EU Energy Law, Volume I: Internal Energy Market [5 ed.] 9077644652, 9789077644652

Table of contents :
Table of Contents
1 Introduction • Christopher Jones
2 Creating competition on the generation market • Christopher Jones, revised by Ruben Vermeeren
3 Network regulation and third party access • Floris Gräper & Christof Schoser – revised and updated by Floris Gräper and Markela Stamati
4 Unbundling of Transmission System Operators • Emmanuel Cabau, revised and updated by Lena Sandberg
5 Unbundling of Distribution System Operators • Christopher Jones, revised and updated by William-James Kettlewell
6 National Regulatory Authorities • Emmanuel Cabau, revised and updated by Kristóf Kovács
7 The EU Agency for the Cooperation of Energy Regulators (ACER) • Ernst Tremmel
8 The regulation on cross-border electricity exchanges: substantive rules • Christof Schoser, revised and updated by Lena Sandberg
9The gas regulation: substantive access rules...........................................513Floris Gräper
10 Public service obligations and the EU energy market legislation • Bartek Gurba
11 Derogations and exemptions • Jan Papsch
12 The establishment of common network rules • William Webster
13 Security of supply • William Webster
14 Reporting and review of the Directives • Jan Papsch
15 Implementation of the Third Internal Energy Market Package • Yona Marinova
16 The internal energy market and neighbouring countries • Erlendas Grigorovic, updated by William-James Kettlewell
17 Import Gas Pipelines under the Third Energy Package • William-James Kettlewell
Appendix 1: Directive (EU) 2019/944 of the European Parliament and of the Council of 5 June 2019 on common rules for the internal market for electricity and amending Directive 2012/27/EU (recast)
Appendix 2: 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
Appendix 3: 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
Appendix 4: Regulation (EC) No 715/2009 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) No 1775/2005
Appendix 5: Regulation (EU) 2019/942 of the European Parliament and of the Council of 5 June 2019 establishing a European Union Agency for the Cooperation of Energy Regulators (recast)
Appendix 6: Regulation (EU) No 1227/2011 of the European Parliament and of the Councilo f 25 October 2011 on wholesale energy market integrity and transparency
Appendix 7: Commission staff working document. Ownership unbundling. The commission’s practice in assessing the presence of a conflict of interest including in case of financial investors
Appendix 8: Council Directive 2004/67/EC of 26 April 2004 concerning measures to safeguard security of natural gas supply
Appendix 9: Regulation (EU) 2017/1938 of the European Parliament and of the Council of 25 October 2017 concerning measures to safeguard the security of gas supply and repealing Regulation (EU) No 994/2010
Appendix 10: 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 unbundling regime
Appendix 11: 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
Appendix 12: 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
Appendix 13: 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
Appendix 14: Energy Community Treaty
Index

Citation preview

Edited by CHRISTOPHER JONES and WILLIAM-JAMES KETTLEWELL

EU ENERGY LAW VOLUME I

The Internal Energy Market

EMMANUEL CABAU FLORIS GRÄPER ERLENDAS GRIGOROVIC BARTEK GURBA CHRISTOPHER JONES WILLIAM-JAMES KETTLEWELL KRISTÓF KOVÁCS YONA MARINOVA

FIFTH EDITION

JAN PAPSCH LENA SANDBERG CHRISTOF SCHOSER MARKELA STAMATI ERNST TREMMEL RUBEN VERMEEREN WILLIAM WEBSTER

EU ENERGY LAW VOLUME I

THE INTERNAL ENERGY MARKET

Fifth edition

EU ENERGY LAW VOLUME I

THE INTERNAL ENERGY MARKET Fifth edition Emmanuel Cabau Floris Gräper Erlendas Grigorovic Bartek Gurba Christopher Jones William-James Kettlewell Kristóf Kovács Yona Marinova Jan Papsch Lena Sandberg Christof Schoser Markela Stamati Ernst Tremmel Ruben Vermeeren William Webster Edited by Christopher Jones and William-James Kettlewell CLAEYS & CASTEELS 2021

All views expressed are strictly personal. The opinions expressed in individual chapters are those of the author(s) in question.

© 2021 by the authors

ISBN 9789077644652 (Print) ISBN 9789077644669 (ePDF)

The paper and board used in the production of this book is sourced exclusively from replanted forests.

All rights reserved. This publication, in whole or in part, may not be copied, reproduced nor transmitted in any form without the written permission of the copyright holder and the publisher. Applications to copy, transmit or reproduce any part of this work may be made to the publisher.

Published in 2021 by Claeys & Casteels Law Publishers Deventer (Netherlands) – Leuven (Belgium) P.O. Box 2013 7420 AA Deventer Netherlands www.claeys-casteels.com

Table of contents

TABLE OF CONTENTS

Chapter 1 Introduction Christopher Jones

.....................................................................................1

Chapter 2 Creating competition on the generation market.........................................7 Christopher Jones, revised by Ruben Vermeeren 1.

2.

Electricity............................................................................................................... 7 1.1 Opening the generation market for competition.............................. 7 1.2 The authorisation procedure............................................................... 10 1.2.1 Substantive issues................................................................. 10 1.2.2 Procedural issues.................................................................. 13 Gas......................................................................................................................... 14

Chapter 3 Network regulation and third party access...............................................19 Floris Gräper & Christof Schoser – revised and updated by Floris Gräper and Markela Stamati 1. 2.

Introduction........................................................................................................ 19 Duties and responsibilities of transmission and distribution system operators................................................................................................. 24 2.1 General duties......................................................................................... 24 2.1.1 Network-related tasks......................................................... 24 2.1.2 Confidentiality obligation................................................. 31 2.1.3 Balancing............................................................................... 32 2.2 Specific duties and responsibilities of electricity transmission and distribution system operators...................................................... 32 2.2.1 Procurement of energy losses, reserve capacity and ancillary services................................................................... 33 2.2.2 Flexibility incentives............................................................ 41 2.2.3 Electromobility.................................................................... 44 v

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3.

4. 5. 6.

7.

2.2.4 Energy storage...................................................................... 45 2.2.5 Dispatching........................................................................... 46 2.2.6 Data management................................................................ 51 Regulated third party access............................................................................ 53 3.1 Connection to the transmission system............................................ 54 3.2 Access and use of transmission and distribution systems.............. 57 3.2.1 Publication of standard tariffs........................................... 58 3.2.2 Regulation of tariffs............................................................. 62 3.2.3 Cost reflectivity.................................................................... 65 3.2.4 Level of detail of a tariff methodology............................ 73 3.3 Capacity allocation and congestion management.......................... 75 3.3.1 Gas......................................................................................... 75 3.3.2 Electricity.............................................................................. 76 Negotiated third party access (storage ancillary and ancillary services).81 Transit................................................................................................................... 89 Jurisprudence and Commission decisions.................................................... 91 6.1 VEMW and others................................................................................ 91 6.2 Citiworks................................................................................................. 98 6.3 Sabatauskas............................................................................................101 6.4 Swedish Interconnectors....................................................................103 6.5 DE/DK Interconnector.....................................................................104 Direct lines........................................................................................................106 7.1 Direct lines electricity.........................................................................106 7.2 Direct lines gas.....................................................................................111

Chapter 4 Unbundling of Transmission System Operators.....................................113 Emmanuel Cabau, revised and updated by Lena Sandberg 1.

Introduction......................................................................................................113 1.1 The need for unbundling....................................................................113 1.2 Unbundling...........................................................................................115 1.3 The first and second electricity and gas directives.........................116 1.4 The 2005 Sector Inquiry....................................................................118 1.5 The Third Energy Package: towards ownership unbundling......122 1.6 The Clean Energy Package . ..............................................................123 1.7 Ownership unbundling under EU competition rules.................124

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2.

3. 4.

5.

The unbundling options under the Clean Energy Package.....................127 2.1 Background ..........................................................................................127 2.2 Unbundling under the Clean Energy Package..............................128 2.2.1 Ownership Unbundling...................................................128 2.2.2 Independent System Operator (ISO)............................129 2.2.3 Independent Transmission Operator (ITO)...............130 2.2.4 General Principles on the Unbundling Options.........132 2.2.5 ITO+: “Unbundling à la carte” – a fourth unbundling option............................................................133 2.2.6 Implementation by the Member States.........................134 2.2.7 Exemptions granted by the Commission......................136 2.2.8 Derogations set out in the Directives............................141 2.2.9 Application of the unbundling principles across the gas and electricity sectors..........................................141 Level Playing Field – Intra EU Acquisitions..............................................142 3.1 Acquisition of rights within an ownership unbundled TSO.....143 3.2 General provision on level playing field..........................................145 Designation of TSO and the certification procedure..............................146 4.1 Approval and designation of the TSO............................................147 4.2 General rules on certification............................................................147 4.2.1 Launch and timing of the procedure.............................150 4.2.2 Procedure and timing........................................................151 4.3 Certification in case of control of an EU transmission system operator by a company from a non-EU country..............152 4.3.1 Introduction........................................................................152 4.3.2 Substance and Procedure.................................................156 4.4 Commission Control of Certification By National Authorities............................................................................................160 The unbundling options under under the Clean Energy Package in detail...............................................................................................................160 5.1 Ownership unbundling......................................................................160 5.1.1 Application of unbundling rules to companies controlling the TSO or supplier.....................................161 5.1.2 The concept of control......................................................162 5.1.3 The concept of “rights”.....................................................163 5.1.4 The rule in practice............................................................164

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Chapter 5 Unbundling of Distribution System Operators......................................217 Christopher Jones, revised and updated by William-James Kettlewell 1. 2. 3. 4.

5. 6.

7.

Introduction . ...................................................................................................217 Definition of a vertically integrated company...........................................221 Legal unbundling.............................................................................................224 3.1 Definition..............................................................................................224 3.2 Combined network operator............................................................225 Management unbundling...............................................................................226 4.1 Introduction . .......................................................................................226 4.2 General definition of management unbundling . .........................226 4.3 Independent Management . ..............................................................229 4.4 Separation of personal interests .......................................................231 4.5 Autonomy and control over assets by the network operator......232 4.6 Compliance officer and compliance programme..........................236 4.7 Prohibition to take advantage of vertical integration to distort competition.........................................................................239 Accounting unbundling ................................................................................240 5.1 The requirements of the Directives . ...............................................240 New ‘unbundling’ rules for electricity DSOs ...........................................244 6.1 Citizen Energy Communities...........................................................245 6.2 Electro-mobility-related services......................................................246 6.3 Storage services.....................................................................................248 6.4 Aggregation and flexibility services.................................................251 Exemptions . .....................................................................................................254 7.1 Exemption for small distributors . ...................................................254 7.2 Exemption for closed distribution systems . ..................................256 7.2.1 Definition of closed distribution systems ....................261 7.2.2 Scope of the derogation . .................................................262 7.2.3 Procedure . ..........................................................................263

Chapter 6 National Regulatory Authorities...........................................................265 Emmanuel Cabau, revised and updated by Kristóf Kovács 1. 2.

The need for a strong sector-specific regulator..........................................265 Designation of a single regulatory authority..............................................269 2.1 Regional regulatory authorities........................................................271 viii

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3.

4. 5.

6.

7.

8. 9. 10.

2.2 Small and separated systems..............................................................272 Independence of regulatory authorities......................................................273 3.1 Principle of independence..................................................................274 3.1.1 Organisational requirements and transparency..........276 3.1.2 Personnel requirements....................................................277 3.2 Rules protecting independence.........................................................279 General objectives of the regulatory authorities........................................282 Duties of regulatory authorities....................................................................285 5.1 General principles applicable to the duties.....................................285 5.2 Content of the duties..........................................................................286 5.2.1 Tariffs....................................................................................293 5.2.2 Prevention of cross-subsidies...........................................293 5.2.3 Compliance and enforcement.........................................294 5.2.4 Cooperation and coordination.......................................295 5.2.5 Monitoring..........................................................................295 5.2.6 Reporting and Publication...............................................297 5.2.7 Consumer protection........................................................297 5.2.8 Specific duties related to ISOs and ITOs.....................298 5.2.9 Specific duties related to the ENTSO for Electricity and the EU DSO Entity...............................298 5.2.10 Specific duties related to the Regional Coordination Centres.......................................................299 5.3 Additional duties granted by other legal acts.................................299 Powers of regulatory authorities...................................................................301 6.1 Adopting binding decisions...............................................................304 6.2 Promoting effective competition and ensuring the proper ........305 functioning of the market..................................................................305 6.3 Information provision.........................................................................306 6.4 Penalties.................................................................................................306 6.5 Investigations and instructions.........................................................308 Procedural issues..............................................................................................308 7.1 Dispute settlement...............................................................................308 7.2 Complaints against tariffs or methodologies.................................310 7.3 Judicial review.......................................................................................311 Regulatory regime for cross-border issues..................................................313 ACER review ...................................................................................................315 Conclusion........................................................................................................318

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Chapter 7 The EU Agency for the Cooperation of Energy Regulators (ACER).......321 Ernst Tremmel 1. 2. 3. 4. 5.

Introduction......................................................................................................321 The legal basis...................................................................................................322 2.1 Overview...............................................................................................322 2.2 The new legal framework of ACER.................................................324 Purpose and objectives....................................................................................326 Types of acts......................................................................................................327 Tasks of ACER.................................................................................................329 5.1 General competences..........................................................................331 5.1.1 Advice to the EU institutions..........................................331 5.1.2 Request for information...................................................332 5.2 Cooperation of transmission system operators and distribution system operators............................................................334 5.2.1 Establishment of the ENTSOs and the EU DSO entity.....................................................................................335 5.2.2 Performance of the ENTSOs and the EU DSO.........337 5.2.3 Regulatory oversight of European and regional entities..................................................................................340 5.2.4 Methodology on the use of congestion income..........343 5.2.5 Certification of transmission system operators...........345 5.3 Regulatory authorities........................................................................347 5.3.1 Frame for the cooperation and coordination of regulatory authorities...................................................347 5.3.2 Review of decisions of national regulatory authorities............................................................................348 5.3.3 Advice on the application of Guidelines.......................351 5.3.4 Operational assistance in REMI investigations...........352 5.3.5 Reduction of cross-zonal capacities or deviation from ­coordinated actions.................................................353 5.3.6 Decisions on technical issues...........................................355 5.3.7 Decisions on regulatory issues of cross-border trade or cross-border system security.............................355 5.4 Regional coordination centres..........................................................362 5.4.1 Decision on the geographical scope of regional coordination c­ entres..........................................................363 5.4.2 Approval of tasks................................................................364 5.4.3 Monitoring..........................................................................365 x

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5.5

5.6

5.7

5.8 5.9

5.4.4 Request for information . ................................................366 5.4.5 Opinions and recommendations....................................366 Nominated electricity market operators.........................................367 5.5.1 Monitoring..........................................................................368 5.5.2 Request for information...................................................368 5.5.3 Recommendations.............................................................369 Development and implementation of network codes and ­g uidelines......................................................................................369 5.6.1 Framework guidelines.......................................................370 5.6.2 Proposals for binding network codes............................372 5.6.3 Proposals for non-binding network rules.....................376 5.6.4 Amendments of network codes......................................378 5.6.5 Monitoring the implementation of network codes and guidelines.....................................................................381 5.6.6 Approval of Union-wider or regional terms and conditions or methodologies for the implementation of network codes and guidelines....................................384 5.6.6.1 Union-wide terms and conditions or methodologies..................................................385 5.6.6.2 Regional terms and conditions or methodologies..................................................386 5.6.6.3 Approval procedure . ......................................388 5.6.6.4 Delegated acts...................................................389 5.6.7 Bidding zone review..........................................................391 Generation adequacy and risk preparedness..................................392 5.7.1 European resource adequacy assessment and cross-border ­participation in capacity mechanisms....393 5.7.2 National resource adequacy assessments.......................395 5.7.3 Risk preparedness – security of electricity supply.......396 5.7.4 Security of gas supply........................................................398 5.7.5 Technical guidance on the calculation of CO2 emission values in the context of capacity mechanisms.........................................................................400 Exemptions for major new infrastructure.......................................401 Infrastructure........................................................................................404 5.9.1 Monitoring the implementation of interconnector capacity projects and the EU TYNDPs........................405 5.9.2 Participating in the identification of PCIs ..................406 5.9.3 Monitoring the implementation of PCIs.....................409 5.9.4 Energy system wide cost-benefit analysis......................411 xi

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6.

