrictions. The Court faced a conundrum: was it to declare the measure unlawful even though it had been adopted in pursuance of an interest widely held to be of great importance? Or was it to disregard its own case law so as to be receptive to the challenges faced by modern industrial societies? The Court chose a pragmatic approach: environmental protection is indeed a primary goal of the EU, and Member States’ measures which pursue such goals as the one at issue may be so justified. It might be wondered whether this ‘sensible’ and pragmatic approach has not contributed to the Member States’ inaction as far as Treaty amendments are concerned: although there have now been rounds of Treaty amendments since the Walloon Waste case, environmental protection has not yet been added to the list of the Article 36 derogations. Thus, it was to be expected that sooner or later a similar problem would arise again; and in PreussenElektra the Court again demonstrated its receptiveness to the need to protect the environment. Whilst the Court’s preference for allowing Member States to pursue environmental protection is welcome, PreussenElektra added confusion and legal uncertainty for economic operators and national courts: to what extent can discriminatory measures be justified on grounds not contained in Article 36? Is environmental protection the only ground which can be added to the list, or, as Decker131 suggests, are there others? Does the distinction between indistinctly applicable measures and discriminatory measures, and between mandatory requirements and the Treaty derogations, still hold good? 12.158 (ii) The Opinion of Advocate General Jacobs: Advocate General Jacobs found that

Article 34 TFEU applied to the German system, since, according to consistent case law electricity is to be considered a good. On the basis of established case law, there was for Advocate General Jacobs little difficulty in establishing that such a measure has an effect equivalent to a quantitative restriction: Campus Oil132 had made

129 Case 302/86 Commission v Denmark (Danish Bottles) [1988] ECR 4607, para 9. The Court had already found in Case 240/83 Procurateur de la République v Association de Défense des Brûleurs d’Huiles Usagées [1985] ECR 531 that environmental protection is one of the EU’s essential objectives which might justify limitations to trade imposed by the EU itself. 130 Case C-2/90 Commission v Belgium (Walloon Waste) [1992] ECR I-4431. 131 Case C-120/95 Decker v Caisse de Maladie des Employés Privés [1998] ECR I-1831. 132 Case 72/83 Campus Oil v Ministry for Industry and Energy [1984] ECR 2727.

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clear that any obligation to purchase a certain amount of products from a national source acts so as to restrict the ability of importing that same product from another Member State. By its restriction to German-produced renewable electricity, the StrEG favoured the ‘marketing of electricity of German origin to the detriment of imported electricity’: indeed, Schleswag asserted that it had been offered Swedish renewable electricity at a reasonable price, but had been forced to decline to purchase it due to its obligation to take all of the wind-generated electricity from its own supply area.133 Could this infringement be justified? In this context, the key (and difficult) issue is the argument that environmental 12.159 protection could justify the restriction. First of all, it is important to characterize the nature of the restriction in question: here, it is clear that renewable electricity of foreign origin is treated differently, both in law and in fact, from that produced in Germany.134 The interveners, Germany and the Commission, sought to rely upon environmental protection. In this context, and after having criticized the reasoning in the Walloon Waste case, Advocate General Jacobs stated that that case demonstrated that it might be desirable that directly discriminatory measures be justifiable on environmental protection grounds. Thus, highlighting the confused state of the case law, he found the time ripe for the Court to clarify its position and that ‘a more flexible approach’ is desirable in case of the imperative requirement of environmental protection. In order to strengthen his view, the Advocate General relied upon Article 11 TFEU—which states that environmental protection is one of the principles informing all Community policies—finding that Article 11 is not merely programmatic but rather imposes legal obligations. Further, he found that, since environmental measures are likely to be inherently discriminatory—a consideration reflected also in Article 191(2) TFEU (ex 174(2) EC), which provides that ‘environmental damage should as a priority be rectified at source’—the exclusion of discriminatory measures from the environmental protection justification would risk undermining the very purpose of the national measure. He thus suggested that environmental protection could be properly invoked in this case and proceeded to analyse the proportionality of the measure. He found that the fact that the measure was trying to rectify the damage produced by greenhouse gas emissions failed to satisfy the proportionality requirement, since energy produced from renewable sources outside Germany would reduce greenhouse gas pollution to the same extent. As to the whether or not the measure was justified because of possible loss of energy through transmission over long distances, the Advocate General left the assessment to the national court.

133 Paras 200–202 of his Opinion. Without arguing the point, Advocate General Jacobs advised that, even if a de minimis rule does exist under Art 34 TFEU, the figure of 1 per cent of total German electricity consumption provided by renewables could not be viewed as negligible. Hence, the mechanism of the StrEG was in principle an infringement of Art 34 TFEU. 134 Para 220 of his Opinion.

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Renewables 12.160 (iii) The judgment of the Court: The ECJ found the rules at issue ‘not incompatible’

with Article 34 TFEU; after having found the measure to be capable—at least potentially—of hindering intra-EU trade, it proceeded to assess whether ‘such a purchase obligation is nevertheless compatible with Article [34]’, having regard to its aim and/or the particular features of the electricity market. 12.161 The Court referred to various sources and reasons which made the measure not

incompatible with Article 34: thus the measure sought to combat greenhouse gases, one of the main causes of climate change, which both the Community and the Member States have pledged to combat in international Conventions. Further, the policy also aimed at protecting ‘the health and life of humans, animals and plants’ (an express derogation under Article 36 TFEU), and Article 11 TFEU requires environmental protection to be integrated in EU policy. The Court referred to the First Electricity IEM Directive135 then in force and to the fact that it is difficult to determine the origin of electricity once it is introduced in the distribution system. It drew support for this view from the Commission’s proposal that a system of certificates of origin for electricity produced from renewable sources should be established in order to make trade in that type of electricity reliable and possible in practice. It the concluded that ‘in the current state of Community law concerning the electricity market, legislation such as . . . [that at issue] is not incompatible with Art. [34] of the Treaty’. 12.162 (iv) Analysis: The Advocate General’s suggestion that the Court should expressly

allow discriminatory measures to be justified on environmental protection grounds, although attractive in principle, poses some problems: Article 11 TFEU provides that environmental protection must be integrated in the definition and implementation of all EU policies mentioned in what is now Article 3 TEU,136 which includes the establishment of the internal market. It is thus clear that, in the case of secondary legislation, a measure that allowed discrimination to occur would be compatible with the Treaty if it was necessary for the protection of the environment. This would hold true even though secondary legislation must comply with Articles 34 and 36: Article 11 seems to be lex specialis in this respect. 12.163 The problem, however, is whether Article 11 also constitutes a derogation from

other Treaty provisions: ie whether it can be considered as lex specialis in respect of the prohibition for Member States to introduce quantitative restrictions and measures having equivalent effect. Article 11 seems to impose an obligation only upon the EU legislator: it is difficult to interpret it as a limitation on the Treaty free movement rights in the absence of EU harmonizing legislation. At the time of the PreussenElektra judgment, no such EU harmonizing rules concerning renewables had been adopted and, as discussed at paras 12.147 ff, even the recent Second

135

Directive 96/92/EC [1997] OJ L27/20 (30 January 1997). This principle has also been incorporated in Art 37 of the Charter of Fundamental Rights for the European Union [2000] OJ C364/1 (18 December 2000). 136

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Renewables Directive provides only limited references to national RES-E support schemes and their status. This might be the reason why the Court avoided following Advocate General 12.164 Jacobs’s analysis, preferring instead its rather Delphic reasoning: it is worth noting that the Court avoided mentioning both discrimination and justifications (whether Treaty derogations or mandatory requirements), suggesting instead that, rather than being justified, a discriminatory measure which pursues an environmental protection aim does not fall within the scope of application of Article 34. A similarly tortuous path had been followed in Walloon Waste, in which the Court relied upon what is now Article 191 TFEU in order to find that the measures at issue were not in fact discriminatory. The environmental protection cases, possibly together with Decker, might then 12.165 suggest a shift in the definition of measures having equivalent effect. If previously discriminatory measures would have been automatically caught by Article 34, it is possible that from now on a discriminatory measure falls within Article 34 only insofar as it is not justified by the mandatory requirements or the Treaty derogations. Thus a measure, whether discriminatory or indistinctly applicable, would fall within the scope of application of Article 34 only insofar as not justified by the mandatory requirements or by the Treaty derogations. There is no textual limitation to such an interpretation, since it is for the Court to interpret whether or not a measure has an effect equivalent to a quantitative restriction. (However, it should be borne in mind that for consistency’s sake this solution can be endorsed only if it is of general application and not limited to environmental protection cases. Whether this is a desirable outcome is for the Court to decide.) The main reasons which might lead to the Court choosing to avoid such a development are that, first, to do so would risk adopting what would amount to a judicial amendment to a Treaty provision and this would do very little to increase the legitimacy of the Court’s activities. Should these concerns be too strong, and should the Court conclude that the problem 12.166 arises only in environmental protection cases, then it could give a broader interpretation to the protection of health of animals, humans, and plants. By reading these three grounds conjunctively as opposed to disjunctively, the Court could include the protection of the environment in Article 36 TFEU. If we examine the judgment carefully: – in paragraph 74 the Court highlighted that the EU and its Member States are members of UNFCCC and Kyoto Protocol, and also emphasized the importance of these environmental objectives as evinced by various Resolutions adopted, and programmes (such as ALTENER)137 developed, by the EU; and

137 See for details of the ALTENER and ALTENER II programmes on renewable energy, whose objectives are now incorporated in the EC’s ‘Intelligent Energy—Europe’ programme (on which see ).

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– in paragraph 75 the Court tied this discussion in with protection of health and life of humans, animals, and plants, and thus explicitly connected such objectives with Article 36 TFEU (ie the express Treaty derogations from Article 34); – then, in paragraph 76 the Court underlined the legal requirement laid down in the EC Treaty itself that environmental objectives must be integrated into other EC policies (relying upon what is now Article 11 TFEU). 12.167 Drawing the strands of the earlier discussion together with this summary, this

suggests that reliance upon Article 11 TFEU, possibly in conjunction with Article 36 TFEU, may well provide the most secure foundation for the approach taken by the Court in PreussenElektra, without doing significant violence to the approach taken by the Court in its previous case law on mandatory requirements under Article 34. 12.168 It might also be objected that the outcome in PreussenElektra, allowing the directly

discriminatory German rules to escape censure, is at odds with the result in Outokumpu. By contrast with the situation in Outokumpu (see paras 12.152 ff ), however, the rules at issue in PreussenElektra seemed to have been adopted in pursuit of a more complex policy: not the production of green electricity per se, but the production of green electricity in the region. In that regard, Advocate General Jacobs’s suggestion—that, if there were a method to certify the origin of green electricity, the rules would not be necessary—did not take into account the fact that environmental policy might be regional. Indeed, he recognized earlier in his Opinion that environmental policy is likely to be discriminatory due to this kind of regional basis.138 This is entirely consistent with Article 191(2) TFEU, which provides that environmental damage should be rectified at source. 12.169 Thus, imported green electricity might not ensure the achievement of the purpose

of a regional development of renewable energy which avoids concentration of pollution in those EU regions in which it is more difficult and expensive (due to a lack of natural resources) to produce green electricity. In this sense, the German policy not only pursued a national interest which deserves protection, but also an EU interest in a balanced development. It is, therefore, possible that the difference between the German and Finnish policy might justify the different findings of the Court in the two cases. The Finnish policy was directed at ensuring that green energy could compete with imported as well as domestic, non-green electricity and the draconian rule was not strictly necessary. The German system, on the other hand, was directed at ‘subsidizing’ the regional production of green electricity: in this way, the additional costs of producing that type of electricity would be redistributed amongst all German consumers. The rule was thus necessary to achieve this goal.

138

See paras 226 ff of his Opinion.

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(v) Implications: The judgment is a clear recognition by the ECJ of the perceived 12.170 need for EU action, since the EU has committed itself to emissions cuts under the Kyoto Protocol. The Court also emphasized the way in which such action accords with declared policy priorities and earlier programmes within the EU. This statement forms a major contextual point for the rest of the relevant ‘considerations’ which it went on to take into account. It was also clear that major legislative proposals were known to be under discussion, both in the field of greenhouse gas emissions trading schemes139 and of a climate change programme in general.140 The Court’s permissive and hands-off approach here made sense in a climate of relative uncertainty as to the exact shape of future, specific legislative proposals in a sensitive area, and the decision had an important impact upon the RES-E policy under construction both at the EU level (in the First Renewables Directive) and in the other Member States (eg Belgium, the Netherlands, and Denmark),141 since it legitimized the German policy and recognized that the Member States had a very substantial margin of manoeuvre in choosing and implementing particular RES-E support schemes, allowing Member States to implement national RES-E support schemes. This is a major reason for the extensive discussion here of the reasoning and outcome in PreussenElektra: after the adoption of the Second Renewables Directive, it is possible that the Court may adopt a more rigorous approach to national RES-E promotion schemes in future, now that a more advanced stage in the liberalization of the electricity market has been reached after the adoption of the Third Package. In that context, the inclusion of Recital 25 and Article 23 in the Second Renewables Directive, alongside the inclusion of Article 194(2) TFEU in the post-Treaty of Lisbon Title XX of the TFEU on the environment, may prove significant in protecting Member State discretion in this field (see the discussion at paras. 12.149 to 12.150). One might also highlight the potential dangers of the perhaps blunter approach 12.171 under Article 34 TFEU, not allowing for the practical difficulties that might be encountered in the relevant situations under such national renewables promotion schemes. For example, Advocate General Jacobs suggested in his Opinion that the proportionality of the German measures might undergo quite strict testing by the national court when the case returned to it from the ECJ. He made a number of comments which highlighted particular areas in the operation of the StrEG

139 Commission, ‘Green Paper: Greenhouse Gas Emissions Trading within the EU’, COM(2000) 87 (8 March 2000). 140 See the Commission proposal at the time to establish a ‘European Climate Change Programme’: Communication, COM(2000) 88 (8 March 2000). 141 I de Lovinfosse, How and Why do Policies Change? A Comparison of Renewable Electricity Policies in Belgium, Denmark, Germany, the Netherlands and the UK (Brussels: PIE Peter Lang, 2008), 70–71; S Poli, ‘National Schemes Supporting the Use of Electricity Produced from Renewable Energy Sources and the Community Legal Framework’ (2002) 14 Journal of Environmental Law 221.

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which he thought would need further and careful investigation: it suffices here to highlight his argument that the generation of electricity from renewable sources in other Member States which could then be sold to Germany would be equally effective in securing reductions in greenhouse gas emissions, thus meaning that (for him) the claimed environmental justification for the restrictive effects of the StrEG upon trade was not proportionate to the goal to be achieved. 12.172 Interestingly, however (and published in the Official Journal almost contempo-

raneously with the Opinion of Advocate General Jacobs in PreussenElektra), the Commission in its Explanatory Memorandum to the proposal for what became the First Renewables Directive, explored some of these trade issues in the context of possible future harmonization. The danger of Advocate General Jacobs’s suggestion that the nationality ground be removed and foreign electricity allowed access to the German grid on similar terms ‘is that the co-existence of different schemes, even if open to foreign producers, may lead to distortions of the market, e.g. when all [renewables] producers will try to benefit from the national system offering the best conditions, e.g. in terms of prices paid’.142 Furthermore, there was a generally perceived wisdom shared among those in the drafting and negotiation process that we are still at too early a stage to propose the exact shape of any more comprehensive harmonization of these schemes—the Commission, the Economic and Social Committee, and the European Parliament were at one on this issue. And it is tolerably clear that this position continues to prevail today, as discussed at paras 12.147 ff. 12.173 (d) State aids: State aid can be a real benefit to society but it can, however, also have

harmful effects. Therefore, State aid has to be notified to the Commission to ensure that it contributes to commonly agreed objectives. State aid control stems from the need to maintain a level playing field for all companies active in the Single Market, irrespective of the Member State in which they are established. The scheme of the TFEU assumes that aid granted by a Member State is prohibited unless some exception or exemption is provided for in or under the Treaty.143 Article 107 TFEU prohibits any aid granted by a Member State in any form whatsoever which distorts competition by favouring certain firms or the production of certain goods where such aid affects trade between Member States. A number of exceptions are allowed.

142 ‘Proposal for a Directive of the European Parliament and of the Council on the promotion of electricity from renewable energy sources in the internal electricity market’ COM(2000) 279 final, [2000] OJ C311/320 (31 October 2000) (originally submitted by the Commission on 31 May 2000), at 6. Advocate General Jacobs’s Opinion in PreussenElektra was handed down on 26 October 2000. 143 In the TFEU itself, there are both automatic and discretionary exceptions from the prohibition, although both require Commission approval after notification of the aid by the Member State. Under the Treaty, legislation has been adopted to exempt various aids from the prohibition, in the style of the Block Exemptions used to give effect to the exemption in Art 101(3) TFEU. See Joined Cases T-447/93 and T-448/93 AITEC v Commission [1995] ECR II-1971.

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However, all State aid measures need to be notified by the Member States to the Commission prior to their implementation (Article 108 TFEU). The general prohibition against such aid is laid down in Article 107(1) TFEU:

12.174

Save as otherwise provided in this Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the common market.

From this provision, and from the case law and decisional practice of the 12.175 Commission, it has been established that certain criteria must be met to show that something amounts to ‘State aid’ for these purposes. It must be shown that: an ‘advantage’ has been conferred;144 which was granted by the State or through State resources;145 which distorts or threatens to distort competition;146 by favouring certain undertakings or the production of certain goods or services (ie a ‘selectivity’ criterion);147 – and which affects or may affect trade between EU Member States.148

– – – –

This is not the place to provide a detailed discussion of the requirements of EU State 12.176 aid law.149 However, we should note that, in the renewables field, the question of whether or not the ‘advantage’ was granted by the State or through State resources has raised difficult questions when considering the nature of national support schemes and the actual source of the funding which they provide for renewables. (i) PreussenElektra and ‘State resources’: In the PreussenElektra case (discussed at 12.177 paras 12.154 ff ), the issue of State aid was also raised. Under the German rules, the cost of supporting the subsidy for renewable power generation was borne by

144

Case C-256/97 Déménagements-Manutention Transport SA (DMT) [1999] ECR I-3913: has ‘the recipient undertaking receive[d] an economic advantage which would not have been obtained under normal market conditions’? 145 See, eg, Joined Cases 67, 69, and 70/85 Kwekerij Gebroeders Van der Kooy BV v Commission [1988] ECR 219. 146 See, eg, Case 730/79 Philip Morris Holland BV v Commission [1980] ECR 2671 and Cases 296 and 381/82 Netherlands and Leeuwarder Papierwarenfabriek v Commission [1985] ECR 809. 147 Favourable treatment granted to a given sector within the scope of general taxation will normally be regarded as an aid (Case 70/72 Commission v Germany [1973] ECR 813) but may also be sometimes objectively justified as a response to market forces (Case 67/85 Van der Kooy [1988] ECR 219, although that justification was not established in the case itself). 148 See, eg, Case 102/87 France v Commission (Brewery loan) [1988] ECR 4067. This criterion is generally very easily found to be satisfied—indeed, such an effect is often assumed if the other criteria are met. 149 For general discussion, see M Heidenhain (ed), European State Aid Law Handbook (Munich: CH Beck, 2010) and K Bacon (ed), EC Law of State Aid (OUP, 2009); for energy-specific analysis, see L Hancher and F Salerno, ‘State aid’, in C Jones (gen ed), EU Energy Law—Volume II: EU Competition Law and Energy Markets (Leuven: Claeys & Casteels, 2011), Part 5.