7.

5.9.5 Sharing good practices regarding risk-related incentives for PCIs............................................................413 5.9.6 Investments requests and cross-border cost allocation.............................................................................415 5.10 Wholesale market integrity and transparency...............................416 5.10.1 Monitoring of wholesale energy markets......................418 5.10.2 Collection of data..............................................................420 5.10.3 Registration of market participants...............................422 5.10.4 Sharing of information between the ACER and other authorities.................................................................424 5.10.5 Coordination and cooperation ......................................426 5.11 Monitoring and reporting on the electricity and natural gas sectors..............................................................................................430 Procedure...........................................................................................................433 6.1 Consultation and transparency.........................................................433 6.2 Procedural safeguards for decisions.................................................435 6.3 Internal workflow: Director – Working Group – Board of ­Regulators.........................................................................................437 Organisation of ACER...................................................................................440 7.1 The Administrative Board..................................................................442 7.1.1 Composition and voting..................................................442 7.1.2 Functions.............................................................................445 7.2 The Board of Regulators.....................................................................449 7.2.1 Composition and voting..................................................449 7.2.2 Functions.............................................................................452 7.3 The Director..........................................................................................454 7.3.1 Profile and appointment...................................................454 7.3.2 Tasks.....................................................................................457 7.4 Board of Appeal...................................................................................459 7.4.1 Composition.......................................................................459 7.4.2 Appeals.................................................................................462 7.5 Working groups....................................................................................464 7.6 Staff.........................................................................................................466

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Chapter 8 The regulation on cross-border electricity exchanges: substantive rules .................................................................................469 Christof Schoser, revised and updated by Lena Sandberg 1. 2. 3.

4.

5.

Introduction......................................................................................................469 Background – the properties of electricity.................................................471 Tarification........................................................................................................473 3.1 The physical and economic principles underlying tarification...473 3.2 The need for an inter-TSO compensation mechanism................475 3.3 Cross-border tarification and the Cross-border Electricity R ­ egulation.........................................................................476 3.3.1 From voluntary ITC agreements to binding ITC guidelines...................................................................480 3.4 National transmission and distribution tariffs principles............482 Congestion management and capacity allocation....................................484 4.1 Introduction..........................................................................................484 4.2 Constraints on available capacity.....................................................485 4.2.1 Long‑term capacity reservation agreements.................485 4.2.2 Public service obligations.................................................487 4.3 Congestion management methods..................................................487 4.3.1 The “first come, first served” method.............................487 4.3.2 Pro-rata method.................................................................488 4.3.3 Explicit auction method...................................................488 4.3.4 Implicit auction..................................................................490 4.3.5 From non market-based capacity allocation systems to market-based capacity allocation systems................491 4.4 Requirements of the Regulation.......................................................492 4.4.1 Requirement for market based methods.......................496 4.4.2 Maximisation of capacity use..........................................497 4.4.3 Requirement for co-ordination between TSOs..........498 4.4.4 Distribution of congestion rents.....................................498 4.5 The forthcoming CACM guidelines/network code . .................499 4.5.1 Congestion..........................................................................501 4.5.2 Flow-based calculation method......................................501 4.5.3 Matching of bids and offers using an algorithm..........502 4.5.4 Use of implicit allocations................................................502 4.5.5 Regional level cooperation...............................................503 Locational signals.............................................................................................503

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6. 7. 8.

5.1 Introduction..........................................................................................503 5.2 Requirements of the Regulation.......................................................505 Harmonisation of tariffs.................................................................................507 Transparency.....................................................................................................508 Network security and calculation of available capacity...........................511

Chapter 9 The gas regulation: substantive access rules...........................................513 Floris Gräper 1. 2. 3. 4. 5. 6. 7.

8. 9.

Introduction.....................................................................................................513 Access rules in the the Gas Regulation........................................................514 Charges for access to networks....................................................................514 Third party access services..............................................................................517 4.1 Third party access services concerning storage and LNG facilities..................................................................................................521 Capacity allocation and congestion management....................................522 Capacity allocation and congestion management for LNG...................526 Transparency ....................................................................................................528 7.1 Introduction..........................................................................................528 7.2 Definition of relevant points.............................................................530 7.3 Level of detail to be published..........................................................531 Transparency for LNG...................................................................................532 Balancing...........................................................................................................533

Chapter 10 Public service obligations and the EU energy market legislation............539 Bartek Gurba 1. 2. 3. 4. 5. 6.

Introduction......................................................................................................539 Concepts of the Public Service Obligations and the Services of General Interest ..........................................................................................541 Public Service Obligations and the Third Energy Package ­Directives.543 Jurisprudence of the Court............................................................................544 The Security of Supply Regulation and the Clean Energy Package .....547 Public Service Obligations and state aid.....................................................551

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Chapter 11 Derogations and exemptions.................................................................553 Jan Papsch 1. 2.

3.

Introduction......................................................................................................553 Derogations directly provided in secondary law.......................................555 2.1 TSO unbundling.................................................................................557 2.2 DSO unbundling.................................................................................560 2.3 Isolated markets (gas).........................................................................561 2.4 Emergent markets (gas)......................................................................564 2.5 Derogations under the electricity and gas Regulations...............567 2.6 Limited application of the electricity Directive to Malta...........569 2.7 Former derogations granted during the accession process..........569 Derogation and Exemption Decisions........................................................570 3.1 Small systems (electricity)..................................................................571 3.1.1 Assessment criteria.............................................................579 3.1.2 Derogation procedure.......................................................581 3.1.3 Derogation Decisions adopted by the Commission..583 3.1.3.1 The Azores.........................................................583 3.1.3.2 Madeira..............................................................584 3.1.3.3 Cyprus . .............................................................584 3.1.3.4 Malta...................................................................585 3.1.3.5 Greek non-interconnected islands...............586 3.2 Emergent regions (gas).......................................................................587 3.2.1 Assessment criteria and procedure.................................588 3.2.2 Derogations being dealt with by the Commission.....591 3.3 Take-or-pay contracts..........................................................................591 3.3.1 Derogation only from Article 32....................................594 3.3.2 Derogation procedure.......................................................595 3.3.3 Substantive issues ..............................................................596 3.4 New Infrastructure..............................................................................597 3.4.1 Scope and substantive issues relevant to an exemption..... 599 3.4.1.1 Eligible infrastructure.....................................602 3.4.1.2 The investment must enhance competition in supply.....................................603 3.4.1.3 The risk makes an exemption necessary......605 3.4.1.4 Legal unbundling.............................................607 3.4.1.5 Access charges...................................................607

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3.4.2

3.4.3

3.4.1.6 The exemption must not be detrimental to competition, market functioning, and the functioning of the regulated system.................................................................608 3.4.1.7 The investment must enhance security supply (gas only)..............................................608 3.4.1.8 No regulated income (electricity only).......609 Procedure.............................................................................609 3.4.2.1 Early contacts....................................................609 3.4.2.2 Role of ACER..................................................610 3.4.2.3 Adoption and notification of the national decision..............................................610 3.4.2.4 Commission decision......................................611 3.4.2.5 Implementation................................................613 Exemptions dealt with by the Commission.................617 3.4.3.1 Electricity..........................................................618 3.4.3.1.1 Estlink.................................................................618 3.4.3.1.2 BritNed..............................................................619 3.4.3.1.3 East-West-Interconnectors.............................620 3.4.3.1.4 Arnoldstein/Tarvisio.......................................620 3.4.3.1.5 ElecLink.............................................................621 3.4.3.1.6 Slovenian-Italian Interconnectors................623 3.4.3.1.7 Piemonte Savoia...............................................624 3.4.3.2 Gas pipelines.....................................................624 3.4.3.2.1 BBL.....................................................................625 3.4.3.2.2 Poseidon.............................................................625 3.4.3.2.3 Nabucco.............................................................626 3.4.3.2.4 OPAL.................................................................628 3.4.3.2.5 Gazelle................................................................631 3.4.3.2.6 TAP.....................................................................632 3.4.3.2.7 SK-HU Interconnector..................................635 3.4.3.3 Interconnector Greece-Bulgaria (IGB).......636 3.4.3.4 LNG terminals.................................................636 3.4.3.5 Gas storage........................................................640

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Chapter 12 The establishment of common network rules.........................................643 William Webster 1. 2. 3. 4. 5. 6.

Introduction......................................................................................................643 The Florence and Madrid Fora and first cross border Regulations........644 Revisions to the Regulations in 2009 and the introduction of the network code development process..................................................646 The recasting of the Electricity Regulation 2019/943.............................650 Gas Regulation 715/2009 – Key principles...............................................660 The electricity and gas Regulations and network codes: legal and procedural issues...............................................................................................661 6.1 Implementation of the Regulations: direct effect.........................661 6.2 The comitology and implementing acts procedure......................662 7. TSO cooperation: establishment and tasks of ENTSOs........................664 7.1 Background...........................................................................................664 7.2 Tasks of the ENTSOs.........................................................................666 7.3 Regional cooperation and Co-ordination Centres.......................669 7.4 The European Network of DSOs.....................................................674 8. Establishment and modification of network codes..................................675 9. Summary of Network Codes and Guidelines adopted since 2009.......680 9.1 Gas..........................................................................................................680 9.2 Electricity...............................................................................................683 10. Modification of network codes.....................................................................688 Chapter 13 Security of supply .................................................................................691 William Webster 1. 2.

3.

Security of supply context..............................................................................691 1.1 Introduction..........................................................................................691 Balancing Supply and Demand.....................................................................695 2.1 Introduction..........................................................................................695 2.2 Role of the Wholesale markets.........................................................696 2.3 The Role of the TSO: electricity......................................................698 2.4 Role of TSOs: Gas...............................................................................703 System operation and operational security . ..............................................704 3.1 Background...........................................................................................704 3.2 System Operation Code (SO)...........................................................705 xvii

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4. 5.

6.

3.3 Electricity Emergency and Restoration Code (EER)..................706 Investment in the competitive market.........................................................707 4.1 Electricity: Tendering and Capacity markets.................................707 4.2 Infrastructure and Storage – Gas . ...................................................710 Emergency Coordination and Safeguards..................................................716 5.1 Gas..........................................................................................................716 5.1.1 Background and key principles.......................................716 5.1.2 Common infrastructure standard..................................721 5.1.3 Common supply standard and protected customers.722 5.1.4 Coordination: preparation for a supply disruption . .724 5.1.5 Crisis Resolution................................................................726 5.2 Electricity .............................................................................................726 5.2.1 Background and key principles.......................................726 5.2.2 Risk Assessment and Scenario Modelling.....................728 5.2.3 Risk preparedness plans....................................................730 5.2.4 Management of Crisis Situations...................................732 Overall summary of security of supply legislation....................................733

Chapter 14 Reporting and review of the Directives..................................................735 Jan Papsch 1. 2. 4. 5. 6. 7.

Purpose of reporting obligations..................................................................735 Reporting by the Commission......................................................................736 Reporting by ENTSO-E and ENTSOG....................................................744 Reporting obligations of national authorities............................................747 Reporting obligations on national transmission system operators........749 Review provisions ...........................................................................................750

Chapter 15 Implementation of the Third Internal Energy Market Package...............755 Yona Marinova 1. 2.

The Third Internal Energy Market Package...............................................755 1.1 Implementation via formal enforcement action and other tools..............................................................................................756 Infringement action under the Third Energy Package . ..........................757 2.1 Initiation and steps in infringement proceedings.........................757 xviii

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3.

2.1.1 Procedural steps in infringements..................................757 2.1.2 Confidentiality obligations..............................................758 2.2 Infringement cases for non-transposition . ....................................759 2.2.1 Situation upon expiry of the transposition deadlines....759 2.2.2 Initiation of infringement procedures: Letters of formal notice.......................................................................759 2.2.3 Reasoned opinions............................................................760 2.2.4 Decisions for referral to Court. Application of Article 260(3) TFEU........................................................760 2.3 Infringement cases for incorrect transposition or bad application . ..........................................................................................763 2.3.1 Non-conformity problems...............................................763 2.3.2 Systematic non-conformity assessment . ......................763 2.3.3 Ad-hoc cases . .....................................................................764 Infringement action under the Second Energy Package..........................765 3.1 Infringement cases for non-transposition . ....................................766 3.2 Infringement cases for incorrect transposition or bad application . ..........................................................................................766 3.2.1 Follow-up on the actions under the Second Energy Package.................................................................................766 3.2.1.1 Infringements initiated in 2006-2008 . ......766 3.2.1.2 Infringements referred to Court in 2008 ..768 3.2.1.3 Case C-474/08 Commission v. Belgium ... 768 3.2.1.4 Case C-475/08 Commission v. Belgium ... 768 3.2.1.5 Case C-274/08 Commission v. Sweden .... 769 3.2.1.6 Case C-264/09 Commission v. Slovak Republic ................................................. 770 3.2.1.7 Infringements initiated in 2009 . .................771 3.2.2 Follow-up on the actions under the Third Energy Package.................................................................................773 3.2.2.1 Introduction......................................................773 3.2.2.2 Non-compliance with the Second Package Directives...........................................773 3.2.2.2.1 Price regulation for non-household customers...........................................................773 3.2.2.2.2 Case C-265/08 Federutility .........................774 3.2.2.2.3 Reasoned opinions in 2011-2012................775 3.2.2.2.4 Case-36/14 Commission v. Poland..............775 3.2.2.3 Non-compliance with the Second Package Regulations........................................776 xix

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4.

5.

3.2.2.3.1 C-198/12 Commission v. Bulgaria .............776 3.2.2.3.2 Cases against the United Kingdom and Ireland .......................................................779 Other implementation tools..........................................................................779 4.1 Contacts between the Commission and the Member States......779 4.2 Guidance by the Court in preliminary rulings..............................780 4.2.1 Case C-242/10 Enel Produzione....................................780 4.2.2 Cases C-105/12 to C-107/12 – Essent e.a..................781 4.2.3 Case C-92/11 RWE Vertrieb AG...................................783 4.2.4 Cases C-359/11 and C-400/11 Schulz & Egbringhoff..........................................................................784 4.2.5 Case C-510/13 E.ON Földgáz Trade Zrt....................785 4.2.6 Case C-121/15 ANODE.................................................788 4.2.7 Case C-347/16 Balgarska energiyna borsa AD (BEB)....................................................................................790 4.2.8 Joined cases C-262/17, C-263/17 and C-273/17 Solvay Chemica Italia........................................................791 4.2.9 Case C‑305/17 FENS spol. s r.o.....................................793 Concluding remarks........................................................................................795

Chapter 16 The internal energy market and neighbouring countries........................797 Erlendas Grigorovic, updated by William-James Kettlewell 1. 2. 3. 4. 5. 6.

7.

Introduction......................................................................................................797 Internal energy market and EU accession...................................................798 Energy Community Treaty............................................................................800 The European Economic Area, Norway and Switzerland.......................804 4.1 The European Economic Area and Norway...................................804 4.2 Switzerland............................................................................................805 Energy in Global International Instruments – The Energy Charter Treaty..................................................................................................806 Regional Agreements......................................................................................808 6.1 The Mediterranean Area....................................................................808 6.2 Eastern Partnership.............................................................................811 6.3 Bilateral Relationships and Agreements ........................................811 6.3.1 Russia....................................................................................812 6.3.2 Ukraine................................................................................814 Bilateral agreements of EU Member States with third countries...........816 xx

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Chapter 17 Import Gas Pipelines under the Third Energy Package..........................819 William-James Kettlewell 1. 2.

3.

4.

Introduction......................................................................................................819 The inception and possible demise of the amendments to the Gas Directive.....................................................................................................820 2.1 The Gas Directive as an instrument for shaping the gas ­ importation landscape........................................................................820 2.2 The inapplicability of the Gas Directive to import gas pipelines.................................................................................................821 2.3 The Commission’s proposal . ............................................................823 2.4 The institutional negotiations and political compromise...........823 2.5 The reaction against Directive 2019/692.......................................825 Analysis of the amendments to the Gas Directive....................................826 3.1 Import Gas Pipeline under the Gas Directive, Regulation and Network Codes............................................................................827 3.2 Alternative regulatory regimes applicable to some import gas pipelines..........................................................................................830 3.2.1 Upstream Pipeline Networks to and from third countries..............................................................................830 3.2.2 Extension of the ISO and ITO options for import gas pipelines..........................................................832 3.2.3 Transmission lines under a specific intergovernmental agreement ........................................832 3.3 Exemption for Import Gas Pipelines...............................................838 3.3.1 Exemption for investment purposes..............................838 3.3.2 Exemption for prior completion (‘grandfather clause’)..................................................................................841 Consequences in practice...............................................................................844 4.1 Pipelines will be affected according to their entry point in the EU...............................................................................................844 4.2 Compliance path – and practical consequences – for affected pipelines.................................................................................846 4.2.1 Unbundling rules...............................................................847 4.2.2 Third Party Access requirements....................................848 4.2.3 Regulated Tariffs................................................................849

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APPENDICES

Appendix 1............................................................................................851 Directive (EU) 2019/944 of the European Parliament and of the Council of 5 June 2019 on common rules for the internal market for electricity and amending Directive 2012/27/EU (recast). Appendix 2..........................................................................................1001 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. Appendix 3..........................................................................................1093 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. Appendix 4..........................................................................................1143 Regulation (EC) No 715/2009 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) No 1775/2005. Appendix 5..........................................................................................1193 Regulation (EU) 2019/942 of the European Parliament and of the Council of 5 June 2019 establishing a European Union Agency for the Cooperation of Energy Regulators (recast).

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Appendix 6..........................................................................................1259 Regulation (EU) No 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency. Appendix 7..........................................................................................1297 Commission staff working document. Ownership unbundling. The commission’s practice in assessing the presence of a conflict of interest including in case of financial investors. Appendix 8..........................................................................................1311 Council Directive 2004/67/EC of 26 April 2004 concerning measures to safeguard security of natural gas supply. Appendix 9..........................................................................................1323 Regulation (EU) 2017/1938 of the European Parliament and of the Council of 25 October 2017 concerning measures to safeguard the security of gas supply and repealing Regulation (EU) No 994/2010. Appendix 10........................................................................................1435 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 unbundling regime. Appendix 11........................................................................................1475 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.

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Appendix 12........................................................................................1495 Commission staff working paper Interpretative note on directive 2009/72/EC . 1495 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. Appendix 13........................................................................................1511 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. Appendix 14........................................................................................1537 Energy Community Treaty. Index........................................................................................................................... 1577

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Chapter 1 Introduction Christopher Jones

Chapter 1 Introduction

The first Internal Energy Market Package was adopted in 1966, the second in 2003 and the third in 2009.

1.1

The creation of the Internal Market has been a gradual process, and a moving target. The First Directive provided a basic framework; structural unbundling and negotiated third part access (“TPA”). The second took the step of opening all customers to competition, and increasing the effectiveness of unbundling and related regulations. The Third Directive and Regulation, in 2009, was the real step forward, and provides the basis of the market rules that we see today.

1.2

In essence, the Third Directive provided a robust structure for the development of real and effective competition and a process for developing the very detailed rules that would enable markets to become liquid and contestable, based on common detailed grid and tariff rules and mechanisms through the adoption of Grid Codes. In more details, the third Directive and Regulation provided for:

1.3

(i)

more effective unbundling, requiring real and effective separation of the transmission company from generation and supply, although shying away from mandatory ownership unbundling,

(ii)

a new European Agency, ACER, that brings together national energy regulators,

(iii) new transmission bodies, ENTSOE and ENTSOG, that take more concentrated and effective action to develop common rules that result in better market integration, and

1

Chapter 1 Introduction Christopher Jones

(iv) a new streamlined decision-making process, in which the new Agency and TSO bodies play a leading role, in developing common codes and rules.

1.4

Since the adoption of these provisions, markets have gradually integrated and energy companies have spread their footprint throughout Europe. Whilst the EU retains a number of strong national companies with important market shares at home, the days of the national monopoly have long since gone.

1.5

For many years, the Commission’s main focus was ensuring fair network access, by enforcing the unbundling rules and through competition policy. This issue has now largely passed, competition cases against a TSO for discriminating against competitors of its parent company are now rare, and becoming a thing of the past. It is widely accepted that the unbundling rules, together with TPA, effective regulation and the technical rules contained in the Grid Codes, have achieved many of the objectives that the EU had when starting this process in 2003. The framework in place is now almost certainly robust enough to continue this work.

1.6

However, whilst the 2009 framework and its supplementary and reinforcing measures (such as Grid Codes, regional cooperation, the Energy Community, the TEN-E and CEF infrastructure framework and the Security of Supply Regulations1 and framework) ‘are fit for purpose’ to achieve the objectives of the original liberalisation process, the EU now has to face a challenge that was simply not on its radar in 2003 or 2006: that of climate change and the need to completely decarbonise the energy system in just three decades.

1.7

Even in 2009, when the third Internal Energy Market package was adopted, together with the Renewable Energy and Energy Efficiency Directives, and the introduction of the Emission Trading System (“ETS”), the Commission was not truly aware of the real scale of the challenge ahead and quite how profoundly this would change the EU’s gas and electricity markets.

1.8

The 20-20-20 package, agreed in 2009, committed the EU to cutting CO2 by 20% compared to 1990 levels, achieving a 20% share of renewable energy sources (“RES”) for its entire energy system, and improving energy efficiency by 20%, all by 2020. This was agreed in the light of the EU’s Kyoto commitments.

1

Regulation (EU) 2017/1938 of the European Parliament and of the Council of 25 October 2017 concerning measures to safeguard the security of gas supply

2

Chapter 1 Introduction Christopher Jones

The EU has (pretty much) achieved its 20-20-20 target. But this is just the start. It has already agreed the 2030 target of 32% of its energy system being sourced from RES by 2030, combined with a 40% CO2 cut. The RES target is for the whole energy system, including electricity, industry, buildings, transport… However, getting RES into buildings, transport and industry in the short to medium term is logistically difficult, and in some cases expensive. The electricity system has therefore had to, and will have to until at least 2030, contribute the lions’ share to this transformation. The share of RES electricity in the EU’s gross electricity consumption has leaped from 14.2% in 2004 to 32.1% in 2018. This increase is almost entirely made up of intermittent wind and photovoltaic (“PV”) electricity.

1.9

The increase has been asymmetrical, in line with the 2009 RES Directive that required greater efforts from richer countries. In 2004, for example, 9.5% of Germany’s electricity was sourced from RES. This jumped to 38% in 2018, and again, almost all of this increase came from intermittent wind and PV. In 2018, for the first time, Germany produced, over a few days, more electricity than it could consume from RES.

1.10

This revolution in electricity markets has only just started. To meet the EU’s target of a 32% share of RES by 2030, the Commission estimates that the EU will need to source 50% or more of its electricity from RES. The EU has agreed (with Poland reserving its position) to be net zero-carbon by 2050, and the Commission tabled2 on March 4th 2020 a ‘Climate Law’ to give effect to this commitment.

1.11

This gives rise to new and major challenges to the EU’s electricity market.

1.12

First, it needs to deal with the issue of potential ‘renationalisation’ of electricity markets; Member States can and do limit RES subsidies to national production, although this issue is fading somewhat as RES-E becomes increasingly competitive.

1.13

Second, as the share of intermittent electricity becomes higher, the need for balancing energy becomes greater. When the wind does not blow enough and the sun does not shine, the system needs to use demand response wherever possible, and then call on reserve capacity. When there is too much electricity due to favourable conditions, again after having activated the available demand response,

1.14

2

https://ec.europa.eu/info/sites/info/files/commission-proposal-regulation-european-climate-lawmarch-2020_en.pdf

3

Chapter 1 Introduction Christopher Jones

the electricity needs to be stored. This can be done notably through pumped hydro, batteries (for short-term storage) and converting the excess electricity into other energy vectors, notably ‘green’ hydrogen.

1.15

This gives new, and very important, challenges to the Internal Electricity Market. Firstly, it requires the development of efficient and cost-effective balancing capacity, and in time to deal with the rapidly emerging and very significant peaks and troughs. Secondly, a good way to favour national producers is to only tender for locally produced reserve capacity, or to award it to a national company, for example via a ‘focussed’ tender. This risks again ‘renationalising’ a significant part of the Internal Electricity Market.

1.16

In 2018, the Electricity Market Design package3 was adopted, which aims to provide a foundation to deal with these challenges, inter alia addressing issues such as capacity mechanisms, reinforcing the powers and responsibilities of ACER, collaboration mechanisms between TSOs and DSOs, and increasing risk preparedness. This provides an excellent framework to deal with the issues that will be raised over the next decade as the Internal Electricity Market continues its transition, and these changes are covered in this new edition. The Electricity Market Design package is, however, a ‘staging post’: it will not answer all the questions that levels of RES in the electricity mix above 50% will throw up, and no doubt many of these challenges cannot be fully predicted today. We can confidently expect a new package of measures to be tabled during the next Commission, likely around 2027. Not least, it may need to address the question of price formation in a market dominated by generation sources with high CAPEX and very low OPEX, which may well have the tendency to push pool prices below levels needed to attract new investments.

1.17

The Internal Gas Market has not yet been affected by this decarbonisation agenda, or at least not to the same extent. The changes to the gas market, since the last edition of this book, come more from the Grid Codes which go a long way to integrate markets more efficiently and create liquidity and competition.

1.18

However, this is about to change. The Commission has acknowledged that the EU’s 2050 fully decarbonised energy market will require a great deal of decarbonised and renewable gas, notably hydrogen. Indeed, in 30 years’ time, assuming the EU meets its full decarbonisation goal, unabated fossil fuels will have no place in the EU’s electricity and gas markets. In many respects, this will be an 3

https://ec.europa.eu/energy/topics/markets-and-consumers/market-legislation/electricity-market-design_en?redir=1#new-electricity-market-rules

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Chapter 1 Introduction Christopher Jones

even greater upheaval for the gas markets than that experienced by the electricity system. The Commission is now turning its attention to this issue. Measures need to be taken now if there is any chance that, in just three decades, a functioning and cost-effective renewable and decarbonised gas market and system exists to meet the undoubtedly significant role that it will need to play in the EU’s longer-term energy future. We can expect a ‘Energy System Integration’ package to be tabled in June 2021, and no doubt, the next edition of this book will once again have a great many changes and innovations to cover. The EU’s Internal Energy Market, thus, remains a moving target.

5

1.19

Chapter 2 Creating competition on the generation market Christopher Jones, revised by Ruben Vermeeren

Chapter 2 Creating competition on the generation market

1.

Electricity

1.1 Opening the generation market for competition The liberalisation of the energy sector is based first and foremost on the separation of the regulated network activities on the one hand and the opening of the supply and generation markets on the other. Maintaining the monopolistic structure of network operation should enable competition on the generation as well as the supply segments.

2.1

The generation segment of the vertical chain entails not just the offering of electricity to interested buyers on the wholesale market and running the generation unit on the basis of the merit curve, it also involves the establishment of generation facilities throughout the EU (free establishment). Where there is a level playing field for new generating capacities there is a chance for new entrants to break the monopoly of the incumbent(s) which often historically holds significant shares of generating capacities in many Member States. Thus, already in the first electricity Directive, the principle of free competition in the generation of electricity was established. In the first Directive4, Member States could choose between two different systems regarding the manner in which their generation market was opened to competition; a ‘hands-off ’ authorisation procedure, whereby a number of objective criteria had to be complied with in order for an interested operator to be eligible, or a more centrally steered tendering procedure.

2.2

4

Article 4 of the first electricity Directive 96/92.

7

2.3

Chapter 2 Creating competition on the generation market Christopher Jones, revised by Ruben Vermeeren

2.4

This choice resulted from the fact that a limited number of Member States at that time still believed that the electricity market should and would be opened to competition to only a very limited extent, and would remain characterised by state planning and state control, particularly on the generation side. Thus, the old Directive contained provisions on long‑term planning,5 tendering, and the single buyer procedure6. The rationale behind this was that the state would retain the central role in deciding, for example, the timing and location of investment in generation plant. Competition would be limited to the operation of the plant in a centrally operated wholesale market and in the supply to final customers.