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the distribution and/or transmission system operators, which in turn passed these costs on to final consumers in their access (etc) pricing. The ECJ held, contrary to the submissions of the Commission, that this meant that any resources transferred to the renewable electricity producers ultimately came from consumers and, crucially, not from State resources, nor were they granted directly by the State. Thus, those transfers did not amount to illegal State aid under EU law.150 It should be pointed out that the ECJ’s judgment in PreussenElektra has been subjected to criticism by a number of commentators, on the ground that the ECJ took far too narrow an approach to the interpretation of the notion of the benefit being conferred from ‘State resources’, leading to different treatment being given under State aid law to functionally interchangeable State measures (eg such feed-in tariffs compared with specific taxation) which redistribute private resources to support other undertakings.151 As Heidenhain has argued:152 If one follows the ECJ’s long-standing case law concerning the attribution of resources to the State, pursuant to which all resources of private or public institutions [over] the allocation of which the State can exercise a decisive influence are to be considered State resources, regardless of their source, then—contrary to the assumption of the ECJ—the resources of private undertakings, to the extent the State disposes of them by virtue of legislation, should also be viewed as ‘State resources’. 12.178 The Commission’s subsequent decisional practice has also grappled with the impli-

cations of PreussenElektra, and has endeavoured to confine its impact as much as possible. Wherever it can establish an element of State control over the flow of resources used to support renewables, the Commission treats the national measure as prima facie State aid and thus subject to the notification and exemption requirements under the TFEU. Thus, national TGC regimes typically involve payments passing through funds established by the State before reaching RES-E generators, so that those funds amount to ‘State resources’.153 Similarly, in its Decision to accept the feed-in tariff to support green electricity in Austria,154 the Commission emphasized that the Austrian rules levied a duty to cover the costs of the requirement to purchase RES-E at levels above market prices. These revenues were paid 150 Environmental campaigners welcomed this ruling, although for them the logic behind such support measures is that ‘electricity prices do not reflect the environmental costs incurred by other forms of power generation’ (EU Energy Policy, Issue 142, 31 October 2000). 151 See, eg, Bronckers and Van der Vlies (n 119), at 460–465 for strong criticism, and Baquero Cruz and Castillo de la Torre (n 119), at 490–494 for a balanced but somewhat critical discussion. 152 M Heidenhain (ed), European State aid Law Handbook (Munich: CH Beck, 2010), at 39 (emphasis in the original), citing a long line of earlier case law including: Van der Kooy (n 145), paras 13 ff; and Case C-206/06 Essent Netwerk Noord [2008] ECR I-5497, paras 65 ff. 153 See, eg, Commission Decisions N550/2000, Belgium: certificats verts (25 July 2001) and N504/2000, UK: Renewable Obligations and Capital Grants for Renewable Technologies (28 November 2001). 154 Decision N317a/2006, Austria: Support of electricity production from renewable resources (accepted without objections) [2006] OJ C221/8 (7 July 2006), discussed by B Renner-Loquenz, ‘State aid in feed-in tariff s for green electricity’ (2006) EC Commission Competition Policy Newsletter, Number 3—Autumn, 61.

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into an account held by the Austrian public authorities and then distributed therefrom according to the criteria laid down in the Austrian scheme. Clearly, those revenues became a State resource which was then distributed, and thus amounted to State aid under EU law; they were subsequently cleared under the old 2001 Commission Guidelines on State aid for environmental purposes.155 (ii) General Block Exemption Regulation: In a block exemption Regulation, 12.179 the Commission declares that certain categories of State aid which meet the Regulation’s criteria are automatically compatible with the Single Market and shall not be subject to the requirement of prior notification laid down in Article 108(3) TFEU. Consequently, Member States may implement State aid measures which fulfil the conditions of the Regulation without having gone through the notification procedure. This significantly reduces the administrative costs for the beneficiary, the Member State and the Commission. The State aids General Block Exemption Regulation of 6 August 2008156 (GBER) thus simplifies the treatment of State aid measures. In doing so, the Commission encourages Member States to shift existing State aid budgets towards better targeted aid that is of a real benefit to the European economy and society as a whole. The GBER incorporates into a single text a series of existing block exemption 12.180 Regulations adopted since 2001, which had covered: investment aid for SMEs; research and development aid in favour of SMEs; aid favouring employment; training aid; and regional aid. In addition, the Commission integrated into the GBER five types of aid which had so far not been covered by block exemptions, including aid favouring environmental protection.157 The exemption conditions for these categories are largely inspired by the requirements of the State aid guidelines and frameworks which have been adopted by the Commission since 2006. The following categories of aid can be granted via the GBER, up to the maximum aid 12.181 amounts as defined in that Regulation: aid to small and medium-sized enterprises (SME); social aid; regional aid; environmental aid; aid for research and development (R&D); innovation aid; and aid for promoting women’s entrepreneurship. With regard to environmental aid, Articles 18 to 25 of the GBER facilitate national 12.182 authorities granting an important number of aid measures favouring environmental protection and tackling climate change: such measures include, amongst others, investments in energy savings (Article 21), investments in renewable energy sources (Article 23), and aid in the form of tax deductions (Article 25). The measures 155

[2001] OJ C37/3. Commission Regulation 800/2008/EC declaring certain categories of aid compatible with the common market in application of Articles [107] and [108] of the Treaty [2008] OJ L214/3 (9 August 2008). 157 Other new categories are: aid in the form of risk capital; research and development aid for large companies; innovation aid; aid for newly created small enterprises; and aid for enterprises newly created by female entrepreneurs. 156

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promoted are not based on Directive 2001/77/EC, but are largely inspired by the Commission’s 2008 Guidelines on State aid for environmental protection.158 12.183 These Guidelines provide a very clear view of the criteria which should be met in

order for environmental aid for RES to be compatible with State aid regulations and the GBER should be read in conjunction therewith. 12.184 The GBER does not apply regardless of the amount of aid; it contains so-called

‘ceilings’ for individual notification (Article 6). This means that State aid measures exceeding these ceilings still have to be notified to the Commission individually in order for the Commission to analyse their effects on competition and contribution to the common interest. According to the individual notification thresholds of the GBER, investment aid for environmental protection amounting to more than €7.5 million per undertaking per investment project will need to be notified to the Commission for approval before it may be granted.159 12.185 Recently, the European Commission has approved the Romanian TGCs mecha-

nism after having invited Romania to adapt its initial law on the subject.160 Law 220/2008 was amended accordingly, in June 2011, in order to limit over-compensation to producers and multiple State aids and reduce the number of green certificates issued for energy generated from biomass.161 Other small modifications have been made, such as adding definitions or slightly amending the original text. The amendments were made after discussions and examination of the 2008 law by the European Commission. The European Commission then considered that the law did not infringe EU policy as far as State aid was concerned. Extract from Community guidelines on State aid for environmental protection [2008] O.J. C82/1 (1 April 2008) 3.1.6. Aid for renewable energy sources (101) Environmental investment and operating aid for the promotion of energy from renewable sources will be considered compatible with the common market within the meaning of Article [107](3)(c) [TFEU], if the conditions in points 102 to 111 are fulfilled. State aid may be justified if there is no mandatory Community standard concerning the share of energy from renewable sources for individual undertakings. Aid for investment and/or operating aid for the production of biofuels shall be allowed only with regard to sustainable biofuels.

158 ‘Community guidelines on State aid for environmental protection’ [2008] OJ C82/1 (1 April 2008). 159 Art 6(1)(b) of the GBER. 160 ‘Commission approves Romanian Green Certificates renewable energy support scheme’, Press Release IP/11/867 (13 July 2011). 161 ANRE and Consiliul Concurentei Romania (Competition Council of Romania), ‘Autorităţile Romane au transmis Comisiei Europene notificarea oficială a schemei de sprijin prin certificate verzi’ (June 2011).

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C. Support for Renewable Energy 3.1.6.1. Investment aid Aid intensity (102) The aid intensity must not exceed 60 per cent of the eligible investment costs. (103) Where the investment aid for renewable energy sources is to be given to SMEs, the aid intensity may be increased by 10 percentage points for mediumsized enterprises and by 20 percentage points for small enterprises, as set out in the table. Aid intensity for renewable energy sources Small enterprises 80 per cent Medium-sized enterprises 70 per cent Large enterprises 60 per cent (104) Where the investment aid is granted in a genuinely competitive bidding process on the basis of clear, transparent and non discriminatory criteria, effectively ensuring that the aid is limited to the minimum necessary for delivering maximum renewable energy, the aid intensity may amount to up to 100 per cent of the eligible investment cost as defined in points 105 and 106. Such a bidding process must be non-discriminatory and must provide for the participation of a sufficient number of undertakings. In addition, the budget related to the bidding process must be a binding constraint in the sense that not all participants can receive aid. Finally, the aid must be granted on the basis of the initial bid submitted by the bidder, thus excluding subsequent negotiations. Eligible costs (105) For renewable energy, eligible investment costs must be limited to the extra investment costs borne by the beneficiary compared with a conventional power plant or with a conventional heating system with the same capacity in terms of the effective production of energy. (106) Eligible costs must be calculated net of any operating benefits and operating costs related to the extra investment for renewable sources of energy and arising during the first five years of the life of this investment, as set out in points 81, 82 and 83. 3.1.6.2. Operating aid (107) Operating aid for the production of renewable energy may be justified in order to cover the difference between the cost of producing energy from renewable energy sources and the market price of the form of energy concerned. That applies to the production of renewable energy for the purposes of subsequently selling it on the market as well as for the purposes of the undertaking’s own consumption. (108) Member States may grant aid for renewable energy sources as follows: (109) Option 1 (a) Member States may grant operating aid to compensate for the difference between the cost of producing energy from renewable sources, including depreciation of extra investments for environmental protection, and the market price of the form of energy concerned. Operating aid may then be granted until the plant has been fully depreciated according to normal accounting rules. Any further energy produced by the plant will not qualify for any assistance. However, the aid may also cover a normal return on capital.

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Renewables (b) Where aid is granted in accordance with point (a) any investment aid granted to the undertaking in question in respect of the new plant must be deducted from production costs when determining the amount of operating aid. When notifying aid schemes to the Commission, Member States must state the precise support mechanisms and in particular the methods of calculating the amount of aid. (c) Unlike most other renewable sources of energy, biomass requires relatively low investment costs, but higher operating costs. The Commission will, therefore, be amenable to operating aid for the production of renewable energy from biomass exceeding the amount of investment where Member States can show that the aggregate costs borne by the undertakings after plant depreciation are still higher than the market prices of the energy. (110) Option 2 (a) Member States may also grant support for renewable energy sources by using market mechanisms such as green certificates or tenders. These market mechanisms allow all renewable energy producers to benefit indirectly from guaranteed demand for their energy, at a price above the market price for conventional power. The price of these green certificates is not fi xed in advance but depends on supply and demand. (b) Where the market mechanisms constitute State aid, they may be authorised by the Commission if Member States can show that support is essential to ensure the viability of the renewable energy sources concerned, does not in the aggregate result in overcompensation and does not dissuade renewable energy producers from becoming more competitive. The Commission will authorise such aid systems for a period of ten years. (111) Option 3 Furthermore, Member States may grant operating aid in accordance with the provisions set out in point 100. 3.1.7. Aid for cogeneration (112) Environmental investment and operating aid for cogeneration will be considered compatible with the common market within the meaning of Article [107](3) (c) TFEU, provided that the cogeneration unit satisfies the definition of high-efficiency cogeneration set out in point 70(11), and provided that for investment aid: (a) a new cogeneration unit will overall make primary energy savings compared to separate production as defined by Directive 2004/8/EC and Decision 2007/74/ EC; (b) improvement of an existing cogeneration unit or conversion of an existing power generation unit into a cogeneration unit will result in primary energy savings compared to the original situation. (113) For operating aid, an existing cogeneration must satisfy both the definition of high-efficiency cogeneration set out in point 70(11) and the requirement that there are overall primary energy savings compared to separate production as defined by Directive 2004/8/EC and Decision 2007/74/EC. 3.1.7.1. Investment aid Aid intensity (114) The aid intensity must not exceed 60 per cent of the eligible investment costs.

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C. Support for Renewable Energy (115) Where the investment aid for cogeneration is to be given to SMEs, the aid intensity may be increased by 10 percentage points for medium-sized enterprises and by 20 percentage points for small enterprises, as set out in the table. Aid intensity for high-efficiency cogeneration Small enterprises 80 per cent Medium-sized enterprises 70 per cent Large enterprises 60 per cent (116) Where the investment aid is granted in a genuinely competitive bidding process on the basis of clear, transparent and non discriminatory criteria, effectively ensuring that the aid is limited to the minimum necessary for achieving the maximum energy saving, the aid intensity may amount to up to 100 per cent of the eligible investment cost as defined in points 117 and 118. Such a bidding process must be non-discriminatory and must provide for the participation of a sufficient number of companies. In addition, the budget related to the bidding process must be a binding constraint in a sense that not all participants can receive aid. Finally, the aid must be granted on the basis of the initial bid submitted by the bidder, thus excluding subsequent negotiations. Eligible costs (117) Eligible costs must be limited to the extra investment costs necessary to realise a high-efficiency cogeneration plant as compared to the reference investment. (118) Eligible costs must be calculated net of any operating benefits and operating costs related to the extra investment and arising during the first five years of the life of this investment, as set out in points 81 to 83. 3.1.7.2. Operating aid (119) Operating aid for high-efficiency cogeneration may be granted in accordance with the rules for operating aid for renewable energy laid down in section 3.1.6.2: (a) to undertakings distributing electric power and heat to the public where the costs of producing such electric power or heat exceed its market price. The decision as to whether the aid is necessary will take account of the costs and revenue resulting from the production and sale of the electric power or heat; (b) for the industrial use of the combined production of electric power and heat where it can be shown that the production cost of one unit of energy using that technique exceeds the market price of one unit of conventional energy. The production cost may include the plant’s normal return on capital, but any gains by the undertaking in terms of heat production must be deducted from production costs. 3.1.8. Aid for energy-efficient district heating (120) Environmental investment aid in energy-efficient district heating installations . . . will be considered compatible with the common market within the meaning of Article [107](3)(c) [TFEU], provided that it leads to primary energy savings and that the beneficiary district heating installation satisfies the definition of energy-efficient district heating set out in point 70(13) and that: (a) the combined operation of the generation of heat (as well as electricity in the case of cogeneration) and the distribution of heat will result in primary energy savings; or

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Renewables (b) the investment is meant for the use and distribution of waste heat for district heating purposes. Aid intensity (121) The aid intensity for district heating installations must not exceed 50 per cent of the eligible investment costs. If the aid is intended solely for the generation part of a district heating installation, energy-efficient district heating installations using renewable sources of energy or cogeneration will be covered by the rules set out in sections 3.1.6 and 3.1.7 respectively. (122) Where the investment aid for energy-efficient district heating is to be given to SMEs, the aid intensity may be increased by 10 percentage points for mediumsized enterprises and by 20 percentage points for small enterprises, as set out in the table. Aid intensity for energy-efficient district heating using conventional sources of energy Small enterprises 70 per cent Medium-sized enterprises 60 per cent Large enterprises 50 per cent (123) Where the investment aid is granted in a genuinely competitive bidding process on the basis of clear, transparent and non discriminatory criteria, effectively ensuring that the aid is limited to the minimum necessary for achieving the maximum energy saving, the aid intensity may amount to up to 100 per cent of the eligible investment cost as defined in points 124 and 125. Such a bidding process must be non-discriminatory and must provide for the participation of a sufficient number of undertakings. In addition, the budget related to the bidding process must be a binding constraint in the sense that not all participants can receive aid. Finally, the aid must be granted on the basis of the initial bid submitted by the bidder, thus excluding subsequent negotiations. Eligible costs (124) Eligible costs must be limited to the extra investment costs necessary to realise an investment leading to energy-efficient district heating as compared to the reference investment. (125) Eligible costs must be calculated net of any operating benefits and operating costs related to the extra investment and arising during the first five years of the life of this investment, as set out in points 81 to 83. © European Union, Only European Union legislation printed in the paper edition of the Official Journal of the European Union is deemed authentic.

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13 COAL

A. General

13.01 (1) Expiry of ECSC Treaty and migration of coal into the TFEU regime 13.01 (2) Particular rules concerning State aids for coal 13.04 (3) Monitoring EU imports of hard coal originating in third countries 13.11

B. Directive 2009/31/EC on the Geological Storage of Carbon Dioxide

13.12 (1) Context 13.12 (2) Main elements of the CCS Directive 13.21 (3) Link with the European Emissions trading scheme and the Kyoto Protocol 13.50

A. General (1) Expiry of ECSC Treaty and migration of coal into the TFEU regime Coal, alongside steel, was at the heart of the first steps in the post-war project which 13.01 has grown into today’s EU. The European Coal and Steel Community Treaty, which was signed in Paris on 18 April 1951 and entered into force on 24 July 1952, aimed to create a common market and common institutions under the framework of an autonomous treaty system. While the ECSC Treaty did aim at market and competition objectives (see its Articles 4, 65, and 66), this operated within the broader context of a declining domestic coal industry and the need to manage a contraction in both its output and the extent of employment in the sector.1 Nevertheless, the firm prohibitions on trade restrictions, discrimination, State subsidies, and anticompetitive practices were significant (particularly as forerunners of the regime under the EEC Treaty, now to be found in the TFEU), although the State aids rules soon required relaxation in the face of the demands of restructuring.2 1 See Commission Press Release IP/02/98 on the expiry of the ECSC Treaty (19 June 2002). As a result, a variety of other objectives existed alongside the market goals, especially to allow interventions to address short-term crises where demand or supply declined seriously or in case of general market disorder (Arts 5 and 58–60 ECSC). 2 As early as 1965: Decision 3/65 [1965] OJ L31/480. For discussion, see J Grunwald, Das Energirecht der Europäischen Gemeinschaften (Berlin: de Gruyter, 2003), 115–140 and L Hancher and F Salerno, ‘Coal: the ECSC Treaty’, in C Jones (gen ed), EU Energy Law—Volume II: EU Competition Law and Energy Markets (3rd edn, Leuven: Claeys & Casteels, 2011), 603 ff.

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Coal 13.02 The ECSC Treaty, however, was concluded only for a limited, 50-year period and

it expired on 24 July 2002. After this point, the rules of the then EC Treaty (now the combined system of the TEU and TFEU) have applied to the coal sector. More recently, a more explicit emphasis has been placed upon coal in the contexts of environmental sustainability and security of supply:3 in this connection, ‘clean coal’ and carbon capture and storage (CCS) technology have risen rapidly towards the top of the political and industry agenda, as noted at paras 13.12 ff ). 13.03 Due to the convergence of the ECSC and EC competition rules during the preced-

ing decade, the transition from the ECSC regime proved relatively smooth, with only small substantive and procedural changes experienced.4 In particular, the Commission’s jurisdiction over competition law issues in the coal sector is slightly more limited than under the old ECSC regime: its exclusive role concerning collusion and dominance under the ECSC is now shared with national authorities and courts under Regulation 1/2003/EC.5 Similarly, in the field of merger control the Commission’s former exclusive jurisdiction in the coal sector is now subject to the thresholds of the Merger Regulation 139/2004/EC.6 Other minor substantive and procedural differences exist,7 but for present purposes the most significant element of the new regime concerns the application of the State aid rules to the EU coal sector. (2) Particular rules concerning State aids for coal 13.04 The old State aid regime for coal under Decision 93/3632/ECSC8 was replaced by

Regulation 1407/2002/EC.9 The most striking difference between the two measures is the very strong focus of that Regulation upon energy security: three brief recitals in the Decision referred to diversity of national supplies and suppliers, and the stability of supplies available on the world market, yet Recitals 3 to 12 of the Regulation emphasize security of supply, going so far as to suggest that subsidized production can only be justified insofar as ‘necessary to make an effective contribution to . . . energy security’ (Recital 11). Nevertheless, the Regulation maintained a focus on the need for restructuring of the industry, while taking into account the social and regional consequences of such measures.