2.5

However, in the years immediately following the entry into force of the first Directive it became more widely accepted that such a centrally‑planned approach to ensure generation adequacy was neither necessary nor appropriate, and that essential public services can be maintained and improved within the context of an effectively regulated but essentially free market, particularly when considering the question of investment in generation capacity. In practice, apart from exceptional circumstances, all Member States already had opted for the authorisation procedure as a result of implementing the first Directive. The third Directive provided for an authorisation procedure only, as the normal manner for permitting new generation to be licensed:

2.6

Article 7 (1) electricity “1. For the construction of new generating capacity, Member States shall adopt an authorisation procedure, which shall be conducted in accordance with objective, transparent and non‑discriminatory criteria.”

2.7

With the adoption of the fourth electricity Directive this article was renumbered and it is now Article 8.

2.8

The philosophy underlying this procedure is rather simple; Member States are obliged to publish a list of criteria that must be met by any undertaking wishing to establish new generation capacity. These criteria must be “objective, transpar‑ ent, and non‑discriminatory”. 5

6

Articles 2 (21), 3 (2) of the first electricity Directive. The idea behind longterm planning in the first Directive was that Member States could decide how much capacity would be needed on a year by year basis and tender for it. No freedom would be given to market participants to construct new capacity not envisaged under the longterm plan. Articles 2 (22), 15 of the first electricity Directive. This procedure was envisaged as an alternative to third party access. In practice, however, it proved unworkable, and no Member State used it.

8

Chapter 2 Creating competition on the generation market Christopher Jones, revised by Ruben Vermeeren

Any undertaking meeting these criteria must have the right to build and operate generation capacity.

2.9

Thus, in normal circumstances Member States can only use the authorisation procedure. It is, in principle, not open to Member States to centrally plan, on a year‑to‑year basis, future estimated generation needs and to tender for future capacity. It must be left to the market to ensure that supply meets demand.

2.10

The move towards the authorisation procedure was also intended to be an additional protection against discrimination. Under a tendering procedure, given the dominant role of any ex‑monopoly and the economies of scale from which it can benefit, and given the interest of the incumbent to prevent the emergence of competition on “its” home market, there is every risk that this company will bid for and win all tenders if they are limited to large generation projects. An authorisation procedure, permitting new market entrants to build smaller plants, provides a greater level of flexibility necessary to encourage market entry.

2.11

Although the role of central planning has been severely constrained by the second and then third Directives, this does not mean that a Member State may not adopt a long-term plan indicating its view of expected future generation requirements7. However, any such plan must be indicative in nature with a role, for example, to guide the compilation of authorisation criteria.

2.12

Furthermore, the third electricity Directive retained, in Article 8, the possibility for Member States to tender in certain limited circumstances for new capacity. This could have been carried out where necessary for reasons of security of supply, or in order to promote environmental protection or new infant technologies. However, the fourth Directive no longer contains the tender procedure and the former Article 8 was erased altogether.

2.13

Even if the authorisation procedure clearly prevailed over the tendering procedure, this should not be seen as a sign of the increased trust in the market to deliver an adequate mix of generation capacity able to meet demand at all times. On the contrary, this trust has come under increasing pressure in recent years, as a result of the increased variability that comes with increasing shares of renewables in the generation mix.8 This widespread concern has not only led to the

2.14

7 8

Article 3 (2) of the third electricity Directive. Commission Communication COM(2013)7243, ‘Delivering the internal electricity market and making the most of public intervention’, http://ec.europa.eu/energy/gas_electricity/doc/com_2013_public_intervention_en.pdf

9

Chapter 2 Creating competition on the generation market Christopher Jones, revised by Ruben Vermeeren

development of a number of so-called capacity mechanisms9, it has also inspired revisions to all articles relevant to the generation segment of the value chain, in the fourth electricity Directive as well as the revised electricity Regulation.

1.2 The authorisation procedure 1.2.1 Substantive issues 2.15

The fourth electricity Directive sets out, in Article 8 (2), the following exhaustive list of criteria that may be applied by Member States in establishing an authorisation procedure. These criteria are listed below, and commented upon:

2.16

a.

the safety and security of the electricity system, installations and associated equipment

Normally this criterion is met through an obligation that any new capacity meets the requirements of the grid code or other standard operational or safety criteria adopted by the transmission system operator and approved by the regulator.

2.17

b.

the protection of public health and safety

2.18

c.

protection of the environment

These criteria are typically met by requirements to respect any legislation on environmental and safety standards in force, and again, the grid code.

2.19

d.

land use and sitting

2.20

e.

use of public ground

In most Member States, there are no specific planning procedures relating to electricity generating plants, which must therefore meet the normal planning requirements applying to any new industrial or semi‑industrial plants or facilities. Such planning requirements are to a very large extent left to each Member State under the subsidiarity principle. However, according to Article 7 (3) of the third electricity Directive they may not be discriminatory in nature, and furthermore, “Member States shall ensure that specific authorisation procedures exist for small decentral9

Capacity mechanisms are State aid mechanisms through which Member States remunerate capacity for being available instead of or in addition to any revenues this capacity obtains from operating in the electricity market. These mechanisms are discussed in more detail in Chapter 13 on Security of Supply.

10

Chapter 2 Creating competition on the generation market Christopher Jones, revised by Ruben Vermeeren

ised and/or distributed generation, which take into account their limited size and potential impact”. The obligation is rather generally phrased, but does give rise to specific rights. Member States must examine whether their planning procedures adequately reflect the enormous difference in environmental impact between a small renewable, CHP or micro‑generation plant and a major electricity facility. The difference should not only be reflected by the difficulty in getting acceptance for the project, but also the speed with which any application is processed. f.

2.21

energy efficiency

Also this criterion is typically met by requirements to respect any legislation on environmental and safety standards in force, and again, the grid code. g.

the nature of primary energy sources

2.22

In normal circumstances, it is not open to a Member State to prescribe which primary energy source should be used by a new generator because such an approach would be likely to result in discrimination vis‑à‑vis existing generators which have not been constrained in this manner. Furthermore, such constraints run contrary to the underlying objective of an authorisation procedure: freedom for new competitors to enter markets, only limited by authorisation criteria imposed to meet essential public service objectives. However, exceptionally, it may be necessary to put restraints on the use of primary energy sources by new generators, notably for reasons relating to security of supply or – possibly – environmental protection.

2.23

The imposition of such constraints needs to be considered carefully since they may easily lead to discrimination. In principle, to be compatible with the Directive, any such limitation must be the least restrictive approach of trade and competition reasonably possible to achieve the legitimate objectives in question. In examining this, the Commission would consider whether the measure was proportionate to its objective, and whether any other, less restrictive possibilities exist. In the event that such an authorisation criteria were seen as discriminatory, the Commission would need to launch an infringement procedure against the Member State concerned.

2.24

Practice however demonstrates that it is not under the authorisation procedure of Article 7 Electricity Directive that Member States introduce and justify constraints of one fuel in favour of the other. In recent years public intervention

2.25

11

Chapter 2 Creating competition on the generation market Christopher Jones, revised by Ruben Vermeeren

of Member States in the generation sector has been a key topic in discussions on the functioning and the completion of the internal electricity market. First, the impact of support schemes for renewable energy has drastically changed the merit order and is raising generation adequacy risks in a number of Member States, which generally seek to remedy the situation by new interventions.10 These interventions however tend to take place outside of the ‘standard’ authorisation procedure framework of Article 7 and their legality is assessed under different legal instruments, such as the tender procedure of Article 8, the reviewed Energy and Environmental State Aid Guidelines or the public service obligations framework. This issue will therefore be further discussed in the Chapters on Security of Supply and public service obligations.11

2.26

h.

characteristics particular to the applicant, such as technical, economic and financial capabilities

When establishing authorisation criteria, Member States may set minimum solvency requirements that must be met by any undertaking operating on the market. Such criteria may be differentiated according to the activity undertaken, for example generator, trader, or supplier. Clearly, care must be taken to ensure that such requirements are non‑discriminatory, and take into account that it may not be appropriate to place the same solvency requirements on all market actors, because failure to take into account different objective requirements may favour incumbents.

2.27

i.

compliance with measures adopted pursuant to Article 9

A construction/operating license can be made subject to the respect of any public service criteria legitimately adopted pursuant to Article 912. However, given the fact that the preceding paragraphs already cover to a very large extent such obligations relevant to the generation sector, it is difficult to envisage that this paragraph will in practice add anything further.

2.28

j.

the contribution of generating capacity to meeting the overall Union target of at least a 32 % share of energy from renewable sources in the Union’s gross final consumption of energy in 2030 referred to in Article 3(1) of Directive (EU) 2018/2001 of the European Parliament and of the Council (19);

10

Commission Communication COM(2013)7243, Delivering the internal electricity market. Making the most of public intervention. See Chapter 13. See Chapter 10.

11 12

12

Chapter 2 Creating competition on the generation market Christopher Jones, revised by Ruben Vermeeren

This criterion seems to add little in terms of concrete obligation. It should rather be seen as a political provision inciting Member States to ensure that the measures are taken to permit Member States to meet their commitments under the 2009 Renewable Energy Directive. k.

the contribution of generating capacity to reducing emissions.

2.29

This provision is similar to (j) above. It gives an incentive to Member States, where appropriate, to take specific measures to promote generation that contributes to reducing national emissions levels. In addition to this, Article 7 (3) provides a specific obligation to ensure that authorisation procedures for small decentralised and/or distributed generation exist. l.

the alternatives to the construction of new generating capacity, such as demand-response solutions and energy storage

2.30

This provision is a new addition introduced in the fourth Directive. It reflects the need, underlined already in the chapter on capacity mechanisms of the Energy and Environmental Aid Guidelines, for Member States to not only regard conventional power plants or renewable generators as potential capacity providers, but to include innovative capacity sources such as demand-response and storage as well. The need for such alternatives, and in particular their flexibility, is closely connected to the rapid development of variable renewables sources that require sufficiently flexible back-up.

1.2.2 Procedural issues Article 8 (4) of the fourth electricity Directive outlines the procedure to be followed regarding authorisation: Article 8 (4) electricity “The authorisation procedures and criteria shall be made public. Applicants shall be informed of the reasons for any refusal to grant an authorisation. Those reasons shall be objective, non‑discriminatory, well-founded and duly substantiated. Appeal procedures shall be made available to the applicant.”

13

2.31

Chapter 2 Creating competition on the generation market Christopher Jones, revised by Ruben Vermeeren

2.32

2.33

2.34

2.35

This Article makes it clear that an authorisation procedure may be the subject of an active licensing procedure, typically (but not necessarily) carried out by the regulator. The grant of a license may be a precondition to authorisation to construct generating facilities. However, such a licensing system must respect a number of procedural safeguards, notably that Member States must make public the requirements to be met by any potential generator. This need not be in a specific legal act, but may simply be an obligation to meet listed and published requirements, such as a network code and existing planning and environmental legislation. Indeed, in most Member States no specific energy related authorisation criteria apply to generation. In the first electricity Directive, Member States were required to forward to the Commission a copy of any refusal to grant an authorisation. In reality this proved unworkable; the administrative cost of ensuring that all local government bodies that refuse permission on environmental or planning grounds inform the Commission of their negative decision outweighed any potential benefits. Thus, the present approach is based on transparency with, if necessary, action by the Commission on the basis of complaints. Thus, although Article 8 (4) of the fourth electricity Directive requires that Member States ensure that “appeal procedures shall be made available to the applicant” in the event of a refusal of a license, it is a question of subsidiarity as to the nature of the appeal procedure. For example, in many Member States, under administrative law, the grounds of any such appeal will be strictly limited; typically to the question whether a procedural error occurred during the decision‑making process. A right of appeal under national law does not prevent a complaint being made to the Commission under Community law. Whilst the Commission would not have jurisdiction to consider the merits of any given license application, it would have the task of verifying that the license procedure complies with the requirements of the Directive. If this would be found not to be the case, the only remedy would be the launch of an infringement procedure against the Member State in question for insufficient implementation of the Directive.

2. 2.36

Gas

Prior to the first gas Directive, in many Member States the national gas company held exclusive de facto or de jure rights to import and export gas and to construct gas infrastructure: transmission, distribution, storage and LNG. The 14

Chapter 2 Creating competition on the generation market Christopher Jones, revised by Ruben Vermeeren

first gas Directive required the abolition of these exclusive rights, through provisions regarding market opening and third party access and an obligation to establish non‑discriminatory authorisation procedures for the construction of natural gas facilities. These provisions also exist in the second gas and now third Directive, Article 4 simply taking over the text from the first Directive, with a slight addition in the third Directive at the end of paragraph 2 (underlined), which adds however little if anything in practice: Article 4 gas “1. In circumstances where an authorisation (for example licence, permission, concession, consent or approval) is required for the construction or operation of natural‑gas facilities, the Member States or any competent authority they designate shall grant authorisations to build and/or operate such facilities, pipelines and associated equipment on their territory, in accordance with paragraphs  2 to 4. Member States or any competent authority they designate may also grant authorisations on the same basis for the supply of natural gas and for wholesale customers. 2. Where Member States have a system of authorisation, they shall lay down objective and non‑discriminatory criteria which shall be met by an undertaking applying for an authorisation to build and/or operate natural‑gas facilities or applying for an authorisation to supply natural gas. The non‑discriminatory criteria and procedures for the granting of authorisations shall be made public. Member States shall ensure that authorisation procedures for facilities, pipelines and associated equipment take into account the importance of the project for the internal market in natural gas where appropriate. 3. Member States shall ensure that the reasons for any refusal to grant an authorisation are objective and non‑discriminatory and that they are given to the applicant. Reasons for such refusals shall be notified to the Commission for information. Member States shall establish a procedure enabling the applicant to appeal against such refusals. 4. For the development of newly supplied areas and efficient operation generally, and without prejudice to Article 38, Member States may decline to grant a further authorisation to build and operate distribution pipeline systems in any particular area once such pipeline systems have been or are proposed to be built in that area and if existing or proposed capacity is not saturated.”

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Chapter 2 Creating competition on the generation market Christopher Jones, revised by Ruben Vermeeren

2.37

This gives rise to the following comments: –

Member States are not obliged to establish any specific authorisation procedure for the construction of new infrastructure; they may simply apply local or regional environmental/planning rules.

–

Where specific authorisation procedures exist, these have to be published and non‑discriminatory. Such authorisation procedures may be relevant not just for the construction of new infrastructure, but also regarding supply – i.e. any company wishing to sell gas in a Member State may be obliged to acquire a supply license from the relevant authorising body. In fact, the obligation to acquire a supply license, typically from the regulator, is rather standard practice in the EU. Usually, this license is the manner in which the regulator ensures the maintenance of security and public service standards by making them license conditions. – The conditions for the grant of a construction, operation or supply license must be established on implementation of the second Directive. In fact, they should already exist and be published as they were required by the first gas Directive. Any changes to the authorisation criteria must be published in good time prior to its entry into force. – Article 4(4) provides a significant limitation on the obligation on Member States to permit the construction of competing distribution infrastructure. Under Article 4 (4), Member States can refuse the construction of competing gas distribution systems “for the development of newly supplied areas and efficient operation generally”.

2.38

Article 4(4) makes it clear that Member States may only refuse authorisation to build new distribution facilities if existing or proposed capacity is not saturated. Thus, if a potential constructor of a competing distribution system has requested third party access and has been refused on the grounds of lack of capacity and if this congestion will not be resolved within a reasonable time‑frame due to planned grid reinforcements, authorisation must in principle be granted. The first sentence of 4 (4) permits a refusal to construct to be justified either on the basis of “the development of newly supplied areas” or for “efficient operation generally”. Distribution tariff systems, unlike transmission, are almost always based on postage stamp tariffs. Thus, the risk of companies “cherry picking” – building pipelines where it would be profitable and thereby undermining the ability of the distribution company to maintain postage stamp tariffs – exists 16

Chapter 2 Creating competition on the generation market Christopher Jones, revised by Ruben Vermeeren

with distribution, but to a lesser extent with transmission. This explains why the possibility contained in Article 4 (4) to derogate from the basic rule that any company must in principle be free to construct competing infrastructure applies only to distribution systems. However, possible limitations on the right to construct transmission pipelines that compete with those of the incumbent network operator are contained in Article 38 of the third gas Directive13, which also permits Member States to make the grant of an authorisation to construct a direct transmission line subject to a refusal of network access due to lack of capacity. This possible limitation to the authorisation procedure contains, however, different conditions to those contained in Article 4(4).

2.39

Where the relevant body in the Member State responsible for granting authorisations (usually the regulator) refuses an application, the decision must be reasoned and the possibility of appeal must exist. It is left to subsidiarity to decide the procedure and grounds for appeal. Article 4(3) of the third gas Directive requires that the reasons “ for such refusals shall be notified to the Commission for information.”

2.40

This may be contrasted with the second and third electricity Directives which (unlike with respect to gas) deletes this notification requirement (it figured in the first electricity Directive). The reason for the deletion of the requirement to notify refusals of requests for authorisation regarding electricity was set out in preamble 30 to the second electricity Directive.

2.41

13

Article 38 Gas Directive 1. Member States shall take the necessary measures to enable: (a) natural gas undertakings established within their territory to supply the eligible customers through a direct line; and (b) any such eligible customer within their territory to be supplied through a direct line by natural gas undertakings. 2. In circumstances where an authorisation (for example, licence, permission, concession, consent or approval) is required for the construction or operation of direct pipelines, the Member States or any competent authority they designate shall lay down the criteria for the grant of authorisations for the construction or operation of such pipelines in their territory. Those criteria shall be objective, transparent and nondiscriminatory. 3. Member States may issue an authorisation to construct a direct line subject either to the refusal of system access on the basis of Article 35 or to the opening of a disputesettlement procedure under Article 41.

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Preamble 30 Electricity Directive “The requirement to notify the Commission of any refusal to grant authorisation to construct new generation capacity has proven to be an unnecessary administrative burden and should therefore be dispensed with.”

2.42

One may therefore presume that a refusal with respect to gas is viewed with more concern than with electricity, and may be expected to be very much the exception. This underlines the arguments set out above as to the difficulty to justify a refusal to construct competing transmission pipelines and LNG and storage facilities.

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Chapter 3 Network regulation and third party access14

1. Introduction Good functioning electricity and gas networks are essential for the system security and the security of supply of the European Union. All Energy Packages, including the latest update of the Third Energy Package for electricity with the Clean Energy for all Europeans Package,15 recognise the importance of independent transmission and distribution networks from the generation and supply segments as a condition for the market opening and more competition in the electricity and gas markets. To ensure such independence the tasks of the transmission and distribution networks are described in detailed manner and fall under strict regulation. The obligation to provide non-discriminatory access to the networks, including connection and use of such networks, as well as to the electricity markets fall within these tasks.

3.1

The transmission and distribution of electricity and gas in Europe have generally been considered as monopoly activities. Even where the legal right exists to construct parallel networks, with the exception of an occasional direct line, it will not typically be economically viable to construct a competing network. Thus, in order to have effective competition in the gas and electricity markets, any electricity or gas supplier must have non‑discriminatory access to the network in order to supply customers.

3.2

14 15

The content of this article does not necessarily reflect the official position of the European Union. Responsibility for the information and views expressed herein lies entirely with the author. Regulation (EU) 2019/942 of the European Parliament and of the Council of 5 June 2019 establishing a European Union Agency for the Cooperation of Energy Regulators; Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity; Directive (EU) 2019/944 of the European Parliament and of the Council of 5 June 2019 on common rules for the internal market for electricity and amending Directive 2012/27/EU.

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3.3

In some countries, notably Germany, the construction of gas transmission pipelines has not been considered a monopoly activity, and parallel lines or alternative routes exist to a certain extent. In those circumstances, it could be argued that it is unnecessary to require the owner of a gas transmission network to allow access to suppliers, as potential competitors to the existing pipeline owner could – in principle – construct a competing network. This approach would be similar to practice in the telecoms sector and to the way gas transmission networks in the USA have been regulated.

3.4

It was this line of argument that led to a choice for Member States between negotiated or regulated access to transmission networks in the first electricity and gas Directives. The possibility to choose between negotiated and regulated access to the transmission networks in gas was dropped in the second electricity and gas Directives. Regulated access to transmission lines, to be provided by legally and organisationally unbundled companies became the minimum requirement.16,17 The main reason for dropping the possibility for negotiated access was that competition in the electricity and gas markets was not developing satisfactorily. There are a number of reasons for this.

3.5

Firstly, there has been rather limited growth in the volume of gas and electricity transported. This is different from the telecommunication sector, where very strong growth in telecommunications traffic and fundamental technological changes have allowed parallel networks to become a reality in many areas. In the absence of such growth, competitors would find it particularly difficult to finance the construction of additional transmission lines and relying on the emergence of network competition would mean a very slow introduction of competition. In practice, it was therefore crucial that competitors could use existing networks. Secondly, electricity and gas transmission lines are, for geographical reasons, increasingly difficult to construct in densely populated areas such as the European Union, and many networks in Europe are much more meshed than the competing US trunk lines. New entrants would therefore typically rely on existing infrastructure owned by incumbents to access the market. Thirdly, the introduction of decoupled entry-exit pricing in some gas markets meant that access to the virtual or notional trading hub required the use of that particular infrastructure and limited potential competition between networks to the transit 16 17

Member States retain the choice between regulated and negotiated third party access regarding access to gas storage and gas ancillary services, with the exception of balancing for which regulated access is mandatory. Derogation from regulated access, however, was, and still is, possible: main examples are the exemptions from regulated third party access according to Article 36 of the gas Directive and Article 17 of the electricity Regulation as well as regional derogations according to Article 44 of the electricity Directive and Article 49 of the gas Directive.

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of gas through those networks or market areas. Finally, an integrated system of transmission networks allows for a more efficient use of existing infrastructure, especially in a highly meshed system such as the European electricity (and to a more limited extent gas) grid. Regarding electricity, the example of Great Britain’s policy regarding transmission and distribution networks is also worth mentioning. Without changing the principle of the networks being a natural monopoly, Great Britain applies competition for the networks’ development and ownership on offshore transmission networks and interconnectors. Given the identified benefits for consumers, more competition on onshore transmission networks is introduced recently with an updated plan in this regard.18 In this regime where competitors participate in tenders for the ownership and operation of the transmission assets, it is noted that the requirements of unbundling and the independent performance of the system operators’ tasks are respected.

3.6

The Third Package Directives maintained the system of regulated access as the minimum requirement for distribution and transmission networks in the gas and electricity sectors. They also strengthened the unbundling requirements in order to overcome discriminatory obstacles in accessing networks of so-called vertically integrated companies. The unbundling rules are discussed in Chapter 4.

3.7

18

Regarding offshore transmission assets, in 2009 Great Britain has introduced a regime where the assets constructed by the offshore developer are transferred to the Offshore Transmission Owner (OFTO) who was identified through a competitive tender process. Potential OFTOs bid to purchase the transmission assets from the developer and then finance and maintain the assets over a twenty-year revenue stream period. In the first, so-called transitional period until 2014, the first tender started in July 2009 and the first offshore transmission licence was granted in March 2011. A second round of transitional tenders started in November 2010 and in February 2014 the third tender phase started under the so-called enduring regime. In this stage the offshore developers have the flexibility to choose whether they or an OFTO design and construct transmission assets. Important is thought that, in accordance with the unbundling requirements, regardless of the party who constructs the offshore transmission assets, an OFTO will be responsible for the ongoing ownership and operation of the transmission assets. See https://www.ofgem.gov.uk/electricity/transmission-networks/offshore-transmission/offshore-transmission-policy-design. Regarding the application of the competition regime to onshore transmission assets see “Update on competition in onshore electricity transmission”, published on 23 January 2018, https://www.ofgem.gov.uk/system/files/docs/2018/01/ competition_update.pdf. This document provides an update on OFGEM’s plans to introduce competitive tendering into onshore electricity transmission, sets the criteria and the process to be applied. The decision to introduce more competition on onshore transmission networks was based on the fact that that new, separable and high value onshore transmission assets should be competitively tendered to ensure value for consumers, with potential reduced costs and increased innovation. The process builds on the already applicable offshore transmission model which grants licences on the basis of competitive tendering which has led to considerable savings for consumers of between £600m and £1.2bn since its implementation in 2009.

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3.8

With regard to electricity, a number of amendments have been made to Directive 2009/72/EC of the European Parliament and of the Council and Regulation (EC) No 714/2009 of the European Parliament and of the Council with the newly adopted Directive (EU) 2019/944 of the European Parliament and of the Council of 5 June 2019 on common rules for the internal market for electricity and amending Directive 2012/27/EU (Electricity Directive) and Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity (Electricity Regulation).

3.9

Even though the principles of third-party access and regulated networks have been maintained, the tasks of electricity system operators have been updated to accommodate the needs of the future electricity markets. The networks have to be able to integrate active customers who now have the right to actively participate in the electricity markets similarly to all other market participants and who need to be empowered to manage their energy consumption.19

3.10

Further, the electricity systems and markets need to be able to integrate the growing share of renewable energy and to make use of all available sources of flexibility with special focus on demand side solutions and energy storage. Also digitalisation will play a significant role through the integration of innovative technologies with the electricity system. The increasing market integration and the more volatile production will require an even closer coordination of the electricity system operators within and across Member States and use of more and more cross-border electricity trade.

3.11

Regarding access and use of Europe’s cross-border electricity networks, detailed rules that govern how network operators provide access to users have been developed with technical network codes and guidelines on the basis of Articles 6 and 18 of Regulation 714/2009. Whereas in the past, such technical rules were mainly decided nationally, the increased interconnections between countries and the need for more cross-border energy exchanges have made EU-wide rules increasingly necessary to effectively manage electricity flows in a fair and nondiscriminatory manner. These network codes and guidelines are legally binding European Commission implementing Regulations based on proposals submitted by the European Network of Transmission System Operators for Electricity (ENTSO-E) followed up by an assessment and review from the Agency for the Cooperation of Energy Regulators (ACER).20 19 20

See Recitals 10, 37, 42 and 55 of Electricity Directive. https://ec.europa.eu/energy/en/topics/markets-and-consumers/wholesale-market/electricity-networkcodes.

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Of relevance for the third party access to the transmission networks and electricity markets are the following network codes and guidelines (more details can be found in Chapter 12):

3.12

Market codes:

3.13

–

Commission Regulation (EU) 2015/1222 of 24 July 2015 establishing a guideline on capacity allocation and congestion management (CACM Regulation);21

–

Commission Regulation (EU) 2016/1719 of 26 September 2016 establishing a guideline on forward capacity allocation (FCA Regulation);22

–

Commission Regulation (EU) 2017/2195 of 23 November 2017 establishing a guideline on electricity balancing (Balancing Regulation).23

3.14

Connection codes: –

Commission Regulation (EU) 2016/631 of 14 April 2016 establishing a network code on requirements for grid connection of generators (Requirements for Generators Code);24

–

Commission Regulation (EU) 2016/1388 of 17 August 2016 establishing a Network Code on Demand Connection (Demand Connection code);25

–

Commission Regulation (EU) 2016/1447 establishing a network code on requirements for grid connection of high voltage direct current systems and direct current-connected power park modules (HVDC code).26

3.15

System operation codes: –

21 22 23 24 25 26 27

Commission Regulation (EU) 2017/1485 of 2 August 2017 establishing a guideline on electricity transmission system operation (System Operation Regulation).27 OJ L 197, 25.7.2015. C/2016/5946 OJ L 259, 27.9.2016. C/2017/7774 OJ L 312, 28.11.2017. C/2016/2001 OJ L 112, 27.4.2016. C/2016/5239 OJ L 223, 18.8.2016. OJ L 241, 8.9.2016. C/2017/5310 OJ L 220, 25.8.2017.

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3.16

These technical legal acts contain details on the terms and conditions for connection and use of the transmission system, rights and obligations of TSOs and other market participants regarding access to the electricity markets as well as rules on system operation and cooperation of TSOs on various aspects of operational security including tasks on electricity balancing. Specific references to the individual network codes and guidelines are made in the relevant sections of this Chapter as well as in Chapter 8 (on capacity allocation and congestion managements).

2.

Duties and responsibilities of transmission and distribution system operators

2.1 General duties 2.1.1 Network-related tasks 3.17

The electricity and gas Directives list a minimum set of tasks of transmission and distribution system operators (‘TSO’ and ‘DSO’ respectively). Member States are free to entrust additional responsibilities to them, but they must make sure that as a minimum all tasks in the Directive are entrusted. The list of tasks differs to some extent between transmission and distribution as well as between electricity and gas. With regard to electricity, these markets differ from those for natural gas, as they involve the trading in a commodity which cannot currently be easily stored and which can be produced using various kinds of generating installations. For this reason, a well-interconnected transmission system across the Union and a high degree of integration of the electricity markets require close cooperation among system operators, market participants and regulatory authorities.28 The present chapter, firstly, describes the relevant provisions for electricity and, subsequently, for gas.

3.18

With respect to electricity, the new Electricity Directive sets the general duties in Article 31 for DSOs and Article 40 for TSOs. Some specific duties are described in other articles of the Electricity Directive and further principles to be followed by the DSOs/TSOs while performing these tasks are included in the Electricity Regulation. The core tasks of the DSOs and TSOs have not changed from the ones in Directive 2009/72 and they cover the following: 28

See recital 18 of Electricity Directive.

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Article 31 Tasks of distribution system operators “1. The distribution system operator shall be responsible for ensuring the long-term ability of the system to meet reasonable demands for the distribution of electricity, for operating, maintaining and developing under economic conditions a secure, reliable and efficient electricity distribution system in its area with due regard for the environment and energy efficiency. 2. In any event, the distribution system operator shall not discriminate between system users or classes of system users, particularly in favour of its related undertakings. 3. The distribution system operator shall provide system users with the information they need for efficient access to, including use of, the system. […].”