3 See, eg, Commission Green Paper, ‘Towards a European Strategy for the Security of Supply’, COM(2000) 769, para II.B(d), and the subsequent ‘Sustainable power generation from fossil fuels: aiming at zero emissions from coal after 2020’ COM(2006) 843 (10 January 2007). 4 For the Commission’s summary of these changes, see Commission Communication concerning certain aspects of the treatment of competition cases resulting from the expiry of the ECSC Treaty [2002] OJ C152/5. 5 [2003] OJ L1/1, esp its Art 3. For details, see, eg, R Whish & D Bailey, Competition Law (7th edn, Oxford: OUP, 2012), ch 7. 6 [2004] OJ L24/1. For details, see Whish & Bailey (n 5), ch 21. 7 See PD Cameron, Competition in Energy Markets (2nd edn, OUP, 2007), paras 8.14–8.16 for discussion. 8 [1993] OJ L329/12. 9 [2002] OJ L205/1.

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According to Article 3(1), aid to the coal industry would only be compatible with the 13.05 common market if it met the conditions laid down in Chapter 2 of the Regulation, although other measures concerning aid for R&D, the environment, and training remained unaffected by the Coal Regulation. Article 3(2), meanwhile, limited such aid to costs connected to the production of electricity, CHP, coke production, and fuelling of steel industry blast furnaces. The acceptable categories of aid then listed in Chapter 2 were: – aid for the reduction of activity (Article 4): this concerned aid to cover production losses, in conjunction with restructuring plans leading to closures by no later than the end of 2007; – aid for accessing coal reserves (Article 5): this could cover initial investment (Article 5(2)) or current production aid (Article 5(3), only as part of a plan for accessing such reserves), but not cumulatively under both headings (Article 5(1)); – aid to cover exceptional costs (Article 7): this concerned non-production-related losses as a result of rationalization and restructuring (known as ‘inherited liabilities’), such as the environmental rehabilitation of former mining sites and the payment of social welfare benefits to those pensioned off early. Detailed categories of such costs were contained in the Annex to the Regulation. Under both Articles 4 and 5, such aid was not permitted to cause EU coal prices 13.06 to fall below that for comparable quality coal from third countries, nor should it have led to distortions between coal buyers and users in the EU or distortions of competition on the electricity, CHP, coke production, or steel markets (Article 4(c) to (e) and Article 5(2) and (3)). Also, aid granted under Articles 4 and/or 5(3) was required to ‘follow a downward trend so as to result in a significant reduction’ (Article 6(1)), while the total amount of aid granted under Articles 4 and 5 in any year after 2003 was not to exceed that authorized by the Commission in 2001 under the old Decision (Article 6(2)). Aid under Article 7, however, was not required to be degressive in nature nor was it subjected to a maximum total amount of aid in any given year. The Regulation also provided for its own special notification requirements (beyond 13.07 those laid down in Regulation 659/1999/EC and Regulation 794/2004/EC) in its Article 9: in particular, Member States wishing to rely upon Article 4 were required to submit a closure plan, while attempts to grant aid to access reserves under Article 5 were required to submit plans for accessing such reserves. Each plan was required to address certain elements listed in Article 9(4), and (5) and (6) respectively. As required by Article 11, the Commission produced its Report on operation of the 13.08 Coal Regulation in 2007.10 This summarized the Commission’s practice under the

10

COM(2007) 253 (21 May 2007).

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Regulation, referring to various Decisions adopted with regard to Member State investment and restructuring plans.11 While various problems with the operation of the Coal Regulation were identified by the Commission,12 it did not (under Article 13(1) of the Regulation) propose amendments thereto for introduction in the period commencing 1 January 2008: it decided that Articles 5 and 7 provided the practical means necessary for dealing with aid for closures and pointed out both that the world coal market seemed to function effectively and that the practical impact of any changes for the remaining two years of the Regulation’s life would have been minimal. 13.09 By virtue of its Article 14(3), this Regulation expired on 31 December 2010.

Without a specific replacement measure, all coal aid would have become subject to the basic rules of EU law under Articles 107 and 108 TFEU: this would almost certainly have resulted in a significant reduction of the ability of Member States to grant aid in this sector. In that light, and as a result of its experience in the operation of the Coal Regulation, the Commission proposed a new regulation13 to phase out hard coal14 subsidies and close uncompetitive coal mines by 2014. This approach intended to re-focus aid on the social and environmental consequences of mine closures, rather than continuing to support the operation of uncompetitive mines. Under the proposal, in future operating aid would only have been available to mines for which Member States had submitted a definite closure plan with a deadline of 1 October 2014 (ie a maximum of four years: later submission of a closure plan does not extend the deadline: Article 3(1)(a) of the proposal). Failure to close the mine by the planned target date would have led to liability to repay any aid received under the plan (Article 3(2)). Along the way to such closure, clear reductions in aid were to be required (to the tune of at least 33 per cent for every fifteen months: Article 3(1)(f)) and aid in any given year could not exceed the upper limit of the total authorized for that Member State in 2010 (Article 3(1)

11

For an outline, see Cameron (n 7), paras 8.22–8.26. Specifically (Cameron (n 7), at 8–10), the Commission referred to: difficulties in verifying prices under Art 4(c); the scope of Art 2(a) concerning what types of coal were covered by the Regulation; the omission of the requirement from the old Coal Decision that mines receiving operating aid had to show a ‘trend towards reduction in production costs’; the difficulties of applying some of the rather vague categories in the Annex (leading to aid which does not encourage further restructuring); and the problem of enforcing Spanish commitments to close those mines which had received aid (see Decision C14/04, restructuring Plan of the Spanish coal industry and State aid for the years 2003–2005 (21 December 2005)). 13 Proposal for a Council regulation on State aid to facilitate the closure of uncompetitive coal mines, COM(2010) 372 and IP/10/984 (both 20 July 2010). (It also considered simply adopting guidelines under Art 107(3)(c) TFEU and allowing the Coal Regulation to expire, as a means of minimizing the impact of such aid upon competition.) 14 Lignite is already (essentially) prevented from receiving operating aid: see, originally, Annex I to the ECSC Treaty and the Commission’s Communication on the matter: [1986] OJ C254/2 (11 October 1986), and now Art 2(a) of the Coal Regulation. (Although see COM(2007) 253, para 2.3.2.) 12

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A. General

(g)): this degressivity proposal was a great deal more specific than under the Coal Regulation. Aid to cover exceptional costs remained possible under Article 4 of the proposed Regulation, subject to some amendments to the related Annex.15 Finally, the provisions concerning access to coal resources (both on investment aid and production aid) were removed from the proposed new Regulation.16 In this way, the Commission hoped to exert pressure upon Member States to restructure their coal industry and/or to accept the need for some closures of mines the operation of which will never be economic. The proposed regime was presented as transitional, providing the key stepping stone towards the full application of the general State aid rules in the hard coal sector (Recital 6 of the proposal). The security of supply justifications used to support the current Coal Regulation were summarily dismissed (Recital 2), while the EU’s environmental sustainability goals were emphasized as the reason to reject the indefinite continuation of coal subsidies (Recital 3). On 10 December 2010, the Council adopted a Decision17 which accepted the vast 13.10 majority of the elements contained in the Commission’s proposal for a Regulation. Aside from the form of the measure, the key change made by the Council concerns the deadline for definite closure, and the consequences of this change for the degressivity framework. Thus, under Article 3(1)(a) of the new Decision, the closure plan for the relevant coal production unit(s) must have a deadline of no later than 31 December 2018. As a result, Article 3(1)(f) maintains the requirement of a clear ‘downward trend’ for the overall amount of closure aid granted by a Member State: it must be reduced (by comparison with the aid granted in 2011) by at least 25 per cent by the end of 2013, not less than 40 per cent by the end of 2015, at least 60 per cent by the close of 2016 and not less than 75 per cent by the end of 2017. Despite the slower pace of the transition away from the grant of aid in such circumstances, these criteria still provide much more detail than those obtained under the old Coal Regulation. The other minor change of substance from the proposal is contained in paragraph 1(m) of the Annex to the Decision, where the ‘costs of surface recultivation’ which result from the closure of coal production units may also be covered by State aid under the new regime. Arguably, such costs were already covered by paragraph 1(i) of the Annex, but the clarification of the point is not unwelcome.

15 Crucially, the costs incurred by undertakings which are closing units could only be covered ‘if they result from the closure of coal production units’: this aimed to address the problem noted in COM(2007) 253 concerning the vagueness of the Annex categories under the 2002 Coal Regulation (see n 10). 16 According to the Commission, when taking only production aid into account, a mere 1.4 per cent of EU electricity production is attributable to subsidized coal; even when including all coal aid, the figure rises to only 5.4 per cent (COM(2010) 372 (n 13), at 2). 17 Council Decision 2010/787/EU on State aid to facilitate the closure of uncompetitive coal mines [2010] OJ L316/24 (21 December 2010).

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Coal (3) Monitoring EU imports of hard coal originating in third countries 13.11 For the purposes of monitoring the extent of EU reliance upon hard coal imports,

and to allow the effective monitoring of State aid allowed to hard coal producers within the EU, Regulation 45/2003/EC was adopted.18 Its Article 4 imposes reporting obligations upon importers of hard coal from third countries into the EU, while Article 5 specifies the detailed information to be provided by them to the Member State of importation. Member States are then obliged to transmit that data to the Commission in aggregated form (Articles 2 and 6), enabling the Commission to produce regular reports on prices and the market, including a market outlook (without disclosing information in such a way as to allow the identification of individual imports or companies) (Recitals 9 and 12, Articles 7 and 9).

B. Directive 2009/31/EC on the Geological Storage of Carbon Dioxide19 (1) Context 13.12 The EU has set itself the target of achieving at least a 20 per cent reduction of

greenhouse gas emissions by 2020, and 50 per cent by 2050.20 One of the ways of achieving this goal is the improvement and deployment of CCS technology. The widespread use of CCS could reduce the economic costs of cutting greenhouse gas emissions and also improve the security of energy supply by allowing the continued use of indigenous fossil fuel energy sources. CCS is expected to play a major role in the transition to sustainable energy in the EU: by 2050 CCS could provide 20 per cent of the CO2 reductions required.21 13.13 At this stage, CCS is an emerging technology and it raises different (and often

difficult) questions relating to its funding. Also, its regulatory framework remains uncertain. Its cost could yet prove a real barrier to its widespread use. The cost of

18 [2003] OJ L62/1, replacing Decision 77/707/ECSC, [1977] OJ L292/11, as amended by Decision 85/161/ECSC, [1985] OJ L63/20. 19 Directive 2009/31/EC of the European Parliament and of the Council of 23 April 2009 on the geological storage of carbon dioxide and amending Council Directive 85/337/EEC, European Parliament and Council Directives 2000/60/EC, 2001/80/EC, 2004/35/EC, 2006/12/EC, 2008/1/EC and Regulation (EC) No 1013/2006, [2009] OJ L140/114 (hereinafter, ‘the CCS Directive’). For various related documentation, see: ; Commission guidance documents on certain aspects of the CCS Directive have recently been issued and are available at: . 20 Recital 3 to the CCS Directive. 21 Commission, ‘Proposal for a Directive of the European Parliament and of the Council on the geological storage of carbon dioxide’, COM(2008) 18 (23 January 2008), 2.

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CCS using current technologies can rise up to €60 to €90/t CO2, and the costs of CCS by 2030 are estimated to be about €30 to €40/t CO2.22 To promote the development of CCS, the EU has set up support actions and inter- 13.14 national collaborations within the FP7 Energy programme for the deployment of CCS in Europe.23 FP7 granted financial aid to test the most promising technologies in industrial pilot plants with a CO2 capture capacity of 2 to 4 MW.24 In response to these developments, the Commission proposed (on 23 January 13.15 2008), and the Council and European Parliament adopted (on 23 April 2009), the CCS Directive.25 Member States were required to implement the CCS Directive by 25 June 2011 (Article 39). This Directive has had a significant impact upon the other European Directives in this field.26 It establishes clearly which provisions of existing legislation should apply to which aspects of CCS. It is a significant step towards achieving coherence across the EU legislation which addresses this subject matter. Also, the adoption of the CCS Directive could confer new competences upon NRAs for the electricity and gas market.

22

McKinsey Consulting, ‘Carbon capture and storage: Assessing the Economics’ (22 September 2008, available at: ). This can be compared with current CO2 prices under the EU ETS which typically have ranged between €15 and €40/t CO2 during Phase II of the EU ETS (although fluctuations have seen significantly lower prices at certain times of difficulty). 23 ZEP Task Force on Technology, ‘Recommendation for RTD, support actions and international collaboration priorities within the next FP7 Energy work programme in support of deployment of CCS in Europe’ (20 April 2007), available at . 24 See n 23. 25 For background and related documentation, see: . 26 Directive 96/61/EC ([1996] OJ L257/26) has been reviewed—see now Directive 2008/1/EC [2008] OJ L24/8—and now the CCS Directive regulates the risks to the environment and human health posed by the capture of CO2 streams. Directive 85/337/EEC ([1985] OJ L175/40) was also modified. Now, the CCS Directive regulates liability for local environmental damage caused by CCS: previously, that was regulated by the Directive 2004/35/EC ([2004] OJ L143/56). Directive 2000/60/EC ([2000] OJ L327/1) establishing a framework for Community action in the field of water policy has been amended and now the CO2 can be injected into saline aquifers. The new Directive completes the large combustion plant Directive 2001/80/EC ([2001] OJ L309/1) on the limitation of emission of certain pollutants into the air from large combustion plants by introducing the requirement that all future combustion plants of 300 MW or more must have suitable space on the installation site for the equipment necessary to capture and compress CO2 and that the availability of suitable storage sites and transport networks as well as technical and economic capacity of retrofitting for CO2 capture must be assessed. Directive 2006/12/EC ([2006] OJ L114/9) on waste and Regulation 1013/2006/EC ([2006] OJ L190/1) on the shipment of waste have also been modified: the amended Art 2(1)(a) of the waste Directive excludes CO2 which is captured and transported for the purpose of geological storage.

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Coal 13.16 Technically, CCS consists of the capture of carbon dioxide from industrial installa-

tions, its transport to the storage site, and its injection into a suitable underground geological formation for the purposes of permanent storage.27 13.17 It is also important to remember that the CCS Directive has been developed as a

result of policy initiatives tending to regulate energy and climate change issues. One of the key elements of these policies was their design with a view to the EU meeting the requirements of the Kyoto Protocol.28 13.18 The objectives of the CCS Directive are to:

– ensure the appropriate management of the environmental risks associated with CCS and reduce environmental impacts associated with the CCS chain; – provide clarity, coherence, and stability, enabling market operators to invest in CCS facilities across the EU under comparable regulatory conditions; – provide appropriate incentives for the use of this technology, that are in relation to its actual GHG reduction benefits; – address liability issues, in particular responsibility for remediation in relation to leakage from the storage site in the short and long term.29 13.19 This Directive provides greater certainty for investors in CCS by fi xing a clear legal

framework. 13.20 Now that the context has been set, it is important to analyse the main elements of

the CCS Directive (1) the enabling framework of the CCS Directive; (2) the exploration and storage permits, and their transferability; (3) the issues of responsibility and liability, and the transfer of responsibility after the closure of the site; (4) third party access to the pipe and to the storage sites; (5) the purity of the CO2 captured. (2) Main elements of the CCS Directive30 13.21 (a) Enabling or mandatory framework? The CCS Directive establishes an enabling

framework. According to the Directive, there is no obligation to capture and store 27 B Metz et al, Carbon Dioxide Capture and Storage (Cambridge: IPCC/CUP, 2005), 54, available at . For a helpful diagram, see . For further information, see: . 28 See Recitals 1–4 to the CCS Directive. This question will be examined at paras 13.50 ff. 29 Report of Working Group 3: Carbon Capture and Geological Storage (CCS), at 7, available at: . 30 See, generally, MM Roggenkamp and E Woerdman (eds), Legal Design of Carbon Capture and Storage: Developments in the Netherlands from an International and EU Perspective (Antwerp: Intersentia, 2009).

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CO2, but there is an obligation to enable it. Member States can decide whether and where CCS will be developed on their territories (Article 4): this requires Member States to conduct the appropriate studies to enable them to reach this decision. Also, Member States must ensure that operators of future combustion plants with 13.22 a rated output of 300 MW or more assess the availability of suitable storage sites, transport networks, and the technical and economic feasibility of retrofitting for CO2 capture (Recital 46, and Article 34 of the amendment to Directive 2001/80/ EC on the limitation of emission of certain pollutants into the air from large combustion plants). If those conditions are met, a suitable space must be set aside on the site for the equipment necessary to capture and compress CO2. Member States accordingly have an obligation to ensure that such assessments are conducted by the relevant operators. However, Article 38(3) of the CCS Directive does provide the possibility for the 13.23 Member States to establish mandatory requirements for emission performance standards for new electricity-generating large combustion installations. (b) Exploration and storage permits, and the transferability of these permits: The 13.24 CCS Directive imposes a permit-based system. There are two kinds of permits: (a) a permit for exploration; and (b) a permit for storage. (a) Regarding the exploration permit, Article 5(2) provides that the Member 13.25 States should ensure that permits are granted on the basis of objective, published, and non-discriminatory criteria. In this way, the Member States can protect and encourage exploration investments (Recital 23). The permit cannot be of a duration longer than that needed for the completion of the exploration of the concerned site (Article 5(3)). (b) Storage sites can be operated only with a storage permit (Article 6) and the 13.26 Member State’s Competent Authority must ensure that the requirements of the Directive and other relevant EU legislation are met and the storage of CO2 occurs while taking environmental safety into account. Article 6(3) provides that the holder of the exploration permit has priority over competitors in securing the grant of the storage permit, because as a holder of the former he will have made substantial investments and taken associated risks (Recital 24). The application for a storage permit is submitted to the Commission for its opin- 13.27 ion (Article 10 of the CCS Directive).31 Within four months, the Commission may issue a non-binding opinion on that application: if the national Competent Authority departs from that opinion, it must give its reasons for doing so. The permit is reviewed five years after issue and every ten years thereafter (Article 11).

31 The aim of this provision is to ensure consistency in the application of the Directive across the EU in the early years of its operation: Recital 25.