Article 40 Tasks of transmission system operators “1. Each transmission system operator shall be responsible for: (a) ensuring the long-term ability of the system to meet reasonable demands for the transmission of electricity, operating, maintaining and developing under economic conditions secure, reliable and efficient transmission system with due regard to the environment, in close cooperation with neighbouring transmission system operators and distribution system operators; (b) ensuring adequate means to meet its obligations; (c) contributing to security of supply through adequate transmission capacity and system reliability; (d) managing electricity flows on the system, taking into account exchanges with other interconnected systems. To that end, the transmission system operator shall be responsible for ensuring a secure, reliable and efficient electricity system and, in that context, for ensuring the availability of all necessary ancillary services, including those provided by demand response and energy 25

Chapter 3 Network regulation and third party access Floris Gräper & Christof Schoser – revised and updated by Floris Gräper and Markela Stamati storage facilities, insofar as such availability is independent from any other transmission systems with which its system is interconnected; (e) providing to the operator of other systems with which its system is interconnected sufficient information to ensure the secure and efficient operation, coordinated development and interoperability of the interconnected system; (f ) ensuring non-discrimination as between system users or classes of system users, particularly in favour of its related undertakings; (g) providing system users with the information they need for efficient access to the system; (h) collecting congestion rents and payments under the inter-transmission system operator compensation mechanism, in accordance with Article 49 of Regulation (EU) 2019/943, granting and managing third-party access and giving reasoned explanations when it denies such access, which shall be monitored by the regulatory authorities; in carrying out their tasks under this Article transmission system operators shall primarily facilitate market integration;

3.19

These Articles define the general tasks of system operators which are largely selfexplanatory and remained unchanged after the revision of Directive 2009/72. Compared to the second package, the third package had assigned some additional tasks to the electricity TSOs, namely the task of collecting congestion rents at interconnections and the granting and managing of third-party access. The new Electricity Directive added, however, some new general and specific tasks to electricity TSOs and DSOs necessary for the fulfilment of the objectives of the energy policy in the next ten to fifteen years, these being the decarbonisation of the energy markets, integration of renewable energy in the energy networks and active participation of final customers in the electricity markets. Article 40(1)(i) to (m) adds the following tasks in the main tasks of the TSOs: “(i) procuring ancillary services to ensure operational security; (j) adopting a framework for cooperation and coordination between the regional coordination centres;

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Chapter 3 Network regulation and third party access Floris Gräper & Christof Schoser – revised and updated by Floris Gräper and Markela Stamati (k) participating in the establishment of the European and national resource adequacy assessments pursuant to Chapter IV of Regulation (EU) 2019/943; (l) the digitalisation of transmission systems; (m) data management, including the development of data management systems, cybersecurity and data protection, subject to the applicable rules, and without prejudice to the competence of other authorities. […].”

Some of the tasks above were fully or partially already performed by TSOs, such as the procurement of ancillary services or the cooperation for the establishment of regional coordination centres (RCCs)29 based on previous legislation and the network codes and guidelines. The adoption of a framework for cooperation and coordination between RCCs will lead to an enhanced institutional model of the regional security coordinators established with the System Operation Regulation,30 will perform several coordinated tasks on behalf of the TSOs and their governance structure has to be defined by the TSOs in a coordinated manner. TSOs are obliged to take into account the recommendations issued by the regional coordination centres and they can deviate only under specific conditions.31 Other new tasks refer further to the integration of flexible energy sources, like storage and demand response, the facilitation of electro-mobility and data management tasks. These are further developed under section 2.2.

3.20

It is new that Member States or their designated competent authorities may allow TSOs or DSOs to perform activities other than those provided for in the Electricity Directive and in the Electricity Regulation where such activities are necessary for the network operators to fulfil their obligations. This is conditioned upon the regulatory authority’s assessment of the necessity of such a

3.21

29 30

31

TSOs were obliged to perform similar tasks under the System Operation Guideline and under the Balancing Regulation. This Regulation defines a set of minimum requirements for EU-wide transmission system operation, crossborder cooperation between TSOs, using the relevant characteristics of the connected DSOs and significant grid users (SGUs). The rules contained therein are necessary for safeguarding operational security, power supply frequency and the efficiency of the interconnected system and resources. These rules include requirements for operational security, operational planning, operational security analysis, requirements for scheduling between the control areas for which the TSOs are responsible and rules for the establishment of an EU-wide framework for load-frequency control and reserves. https://eur-lex.europa.eu/legal-content/EN/ TXT/?uri=celex:32017R1485. Article 40(3). For example, TSOs may deviate from coordinated actions in respect of coordinated capacity calculation and coordinated security analysis only in accordance with Article 42(2) of the Electricity Regulation. This article provides that TSOs can deviate from coordinate actions where their implementation would result in a violation of the operational security limits defined by each TSO in accordance with the SO GL.

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derogation and it should be without prejudice to the right of the DSOs to own, develop, manage or operate networks other than electricity networks where the Member State or the designated competent authority has granted such a right.32

3.22

In accordance with paragraph 2 of Article 40 of the Recast electricity Directive, Member States may provide that one or several TSOs tasks be assigned to a TSO other than the one which owns the transmission system to which the responsibilities concerned would otherwise be applicable. The TSO to which the tasks are assigned shall be certified under the ownership unbundling, the independent system operator or the independent TSO model, and fulfil the requirements provided for in Article 43, but shall not be required to own the transmission system it is responsible for. This possibility is used in particular in Great Britain where various types of TSOs are certified and depending on the function of these TSOs the tasks have been assigned respectively.33

3.23

In addition to the assignment of the tasks by the Member State, a TSO is entitled to delegate, on their own initiative and under their supervision, certain tasks to other TSOs which are certified under the unbundling framework. Such a delegation is allowed under the condition that it does not endanger the effective and independent decision-making rights of the delegating TSO who remains responsible to fulfil the tasks assigned to it. This rule has been reflected as well in the network codes and guidelines covering sometimes also other entities as the Nominated Electricity Market Operators (NEMOs).34

3.24

With respect to gas, Article 13 of the Gas Directive contains the minimum responsibilities that must be entrusted to TSOs, which largely parallel those regarding electricity under the Third Package:

32 33

34

See Articles 31(10) and 40(8) of the Electricity Directive. This legal basis may be relevant in the future in cases of the development of other networks like heat or hydrogen networks by network operators. While there are three Transmission Operators (TOs) permitted to develop, operate and maintain a high voltage system within their own distinct onshore transmission areas (National Grid Electricity Transmission plc (NGET) for England and Wales, Scottish Power Transmission Limited for southern Scotland and Scottish Hydro Electric Transmission plc for northern Scotland and the Scottish islands groups) there is a single System Operator (SO) operating the system as a whole (National Grid Electricity Transmission plc (NGET)). E.g. Article 81 of CACM Regulation or Article 62 of FCA Regulation.

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Article 13 gas Tasks of transmission, storage and/or LNG system operators “1. Each transmission, storage and/or LNG system operator shall: (a) operate, maintain and develop under economic conditions secure, reliable and efficient transmission, storage and/or LNG facilities to secure an open market, with due regard to the environment, ensure adequate means to meet service obligations; (b) refrain from discriminating between system users or classes of system users, particularly in favour of its related undertakings; (c) provide any other transmission system operator, any other storage system operator, any other LNG system operator and/or any distribution system operator, sufficient information to ensure that the transport and storage of natural gas may take place in a manner compatible with the secure and efficient operation of the interconnected system; and (d) provide system users with the information they need for efficient access to the system. 2. Each transmission system operator shall build sufficient cross-border capacity to integrate European transmission infrastructure accommodating all economically reasonable and technically feasible demands for capacity and taking into account security of gas supply. 3. Rules adopted by transmission system operators for balancing the gas transmission system shall be objective, transparent and non-discriminatory, including rules for the charging of system users of their networks for energy imbalance. Terms and conditions, including rules and tariffs, for the provision of such services by transmission system operators shall be established pursuant to a methodology compatible with Article 41(6) in a non-discriminatory and cost reflective way and shall be published. 4. The regulatory authorities where Member States have so provided or Member States may require transmission system operators to comply with minimum requirements for the maintenance and development of the transmission system, including interconnection capacity.

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Chapter 3 Network regulation and third party access Floris Gräper & Christof Schoser – revised and updated by Floris Gräper and Markela Stamati 5. Transmission system operators shall procure the energy they use for the carrying out of their functions according to transparent, non-discriminatory and market based procedures.”

3.25

Similarly, with respect to distribution, the requirements under the gas Directive parallel those for electricity: Article 25 gas Tasks of distribution system operators “1. Each distribution system operator shall be responsible for ensuring the longterm ability of the system to meet reasonable demands for the distribution of gas, and for operating, maintaining and developing under economic conditions a secure, reliable and efficient system in its area, with due regard for the environment and energy efficiency. 2. In any event, the distribution system operator shall not discriminate between system users or classes of system users, particularly in favour of its related undertakings. 3. Each distribution system operator shall provide any other distribution system operator, and/or any transmission, and/or LNG system operator, and/or storage system operator with sufficient information to ensure that the transport and storage of natural gas takes place in a manner compatible with the secure and efficient operation of the interconnected system. 4. Each distribution system operator shall provide system users with the information they need for efficient access to, including use of, the system. 5. Where a distribution system operator is responsible for balancing the distribution system, rules adopted by it for that purpose shall be objective, transparent and non-discriminatory, including rules for the charging of system users for energy imbalance. Terms and conditions, including rules and tariffs, for the provision of such services by distribution system operators shall be established pursuant to a methodology compatible with Article 41(6) in a non-discriminatory and cost-reflective way and shall be published.”

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As with electricity, these provisions are largely self-explanatory. A major difference in the third package compared to the second gas Directive is the more explicit obligation in Article 13(2) on TSOs to build sufficient cross-border capacity (albeit economically reasonable and technically feasible) in addition to the existing obligation in Article 13(1) to maintain and develop their systems under economic conditions. Similarly, DSOs are obliged to ensure the long-term ability of the system to meet reasonable demand for the distribution of gas, as required under Article 25(1) of the Gas Directive. These obligations are a reflection of the increased importance of ensuring sufficient investment in the DSO and TSO systems in order to facilitate the market and to contribute to further market integration.

3.26

2.1.2 Confidentiality obligation Articles 37 and 41 of the Electricity Directive and articles16 and 27 of the Gas Directive impose on transmission and DSOs an obligation to respect the confidentiality of commercially sensitive information.

3.27

In the case of DSOs, the provisions have not substantially changed with the adoption of the third legislative package. However, for TSOs (and for gas: storage and LNG system operators), the third package spells out the confidentiality requirements in more detail.

3.28

The reason for this is that the third package has increased the focus on fully nondiscriminatory access to the relevant systems and has as one of its core objectives the full independence and accountability of the TSOs. Although for transmission operators the preferred option is full ownership unbundling, somewhat more integrated unbundling options remain possible.

3.29

This is equally true for operators of storage and LNG systems. Therefore, in order to guarantee that commercially sensitive information at the disposal of system operators is dealt with in a responsible manner, the requirements in article 16 of the Gas Directive have been elaborated. The confidentiality requirements extend to the owners of transmission systems. As certain unbundling options introduce a distinction between the operator and the owner of the network and both are likely to be in possession of commercially sensitive information, it is consistent that both are covered by the confidentiality requirements.

3.30

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2.1.3 Balancing 3.31

Access to the networks will involve the requirement to balance input and offtake, as a direct result of the physical limitations of both gas and electricity networks. As especially offtake (as a consequence of consumption patterns) may not always be fully predictable, balancing a portfolio can be difficult, depending on the requirements set by the network operator. Therefore, the Directives as well as the gas and electricity Regulations include specific rules on balancing, requiring network operators to implement balancing models and settlement arrangements for imbalances in a way that is non-discriminatory and cost reflective and subject to regulatory oversight. This is part of the general tasks conferred on the TSOs in Articles 13 (gas) and Article 40 (electricity).

3.32

The manner in which imbalances are charged for is a key determinant of the regulatory framework and will often determine the attractiveness of the market concerned for new investors. If, for example, generators have to pay an excessive price for imbalances caused by them, this could constitute an important risk to the profitability of their investment. On the other hand, too low imbalance charges would leave the financial burden of balancing to the network operator and would ultimately socialise the costs of imbalances and damage price signals for new investment.

3.33

The Directives envisage a transition in the treatment of balancing from a regulatory point of view: where markets are not yet sufficiently liquid (thus making market based balancing difficult or incomplete), access to specific balancing services provided by the TSO will require regulatory oversight. Once a market for balancing is established, the charges for imbalances should be determined by market forces. Regulatory oversight should then concentrate on the residual balancing role of the TSO (to provide for situations that the market cannot accommodate (extreme situations etc.) as well as the oversight of imbalance charges. For both gas and electricity this transition has been formalised in specific Network Codes for balancing.

2.2 Specific duties and responsibilities of electricity transmission and distribution system operators 3.34

In addition to the general tasks of Articles 40 and 31 of the Electricity Directive, a number of specific duties and responsibilities of TSOs and DSOs are included elsewhere. Articles 31 to 34 and 37 contain rules for DSOs while Articles 41 and 42 specific rules for TSOs. Some of these obligations are introduced in the 32

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Electricity Directive to create the appropriate legal framework for DSOs and TSOs to facilitate the integration of increased energy from renewable sources. They aim further at providing them with the necessary tools and incentives to enable new technologies, storage and demand response to participate in the electricity markets.

2.2.1 Procurement of energy losses, reserve capacity and ancillary services Losses and reserve capacity Electricity transmitted on a network is always subject to losses. Generally speaking, the further the electricity is physically transmitted, the greater the loss. Contractually, this can be dealt with in two ways. The network operator can require suppliers to put in more electricity than they sell proportionate to the losses, or it can itself add electricity to the network and charge for this service. An overview of the solutions applied in different EU Member States can be found in the annual report on transmission tariffs by ENTSO-E.35 Where the system operator is responsible for the compensation for losses it needs to purchase the necessary volume of electricity.

3.35

Article 31(5) of the Electricity Directive requires that in such circumstances the DSO has to procure the electricity in question in a competitive manner – i.e., the network operator cannot simply purchase the electricity from an affiliated supply company.

3.36

Article 31 Tasks of distribution system operators “[…] 5. Each distribution system operator shall act as a neutral market facilitator in procuring the energy it uses to cover energy losses in its system in accordance with transparent, non-discriminatory and market-based procedures, where it has such a function. […]”

35

https://docstore.entsoe.eu/Documents/MC%20documents/TTO_Synthesis_2018.pdf.

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3.37

Regarding the obligation of TSOs to deal with losses, it falls under the general obligation to manage the system in a reliable manner to ensure the operational security (article 40(1)(a) and (d) of Electricity Directive).