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Coal 13.28 The Directive does not contain any explicit provisions concerning the transferabil-

ity of the exploration and the storage permits and leaves that task to Member States. The only provision related to this matter concerns ‘changes planned in the operation of the storage site, including changes concerning the operator’ (Article 11(1)).32 13.29 In the implementation of the Directive by Member States, special attention must

be given to certain aspects concerning the transfer of permits: – will the permits be transferable at all; – if so, according to which conditions; – would the exploration and storage permits have to be transferred with the power plants; and – will the exploration and storage permits be tied to the CO2 emissions? 13.30 (c) Responsibility, liability,33 site closure, and transfer of responsibility after

closure: The operator is charged with the responsibilities of maintenance, monitoring (Article 13)34 and control, reporting (Article 14), and taking corrective measures, until such time that the responsibility for the storage site is transferred to the Competent Authority (Article 18 of the CCS Directive). In case of leakage, the operator must notify the Competent Authority and take the necessary corrective measures. If the operator fails to take the necessary corrective measures, those measures are to be taken by the Competent Authority which shall then recover the costs from the operator (Article 16). The Competent Authority must organize a system of routine and non-routine inspections for all storage complexes, the details concerning which are laid down in Article 15. 13.31 Under Article 17(1) of the CCS Directive, the closure of a storage site can occur if:

(a) the relevant permit conditions have been met (most importantly, that the total quantity authorized to be stored—see Article 9(3)—has now been reached); (b) the operator so requests and the Competent Authority accepts its reasons for doing so; or (c) the Competent Authority so decides after having withdrawn the storage permit in accordance with Article 11(3). 13.32 Where closure has occurred under Article 17(1)(a) or (b), the operator retains

responsibility for monitoring, reporting, and taking corrective measures until responsibility for the site has been transferred to the Competent Authority under 32 The Competent Authority is required to review and update or, as a last resort, withdraw the storage permit if any of the criteria in Art 11(3) is satisfied. 33 For discussion in the Dutch (private law) context, see MH Wissink, ‘Post-Injection Liability for CO2 storage’, in Roggenkamp and Woerdman (eds) (n 30), ch IX. 34 See, further, Commission, ‘Implementation of Directive 2009/31/EC on the Geological Storage of Carbon Dioxide—Guidance Document 2: Characterisation of the Storage Complex, CO2 Stream Composition, Monitoring and Corrective Measures’ (2011) (available at: ), 89–127.

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Article 18 of the CCS Directive (discussed at paras 13.35 ff ) (Article 17(2)). Prior to closure, the operator must submit a provisional post-closure plan to the Competent Authority for approval. The plan is to be based on best practice and must comply with the criteria laid down in Annex II to the Directive (Article 17(3)). The operator is also responsible for sealing the storage site and removing the injection facilities (Article 17(2)). Closure under Article 17(1)(c), however, transfers monitoring (etc) responsibilities 13.33 to the Competent Authority, although it pursues those functions on the basis of the provisional post-closure plan submitted by the operator in accordance with the criteria of Article 17(3). However, in an Article 17(1)(c) closure the Competent Authority may recover from the operator the costs of fulfilling those responsibilities, including by drawing upon the operator’s financial contribution required under Article 20 (on which see para 13.37). The general philosophy of the Directive is to promote investments in CCS and to 13.34 make sure that investors are able to transfer their responsibilities after a certain period to a Competent Authority (Recital 26 of the proposal for a Directive CCS). The transfer of responsibility will ensure the consistency in implementation of the requirements of the Directive across the EU, enhance public confidence in CCS, and facilitate investments in CCS (Recital 33 to the CCS Directive). Article 18 lays down detailed rules on the operation of such transfers of responsi- 13.35 bility after site closure under Article 17(1)(a) or (b).35 For such a transfer to occur (whether at the request of the operator or on the Competent Authority’s own initiative), a range of conditions set by Article 18(1) must be met: (a) all available evidence indicates that the stored CO2 will be completely and permanently contained; (b) a minimum period, to be determined by the Competent Authority has elapsed. This minimum period shall be no shorter than 20 years, unless the Competent Authority is convinced that the criterion referred to in point (a) is complied with before the end of that period; (c) the financial obligations referred to in Article 20 have been fulfilled; and (d) the site has been sealed and the injection facilities have been removed. It is for the operator to demonstrate in a report that it has satisfied these condi- 13.36 tions (Article 18(2)) and, once the Competent Authority has accepted this,36 the

35 See, further, Commission, ‘Implementation of Directive 2009/31/EC on the Geological Storage of Carbon Dioxide—Guidance Document 3: Criteria for Transfer of Responsibility to the Competent Authority’ (2011, available at: ). 36 Article 18(3)–(5) contains various provisions concerning this decision-making procedure, including obligations to notify to the Commission of the operator’s report, the Competent Authority’s draft and final approval decisions, as well as a requirement for the Competent Authority

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transfer will take place and monitoring will be reduced to checking for detection of leakages or significant irregularities (Article 18(6)). Where closure has occurred pursuant to Article 17(1)(c), however, transfer of responsibility will only be deemed to have occurred when the evidence shows that ‘the stored CO2 will be completely and permanently contained’ and after sealing and removal of injection facilities (Article 18(8)). 13.37 Prior to a transfer of responsibility to the Competent Authority (including via a

forced closure under Articles 11(3) and 17(1)(c)), the operator is required to make a financial contribution to the Competent Authority on the basis of arrangements to be decided by the Member States, but covering at least the anticipated costs of monitoring for a thirty-year period (Article 20(1)).37 The Commission, in consultation with the Member States, may adopt guidelines for the estimation of such costs to ensure transparency and predictability for operators (Article 20(2)). 13.38 However, the Competent Authority cannot recover the costs incurred from the

former operator after the transfer, except in case of fault of the operator including cases of deficient data, concealment of relevant information, negligence, wilful deceit, or malpractice (Article 18(7)). 13.39 Indeed, Member States must designate Competent Authorities to fulfil the duties

of the Directive (Article 23).38 Two possibilities could be envisaged: either the Member State could put in place a new entity or it could extend the competences of the existing national regulatory body (or bodies) for the electricity and gas markets to cover CCS as well. So far as Member States with a federal structure are concerned, the federal regulator, or the regional regulators, or both of them can be Competent Authorities under the Directive. Where more than one such Competent Authority is designated in any given Member State, arrangements must be made to ensure the coordination of their work (Article 23). 13.40 (d) Third party access to the pipe and to the storage sites:39 Recital 38 to the

CCS Directive emphasizes that access to CO2 transport networks and storage sites may become a condition for entry into competitive operation within the internal

to take into account any opinion delivered by the Commission on the decision at hand and to provide reasons to the operator for any refusal and to explain why it has departed from any such Commission opinion at any point. 37 Under Art 19, the operator must provide evidence of adequate provision to cover the obligations under the Directive: this can be done by showing that the operator has obtained financial security or any other equivalent. See, further, Commission, ‘Implementation of Directive 2009/31/ EC on the Geological Storage of Carbon Dioxide—Guidance Document 4: Article 19 Financial Security and Article 20 Financial Mechanism’ (2011) (available at: ). 38 For discussion, see K de Ridder and A Haan, ‘The Role of the Competent Authority in Regulating CCS’, in Roggenkamp and Woerdman (eds), ch XI (n 30). 39 See MM Roggenkamp, ‘The Concept of Th ird Party Access applied to CCS’, in Roggenkamp and Woerdman (eds) (n 30), ch X.

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electricity and heat market, depending upon the prices of carbon and CCS. That is why it is important for potential users to have access and that is a way to ensure investments in this field. The conditions of access are to be determined by Member States to ensure fair and open third-party access, provided in a transparent and non-discriminatory manner (Article 21). Third-party access to the pipeline system means that the private pipeline owner has 13.41 a duty to provide access to a third party which wishes to transport CO2; the same basic duty also applies for access to the storage site for a third party which wants to store CO2 (Article 21(1)).40 Various grounds upon which the operator may refuse to grant such access are laid down in Article 21. Under Article 21(2), in ensuring the application of TPA Member States must take into account: (a) the storage capacity which is or can reasonably be made available within the areas determined under Article 4, and the transport capacity which is or can reasonably be made available; (b) the proportion of its CO2 reduction obligations pursuant to international legal instruments and to EU legislation that it intends to meet through capture and geological storage of CO2; (c) the need to refuse access where there is an incompatibility of technical specifications which cannot be reasonably overcome;41 and (d) the need to respect the duly substantiated reasonable needs of the owner or operator of the storage site or of the transport network and the interests of all other users of the storage or the network or relevant processing or handling facilities who may be affected. Further, Article 21(3) makes clear that TPA may also be refused on grounds of 13.42 lack of capacity, provided that operators provide duly substantiated reasons for such refusal. It should be noted, however, that reliance by an operator upon lack of capacity should trigger Member State provisions requiring the operator to make any necessary enhancements so far as it is economical to do so or when a potential customer is prepared to pay for their cost, provided that this would not have a negative impact upon the environmental security of such transport and/or storage (Article 21(4)). It is clear that the operation of such TPA principles shares many similarities with 13.43 the TPA concept under the Gas and Electricity Internal Market Directives, which we have discussed previously (Chapter 4). However, it should be emphasized that the provisions on refusal of access are both vaguer and more wide-ranging than 40 For discussion, see: L Birkeland, ‘Burying CO2: The New EU Directive on Geological Storage of CO2 from a Norwegian Perspective’ (January 2009) (available at: ). 41 See M Holwerda, ‘The Scope under EU Competition Law for CO2 Transport and Storage Operators to Refuse Access to Infrastructure on Technical Grounds’ (see , 4 July 2011).

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those applicable under the Internal Market Directives, providing greater scope for Member States to allow such refusal of access in their implementing legislation and making it easier for operators to justify denial of TPA. This is perhaps unsurprising given the early stage of CCS development and the fact that most such transport networks and storage facilities are, or will be, purely privately owned (in contrast to many such infrastructural elements in the traditional electricity and gas supply industries). Nevertheless, while there is no express reference to the EU competition rules (beyond the provisions on State aids: Recital 51), it seems clear that operators must still comply with Articles 101 and 102 TFEU when setting up and running such CCS transport and storage facilities. How the CCS Directive’s less intrusive provisions on TPA will interact with those competition rules remains to be seen. 13.44 A possible option for Member States in implementing these TPA requirements

would be to introduce a system of regulated tariffs. To achieve this, the competences of the national regulators for the energy and gas markets could be extended accordingly.42 It will be necessary, of course, to take into account the rights of the owner of the storage site or the CO2 transportation network (see, eg, Article 21(2)(d)). 13.45 For the application of this obligation, two situations can be envisaged. Either there

will be an existing network or storage site and the owner will have to give access to third parties or the network or the storage site has yet to be constructed. In the latter scenario, various questions arise: who will invest? Will the money come from public funds, a gas TSO, or gas DSOs? 13.46 Member States must put in place dispute settlement arrangements for disputes

related to access to transport networks or storage sites (Article 22). Where a crossborder dispute is involved, the place where the access is refused determines the jurisdiction (Article 22(2)). If the dispute has a cross-border impact, other regulatory authorities should be consulted. 13.47 With regard to transboundary transport or storage, the Competent Authorities

of the Member States concerned shall jointly meet the requirements for CCS (Article 24). 13.48 (e) Purity of the CO2 captured: The acceptance criteria for evaluating the purity

of the CO2 captures are based upon the 1972 London Convention and the OSPAR.43 The contracting parties to the OSPAR Convention in 2007 voted for

42 Given that NRAs in the energy sector will already have experience of TPA regimes, and since CCS transport networks will almost certainly need to be connected directly to power stations, this may well prove the most sensible implementation option. 43 The Convention for the Protection of the Marine Environment of the North-East Atlantic, known as OSPAR after the Oslo and Paris Conventions which provide its substance. See: .

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amendments to the Annexes to the Convention to allow the storage of CO2 in geological formations under the seabed. As stated in the OSPAR Guidelines: CO2 streams may contain incidental associated substances from the source or capture process. Furthermore, it should be stressed that no substances may be deliberately added to the CO2 stream for the purposes of waste disposal but may be added to enable or improve the efficiency of capture, transport, and storage. In all cases, acceptable concentrations of substances should be related to their potential impacts on the integrity of storage sites and relevant transport infrastructure, the risk they pose to the marine environment, and to requirements of the applicable EU regulations.44

Article 12 of the Directive provides that the CO2 stream ‘shall consist overwhelm- 13.49 ingly of carbon dioxide’.45 No waste or other matters can be added for the purpose of disposal. However, the CO2 stream may contain incidental associated substances from the source, capture, or injection process and trace substances added to assist in monitoring and verifying CO2 migration. Concentrations of all incidental and added substances must respect certain conditions (Article 12(1)(a) to (c)) and the Commission may, if appropriate, adopt guidelines to assist in identifying the conditions for respecting these purity criteria and thresholds (Article 12(2)). Respect for these conditions will probably be assessed in the light of applicable best available techniques (BAT), as a result of the inclusion of CCS installations under the regime of the IPPC Directive 2008/1/EC 46 (see Recital 27 to the CCS Directive). This kind of evaluation has been set up to reconcile the wide and ongoing development of CCS technologies with the protection of the environment. Therefore, the reference to BAT leaves the door open and does not exclude any system of CCS a priori. The system put in place in Japan can be considered as a counter-example. Debate on this topic is ongoing in Japan due to its adoption of 99 per cent purity criteria: this has led to discussion due to the resulting potential exclusion of certain CCS technologies.47

44

OSPAR Guidelines (2007–12), Annex 1, Section 1.4. See, further, Commission, ‘Implementation of Directive 2009/31/EC on the Geological Storage of Carbon Dioxide—Guidance Document 2: Characterisation of the Storage Complex, CO2 Stream Composition, Monitoring and Corrective Measures’ (2011) (available at: ), 58–88. 46 The Integrated Pollution Prevention and Control Directive 2008/1/EC [2008] OJ L24/8. For discussion, see: KJ de Graaf and JH Jans, ‘Environmental Law and CCS in the EU and the Impact on the Netherlands’, in Roggenkamp and Woerdman (eds) (n 30), ch VI. 47 ‘CCS Regulatory Developments in Japan, CCS in the EU and Japan’, Seminar, Brussels, 12 November 2008 (see: ). 45

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Coal (3) Link with the European Emissions trading scheme and the Kyoto Protocol 13.50 (a) European Emissions trading scheme:48 The latest EU ETS Directive 49 lays

down the rules for Phase III of the system, and provides for full auctioning of CO2 allowances for the power sector from 2013, except for high efficiency cogeneration, electricity produced from combustion gases and modernization of electricity generation (Recital 19 to the EU ETS Directive). Certain Member States have already provided this for coal-fired power plants under EU ETS Phase II.50 13.51 CCS has been integrated into the European ETS (see Article 10a(8) of the EU ETS

Directive). Article 12(3a) of the EU ETS Directive provides that the CO2 captured, transported, and safely stored is considered as non-emitted. In the case of leakage, a corresponding quantity of EU ETS allowances must be surrendered. Free allowances are not granted to CCS operators, except for demonstration purposes where up to 300 million allowances must be reserved for free (Article 10a(6) and (8) of the EU ETS Directive).51 13.52 There are different conditions which govern whether an operator is to receive free

allocation of allowances, and how substantial that allocation may be: – such allocation is only available until 31 December 2015; – allocations can be made for up to a maximum of twelve commercial demonstration projects; and – the Allowances are awarded according to the verified avoidance of CO2 emissions (Article 10a(8) of the EU ETS Directive). 13.53 (b) Kyoto Protocol:52 Discussions are pending at the United Nations Framework

Convention on Climate Change (UNFCCC) on the recognition of CCS within the CDM. On 17 November 2006, the Kyoto Protocol Conference of the Parties in Bali decided to examine the inclusion of CCS in the list of CDM activities.53 48 E Woerdman and O Couwenberg, ‘CCS in the European Emissions Trading Scheme’, in Roggenkamp and Woerdman (eds) (n 30), ch IV. 49 Directive 2009/29/EC of the European Parliament and of the Council of 23 April 2009 amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading scheme of the Community published [2009] OJ L140/63 (5 June 2009). 50 For example, in Belgium, the Flanders NAP 2008-2012 provides 6,300 functioning hours per year for combined cycle gas turbine plants, 50 functioning hours per year for turbojets, 0 functioning hours per year for classic gas power plants, and 0 functioning hours per year for coal power plants. 51 The Commission consulted stakeholders on the modalities for the allocation of these allowances on 29 June 2009 (for details, see: ). 52 See A Boute, ‘CCS under the project-based Kyoto mechanisms’, in Roggenkamp and Woerdman (eds) (n 30), ch III. 53 Decisions adopted by the Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol; Decision 1/CMP.2, available at: .

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Different (inter-) governmental and non-governmental organizations were invited to provide their opinions on the matter. In September 2008, the Subsidiary Body for Scientific and Technological Advice 13.54 (SBSTA) received a synthesis of the opinions.54 In this synthesis, certain arguments were made in favour of the inclusion of CCS in the CDM: – CCS is one of the only technologies that enables deep cuts to be made in the emissions from fossil fuel use; – unless CCS is developed as a viable abatement option, the competing pressures for economic development and energy security may result in a lower level of commitment of greenhouse gas emissions reductions; – without the inclusion of the CCS, the costs to achieve the emissions reductions will increase and the achievement of the climate change goal will consequently be triggered; and – it is also important to highlight that it is insufficient only to allow CCS in Annex 1 Countries.55 In Annex 1 Countries, support will be received from governments which permit the deployment of CCS in a safe manner and with respect for environmental integrity. In non-Annex 156 Countries, it is necessary to obtain CCS recognition as a valid abatement option to ensure the legitimacy of the technologies and the availability of financial support. Other arguments were made against the inclusion of CCS in the CDM:

13.55

– it is difficult clearly to define baselines, project boundaries and project emissions in CCS projects; – also, it is better to deploy CCS in Annex 1 countries where a fossil fuel infrastructure is in place, where there is a short-term need to reduce emissions and where there is support from host governments; and – CDM should focus on renewable energy and energy efficiency projects, and should not support fossil-fuel-based projects. Part of the debate at the COP14 in Poznan, Poland57 concerned the inclusion of 13.56 CCS in the CDM. Different issues were raised: – do CCS activities have a positive or a negative impact on greenhouse gas emissions; 54 ‘Synthesis of views on technological, methodological, legal, policy, and financial issues relevant to the consideration of carbon dioxide capture and storage in geological formations as project activities under the clean development mechanism’, FCCC/SBSTA/2008/INF 3, available at: . 55 Countries such as Belgium, Turkey, the US, etc. For the full list, see . 56 Countries such as Armenia, Brazil, Congo, etc. For the full list, see . 57 The United Nations Climate Change Conference in Poznań, 1–12 December 2008, see .

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Coal – how shall the additional energy used to operate CCS be calculated; – are there ‘emissions’ in the sense of the Kyoto Protocol, since there are no emissions in the atmosphere but instead storage in geological sites; – is the emissions saving permanent or temporary? 13.57 Because of the different views of the parties, the discussions were unable to reach

agreement. But the Member States decided to postpone the decision on whether or not to include CCS in the CDM to the COP15 in Copenhagen.58 However, the talks in Copenhagen also failed to make progress on the matter, so it was decided to postpone this for discussion at a future COP. In December 2011, COP16 (held at Cancún in Mexico) concluded that CCS was eligible as a project activity under the CDM, subject to the resolution of certain key issues, viz: the permanence of sequestration; long-term liability; and the risk of leakage.59 13.58 It is essential to highlight the importance of CCS recognition within the CDM. Its

inclusion will play an important role in the improvement of these technologies. The issue is both crucial and complicated, with many different interests and concerns involved, which is why it has proved so difficult for the countries to reach an agreement. After COP17 at Durban,60 the principle has been accepted and CCS is now a part of the CDM, although certain issues61 await resolution at a future COP.