3.38

Similar principles apply regarding reserve capacity as defined in the Electricity Regulation36 and in more details in the network codes and guidelines. No specific reference is made anymore to reserve capacity in the list of main tasks for DSOs/TSOs. The relevant obligations fall under the rules on ancillary services and balancing in the Electricity Directive and Electricity Regulation as well as in the System Operation Regulation and the Balancing Regulation.37

3.39

The regional dimension of the way TSOs perform the dimensioning of reserve capacity is enforced in the Electricity Regulation. In particular regarding reserve capacity Article 6(7) of Electricity Regulation provides that “The dimensioning of reserve capacity shall be performed by the transmission system operators and shall be facilitated at regional level.” The dimensioning of reserve capacity is, furthermore, included in the tasks of the regional coordination centres (RCCs)38 which, once established, will be responsible for the regional sizing of reserve capacity as follows. Regional coordination centres will calculate the reserve capacity requirements for the system operation region which shall: (a)

pursue the general objective to maintain operational security in the most cost effective manner;

(b)

be performed at the day-ahead or intraday timeframe, or both;

(c)

calculate the overall amount of required reserve capacity for the system operation region;

(d)

determine minimum reserve capacity requirements for each type of reserve capacity;

36

37

38

According to Article 2(19) “Reserve capacity” means the amount of frequency containment reserves (FCR), frequency restoration reserves (FRR) or replacement reserves (RR) that needs to be available to the transmission system operator. The rules regarding the definition of the volumes of reserve capacity, its dimensioning and sharing of reserve capacity among TSOs are included in the System Operation Regulation. See definition in Article 2(5) of the Balancing Regulation L: “balancing capacity means a volume of reserve capacity that a balancing service provider has agreed to hold and in respect to which the balancing service provider has agreed to submit bids for a corresponding volume of balancing energy to the TSO for the duration of the contract.” See about the purpose and tasks of the RCCs articles 35ff of Electricity Regulation.

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(e)

take into account possible substitutions between different types of reserve capacity with the aim to minimise the costs of procurement;

(f )

set out the necessary requirements for the geographical distribution of required reserve capacity, if any.39

RCCs have been also assigned with the task of supporting TSOs in a certain predefined region in determining the amount of balancing capacity that needs to be procured as well as when procuring such capacity in the day-ahead and intraday timeframe. When doing so, RCCs have to take into account possible substitutions of the various types of reserve capacity in order to reduce relevant costs.40

3.40

Ancillary services Regarding ancillary services the main definitions and principles for the tasks of DSOs and TSOs are included in the Electricity Directive and Electricity Regulation partially reflecting the rules already established with the Balancing Regulation. The ancillary services include balancing and non-frequency ancillary services necessary for the operation of the transmission or distribution system but they do not include congestion management services.41

3.41

In the updated Electricity Directive, the TSOs/DSOs’ obligation to procure ancillary services based on objective, transparent and non-discriminatory marketbased conditions has been broadened to cover non-frequency ancillary services as well as new technologies e.g., inclusion of storage and demand response. Article 31(6) and (8) reads as follows:

3.42

Article 31 Tasks of Distribution System Operators “[…] 6. Where a distribution system operator is responsible for the procurement of products and services necessary for the efficient, reliable and secure operation of the distribution system, rules adopted by the distribution system operator for 39 40 41

Annex I (7) of Electricity Regulation. Annex I (8) of Electricity Regulation. According to the definition in Article 2(48) Electricity Directive.

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Chapter 3 Network regulation and third party access Floris Gräper & Christof Schoser – revised and updated by Floris Gräper and Markela Stamati that purpose shall be objective, transparent and non-discriminatory, and shall be developed in coordination with transmission system operators and other relevant market participants. The terms and conditions, including rules and tariffs, where applicable, for the provision of such products and services to distribution system operators shall be established in accordance with Article 59(7) in a nondiscriminatory and cost-reflective way and shall be published. […] 8. The procurement of the products and services referred to in paragraph 6 shall ensure the effective participation of all qualified market participants, including market participants offering energy from renewable sources, market participants engaged in demand response, operators of energy storage facilities and market participants engaged in aggregation, in particular by requiring regulatory authorities and distribution system operators in close cooperation with all market participants, as well as transmission system operators, to establish the technical requirements for participation in those markets on the basis of the technical characteristics of those markets and the capabilities of all market participants.”

3.43

The new provision highlights that the DSOs have to closely cooperate with TSOs for the effective participation of market participants connected to their grid in retail, wholesale and balancing markets. The Directive is requiring an agreement with the relevant TSO when balancing services stemming from resources located in the distribution system will be delivered in accordance with Article 57 of the Electricity Regulation and Article 182 of System Operation Regulation.

3.44

Regarding TSOs’ tasks on ancillary services, Article 40 of Electricity Directive includes detailed rules on the obligation to manage electricity flows in the system and the procurement of ancillary services as follows: Article 40 Tasks of transmission system operators “[…] 1. Each transmission system operator shall be responsible for: […] 36

Chapter 3 Network regulation and third party access Floris Gräper & Christof Schoser – revised and updated by Floris Gräper and Markela Stamati (d) managing electricity flows on the system, taking into account exchanges with other interconnected systems. To that end, the transmission system operator shall be responsible for ensuring a secure, reliable and efficient electricity system and, in that context, for ensuring the availability of all necessary ancillary services, including those provided by demand response and energy storage facilities, insofar as such availability is independent from any other transmission systems with which its system is interconnected; […] (i) procuring ancillary services to ensure operational security; […] 4. In performing the task referred to in point (i) of paragraph 1, transmission system operators shall procure balancing services subject to the following: (a) transparent, non-discriminatory and market-based procedures; (b) the participation of all qualified electricity undertakings and market participants, including market participants offering energy from renewable sources, market participants engaged in demand response, operators of energy storage facilities and market participants engaged in aggregation. For the purpose of point (b) of the first subparagraph, regulatory authorities and transmission system operators shall, in close cooperation with all market participants, establish technical requirements for participation in those markets, on the basis of the technical characteristics of those markets.”

Regarding the progress achieved on the development of electricity balancing markets, there are markets which are sufficiently liquid and others which are not (thus making purely market based ancillary services difficult). In order to achieve the goals of the new electricity market design and move towards a genuinely integrated electricity market while ensuring operational security, efficient balancing rules were developed already with the Balancing Regulation. These rules aim at providing incentives for market participants to contribute in solving the system scarcities for which they are responsible. The Balancing Regulation establishes an EU-wide set of technical, operational and market rules to govern the functioning of electricity balancing markets.42 42

Recital 5 of Balancing Regulation.

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3.46

Addressing the issue of the model to be applied by electricity TSOs regarding balancing, in accordance with the Balancing Regulation, the TSO should apply a self-dispatching model for determining generation schedules and consumption schedules. Exceptionally, TSOs that applied a central dispatching model at the time of the entry into force of this Regulation should notify this to the relevant regulatory authority in order to continue to apply a central dispatching model for determining generation schedules and consumption schedules.43 It is a task of the relevant regulatory authority to verify whether the tasks and responsibilities of the TSO are consistent with the definition of a central dispatching model in Article 2(18) of Balancing Regulation.

3.47

Even though the central dispatching model is still an option, the self-dispatch model is the default approach used in most Member States. It seems to be most suitable to address the needs of the future decentralised energy markets, the implementation of the single intraday market, the requirement of balance responsibility of all market participants including active customers and the financial risks associated with such responsibility. However, in some limited cases they may be good reasons justifying the continuation of a central dispatching model in some Member States.

3.48

With regard to the procurement and settlement of balancing services, the Balancing Regulation lays down common principles for the procurement and the settlement of all types of reserve capacity, i.e., frequency containment reserves (FCR), frequency restoration reserves (FRR) and replacement reserves (RR) and a common methodology for the activation of FRR and RR. Similar to other electricity guidelines,44 the Balancing Regulation does not itself contain all the methodologies required for the development of the future integrated balancing markets but it rather requires the development of several technical rules and harmonised methodologies (e.g., for the allocation of cross-zonal transmission capacity for balancing purposes) by the relevant TSOs. Based on the obligations imposed by the Balancing Regulation, the definition of the governance framework and the establishment of EU-wide balancing platforms are under development. On these platforms balancing energy bids will compete and therefore have positive effects on competition.45 43 44 45

Article 14 of Balancing Regulation. See more about the dispatching models under Section 2.2.5. In particular the CACM, FCA and System Operation Regulations have a similar structure. See recitals 10 and 11 of Balancing Regulation. See also information on the progress made in the implementation of the Balancing Regulation on https://www.entsoe.eu/network_codes/eb/. Regarding the platforms to be established, the following projects are under development: a). The Platform for the International Coordination of Automated Frequency Restoration and Stable System Operation (PICASSO) is the implementation project for the establishment of the European

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When the Balancing Regulation will be fully implemented, TSOs and thus Member States will be able to share the resources used for balancing purposes. Further, new players such as demand response and renewables will be able to participants in this new market.

3.49

The main principles of the Balancing Regulation have been reflected in Articles 5 and 6 of the Electricity Regulation. Article 6 sets the objectives of the future balancing markets that shall be organised in order to, among others, ensure that services are defined in a transparent and technologically neutral manner and that they are procured in a transparent, market-based manner. The balancing markets have to ensure non-discriminatory access to all market participants, individually or through aggregation, including for electricity generated from variable renewable energy sources, demand response and energy storage.

3.50

The Electricity Regulation sets the rule of balance responsibility for all market participants in article  5(1) which means that each balance responsible party shall be financially responsible for its imbalances and has to try to be balanced or help the electricity system to be balanced.46 Therefore, the manner in which imbalances are charged for is a key determinant of the regulatory framework and will often determine the attractiveness of the market concerned for new investors. If generators or suppliers have to pay an excessive price for imbalances caused by them, this could constitute an important risk to the profitability of their investment. On the other hand, too low imbalance charges would leave the financial burden of balancing to the network operator and would ultimately socialise the costs of imbalances and damage price signals for new investment.

3.51

It is therefore important that Articles 31(6) (7) and 40(4) of Electricity Directive explicitly provide that the terms and conditions for balancing services must be cost reflective and market-based. The Balancing Regulation defines further the rules on imbalance settlement47 based on non-discriminatory, fair, objective

3.52

automatic Frequency Restoration Reserves (aFRR)-Platform. The International Grid Control Cooperation (IGCC) is the implementation project for the establishment of the European imbalance netting (IN)-Platform c). The Trans-European Replacement Reserves Exchange (TERRE) is the implementation project for the establishment of the European replacement reserve (RR)-Platform. d). The Manually Activated Reserves Initiative (MARI) is the implementation project for the establishment of the European Manual Frequency Restoration Reserves (mFRR)-Platform. e). The common market for procurement and exchange of Frequency Containment Reserves (FCR Cooperation) aims at the integration of balancing markets. Derogations to this rule are allowed under Article 5(2) to (4) in specific cases as demonstration projects and small-scale renewable energy generation facilities. According to Article 2 (9) of the Balancing Regulation “‘imbalance settlement’ means a financial settlement b).

46 47

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and transparent criteria. The general objective of imbalance settlement is to ensure that balance responsible parties support the system’s balance in an efficient way and to incentivise market participants in keeping and/or helping to restore the system balance. With the goal to make balancing markets and the overall energy system fit for the integration of increasing shares of variable renewables, the Electricity Regulation (Article 6(5)) and the Balancing Regulation (Article 44(1)(b)) provide that imbalance prices should reflect the real-time value of energy and that settlement processes should establish adequate economic signals reflecting the imbalance situation.

3.53

The principle of cost reflectiveness does not generally exclude the application of imbalance penalties. It can be argued that these provisions refer to rules set and tariffs charged by the system operators. Additional fines imposed by the regulatory authorities are not expressly excluded and may be justified by externalities, e.g., ensuring that the balance risk is not socialised.

3.54

A TSO’s task which found its way in the Electricity legal framework is the procurement of non-frequency ancillary services. Non-frequency ancillary services are services procured or mandated by TSOs that support the electricity network, such as voltage support, short circuit power, black start capability, synthetic inertia or congestion management.48 They are in most cases supplied by electricity generators, while they can in some cases also be supplied by demand facilities, electricity storage or network equipment.

3.55

Before the adoption of new Electricity Directive, the procurement of nonfrequency ancillary services was not regulated at EU-level. The Member States apply national rules for the provision of non-frequency ancillary services (e.g., grid code) which were evolving continuously. For example, regarding the provision of reactive power voltage-related ancillary services, one of the most important non-frequency ancillary services several approaches are applied in Europe based on either market-based procedures or bilateral agreements or a mix of the above.49

48 49

mechanism for charging or paying balance responsible parties for their imbalances”. See rules on imbalance settlement in Articles 52 ff Balancing Regulation. Definition in accordance with Article 2(49) Electricity. Commission Staff Working Document Impact Assessment Accompanying the document Proposal for a Directive of the European Parliament and of the Council on common rules for the internal market in electricity (recast) Proposal for a Regulation of the European Parliament and of the Council on the electricity market (recast) Proposal for a Regulation of the European Parliament and of the Council establishing a European Union Agency for the Cooperation of Energy Regulators (recast) Proposal for a Regulation of the European Parliament and of the Council on risk preparedness in the electricity sector, SWD/2016/0410 final - 2016/0379 (COD), Section 1.3.2.

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Both for DSOs and TSOs the Electricity Directive (Articles 31(7) and 40(5) and (7)) requires similar rules for non-frequency ancillary services needed for the system in accordance with transparent, non-discriminatory and marketbased procedures, unless the regulatory authority has assessed that the marketbased provision of non-frequency ancillary services is economically not efficient and has granted a derogation. The obligation to procure non-frequency ancillary services does not apply to fully integrated network components of the distribution and the transmission system.50 These are network components that are integrated in the transmission or distribution system, including storage facilities, and that are used for the sole purpose of ensuring a secure and reliable operation of the transmission or distribution system, and not for balancing or congestion management. The definition of such components should be understood in a narrow way in order to not create obstacles in the development of non-frequency ancillary services markets. The introduction of the procurement obligations serves the creation of a level playing field between all relevant providers of such services, including demand response, aggregators and energy storage facilities.51

3.56

2.2.2 Flexibility incentives The task of demand-side management is in times of high shares of renewable generation not necessarily identical to reduction of total demand via efficiency increases. Instead, shifting demand away from peak hours, stabilizing the network as a frequency reserve (e.g., cooling and heating installations slightly adapting their electricity consumption in case of frequency changes) or interruptible supply in case of lack of peak generation capacities can be of great relevance in the future. Realising this potential, however, requires significant network investments (e.g., smart meters) at distribution level and full implementation of current legislation, including relevant network codes and guidelines (i.e., the Demand Connection Code and Balancing Regulation). Ensuring the necessary investments is particularly difficult as the demand side response services market is currently still underdeveloped, especially at residential level.