58 The United Nations Climate Change Conference in Copenhagen (7–19 December 2009); see . 59 The United Nations Climate Change Conference in Cancún (29 November–10 December 2011), Decision 7/CMP.6; see . 60 The United Nations Climate Change Conference in Durban (29 November–10 December 2011), Decision 10/CMP.7; see . 61 These involve: transboundary movement of CO2 captured in one State and then shipped into and stored in another State; and certain matters concerning the Certified Emissions Reductions reserve.

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14 NUCLEAR

A. Introduction B. The Euratom Treaty (1) Introduction

(2) Tasks and activities

14.01 14.03 14.03

C. TFEU and Euratom Competition Law

14.06 14.14

A. Introduction These are uncertain times for nuclear power in the EU, and generally. The multiple, 14.01 and interdependent challenges of climate change and security of supply had suggested a return to fashion for nuclear power (eg the UK has planned a new generation of nuclear power stations to be built over the coming decade); yet fears concerning safety in the aftermath of the Fukushima incident in Japan have led other EU Member States (notably Germany, but also Italy) not only to abandon plans to prolong the life of current nuclear plants but also to cease all future nuclear generation. Others have either never employed nuclear power on the territory or have even adopted positions hostile to the technology (such as Austria, Ireland, and Luxembourg). These developments, allied with the place of nuclear power in the operation of liberalizing energy markets across the EU and more general and long-standing environmental concerns about nuclear power (particularly with regard to decommissioning and the management and disposal of nuclear waste products created by the nuclear power generation process), make the future for nuclear power both interesting and uncertain in many countries. Further, much of the European-level regulation of this sector falls within the 14.02 Euratom Treaty, which strictly lies beyond the scope of this work; a full treatment of Euratom, its operation, legislation, and implications would require a book in itself.1 A brief outline of the Euratom Treaty is provided to explain the context, 1 For detailed discussion, see J Grunwald, Das Energierecht der Europäischen Gemeinschaften (Berlin: De Gruyter, 2003), 193–308 (in English, see his earlier assessment: ‘The Role of Euratom’, in PD Cameron, L Hancher, and W Kühn (eds), Nuclear Energy Law After Chernobyl (London: Graham & Trotman, 1988)); W-G Scharf, Europäisches Nuklearrecht (Berlin: De Gruyter, 2008), generally, but esp Part V (159–378); and S Tromans, Nuclear Law: The Law Applying to Nuclear

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followed by reference to certain specific measures and areas of law (including questions about competition law regimes). Finally, a full understanding of this area also requires an appreciation of the international legal context: there exist various treaties and international organizations which play a key role in the development of various standards applicable to the use of nuclear energy: again, space precludes discussion of these elements here.2

B. The Euratom Treaty (1) Introduction 14.03 The European Atomic Energy Community (‘Euratom’)3 Treaty was concluded

by the original six Member States in 1957, alongside the EEC Treaty and also for an unlimited period (unlike the ECSC Treaty). It was the second of the founding instruments (after the ECSC Treaty in 1952) of what is now the EU which was aimed specifically at questions of energy policy. Euratom’s origins lay in a number of key contemporary political and economic developments: first, the negotiation of the Treaty took place in the immediate aftermath of the Suez Crisis, which had raised fears concerning the security of oil supplies and energy import dependence more generally. Secondly, the pursuit of such technologically complex and capital-intensive research and development projects as would be required to develop nuclear power was felt to require investments and access to resources (both natural and human) beyond the means of individual Member States. Ranged against these forces in favour of European-level action, however, were concerns in some Member States (notably France) with regard to issues such as national technological policy choices and military use of such technology, while others, in the aftermath of the bombs dropped at Hiroshima and Nagasaki, opposed the use of nuclear technology altogether. 14.04 Since that time, developments such as the incidents at Three Mile Island and

Chernobyl (and indeed Fukushima) and the accession in May 2004 of a number of Central and Eastern European countries to the EU (often with strong reliance upon nuclear power, typically from older Soviet-designed installations) have created a diverse range of interests and opinions on the subject within the EU. The fact that the Euratom Treaty adopts no particular policy with regard to nuclear power,

Installations and Radioactive Substances in its Historic Context (Oxford: Hart Publishing, 2010), generally and esp ch 3. 2 See, further: F Nocera, The Legal Regime of Nuclear Energy: A Comprehensive Guide to International and European Union Law (Antwerp: Intersentia, 2005); C Redgwell, ‘International Regulation of Energy Activities’, in MM Roggenkamp et al, Energy Law in Europe: National, EU and International Regulation (2nd edn, OUP, 2007), ch 2, 96–104 re international law principles and instruments concerning the peaceful use of nuclear energy; and W-G Scharf, Europäisches Nuklearrecht (Berlin: De Gruyter, 2008). 3 The ‘EAEC’.

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but instead lays down various conditions for its use, enables these different views to be accommodated (mostly smoothly)4 within the EAEC. Unlike the current TEU and TFEU, however, Euratom provides a more limited 14.05 role for what became the European Parliament: under Article 31 Euratom, the Council need only consult the Parliament and no co-decision procedure exists. Although reforms were proposed during the Convention which led to the Draft EU Constitutional Treaty,5 ultimately the only amendments made to Euratom by the Treaty of Lisbon were to update its institutional provisions in light of the changes made to the TEU and TFEU (see Title III Euratom).6 These differences, allied with the specific nature of its subject matter, led to the inclusion of Article 305(2) EC, which laid down the relationship between the Euratom Treaty and the TEU/TFEU. It provided that ‘[t]he provisions of this Treaty shall not derogate from those of the [Euratom] Treaty: this seems to set up Euratom as a lex specialis vis-à-vis the TEU/TFEU, but in the absence of conflicts between the two sets of treaties, it would seem that it remains open to the EU to act in areas affecting nuclear energy under the competences laid down in the TEU/TFEU.7 (2) Tasks and activities Euratom’s overall task, laid down in its Article 1, is ‘to contribute to the raising of 14.06 the standard of living in the Member States and to the development of relations with the other countries by creating the conditions necessary for the speedy establishment and growth of nuclear industries’. To that end, Article 2 Euratom specifies a range of specific tasks to be performed, viz to: (a) promote research and ensure the dissemination of technical information; (b) establish uniform safety standards to protect the health of workers and the general public and to ensure that they are applied; (c) facilitate investment and ensure, particularly by encouraging ventures on the part of undertakings, the establishment of the basic installations necessary for the development of nuclear energy in the [EAEC]; 4 Although tensions can arise, particularly in border regions: see the response of Slovakia to the 2006 gas supply interruptions, apparently planning to reopen a reactor which had been closed when it acceded to the EU (as part of the accession conditions). This move was strongly opposed by Austria’s Green Party, and the Commission threatened enforcement proceedings against Slovakia if the plans were pursued: The Times, 12 January 2009. 5 See, eg, M Nagy, R Wagner, and N MacCormick, ‘The Future of the Euratom Treaty in the Framework of the European Constitution’ (CONV 563/03, 18 February 2003), essentially proposing its abolition or integration into what was then the EC Treaty. For discussion of the various proposals, see N Prieto Serrano, ‘Wakening the Serpent: Reflections on the possible modification of the Euratom Treaty’ (2006) 1(1) International Journal of Nuclear Law 11. 6 [2010] OJ L84/1, at C84/43. Although note the Declaration to the Final Act of the Lisbon Treaty, in which a number of Member States publicly acknowledged their support for updating and revising the Euratom Treaty: [2007] OJ C306/231, at 268. 7 See, eg, PD Cameron, Competition in Energy Markets: Law and Regulation in the European Union (2nd edn, Oxford: OUP, 2007), para 9.01 (incl n 3). Tromans (n 1) has suggested that the

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(d) ensure that all users in the [EAEC] receive a regular and equitable supply of ores and nuclear fuels; (e) make certain, by appropriate supervision, that nuclear materials are not diverted to purposes other than those for which they are intended; (f) exercise the right of ownership conferred in respect of special fissile materials; (g) ensure wide commercial outlets and access to the best technical facilities by the creation of a common market in specialised materials and equipment, by the free movement of capital investment in the field of nuclear energy and by the freedom of employment for specialists within the [EAEC]; and (h) establish with other countries and international organisations such relations8 as will foster progress in the peaceful uses of nuclear energy. 14.07 These tasks are given concrete expression in the more detailed provisions of Title II:

Chapter 1 – Promotion of Research; Chapter 2 – Dissemination of Information;9 Chapter 3 – Health and Safety; Chapter 4 – Investment; Chapter 5 – Joint Undertakings; Chapter 6 – Supplies; Chapter 7 – Safeguards; Chapter 8 – Property Ownership;10

TEU/TFEU and Euratom should be considered as a whole, so that Euratom measures on the environment should be seen in the light of the general environmental objectives (Art 191(1) TFEU) and principles of law (such as precaution, rectifying damage at source, ‘polluter-pays’, etc: see Art 191(2) TFEU). 8 Made possible by Art 206 Euratom Treaty, which empowers the EAEC to conclude agreements with States or international organizations. Under its auspices, various cooperation agreements have been signed by the EAEC with third countries, and it has also acceded to the Convention on Nuclear Safety (on which see Case C-29/99 Commission v Council [2002] ECR I-11221, where the ECJ held that the scope of the EAEC’s competence did cover safety, emergency preparedness, siting, design, and construction of nuclear power stations). Cooperation with various international organizations and agencies (especially the International Atomic Energy Agency or IAEA) is also conducted under this provision: see, generally, Title II, Ch X of Euratom on External Relations, and Arts 199–201 concerning the Commission’s role. 9 One particular point to note concerns the provisions on patent rights relating to nuclear subjects, which may require the grant of non-exclusive licences: see Arts 12 and 17–23 Euratom Treaty (including powers, procedures, payment of compensation to the patent owner, etc). 10 For helpful discussion of these rules in Arts 86 ff and the rather novel nature of the ‘ownership’ held by the EAEC over ‘special fissile materials’, see the Opinion of Advocate General Paoires Maduro in Joined Cases C-123 and 124/04 Industrias Nucleares do Brasil and Siemens v UBS and Texas Utilities Electric Corporation [2006] ECR I-7861, paras 80–83. In particular, he suggested that the EAEC’s legal title to such materials requires that: ‘it must have the possibility of exercising its control over them and thus holds the right to object to their transfer; and, therefore, transfer by grant of lien, pledge, or charge which could lead to acquisition of title over such materials by an undertaking cannot be effective unless the EAEC has had the opportunity to object and has not done so’ (at para 83).

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Chapter 9 – The Nuclear Common Market;11 Chapter 10 – External Relations. The contents and activities under each of these Chapters are discussed in detail in 14.08 more specialized works on Euratom and nuclear law.12 Here, a few elements should be highlighted. (a) Health and Safety: Extensive use has been made of the legal bases laid down 14.09 in this Chapter for the adoption of a wide range of Directives on various topics (eg radioactive contamination levels in foodstuffs,13 accident notification and emergency procedures14) and setting basic standards within the EAEC for protection against ionizing radiation, both for workers and the general public (Article 30 Euratom Treaty). The first Basic Safety Standards Directive was adopted in 1959,15 and amendments and developments were made throughout the 1980s and 1990s:16 the current incarnation is to be found in Directive 96/29/Euratom.17 Article 35 of the Euratom Treaty requires Member States to provide the necessary facilities for ongoing monitoring of radioactivity levels in water, soil, and air, in accordance with the ‘basic standards’ laid down; Article 36 requires regular reporting to the Commission of this information (in a form in accordance with its Recommendations).18 This early concern for environmental protection and

11 Involving the abolition by Member States of customs duties, quantitative restrictions on imports and exports, and all measures having equivalent effect, and the creation of a common customs tariff; and removal of nationality-based restrictions on Member State nationals taking up employment in the nuclear energy field or on natural or legal persons wishing to be involved in construction of nuclear installations in the EAEC (subject to justifiable restrictions based upon public policy, public security, or public health). The goods and products involved are listed in Annex IV to the Euratom Treaty. 12 See, eg, Grunwald (2003) (n 1), 193-308; and Tromans (n 1), ch 3 generally, and in other subject-specific chapters therein. 13 Regulation 3954/87/Euratom [1987] OJ L371/11; see also Regulations 944/89/Euratom [1989] OJ L101/17 (minor foodstuffs), 770/90/Euratom [1990] OJ L83/78 (‘feedingstuffs’) and 737/90/Euratom [1990] OJ L82/1 (restricting imports of foodstuffs from countries affected by radioactive contamination) (as extended and amended). 14 Directives 87/600/Euratom [1987] OJ L371/76 (early exchange of information between Member States in the event of a radiological emergency) and 89/618/Eurotom [1989] OJ L357/31 (informing the general public about health protection measures and steps to be taken in event of such an emergency). 15 Directive 59/221/Euratom [1959] OJ No 11, p 221/59 (20 February 1959). 16 Directives 80/386/Euratom [1980] OJ L246/1 and 84/467/Euratom [1984] OJ L265/4. 17 [1996] OJ L159/1 (‘BSS Directive’); see Commission, ‘Communication concerning the implementation of Council Directive 96/29/Euratom’ [1998] OJ C133/03 (30 April 1998) for details on its provisions and their implementation. For discussion of its implementation in the UK, see Tromans (n 1), 244–253. NB Commission proposals for amendments are expected in the near future, possibly combining the BSS Directive with other Directives on medical exposures (Directive 97/43/ Euratom), high activity sealed sources (Directive 2003/122/Euratom), outside workers (Directive 90/641/Euratom), and public information (Directive 89/618/Euratom). 18 Recommendations 2000/473/Euratom (8 June 2000; see ) and 2004/2/Euratom [2004] OJ L2/36 (18 December 2003).

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potential cross-border impact caused by such pollutants is a noteworthy early example of EU-level attention given to such issues. One issue of difficulty with regard to the scope of Euratom competence has arisen in this area (in the context of the EAEC’s proposed accession to the Convention on Nuclear Safety (1984)),19 which concerned whether ‘technological safety’ (as distinct from ‘radiological safety’) also fell within the scope of the Euratom Treaty. The ECJ ruled that to draw such a distinction would be artificial and thus acknowledged that Euratom was indeed competent ‘to establish, for the purpose of health protection, an authorisation system which must be applied by the Member States’ with regard to the construction and operation of nuclear installations.20 This conclusion21 was clearly a significant element in the drive towards what became the Euratom Nuclear Safety Directive which was adopted in mid-2009.22 14.10 According to its Article 1, the new Nuclear Safety Directive provides an EAEC

framework for the maintenance and continuous improvement of nuclear safety and the rules regulating it, within which Member States are to adopt, enforce, and continue to update and develop23 an appropriate national regulatory framework for ensuring such high levels of safety (Article 3(1)). The Directive applies to civilian ‘nuclear installations’24 licensed by a Member State and provides minimum standards, beyond which Member States may impose greater protection if they so choose. The national framework under Article 3 must lay down the responsibilities for: adoption of safety requirements; supervision of installations and enforcement of the safety rules; and a licensing regime. A competent NRA must be established and maintained, and it must be independent and functionally separated from other organizations or bodies involved with the promotion or use of nuclear energy (Article 5). Nuclear installation licence-holders must hold (and may not delegate) the main responsibility for their safety, and they must conduct regular safety assessment and verification of their safety (Article 6). Various requirements with regard to management systems, financial and human resources, and staff education and training, are also laid down (Article 7), and the Directive also requires the provision of information to the public (Article 8) and imposes reporting25 and self-assessment and peer review requirements on the national system (Article 9).

19 Commission Decision 1999/819/Euratom [1999] OJ L318/20 approved the EAEC’s accession to the Convention. 20 Case C-29/99 (n 8), paras 82 and 89. 21 Which was rather less nuanced and cautious than that of Advocate General Jacobs in the same case (Case C-29/99 (n 8)), see paras 132–200 of his Opinion. 22 Directive 2009/71/Euratom [2009] OJ L172/18. 23 Art 3(2). 24 Art 2, which defines such ‘installations’ as: (a) plants for enrichment, fuel fabrication, power generation and reprocessing, as well as research reactors and spent fuel storage facilities; and (b) radioactive waste storage where on the same site and directly related to any of the installations under (a). 25 Triennially to the Commission.

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(b) Supplies: The Treaty establishes a common policy on supplies, founded upon 14.11 equal access to sources of supply (Article 52(1) Euratom Treaty) and prohibiting anything which seeks to establish a privileged position for particular users (Articles 52(2)(a) and 67). To that end, Article 52 established the Euratom Supply Agency (ESA), which is charged with ensuring a regular and equitable supply of ores and nuclear fuels for all users in the EAEC, pursuing the longer-term aim of security of supply through reducing dependence upon any one source and diversifying sources of supply. The ESA has been granted wide-ranging powers to fulfil those functions, specifically: – a right of option on all ores, source materials and ‘special fissile materials’ (Articles 57 ff Euratom Treaty);26 and – the exclusive right to conclude contracts concerning the supply of such goods, whether they originate from inside or outside the EAEC (Articles 64 ff Euratom Treaty). In practice, private entities conclude such contracts, but these must then be submitted to the ESA for the latter to add its signature to formalize the deal (Article 73). But this does not cover the ‘processing, conversion or shaping of ores [etc]’ where the material is to be returned to the original undertaking after such processes (Article 75). Nor, after the INB cases,27 does this extend to contracts for the enrichment of uranium, where that essentially amounts to performing a service for a third-country undertaking, rather than the supply of nuclear materials to the EAEC. In essence, this recognizes that enrichment is to be treated as a commercial activity falling within Article 75, rather than a transfer affecting EAEC users: the movements of nuclear materials within the EAEC are simply incidental to that activity and thus not caught by the Euratom Treaty. It is clear from the case law of the ECJ that the ESA enjoys significant powers and 14.12 wide discretion in performing its functions, especially when pursuing objectives requiring broad economic and commercial policy choices (such as safeguarding security and diversity of supplies).28 In such cases, judicial review is limited to preventing manifest error or misuse of power by the ESA.29

26

For the definitions of such goods, see Art 197 Euratom Treaty. Joined Cases C-123 and 124/04 (n 10). For discussion, see Tromans (n 1), 62–66. 28 See, eg, Commission, ‘White Paper: an Energy Policy for the European Union’, COM(95) 682 (13 December 1995) which, in the face of concerns with regard to the massive growth in imports from the countries of the former Soviet Union posing dangers to the diversity of EAEC supply sources, clarified that the ESA and Commission were actively pursuing a source-diversification policy (at para 79). 29 See, eg, Joined Cases T-149 and 181/94 Kernkraftwerke Lippe-Ems v Commission [1997] ECR II-161, paras 90–92, in the context of preventing imports which would reduce diversification in sources of supply, with a view to pursuing the objective of security of supply in exercising its exclusive right to conclude such contracts. (Upheld on appeal, Case C-161/97, [1999] ECR I-2057.) 27

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are laid down in the Treaty itself (see, eg Article 75). Another exclusion concerns military uses of nuclear energy, which have been held not to fall within Euratom’s remit, relating as it does to peaceful uses of nuclear energy. The case law of the ECJ has acknowledged30 and defended31 this exclusion against attempts by the Commission32 to apply various elements of Euratom law to the activities of Member States. The Court accepted that the application to military installations, research programmes, and other activities of Euratom provisions on matters such as health and safety (eg Articles 34, 35, and 37) could endanger Member States’ legitimate national defence interests. The lack of any specific derogation for Member States under Euratom for such defence-related matters thus militated in favour of the interpretation that such military-related activities fell outside the scope of Euratom altogether.33

C. TFEU and Euratom Competition Law 14.14 There seems to be no reason why the EU Law rules on mergers and antitrust (ie

Articles 101 and 102 TFEU, and the associated legislation) are not applicable to the nuclear energy sector: nothing in the Euratom Treaty would seem to conflict with this conclusion, and there have been cases concerning long-term and exclusive contracts in the nuclear industry which have been analysed by the Commission under the EU law rules.34 Further, it seems clear that the Third Package IEM rules will apply to the nuclear power sector as to any other generation installation, so that the rules on TPA (Ch 4) and the authorization of new generation capacity are equally applicable here. 14.15 However, it is clear that the operation of the specific Euratom supply policy, and the

competences conferred upon the Euratom Supply Agency and the Commission, may have an impact upon market actors and their agreements and practices. The ECJ has been faced with cases35 where undertakings have challenged decisions of

30

Case C-61/03 Commission v United Kingdom, supported by France [2005] ECR I-2477. Case C-65/04 Commission v United Kingdom [2006] ECR I-2239. 32 See, eg, the saga of France’s resumption of nuclear weapons testing on the Mururoa Atoll and the issue whether Arts 34 and 35 Euratom Treaty applied, requiring additional health and safety measures, and monitoring, respectively. The Commission argued that these provisions did cover military as well as civilian activities (Minutes of the 1266th meeting of the Commission, 23 October 1995). 33 Case C-61/03 (n 30); although, NB, it might be possible to address that situation under the TFEU, provided an appropriate legal basis existed and no relevant derogation applied. 34 See, eg, Commission Decision 91/329/EEC (30 April 1991), Scottish Nuclear (discussed at para 8.146). 35 See also Joined Cases T-458 and 523/93 ENU v Commission [1995] ECR II-2459 (CFI), upheld on appeal: Case C-357/95, [1997] ECR I-1329. 31

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the ESA and/or the Commission concerning various supply and other contracts involving nuclear materials, as discussed at paras 14.11–14.12). With regard to the law of State aid, however, overlap may exist and the precise 14.16 nature of the relationship between the TFEU and the Euratom Treaty remains a matter of debate.36 There are no specific Euratom provisions concerning State aids, although the provisions of Title II, Chapter 4 on Investments clearly envisage financial support being provided in the pursuit of the Euratom goal of promoting the development and use of nuclear energy (Articles 2 and 4). It should be acknowledged that various provisions of the Euratom Treaty do indeed envisage a degree of Commission supervision over national measures and actions in the civilian nuclear field (see, eg, Articles 5 and 6, 34, 37, and 40 to 44, as well as the role of the ESA (eg in Article 67)). No ECJ judgment has ever ruled definitively on the question of the applicability 14.17 of the TFEU rules on State aid to the nuclear sector.37 Commission Decisions and statements in the area have also shied away from adopting a clear position on the question, often with, at best, limited or vague reasoning applied in the publicly available announcements.38 Some Decisions seem to proceed on the assumption that the TFEU State aid rules could apply, but conclude that either no aid was present on the facts39 or that any aid involved was justifiable.40 Earlier public statements and documents seemed to assume the application of what is now the TFEU to State aids to the nuclear sector,41 except insofar as specific rules applied under the Euratom Treaty,42 while other responses suggested that there was ‘no

36

See: Cameron (n 7), paras 9.29–9.37 and 15.79–15.89; and L Hancher and F Salerno, ‘Nuclear: the Euratom Treaty’, in C Jones (gen ed), EU Energy Law—Volume II: EU Competition Law and Energy Markets (3rd edn, Leuven: Claeys & Casteels, 2011), Part 5, ch 2, section II. 37 In Joined Cases 188-190/80 France, Italy and the United Kingdom v Commission [1982] ECR 2545, Advocate General Reischl saw no reason to exempt the nuclear sector from State aid control under what was then the EEC Treaty, but the ECJ found that there was no need to rule on the point since France had failed to establish any conflict between the two sets of rules at issue. 38 See, eg, UK package of State aid measures for the nuclear sector, Commission Press Release IP/90/627 (23 July 1990), approving various measures (guarantees, distribution of proceeds from the no-fossil fuel levy and a debt write-off ). 39 Commission Decision, ‘German tax treatment of reserves for nuclear power plant decommissioning’: see Press Release IP01/1799 (11 December 2001): no aid because the tax rules applied equally to all undertakings affected, hence no ‘selectivity’. Upheld on appeal by the CFI in Case T-92/02 Stadtwerke Schwäbisch Hall GmbH v Commission [2002] ECR II-11*, as part of a general system of taxation and thus not aid. 40 Decision C31/2002, ‘Transitional regime for the Belgian electricity market’ [2002] OJ C222/2 [ATHENA: Cannot confirm this one], where compensation for the costs of dismantling experimental nuclear sites would be in accordance with what is now Art 107(3)(c) TFEU. 41 Reply by the then Competition Commissioner M Monti to Written question P1873/00 (6 June 2000). 42 The clearest statement of which is provided in the reply by then Energy Commissioner C Papoutsis to various written questions: Written answer 175/97 [1997] OJ C319/31. See also Commission, ‘Illustrative Nuclear Programme for the Community under Article 40 of the Euratom Treaty’, COM(96) 339 (known as the PNIC), as updated by COM(2006) 844 (10 January 2007).

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systematic method of identifying state assistance to the nuclear industry’ at all and that Article 305(2) EC meant that the provisions of the Euratom Treaty applied to the nuclear sector, rather than those of what is now the TFEU.43 14.18 Slightly clearer efforts have been made to address this issue in more recent

Commission Decisions on the nuclear sector.44 Thus, in British Energy (a Decision concerning restructuring aid proposed by the UK), in opening the procedure, the Commission explicitly stated that some of the UK proposals involved issues which fell under the Euratom Treaty45 ‘and therefore [had] to be assessed accordingly. However, to the extent that [such measures] are not necessary for or go beyond the objectives of the Euratom Treaty or distort or threaten to distort competition in the internal market, they have to be assessed under’ what is now the TFEU.46 In the final Decision,47 only one of the various measures (concerning the funding of nuclear liabilities) was found to constitute State aid under what is now Article 107 TFEU, and it was found to be justified (subject to a relatively lengthy list of conditions)48 and proportionate. In assessing this justification the Commission took into account the fact that the measures were consistent with the objectives of the Euratom Treaty. 14.19 Similarly, the Commission’s Decision in NDA 49 (which concerned the UK’s pro-

posed Nuclear Decommissioning Agency (NDA) and Fund), rejected the UK’s argument that all such activities (storage of spent fuels, treatment, reprocessing and disposal of nuclear waste, and decommissioning activities in general) fell within the exclusive purview of the Euratom Treaty. Rather, the Commission acknowledged that the UK’s proposed scheme did address Euratom issues and confirmed that the measures involved were acceptable in their pursuit of the various relevant Euratom objectives. But it then went on to analyse whether the UK measures amounted to State aid under EU law and found prima facie aid in the UK’s proposed guarantee of the NDA’s expenses where those could not be met from NDA’s revenues from its business activities or other assets. Nevertheless, this was found justifiable under

43 Written answer to question E-1286/00 (posed by H Breyer MEP, 19 April 2000) by the then Energy Commissioner de Palacio (16 June 2000). See also her reply to Written question P-2422/99 (13 December 1999). 44 Eg in Decision E-3/02, France—State aid to EDF (Guarantee) [2003] OJ C164/7, the Commission expressly stated that its position was taken without prejudice to the possible application of the Euratom Treaty. 45 In particular, reprocessing, storage, and disposal of spent fuel, the decommissioning of nuclear power stations and the reorganization of pre-existing fuel supply contracts between British Energy and BNFL. 46 [2003] OJ C180/5, para 239. 47 [2005] OJ L142/26. 48 In particular, the ring-fencing of British Energy’s nuclear power generation activities, to ensure that the funds received were reserved for decommissioning and not used to support those of its activities which were subject to competition (eg energy trading or operating other, non-nuclear generation plants). 49 [2006] OJ L268/37.

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C. TFEU and Euratom Competition Law what is now Article 107(3)(c) by the Commission. As Hancher and Salerno have concluded, the Commission’s approach in these Decisions is: to take account of the objectives of the Euratom Treaty when assessing the necessity of a measure found to constitute State aid. Where the impact on competition and trading conditions is likely to be negative, the Commission authorises the measure [while] imposing a number of condition[s] to ensure that the negative impact is minimised.50

This all suggests that, in the light of advancing liberalization of the energy markets 14.20 in the EU, the Commission will be less reluctant to assess whether national measures to promote and develop nuclear power generation are in accordance with the State aids rules of the TFEU; at the same time, a degree of sensitivity will be shown to measures pursuing the key objectives of the Euratom Treaty, but the Commission will not shy away from imposing various conditions upon such national schemes to prevent distortive impacts upon competition in electricity markets.

50

Hancher and Salerno (n 36), 617–618.

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15 OIL

A. Introduction B. The Hydrocarbons Licensing Directive

15.01

(1) Member States’ rights (2) Common rules

15.05 15.06

15.03

A. Introduction The oil sector has seen comparatively minimal EU activity, although the impact of EU 15.01 law upon companies in the sector has not been so limited, since many undertakings are involved in both oil and gas exploration and production. Indeed, there have been cases decided under the Merger Control Regulation where the impacts upon both oil and gas have been involved.1 We have already seen (in Ch 10) the measures adopted by the EU in the field of oil supply in response to the oil shocks of the 1970s, and EU legislation on energy taxation began by imposing minimum excise duties on mineral oils,2 before being extended in 2003 to cover coal, natural gas, and electricity as well.3 Various other EU instruments have a bearing on this sector and while their details are 15.02 beyond the scope of this work, they are noted here for the sake of completeness: – rules requiring the registration of crude oil imports and deliveries;4 – the adoption of an information and consultation procedure on crude oil supply costs and consumer prices of petroleum products;5 1 eg Exxon/Mobil (Case COMP/M.1383), Decision 2004/284/EC, [2004] OJ L103/1. For further references, see J Grunwald, Das Energierecht der Europäischen Gemeinschaften (Berlin: de Gruyter, 2003), 343 ff. 2 Directives 92/81 and 92/82/EEC on the structures and rates (respectively) of excise duties on mineral oils, [1992] OJ L316/12 and 19. 3 Directive 2003/96/EC, [2003] OJ L283/51 on the taxation of energy products and electricity. 4 Concerning the Common Customs Tariff, Regulation 2677/75 [1975] OJ L275/1; Regulation 1893/79 [1979] OJ L220/1, Regulation 2592/79 [1979] OJ L297/1, as extended by Regulation 4152/88 [1988] OJ L367/7 and amended by Regulation 1370/90 [1990] OJ L133/1; and Regulation 2964/95 [1995] OJ L310/5. 5 Council Decision 1999/280 [1999] OJ L110/8, implemented by Commission Decision 1999/566 [1999] OJ L216/8.

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Oil – provisions concerning the quality of petrol and diesel fuels;6 – the Integrated Pollution Prevention and Control Directive 96/61/EC.7

B. The Hydrocarbons Licensing Directive 8 15.03 The one internal market measure aimed specifically at the oil sector was adopted

in 1994 and aimed to combat discriminatory practices by Member States which restricted access by foreign undertakings to prospecting or exploring for, and producing, hydrocarbons. Such discrimination was frequently exacerbated by vagueness and lack of transparency in national licensing procedures. On the other hand, care had to be taken to respect Member States’ rights and policies over natural resources and their management (see Recital 4). The framework nature of the resulting Directive strikes this balance by adopting general principles concerning access to hydrocarbons, aiming to ensure transparency and non-discrimination by using open and accessible procedures with decision-making criteria which are objective and published in advance, and which are applied in a non-discriminatory fashion. The Directive does not apply to coal, gas storage, or other solid fuels (such as peat), although Member States remain free to apply their implementing measures to other energy sources if they see fit.9 15.04 Article 8 provides Member States and the Commission with a mechanism to moni-

tor reciprocity of access for EU entities to hydrocarbons prospecting (etc) in third countries: the Commission is to report to the Council and European Parliament periodically on this issue. The Commission may propose the establishment of negotiating mandates with such third countries to secure reciprocal access and/or the authorization of Member States to refuse authorizations to entities controlled by a given third country or its nationals. Article 9 of the Directive requires Member States to submit annual reports to the Commission on the various matters within the scope of the Directive (areas opened up, authorizations granted, entities holding authorizations, estimated national reserves).10

6

Directive 98/70 [1998] OJ L350/58 as amended by Directive 2003/17 [2003] OJ L76/10. [1996] OJ L257/26. 8 Directive 94/22/EC [1994] OJ L164/3. 9 See, eg, Poland’s extension of its implementing rules to cover coal-bed methane ([2006] OJ C98/22) and the Sicilian regional authority’s use of its principles in regulating access to geothermal resources ([2006] OJ C46/31). Such national measures may be of importance in convincing the Commission to accept an exemption for such sectors from the EU’s rules on public procurement: see Recital 41 to Directive 2004/17/EC, [2006] OJ L134/1. 10 For the Commission’s Report on the implementation of the Hydrocarbons Directive, see COM(1998) 447 (29 July 1998), which (in essence) concluded that the Directive had been implemented correctly and that no reciprocity problems had arisen. It also noted that, since neither had hydrocarbon resources, Finland and Luxembourg were not required to implement the Directive. 7

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B. The Hydrocarbons Licensing Directive (1) Member States’ rights Article 2(1) makes clear that Member States are free to decide whether,11 and if so 15.05 which, areas within their territory may be made available for hydrocarbons exploration and production. They may also decide upon who will receive ‘authorizations’ and how to monitor their activities (Article 5(2)), although in these cases the Member State must respect the various criteria laid down in the Directive concerning authorization (Articles 3 and 5) and the purpose of such conditions and monitoring (Article 6(1) and (2)). Further, Member States may decide upon the levels of taxes, levies, and royalties to be applied, including possible State participation in hydrocarbons projects (Article 6(3)). This explicit retention of the possibility of State participation was included to accommodate the Dutch, Danish, and Norwegian practices in this regard, and it also reflects the position set out in Article 18(3) of the ECT.12 Article 2(2), meanwhile, allows Member States to refuse authorization, on grounds of national security, to an entity (effectively) controlled by a third country or its nationals. Finally, Article 6(2) also provides Member States with the opportunity to impose conditions upon the exercise of prospecting, exploration, and utilization of hydrocarbons, to the extent that they are justified by one of many acceptable policy reasons.13 (2) Common rules (a) Authorizations and competent authorities: An ‘authorization’ is defined in an 15.06 all-encompassing manner by Article 1(3) as ‘any law, regulation, administrative or contractual provision or instrument issued thereunder by which the competent authorities of a Member State entitle an entity to exercise . . . the exclusive right to prospect or explore for or produce hydrocarbons in a geographical area’. The relevant ‘competent authorities’ must be notified by the Member State to the Commission (Article 10) and may be regional or even local in nature. Article 3(5) clarifies that some recognitions of authorization (such as a change of name or ownership of an entity holding an authorization) will not count as a grant of an authorization within the meaning of the Directive: this has implications for the applicable procedures, to which we now turn. (b) Authorization procedures: Once a Member State decides to make areas availa- 15.07 ble for authorization, they must (Article 3(1))14 use one of the two basic procedures 11

See also Recital 4 and Art 3(6). See the discussion in Ch 11. 13 Viz: ‘national security, public safety, public health, security of transport, protection of the environment, protection of biological resources and of national treasures possessing artistic, historic or archaeological value, safety of installations and of workers, planned management of hydrocarbon resources (for example the rate at which hydrocarbons are depleted or the optimization of their recovery) or the need to secure tax revenues’. 14 Although this may be avoided if geological conditions concerning one area justify the authorization of an entity which already holds an authorization over a contiguous area (Art 3(4)), provided 12

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Oil possible under the Directive. The first option (Article 3(2)) involves an approach typically known as ‘licensing rounds’, under which a Member State publishes a notice in the Official Journal seeking applications, which may then be accepted via administrative procedure or auction. This procedure can be triggered either by a Member State on its own initiative or after an entity submits an application for an authorization. In either case, at least a ninety-day period must be provided from such publication in the Official Journal until the end of the application period (Article 3(2)(a) and (b)). The second option (Article 3(3)) is known as the ‘open door’ policy, where the Member State permanently designates territories open for authorizations (Article 3(3)(a))15 by publishing (and updating in the event of any changes) a list in the Official Journal. Authorizations for such areas may be granted without initiating the procedure in Article 3(2). The two options can also be combined by Member States for different areas: eg specific areas may be designated in advance and then, on receipt of an application, the Member State triggers an invitation to others to submit competitive bids under Article 3(2).16 Member States have used both procedures in their licensing practices over the years, some sticking consistently to licensing rounds,17 others routinely awaiting applications and then inviting others to apply,18 and others still employing the pure open door approach.19 15.08 (c) Authorization criteria: Article 4 lays down some general requirements with

regard to the delimitation of geographical areas and the duration of the authorization, both overall and concerning the period of time for which the authorized entity may hold exclusive rights in that geographical area. None of these elements of the grant may go beyond what is necessary to carry out those activities in the proper fashion, but these provisions are relatively general in nature and clearly leave significant discretion to the Member States in their implementation, subject to the general principle of non-discrimination which pervades the Directive. 15.09 The detailed criteria and general principles which must be taken into account in the

grant of any authorization are to be found in Article 5. In general terms, the criteria applied must be: objective and non-discriminatory; published in advance of applications for authorization;20and applied in an objective and non-discriminatory that any other contiguous authorization holders are given sufficient time to submit an application for that area. 15 Or where a territory was available under a previous Art 3(2) procedure but was not subject of an authorization, or where a territory has been relinquished by a previously authorized entity (Art 3(3)(b) and (c) respectively). 16 eg the Dutch system under Art 15 of its Mining Act 2002 and Ch 1 of the Mining Regulations (16 December 2002). 17 eg Norway, [2005] OJ C304/37. 18 The Netherlands (n 16). 19 eg Poland, [2006] OJ C98/22. 20 In full in the EU’s Official Journal (OJ) or, if already published in the national equivalent, by publication in the OJ containing a reference to the national source where the criteria are to be

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B. The Hydrocarbons Licensing Directive way. The assessment must include analysis of the technical and financial capability of the entities, and their plans for prospecting, exploring or bringing the field into production (Article 5(1)). Where an entity’s application is rejected, it can require the Competent Authorities to provide it with reasons for this decision (Article 5(5)). Article 7 required that national rules which reserved to a single entity the right to 15.10 receive such authorizations for a given area had to be abolished by 1 January 1997, although this did not of itself have the effect of changing licences already granted under such national provisions. (d) Rules governing the exercise of such authorizations: Member States may 15.11 impose conditions upon the exercise of hydrocarbons authorization, but only where they are to achieve justifiable goals as permitted by the Directive. Member States may thus: impose conditions so as to ensure the proper performance by the licensee of the relevant activities; require some payment to be made by the licensee (whether financial or via contribution in kind—ie in hydrocarbons produced from the licence area); or impose conditions to the extent justified by one of the grounds listed in Article 6(2) (which include (inter alia) national security, public safety, public health, and environmental protection). Article 6(3) contains the provisions allowing State participation in hydrocarbons 15.12 production, while at the same time seeking to ensure that such participation still respects the key principles of the Directive: transparency and non-discrimination. Thus, the State’s role must not prevent the licensee from taking decisions on the basis of ordinary commercial principles: hence payment obligations, access to information, and use of voting rights are constrained (except insofar as the licensee proposes to act in a manner contrary to its licence obligations) so as to protect the management independence of the licensee. The fourth paragraph of Article 6(3) was inserted to cover the Norwegian position, where the State company through which State participation is exercised is also the licence-holder: here (a forerunner of the principles used in the first generation of the Electricity and Gas Directives), accounting and functional separation (including controls to prevent unauthorized information flows) was required between Statoil’s function as manager of the Norwegian State’s interest, on the one hand, and its role as manager of the company’s business activities, on the other. In spite of the Directive’s seal of approval and Article 18(3) of the ECT, one might question whether an authorization requirement of State participation is compatible with the EU rules on freedom of establishment (Article 49 TFEU).21 Such a requirement would seem to amount to a hindrance to such an establishment and thus to require a necessary

found: Art 5(1). Typically, Member States follow the latter approach, although they are supposed to publish any subsequent changes in full in the OJ. 21 For detailed discussion of these rules, see, eg, RCA White, Workers, Establishment, and Services in the European Union (Oxford: OUP, 2004), part II.

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Oil and proportionate justification:22 of course, it may be that Member States’ careful implementation of the detailed provisions in Article 6 of the Directive will satisfy this requirement.23 15.13 (e) Relationship with EU procurement legislation: Article 12 coordinated the

provisions of this Directive with the old EU rules on public procurement,24 allowing Member States to apply for an exemption from the procurement rules by notifying their hydrocarbons licensing regime to the Commission. Under the current regime of Directive 2004/17/EC,25 a general procedure for exemption now applies: its Article 30(3) provides that proper implementation of the relevant EU liberalization legislation (here, the Hydrocarbons Directive) means that access to these markets is deemed to be open to competition and thus not restricted, allowing contracts in this sector to escape the detailed requirements of the procurement rules.26

22

Compare, eg, Case C-246/89 Commission v UK [1991] ECR I-4585 (fishing companies required to be UK-registered, with 75 per cent UK capital and 75 per cent UK directors) and Case C-299/02 Commission v Netherlands [2004] ECR I-9761 (shipping companies’ directors, shareholders and managers required to have EU or EEA nationality): these two cases show more far-reaching restrictions than those typically involved here, although it is noteworthy that in both cases the Court held the restrictions to be unjustifiable. 23 For discussion of the Danish position, see A Rønne, ‘Energy Law in Denmark’, in MM Roggenkamp et al, Energy Law in Europe (2nd edn, OUP, 2007), paras 7.104–7.112. Where the State’s interest remains at the 20 per cent level typically taken in Denmark, then allied with the provisions of Art 6(3), it is arguable that any such restriction upon freedom of establishment is proportionate to the goal of securing revenue for the State from its sovereign natural resources. 24 See Directive 90/351/EEC [1990] OJ L297/1 (esp. Art 3) for its original incarnation. 25 [2004] OJ L134/1. Note that, according to Art 27 and Recital 38 of Directive 2004/17/EC, this does not prejudice the pre-existing exempted status granted to the exploitation of geographic areas in the Netherlands, the UK, Austria, and Germany: Commission Decisions 93/676/EEC, 97/367/EEC, 2002/205/EC, and 2004/73/EC respectively. However, those Member States must ensure that entities operating under those exemptions respect the principles of non-discrimination and competitive procurement when they award contracts for supplies, works, and services, and these entities must continue to communicate information to the Commission concerning contracts awarded. 26 For a list of exemption decisions adopted under Art 30 of Directive 2004/17/EC, see (over half of the Commission’s decisions to date relate to the energy sector (albeit mostly concerning electricity), and not all have accepted that the exemption applies). For detailed consideration of the EU public procurement rules, see, eg, P-A Trepte, Public Procurement in the EU: A Practitioner’s Guide (Oxford: OUP, 2007).

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Part V ENERGY EFFICIENCY IN THE EUROPEAN UNION

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16 INTRODUCTION TO ENERGY EFFICIENCY IN THE EUROPEAN UNION European energy efficiency policy is a broad concept. Technically defined by 16.01 the European Commission as ‘using [fewer] energy inputs while maintaining an equivalent level of economic activity or service’, energy efficiency is also linked to the ‘energy saving’ concept, which comprises ‘the [reduction of] consumption through behaviour[al] change or decreased economic activity’.1 Transport, buildings, energy, and electronic devices have all been affected by 16.02 some kind of European energy efficiency policy over the past few decades. In the early 1990s, Directives which were directly concerned with energy efficiency were already being adopted: Directive 92/75/EEC2 on the indication by labelling and standard product information of the consumption of energy and other resources by household appliances; Directive 93/76/EEC3 to limit carbon dioxide emissions by improving energy efficiency (known as ‘SAVE’); and Directive 92/42/EEC 4 on efficiency requirements for new hot-water boilers fired with liquid or gaseous fuels. The importance of energy efficiency in EU policy has been increasing constantly. A 16.03 whole set of Directives was adopted in the early 2000s: Directive 2002/91/EC5 on the energy performance of buildings; Directive 2006/32/EC6 on energy end-use efficiency and energy services and repealing Directive 93/76/EEC; and Directive 2004/8/EC7 on the promotion of cogeneration based on useful heat demand in the

1 Commission, ‘Communication: Energy Efficiency Plan 2011’, COM(2011) 109 (8 March 2011), 1. 2 [1992] OJ L297/16 (13 October 1992). 3 [1993] OJ L237/28 (22 September 1993). 4 [1992] OJ L167/17 (22 June 1992). 5 [2003] OJ L1/65 (4 January 2003). 6 [2006] OJ L114/64 (27 April 2006). 7 [2004] OJ L52/50 (21 February 2004). For more detailed discussion, see Ch 12 on renewables.

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Introduction to Energy Efficiency in the European Union internal energy market and amending Directive 92/42/EEC. All of these measures strengthened the European legal framework on energy efficiency. 16.04 In 2007, the Spring European Council called for a thorough and rapid implemen-

tation of energy efficiency measures in order to achieve a 20 per cent energy saving target by 2020.8 The EU had at the time: set a unilateral target to cut its greenhouse gas emissions by 20 per cent by 2020 compared to 1990 levels. The European Council agreed that developed countries should commit to collectively cutting their emissions by about 30 per cent by 2020, compared to 1990 levels, as part of an international agreement, and by 60 to 80 per cent by 2050. The Council supported a 30 per cent cut in the [EU]’s emissions by 2020, provided that this international agreement is successfully concluded. [The] European Council supported the following goals: • to improve energy efficiency to save 20 per cent of the EU’s energy consumption compared to forecasts for 2020; • to raise the share of renewable energy to 20 per cent of EU overall energy consumption by 2020; • to raise the share of biofuels to at least 10 per cent of total petrol and diesel consumption for transport in the EU by 2020.9 16.05 Ever since, the European Commission has been conscious of the need to improve

the energy efficiency of the EU and its Member States. 16.06 In 2010, energy efficiency was clearly identified by the European institutions as

one of the headline targets of the EU’s new strategy for jobs and smart, sustainable, and inclusive growth, the so-called the ‘Europe 2020’ Strategy. The European Commission has since intensified its work on energy efficiency. 16.07 Several instruments have been adopted in recent years, mainly repealing the exist-

ing legal framework and increasing the number of binding measures. Among others, the European institutions have adopted: – Directive 2010/30/EU on the indication by labelling and standard product information of the consumption of energy and resources by energy-related products; – Directive 2010/31/EU on the energy performance of buildings; – the ‘resource-efficient Europe flagship’; – the Energy Efficiency Plan 2011; – a Roadmap for moving to a competitive low carbon economy in 2050; – a White Paper on transport containing specific measures regarding energy efficiency.

8 Brussels European Council 8/9 March 2007, ‘Presidency Conclusions’ (7224/1/07 REV 1, 2 May 2007) (available at ), paras 5–8. 9 Commission summary, ‘Strategy on climate change: the way ahead for 2020 and beyond’, available at .

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Introduction to Energy Efficiency in the European Union Moreover, the EU acknowledged at the beginning of 2011 that, on current trajec- 16.08 tories, the 20 per cent energy saving target for 2020 fixed by the Council in 2007 was not going to be reached by the Member States. In order to achieve that energy efficiency target,10 the European Commission has published its proposal for a new Directive on energy efficiency. The proposal has been transmitted to the European Parliament and the Council of the European Union and was published on 22 June 2011.

10 Recitals 7 and 8 of the Proposal for a Directive of the European Parliament and of the Council on energy efficiency and repealing Directives 2004/8/EC and 2006/32/EC (2011/0172(COD)), COM(2011) 370 (22 June 2011).

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17 EU ENERGY EFFICIENCY: LEGISLATION, POLICY INSTRUMENTS, AND PROPOSALS

A. Overview of Recently Adopted EU Energy Efficiency Instruments B. The New Proposal for a Directive on Energy Efficiency

C. Conclusion

17.62

17.02 17.32

It is first necessary (1) to provide a short overview of the recently adopted instru- 17.01 ments, to have a general appreciation of the existing instruments in EU Law (paras 17.02 ff ), before (2) analysing in depth the new proposal for a Directive on Energy efficiency (paras 17.32 ff ).

A. Overview of Recently Adopted EU Energy Efficiency Instruments (a) Directive 2010/30/EU on the indication by labelling and standard product 17.02 information of the consumption of energy and resources by energy-related products: Directive 2010/30/EU1 was adopted on 19 May 2010. Its main objective is to introduce labelling requirements for all energy-related products. It repeals Directive 92/75/EEC. The new Directive’s material scope is much wider than that of Directive 92/75/ 17.03 EEC. All energy-related products which have some direct or indirect impact on the consumption of energy (and on other essential resources) during use are now

1 Directive 2010/30/EU on the indication by labelling and standard product information of the consumption of energy and resources by energy-related products [2010] OJ L 153/1 (18 June 2010).

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EU Energy Efficiency: Legislation, Policy Instruments, and Proposals addressed by the Directive,2 which is no longer restricted to household devices. As a result, the Directive provides a general framework for the harmonization of national measures on end-user information by means of labelling and product information on the consumption of energy. 17.04 As the Directive sets the general framework, delegated acts for each product shall

be laid down with respect to energy efficiency, and the design and content of the label must emphasize the energy efficiency of the product.3 These delegated acts will soon be adopted and will specify the rules for each category of product. 17.05 Member States, suppliers and dealers all have specific responsibilities as provided

by the Directive.4 Also, these labels are to be taken into account by public authorities while concluding public works, supply and/or service contracts.5 17.06 Finally, penalties set by Member States6 for failure to respect the rules laid down

in the Directive and its associated delegated acts are intended to ensure the prompt and faithful implementation of the Directive, which entered into force on 20 June 2011. Those penalties must be effective, proportionate and dissuasive and the provisions creating such penalties should have been notified by Member States to the Commission by 20 June 2011. 17.07 (b) Directive 2010/31/EU on the energy performance of buildings: This new

Directive7 introduces several new concepts in the energy performance of buildings, which are analysed below. It was adopted on 19 May 2011 and repeals the Directive 2002/91/EC, which was the first EU instrument to address this subject matter. 17.08 First, the initial material scope of the Directive has been extended to cover building

‘elements’ and ‘units’. This has the consequence that not only buildings as such are required to satisfy the rules provided by the Directive but also ‘a section, floor, or apartment within a building which is designed or altered to be used separately’.8 Technical building systems—ie ‘technical equipment for the heating, cooling, ventilation, hot water, lighting or for a combination thereof, of a building or building unit’9 —have also been included when defining the new material scope of the Directive.

2

Art 1(2). Art 10. 4 See Arts 3–7. 5 Art 9. 6 Art 15. 7 Directive 2010/31/EU of 19 May 2010 on the energy performance of buildings [2010] OJ 18/6/2011, L 153/13 (18 June 2010). 8 Art 2(8). 9 Art 2(3). 3

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A. Overview of Recently Adopted EU Energy Efficiency Instruments Although Member States are still responsible for laying down the measures in 17.09 order to establish their own system of certification, energy performance certificates are better organized than under the previous Directive. The issue of certificates is required for a larger number of buildings thanks to the lowering of the threshold, as recommended by several studies and actors at the time of the adoption of Directive 2002/91/EC.10 The size of the floor area now taken into account when requiring those certificates is reduced from 1,000m2 to 500m2. Furthermore, while developing their national energy performance schemes, Member States may draw inspiration from a voluntary but common EU certification scheme established for the energy performance of non-residential buildings.11 This EU scheme will be made available to Member States by 2011 and is the first common scheme put in place at EU level. Various measures will need to be implemented by the Member States. The Directive 17.10 requires a minimum energy performance for buildings or building units in order to achieve cost-optimal levels.12 The method for calculating this cost-optimal level is laid down by the Directive and its Annexes, and takes into account relevant parameters such as climatic conditions and the accessibility of energy infrastructure.13 Furthermore, the aforementioned technical building systems should be governed 17.11 by a set of requirements ‘in respect of overall energy performance, the proper installation and the appropriate dimensioning, adjustment and control’14 for the purpose of optimizing the use of energy. A new ‘nearly zero-energy buildings’ concept, defined as ‘very high energy perform- 17.12 ance buildings’15 has also been imposed by the Directive. From 2021 onwards, all new buildings in Member States must be nearly zero-energy buildings and, from 2019, all publicly owned and occupied buildings must be nearly zero-energy buildings.16 Member States are invited to provide the appropriate financing and incentives in order to reach this nearly zero-energy buildings target. Finally, the Directive provides that ‘Member States shall ensure that independent 17.13 control systems for energy performance certificates and reports on the inspection of heating and air-conditioning systems are established’.17 The new Directive 2010/31/EU on the energy performance of buildings is signifi- 17.14 cantly more ambitious than its predecessor. Member States face new provisions 10 L Werring (gen ed), EU Energy Law: Volume III—EU Environmental Law: Energy Efficiency and Renewable Energy (Leuven: Claeys & Casteels, 2006), 169. 11 Art 11(9), Directive 2010/31/EU (n 7). 12 Art 4. 13 Art 5. 14 Art 8. 15 Art 2(2). 16 Art 9(1). 17 Art 18(1): see Annex II for details on the requirements for such control systems.

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EU Energy Efficiency: Legislation, Policy Instruments, and Proposals such as nearly zero-energy buildings or more restrictive measures such as the energy performance certification scheme, which have been adopted to help the EU to reach its energy saving targets in 2020. Article 19 provides that, by 1 January 2017 at the latest, the European Commission, along with a Committee established by Article 26 of the Directive, shall evaluate the Directive in the light of experience gained and progress made during its application. If necessary, new proposals could be made to ensure that the original aim of the Directive is achieved: reaching the energy saving target by 2020. 17.15 (c) The Energy Efficiency Plan 2011: Several ‘think tank papers’ have been drafted

since 2010: – the Resource-efficient Europe flagship under the Europe 2020 strategy; – the Europe 2020 Strategy; and – the Roadmap for moving to a competitive low carbon economy by 2050. 17.16 All of these papers focus on the aim of reducing greenhouse gas emissions to

between 80 and 95 per cent below 1990 levels by 2050. A number of key sectors must be involved in this process for this goal to be achieved: power sectors, industry, transport and, amongst others, the residential and services sectors. ‘The most costeffective way to reduce emissions, improve energy security and competitiveness, make energy consumption more affordable for consumers as well as create employment’18 being energy efficiency, Member States and the EU have announced their intention to work towards an energy-efficient and resource-efficient Europe. 17.17 Yet Member States and the EU need to take urgent measures if they are to reach

the original targets by 2050. The Energy 2020 Strategy concludes that there needs to be a Europeanization of energy policy as a whole, and in particular the necessity of well-coordinated action between Member States inter se and with neighbouring countries. Likewise, the Economic and Social Committee has, in the context of the Roadmap 2050, underlined the importance of framing a properly joined-up European energy policy.19 17.18 With the EU and the Member States having agreed on the urgent need for further

action on energy efficiency, a more detailed plan concerning energy efficiency was drafted by the European Commission in March 2011: the ‘Energy Efficiency Plan 2011’. This plan focuses upon six areas of competence: the public sector; the building industry; European industry in general; financial support measures; the role of consumers; and the transport sector.20

18 Commission, ‘Communication: Energy 2020—A strategy for competitive, sustainable and secure energy’, COM(2010) 639 (10 November 2010), 6. 19 Commission, ‘Background paper, Energy roadmap 2050—State of play’ (3 May 2011), 5. 20 Commission, ‘Communication: Energy Efficiency Plan 2011’, COM(2011) 109 (8 March 2011), 1.

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A. Overview of Recently Adopted EU Energy Efficiency Instruments (i) The public sector: The public sector is to lead by example in implementing future 17.19 energy efficiency policies.21 3 per cent of public authority-owned buildings will have to be refurbished each year. Overall, their buildings, both rented and owned, should always meet high energy performance criteria. In addition, energy performance contracting will be developed as well as energy-efficient public spending. Furthermore, ‘Smart Cities’ projects promoting a highly energy-efficient environment on a larger scale will be encouraged by the European Commission. (ii) The buildings sector: three main aspects of the buildings sector should be tackled 17.20 by new energy efficiency initiatives. First, heat use needs to be severely reduced. Incentives should be developed in order to make further reductions.22 Then, a ‘build-up’ skill programme is to be launched by the European Commission to ensure that craftsmen involved in building refurbishment are trained in the use and installation of energy efficient technologies.23 Finally, energy service companies need to intervene financially and support energy efficiency improvements.24 (iii) European industry: European industry must improve its energy efficiency in 17.21 several fields. First, an efficient generation of heat and electricity needs to be developed. This implies, inter alia, a greater use of cogeneration.25 So far as energy and gas are concerned, the rules concerning NRAs and the grid will be modified in the near future to require the NRAs to take energy efficiency into account in their decisions. Also, market mechanisms which make energy efficiency more attractive to enterprises (which have already contributed successfully to energy savings) need to be emphasized and expanded.26 Small and medium-sized enterprises must be encouraged by Member States through better information and new incentives to invest in energy-efficient technology, while larger companies should conduct regular energy audits.27 Further ideas—such as eco-design measures and voluntary agreements on implementing energy efficiency processes and systems—need to be developed in concrete form, and innovation and research on energy-efficient technologies will continue to be supported by the European Commission and its Member States.28 (iv) Financial support: Financial support schemes need to be restructured.29 Both 17.22 EU funding programmes and Member States must put measures in place to support and encourage energy efficiency. However, this financial support needs to be appropriate and coordinated if the change towards an energy-efficient society is 21

COM(2011) 109 (n 20), 4. COM(2011) 109 (n 20), 6. 23 COM(2011) 109 (n 20), 7. 24 COM(2011) 109 (n 20), 7. 25 COM(2011) 109 (n 20), 8. See the Cogeneration Directive 2004/8/EC, and our discussion of this instrument in Ch 12 on Renewables. 26 COM(2011) 109 (n 20), 9. 27 COM(2011) 109 (n 20), 10. 28 COM(2011) 109 (n 20), 10–11. 29 COM(2011) 109 (n 20), 11–12. 22

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EU Energy Efficiency: Legislation, Policy Instruments, and Proposals to be ensured. Further financial mechanisms could be proposed by the European Commission in the coming years if the existing programmes prove inefficient and/ or ineffectual in their operation. 17.23 (v) Consumers: As far as consumers are concerned, the European Commission will

continue to promote the use of energy-efficient appliances through the product labelling process and the provision of better information on the energy performance of devices and buildings, the cost of energy-use, etc.30 New technologies should also help to make information on consumption at the time of use accessible to end users, with individual meters being made available for all types of energy. With such systems, consumers could change their habits or, at least, regulate their energy consumption. In this way, their consumption should end up being less energy intensive and cheaper.31 17.24 (vi) Transport: 32 per cent of final energy consumption is due to transport.32 A sepa-

rate strategy paper has been published on transport to address the specific needs of this sector; this will be analysed below (at paras 17.26 ff ). 17.25 Drafting the basis of an overall European energy efficiency policy, this 2011 Plan

provides a general policy design for future European binding measures and legal instruments which will be adopted over the coming years. The main guidelines of EU policy are explained and detailed. Its main aim is to try to close the gap between reaching the EU’s 20 per cent energy saving target by 2020 and achieving the 2050 vision. 17.26 (d) A White Paper on transport: As previously explained, transport is a core sec-

tor to address when trying to save energy. This is the reason why the European Commission has drafted a separate Communication33 which tries to develop specific answers to transport’s challenges and which makes specific proposals for energy-efficient transport. 17.27 Air, sea, rail, and road transport are all to be interconnected through intermo-

dal platforms thanks to refurbished and new infrastructures throughout the EU. Existing initiatives such as ‘Clean Sky’,34 ‘Single European Sky’,35 and new 30

COM(2011) 109 (n 20), 12–13. COM(2011) 109 (n 20), 13–14. 32 COM(2011) 109 (n 20), 14. 33 Commission, ‘White Paper: Roadmap to a Single European Transport Area—Towards a competitive and resource efficient transport system’, COM(2011) 144 (28 March 2011). 34 ‘Clean Sky, a Public Private Partnership between the European Commission and the Aeronautical Industry, was set up to bring significant step changes regarding the environmental impact of aviation. Clean Sky will speed up technological breakthrough developments and shorten the time to market for new and cleaner solutions tested on full-scale demonstrators, thus contributing significantly to reducing the environmental footprint of aviation (ie emissions and noise reduction but also green life cycle) for our future generations’: . 35 ‘The Single European Sky initiative is intended to organise airspace and air navigation at a European rather than at a local level. Improved air traffic and aircraft positioning and communication 31

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A. Overview of Recently Adopted EU Energy Efficiency Instruments projects like the ‘Blue Belt’,36 must be enhanced in order to increase energy-efficient transportation of both freight and passengers. Short, medium, and long distances all need to be addressed differently by public authorities in terms of choice of means of transport, type of transport (large or small collective transportation), etc.37 However, the general aim remains the reduction in the use of high emissions vehicles as well as of less efficient individual transportation. The various means of achieving these goals developed in the White Paper are 17.28 mainly based upon new legislative instruments, and on funding and taxation. Incentives to promote specific means of transport, taxation to change individual behaviour and encouraging public transportation, and funding to finance research on energy-efficient technologies and new infrastructure are all to be implemented by both the European Commission and Member States.38 In addition to this, this roadmap emphasizes the need for a safe and secure transport service, fixing several goals for each means of transport.39 Above all, it is the entire European transport policy which is to be modernized, 17.29 improved, and orientated towards energy efficiency. (e) State of play: All of these instruments adopted, whether they are legislative ini- 17.30 tiatives or political intentions, have implications for mainstream energy efficiency. The European Commission has clearly enhanced its action over the past year, as the target of 20 per cent energy savings by 2020 is not yet on the way to being achieved. The recent adoption of various Directives has provided more powerful EU instruments, which will impose stronger binding requirements upon Member States than the previous legislation. A general Directive on energy efficiency concerning various sectors already 17.31 addressed by the Energy Efficiency Plan 2011 was proposed by the European Commission on 22 June 2011. An analysis of the proposal follows below, to examine the extent to which it may amount to an ambitious binding instrument for improving energy efficiency.

technologies, such as GALILEO, offer opportunities for significant improvements in the efficiency and safety of air travel. It responds to the need to conceive developments in air traffic management as a building block of the Community transport policy . . .’: . 36 The aim of the Blue Belt pilot project is to explore new ways to promote and facilitate Short Sea Shipping in the European Union by reducing the administrative burden for intra-Community trade. For details, see: . 37 COM(2011) 144 (n 33), 6–7. 38 COM(2011) 144 (n 33), 13–16. 39 COM(2011) 144 (n 33), 11.

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EU Energy Efficiency: Legislation, Policy Instruments, and Proposals

B. The New Proposal for a Directive on Energy Efficiency 17.32 The proposal for a Directive on energy efficiency40 transforms certain aspects of

the Energy Efficiency Plan 2011 into binding measures and seeks to set a common framework to promote energy efficiency in the EU. As already mentioned, energy efficiency is the most cost-effective way to reduce greenhouse gas emissions, as outlined by the 2050 Roadmap. Two existing Directives have, however, failed to fulfil their objectives: Directive 2006/32/EC and Directive 2004/8/EC. Progressively, these Directives will both be repealed as the relevant parts of the new Directive enter into force. Parts of Directive 2010/30/EU will also be repealed. The new material scope of the Directive will overlap with both repealed Directives and will extend to all sectors with energy-saving potential. The proposed Directive is therefore designed to be significantly more ambitious than all previously adopted EU instruments in this field. 17.33 (a) Setting binding measures: The aim of the Directive is to remove the barriers

which impede efficiency in the supply and the use of energy. To do so, both end-use energy and energy supply will have to meet high energy efficiency requirements. Binding measures have been proposed by the European Commission in order to reach the 20 per cent energy savings target, instead of simply setting targets to be achieved. In so doing, the European Commission has changed its attitude by comparison with the previous approach under Directive 2006/32/EC: at that time, a 9 per cent energy savings target was fixed by the Directive. This target will remain applicable until 2017, as it contributes to the realization of the EU’s 20 per cent energy efficiency improvement target by 2020, but no further target will be provided. This original target has proved insufficient to encourage the necessary measures; the intention is that the specific measures under the new proposal should help in achieving the 20 per cent energy savings target (and indeed beyond). 17.34 By 2014, the European Commission will assess whether the EU can reach its 20

per cent energy savings target by 2020. If it finds that it cannot, further legislative proposals are to be drafted, laying down mandatory national targets. This would be the first time that the EU has provided for such a remedy for the lack of effectiveness of national measures in achieving greater energy efficiency. 17.35 The proposed Directive’s material scope is focused on the ‘remov[al of] barriers in

the energy market ’ (emphasis added). The proposal’s reference to the ‘energy market’ concerns the following sectors: public bodies; the energy sector; enterprises generally; and consumers. All of these were discussed and targeted by the Energy

40 Proposal for a Directive of the European Parliament and of the Council on energy efficiency and repealing Directives 2004/8/EC and 2006/32/EC (2011/0172(COD)), COM(2011) 370 (22 June 2011).

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B. The New Proposal for a Directive on Energy Efficiency Efficiency Plan 2011 and many of the political ideas have been concretized in this proposed Directive. The following measures contained in the Commission’s proposal deserve to be emphasized. (b) Efficiency in energy use (i) Public sector: First, 3 per cent of the total floor area owned by public authorities41 17.36 will have to be renovated every year as from January 2014. This applies to every building with a useful floor area of at least 250m2 and which does not meet the minimum energy performance requirements laid down under Directive 2010/31/ EU on the energy performance of buildings.42 This is very similar to the proposal made by the European Commission in the Energy Efficiency Plan 2011. Second, public authorities are to be required to purchase only products, services 17.37 and buildings with high energy efficiency performance levels.43 (ii) Energy sector: Energy efficiency obligation schemes are proposed so as to ensure 17.38 that: either all energy distributors44 or all retail energy sales companies45 operating on the Member State’s territory achieve annual energy savings equal to 1.5% of their energy sales, by volume, in the previous year in that Member State excluding energy used in transport. This amount of energy savings shall be achieved by the obligated parties46 among final customers.47

Small energy distributors and small retail energy sales companies may be exempted. 17.39 Energy for an undertaking’s own use shall also be exempted by Member States.48 The proposal would require an energy efficiency obligation scheme to be established 17.40 by each Member State. The impact assessment accompanying the proposal for the Directive concluded it was not necessary to implement a harmonized European

41

Directive 2004/18/EC ([2004] OJ L134/114) on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts defines the words ‘contracting authorities’, used by the Proposal for a Directive when defining ‘public bodies’, as being ‘the State, regional or local authorities, bodies governed by public law, associations formed by one or several of such authorities or one or several of such bodies governed by public law’. 42 COM(2011) 370 (n 40), Art 4. 43 COM(2011) 370 (n 40), Art 5. 44 The proposed Directive defines energy distributor as ‘a natural or legal person, including a distribution system operator, responsible for transporting energy with a view to its delivery to final customers or to distribution stations that sell energy to final customers’, COM(2011) 370 (n 40), Art 2(7). 45 The proposed Directive defines a retail energy sales company as ‘a natural or legal person who sells energy to final customers’, COM(2011) 370 (n 40), Art 2(9). 46 The proposed Directive defines obligated parties as ‘the energy distributors or retail energy sales companies that are bound by the national energy efficiency obligation schemes referred to in Article 6’, COM(2011) 370 (n 40), Art 2(9). 47 COM(2011) 370 (n 40), Art 6(1). 48 COM(2011) 370 (n 40), Art 6(8).

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EU Energy Efficiency: Legislation, Policy Instruments, and Proposals energy saving obligation, as that would lead to extra administrative burdens and costs for those Member States which already have introduced such energy saving obligations.49 The European Commission therefore chose not to restrict Member States in their choice of scheme according to the subsidiarity principle. This explains why white certificate schemes implemented in France, Italy and in the UK 50 were not, as such, mentioned in the proposal, by contrast to the position in Directive 2006/32/EC. The European Commission has clearly abandoned its original plan of establishing ‘an EU-wide White Certificate Scheme’.51 In conclusion, it is left to Member States’ discretion to decide whether they choose to implement white certificates as one of their energy efficiency obligation schemes. 17.41 The proposed Directive suggests various criteria which could be taken into account

in developing the obligation scheme and defines calculation methods in its annexes. However, although the calculation methods must be implemented,52 Member States remain entirely empowered to adopt their own obligation scheme. 17.42 (iii) Enterprises: Under the proposal, energy audits53 and energy management sys-

tems54 must be encouraged for both small and medium-sized enterprises (SMEs) and households. Particular attention must be given to SMEs, as energy management systems could help their business.55 This is a step forward when compared with Directive 2006/32/EC, where no appropriate solutions were proposed for SMEs. The proposed Directive would also require that larger enterprises be made subject to an energy audit at the latest by 30 June 2014.56 17.43 Energy audits must remain affordable and must be carried out in an independent

manner by experts. Energy audits can be run on their own or within a broader audit.57 49 Commission, ‘Staff working paper—annexes to the impact assessment accompanying the document Directive of the European Parliament and of the Council, on energy efficiency and amending and subsequently repealing Directives 2004/8/EC and 2006/32/EC’, COM(2011) 370, SEC(2011) 779 (22 June 2011), 30. 50 A De Geeter, ‘Toward a European White Certificates Scheme: Review under current national experiences and international trade law’ (2007) 25(1) Journal of Energy and Natural Resources Law 1 and L Werring (gen ed), EU Energy Law: Volume III—EU Environmental Law: Energy Efficiency and Renewable Energy (Leuven: Claeys & Casteels, 2006), 296. 51 De Geeter (n 50), at 26–27. 52 COM(2011) 370 (n 40), Art 6(2) and (3). 53 The proposed Directive defi nes energy audit as ‘a systematic procedure to obtain adequate knowledge of the existing energy consumption profile of a building or group of buildings, an industrial or commercial operation or installation, or a private or a public service, identify and quantify cost-effective energy savings opportunities, and report the findings’, COM(2011) 370 (n 40), Art 2(12). 54 The proposed Directive defi nes energy management system as ‘a set of interrelated or interacting elements of a plan which sets an energy efficiency objective and a strategy to achieve that objective’, COM(2011) 370 (n 40), Art 2(5). 55 COM(2011) 370 (n 40), Art 7(1). 56 COM(2011) 370 (n 40), Art 7(2). 57 COM(2011) 370 (n 40), Art 7(4).

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B. The New Proposal for a Directive on Energy Efficiency (iv) Consumers: First, the proposed Directive would oblige Member States to ensure 17.44 final consumers for gas, electricity, heating, cooling, and hot water were provided with ‘individual meters that accurately measure and allow to make available their actual energy consumption and provide information on actual time of use’.58 This would apply not only to buildings but also to a building’s units, such as apartments. Then, billing must be accurate and based upon actual consumption, providing a 17.45 comprehensive account of current energy costs.59 The information from both the metering and the bills must be made available 17.46 free of charge for the consumer. This proposal would increase the consumer’s protection, although it should be noted that the cost of providing such information would be likely, eventually, to be fed back into the overall costs of providing energy to consumers (eg as part of the cost base considered by regulators when examining tariff methodologies). (v) Penalties: The proposal would require Member States to lay down rules on the 17.47 penalties applicable in case of non-compliance with the national provisions implementing Articles 6 to 8 of the Directive (ie the obligations to be imposed upon energy companies, undertakings generally, and consumers). Those penalties must be effective, proportionate, and dissuasive. (c) Efficiency in energy supply (i) Heating and cooling and energy transformation: The proposal would require 17.48 Member States to establish a national heating and cooling plan for developing high-efficiency cogeneration and efficient district heating and cooling. This plan would have to comprise several elements referred to in the Annex to the Directive. Local and regional plans would also need to be drafted.60 The proposed Directive would also oblige Member States to take measures to 17.49 develop efficient district heating cooling infrastructure in order to accommodate the development of high-efficiency cogeneration and the use of heating and cooling from waste heat and renewable energy sources.61 Priority, however, is to be given to high-efficiency cogeneration. Furthermore, authorization and permitting criteria for new thermal electricity gen- 17.50 eration installations with a total thermal input exceeding 20 MW would be modified by the proposed Directive. These installations would be required to be completed with a high-efficiency cogeneration unit, although Member States would be allowed to exempt certain installations from this obligation. Whenever a pre-existing thermal

58 59 60 61

COM(2011) 370 (n 40), Art 8(1). COM(2011) 370 (n 40), Art 8(2). COM(2011) 370 (n 40), Art 10(1). COM(2011) 370 (n 40), Art 10(2).

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EU Energy Efficiency: Legislation, Policy Instruments, and Proposals electricity generation installation is refurbished or its permit is updated, conversion to allow its operation as a high-efficiency cogeneration installation would be set as a condition in the new or updated permit. Again, Member States would be able to lay down exemptions from this obligation under certain circumstances. 17.51 Mechanisms would also be enforced to ensure the connection of future industrial

installations generating waste heat to district heating and cooling networks. 17.52 The origin of electricity produced from high-efficiency cogeneration would have

to be guaranteed in a transparent, objective, and non-discriminatory manner by Member States. Further, Member States would be required mutually to recognize those guarantees of origin. If they refused to do so, under the proposal, the European Commission must be informed and could compel the refusing Member State to recognize the guarantee.62 17.53 As far as energy transformation is concerned,63 Member States would be required

to draw up an inventory of data for all installations undertaking the combustion of fuels or the refining of mineral oil and gas and update it every three years. 17.54 (ii) Energy transmission and distribution:64 National energy regulatory authorities

would be required by the proposed Directive to pay due regard to energy efficiency in their decisions on the operation of gas and electricity infrastructure, in particular when supervising network tariffs and regulation. 17.55 Furthermore, the proposal would require that all incentives in transmission and

distribution tariffs which unnecessarily have the effect of increasing the volume of distributed or transmitted energy be removed for good. 17.56 (d) Horizontal provisions: The proposed Directive provides several mechanisms

with a view to achieving a high level of energy efficiency. Certification or equivalent qualification schemes would have to be made available by Member States for providers of energy services, energy audits, and other measures, such as installers for building elements. Appropriate publicity of those schemes must be ensured.65 17.57 Moreover, Member States would be required generally to promote energy efficiency

by: introducing new types of incentives, new legal and administrative provisions, and specific guidelines; providing accurate information to the energy market actors; and offering ‘build-up’ skills training for those involved in construction and installation. 17.58 Overall, the proposed Directive would simplify the range of instruments currently

in force, creating one major energy efficiency Directive which would be relevant across the range of economic sectors. It would ease access to information for all

62 63 64 65

COM(2011) 370 (n 40), Art 10(10). COM(2011) 370 (n 40), Art 11. COM(2011) 370 (n 40), Art 12. COM(2011) 370 (n 40), Art 13.

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B. The New Proposal for a Directive on Energy Efficiency actors and would lighten the administrative burden for Member States. Only the transport sector would be addressed in a separate legal framework. (e) State of discussion: Several critics of the proposal of a Directive on energy 17.59 efficiency have already emerged in both Member States and lobby organizations. Some regret the lack of stronger binding measures and targets in the European Commission proposal,66 but otherwise welcome the initiative. Others67 have criticized the severe impact that such a Directive could have on the 17.60 economy and the unrealistic measures proposed: ie the 1.5 per cent energy saving target for the energy sector and the 3 per cent refurbishment target per annum for public bodies’ buildings. The lack of flexibility in, and the cost of, those measures are at the heart of all criticisms of the proposed Directive. Its measures are considered to be too expensive for Member States, local authorities, and the industry at a time of economic austerity. Moreover, for some, the subsidiarity principle will stand in the way of imposing such a heavy burden on local authorities, which would also be bound by the 3 per cent target on public buildings refurbishment. Furthermore, voices have already begun to criticize the 2014 deadline proposed by the Commission for the implementation of the proposal, as being far too soon to implement such far-reaching and costly measures. The proposed Directive will now make its way through the EU’s legislative process. 17.61 Claude Turmes MEP (of the European Parliament’s Industry, Research and Energy

66 ‘Environmentalists slam EU over non-binding energy targets’ (22 June 2011), . 67 ‘EU-Energiepolitik: FDP vs. Kommission’ (12 July 2011) ; ‘EU-Energieeffizienzpläne auf dem Prüfstand des Bundesrates Energie sparen aber zugleich das Subsidiaritätsprinzip wahren’ (20 July 2011) ; ‘Effizienz? Nicht im Interesse der Energie-Konzerne’ (23 July 2011) ; ‘VKU sieht Licht und Schatten bei EU-Energieeffizienz-Richtlinie’ (20 July 2011) ; ‘Brüssel will Verbraucher zum Stromsparen zwingen’ (16 June 2011) ; ‘EU unveils energy efficiency directive’ (24 June 2011) ; ‘Split emerges in the Commission over energy-efficiency measures’ (16 June 2011)