3.57

The role of DSOs in demand-side management will increase in the future as they have to cost efficiently integrate new, flexible electricity generation and demand response. Recognising the changes needed in the legal framework in order to incentivise the required investments, Article 32 of the Electricity Directive provides for the first time that DSOs should be enabled and provided with in-

3.58

50 51

Article 2 (51) of Electricity Directive. Respective responsibilities are assigned to regulatory authorities under article 59(1)(d) and (7)(b) of the Electricity Directive.

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centives to use services from distributed energy resources. This has to take place based on market procedures so that DSOs can efficiently operate the networks and avoid or reduce costly investments in local grids. The overarching goal is to facilitate the participation of distributed energy resources in the electricity and flexibility markets in order to integrate more renewables into the system and facilitate demand response and storage in the most cost-efficient manner.52 Article 32 Incentives for the use of flexibility in distribution networks “1. Member States shall provide the necessary regulatory framework to allow and provide incentives to distribution system operators to procure flexibility services, including congestion management in their areas, in order to improve efficiencies in the operation and development of the distribution system. In particular, the regulatory framework shall ensure that distribution system operators are able to procure such services from providers of distributed generation, demand response or energy storage and shall promote the uptake of energy efficiency measures, where such services cost effectively alleviate the need to upgrade or replace electricity capacity and support the efficient and secure operation of the distribution system. Distribution system operators shall procure such services in accordance with transparent, non-discriminatory and market-based procedures unless the regulatory authorities have established that the procurement of such services is not economically efficient or that such procurement would lead to severe market distortions or to higher congestion.”

3.59

To fulfil these obligation DSOs, subject to approval by the regulatory authority, or the regulatory authority itself, have to establish the conditions for the flexibility services and where appropriate, standardised market products for such services at least at national level in a transparent and participatory process that includes all relevant system users and TSOs. The principles of effective and non-discriminatory participation of all market participants, including market ­participants offering energy from renewable sources, market participants engaged in demand response, operators of energy storage facilities and market participants engaged in aggregation have to be respected. DSOs have further the obligation to exchange all necessary information and coordinate with TSOs in order to ensure the optimal utilisation of resources, to ensure the secure and efficient operation of the system and to facilitate market development. 52

Recitals 9, 10, 39, 42 and 55 of Electricity Regulation.

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Adequate remuneration for the procurement of such services is certainly a condition to allow DSOs to recover at least their reasonable corresponding costs.

3.60

The new rules are an important step towards a more competitive and more consumer-focused electricity market. They will enable all consumers to participate in price based and incentive based demand response schemes through the right to a smart meter and a dynamic price contract. In addition, a new framework for aggregators as market participants is created and final customers will be able to conclude contracts with aggregators without the consent of their supplier. In addition, the right of demand response to access to all electricity markets is enshrined in the Electricity Regulation.

3.61

In this fully integrated energy market, DSOs/TSOs will have to cooperate very closely to provide the right infrastructure. One crucial element of such cooperation facilitating new investments in the electricity markets will be the common planning of a transparent network. Member States are now obliged to introduce network development plans for distribution systems and provide to system users adequate information regarding the anticipated expansions or upgrades of the network, as currently such procedures do not exist in the majority of Member States. In particular, for DSOs the Directive introduces an obligation for the development of a distribution system based on a transparent network development plan that the DSO will have to publish at least every two years and submit to the regulatory authority.53

3.62

This network development plan will show the needs of future network extensions for the next five-to-ten years taking into account the medium – and longterm flexibility services in order to cover among others the future distributed energy generation but also storage and demand response that the distribution system operator has to use as an alternative to system expansion. DSOs will have to consult all relevant system users and the relevant TSOs on their network development plan before submitting it to the relevant regulatory authority, which may request for amendments. As for the unbundling requirements, the de mini‑ mis principle applies meaning that Member States may decide not to apply the obligation on the network development plan to integrated electricity undertakings which serve fewer than 100,000 connected customers or which serve small isolated systems.

3.63

53

Recital 61 and Article 31(3) and (4) of Electricity Directive.

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2.2.3 Electromobility 3.64

Further, Article 33 of the Electricity Directive introduces new obligations on DSOs regarding electromobility and the connection of recharging points to the distribution networks.54 Article 33 Integration of electromobility into the electricity network “1. Without prejudice to Directive 2014/94/EU of the European Parliament and of the Council (25), Member States shall provide the necessary regulatory framework to facilitate the connection of publicly accessible and private recharging points to the distribution networks. Member States shall ensure that distribution system operators cooperate on a non-discriminatory basis with any undertaking that owns, develops, operates or manages recharging points for electric vehicles, including with regard to connection to the grid.”

3.65

Member States agreed in the negotiations for the Electricity Directive that the deployment of electromobility constitutes an important element of the energy transition. The role of the DSOs in this transition is to contribute to creating favourable conditions for electric vehicles of all kinds in a non-discriminatory manner. In particular, DSOs should ensure the effective deployment of publicly accessible and private recharging points for electric vehicles and should ensure the efficient integration of vehicle charging into the system.55

3.66

In principle, the development and operation of charging points should be a ­service provided by the market. For the potential investors, it has to be ensured that DSOs act as facilitators and provide fair and non-discriminatory access to the network for recharging points. Thus, the Directive provides that DSOs can only own, develop, manage or operate recharging stations if there is no interest from commercial operators or if they own private recharging points solely for their own use.56 There is a possibility for a derogation from the above restriction if the following conditions are cumulatively fulfilled: 54

55

56

The Commission Communication of 20 July 2016, entitled ‘European Strategy for Low-Emission Mobility’, stressed the need for the decarbonisation of the transport sector and the reduction of its emissions, especially in urban areas, and highlighted the important role that electromobility can play in contributing to those objectives. See Recital 40 of Electricity Directive and the Commission Communication of 20 July 2016, entitled “European Strategy for Low-Emission Mobility”, COM/2016/0501 final, where the importance of low-emission mobility was further elaborated for the fulfilment of the EU goals towards reducing its greenhouse gas emissions. Article 33 of Electricity Directive.

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a)

no market interest exists after a tendering procedure has been followed under strict regulatory scrutiny, or the market could not deliver those services at a reasonable cost and in a timely manner;

b)

the regulatory authority has carried out an ex-ante review of the conditions of the tendering procedure and has granted its approval;

c)

the DSO has to respect the third-party access rules and is not allowed to discriminate between system users or classes of system users, and in particular in favour of its related undertakings.

Even where a derogation will be granted, Member States or their designated competent authorities have to perform, at regular intervals or at least every five years, a public consultation in order to re-assess the potential interest of the market in owning, developing, operating or managing recharging points for electric vehicles. If such market interest appears to exist, DSOs’ activities in this regard have to be phased out, subject to the successful completion of a tendering procedure. As part of the conditions of that procedure, regulatory authorities may allow the distribution system operator to recover the residual value of its investment in recharging infrastructure.

3.67

2.2.4 Energy storage The Electricity Directive includes for the first time provisions on energy storage and energy storage facilities that will evidently play an important role in the future electricity markets. The definitions of “energy storage” and “energy storage facility” in Article 2 of the Electricity Directive are very broad covering not only the pure storing of energy but also e.g., the conversion of electrical energy into a form of energy which can be stored and the subsequent reconversion of such energy into electrical energy or use as another energy carrier.57

3.68

Also in this case and for similar reasons as for flexibility and electromobility services, DSOs and TSOs will have to be objective facilitators of the relevant markets and should not substitute the market. In accordance with Articles 36

3.69

57

Article 2 (59) and (60) defines “energy storage” in the electricity system as “ deferring the final use of electric‑ ity to a moment later than when it was generated, or the conversion of electrical energy into a form of energy which can be stored, the storing of such energy, and the subsequent reconversion of such energy into electrical energy or use as another energy carrier” and “energy storage facility” in the electricity system “as a facility where energy storage occurs”. The new rules will be of relevance for the future developments in regards to integration of new technologies as power to gas facilities (e.g., electrolysers) which seem to fall under the scope of these terms.

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and 54 of Electricity Directive, DSOs and TSOs respectively should be precluded from owning, developing, managing or operating such facilities. They could perform these tasks only in two cases and under the following conditions:

3.70

TSOs/DSOs prove that these facilities are “ fully integrated network com‑ ponents”. In this case, a regulatory approval is required. Such fully integrated network components can include energy storage facilities such as capacitors or flywheels which provide important services for network security and reliability, and contribute to the synchronisation of different parts of the system; or it is proven after a tender process that the market will not enable the needed investment and after a careful assessment by the relevant regulatory authority of the effect on competition.

3.71

The derogations will be limited in time and in any case, a review shall take place at least every five years in order to assess the existence of new interest in the market for such assets similarly to the case of recharging points for electric vehicles.

3.72

Thus, in the new electricity market design, energy storage services should be market-based and competitive. Consequently, cross-subsidisation between ­energy storage and the regulated functions of distribution or transmission should be avoided. Such restrictions on the ownership of energy storage facilities aims to prevent distortion of competition, to eliminate the risk of discrimination, to ensure fair access to energy storage services to all market participants and to foster the effective and efficient use of energy storage facilities, beyond the operation of the distribution or transmission system.58

2.2.5 Dispatching 3.73

One of the most important tasks of the TSO is the dispatching of electricity. Prior to liberalisation this involved the exercise of a degree of subjective judgement – determining the order in which the generation plants of the vertically integrated company should be dispatched to maximise efficiency and system security. As with liberalisation the market opens to competition and different generators compete for the dispatch of their respective generation units, this task, however, requires clear rules to avoid discrimination. In principle, in a fully liberalised market the TSO has only very limited power to decide which generating units will be dispatched, and the possibility of priority dispatch risks resulting in inefficient network use and possibly market distortion. 58

See recitals 62 and 63 of Electricity Directive.

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Keeping in mind the provisions of the Balancing Regulation as described above under section 2.2.1, Member States may choose their dispatching model based either on a central dispatching model or a self-dispatch model. According to the definition of the Electricity Directive a ‘central dispatching model’ is a ­scheduling and dispatching model where the TSO determines within an integrated scheduling process the generation schedules and consumption ­schedules as well as dispatching of power-generating facilities and demand facilities, in reference to dispatchable facilities. The ‘self-dispatch model’ is on the other side a scheduling and dispatching model where the generation schedules and consumption schedules as well as dispatching of power-generating facilities and demand facilities are determined by the scheduling agents of those facilities.

3.74

In Member States which traditionally had a pool-type structure to their electricity market, the central dispatching model is essentially maintained.59 However, instead of the TSO subjectively estimating the merit order of different plants, the dispatch is determined by the price bids of the generators into the pool.

3.75

The centralised pool approach is, however, increasingly replaced by a decentralised self-dispatch system whereby generation plants are only dispatched to the extent that they are “nominated” for dispatch by their owners. It is then up to the market participants to ensure that they have a customer for all the plants that they have nominated for dispatch – otherwise they will be out of balance and exposed to imbalance charges.60

3.76

According to this self-dispatch model, it is not the TSO who decides which plant is dispatched. The TSO simply receives notification from each network user of its intentions for dispatch during the day. After gate closure, the TSO has a residual role regarding dispatching. More particularly, its task is to determine which operations are required to balance the network on the basis of nominated injections and consumption. The TSO therefore only dispatches the required residual amount for balancing and it charges an appropriate imbalance charge to the network users contributing to the overall imbalance.

3.77

Irrespective of the model followed by the Member States, dispatch has to be performed based on market rules. Derogations from this principle reduce flexibility signals and act as barriers to the development of solutions such as energy storage, demand response or aggregation.

3.78

59 60

These are mainly Italy, Poland, Ireland and Greece. This may be an explicit bilateral contract or through trading in a power exchange or electricity pool.

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Derogations may be justified in certain cases but the new electricity market design does not leave any more room for broad derogations covering entire technologies.61

3.79

In light of this, the Electricity Regulation allows for limited cases of priority dispatch. The decrease of application of priority dispatch is justified due to the challenges it faces in a competitive market structure. Prior to liberalisation a Member State could require the national electricity company relatively easily to dispatch electricity generated from renewable sources before others, notably thermal. It could also limit this obligation, requiring the priority dispatch of renewable electricity up to a given price limit. However, in a fully liberalised market such an obligation is difficult or even impossible to implement. A TSO can only dispatch electricity generators with sales contracts and only competitive generators will have such contracts. Thus, a support scheme for renewable or combined heat and power based exclusively on priority dispatch will not be effective. As a result, Member States have implemented other support schemes, including green certificates and feed‑in tariff mechanisms.

3.80

Also using priority (re-)dispatch for renewables in the event of network congestion to renewables has little economic impact on the subsidised generation as low marginal cost renewables are likely to be dispatched first, and should be compensated for being curtailed on the basis of redispatch. The support schemes put in place by Member States have the objective of ensuring that renewables or combined heat and power can compete effectively with other forms of electricity. Guaranteeing priority dispatch in case of network congestion can reduce the efficiency of network operation and can be abused as a justification for lowering cross-border capacities. Taking into account that there are limited economic justification for priority dispatch of low marginal cost and especially subsidised generation, the possibility of priority dispatch has been limited in the new Electricity Directive. This becomes particularly relevant with high shares of energy from renewable sources, often representing very large parts of the total dispatched electricity in some Member States such as Spain, Denmark or Germany.62

3.81

The derogations cover mainly electricity from renewable sources from small power-generating facilities or sources using high-efficiency cogeneration. Articles 31(4) of the Electricity Directive and Article 12 of the Electricity Regula61 62

Recital 25 of Electricity Regulation. For the same reasons the Electricity Directive does not provide for priority dispatch for indigenous energy as it was the case in Article 15 (4) of Directive 2009/72.

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tion set the conditions for such priority dispatch to be applied by TSOs and, where the Member State decides so, also by DSOs. Article 31 Electricity Directive Distribution system operators “[…] 4. A Member State may require the distribution system operator, when dispatching generating installations, to give priority to generating installations using renewable sources or using high-efficiency cogeneration, in accordance with Article 12 of Regulation (EU) 2019/943.[…]”

“Article 12 Electricity Regulation Dispatching of generation and demand response 1. The dispatching of power-generating facilities and demand response shall be non-discriminatory, transparent and, unless otherwise provided under paragraphs 2 to 6, market-based. 2. Without prejudice to Articles 107, 108 and 109 TFEU, Member States shall ensure that when dispatching electricity generating installations, system operators shall give priority to generating installations using renewable energy sources to the extent permitted by the secure operation of the national electricity system, based on transparent and non-discriminatory criteria and where such powergenerating facilities are either: (a) power-generating facilities that use renewable energy sources and have an installed electricity capacity of less than 400 kW; or (b) demonstration projects for innovative technologies, subject to approval by the regulatory authority, provided that such priority is limited to the time and extent necessary for achieving the demonstration purposes. […] 4. Without prejudice to Articles 107, 108 and 109 TFEU, Member States may provide for priority dispatch for electricity generated in power-generating facilities using high-efficiency cogeneration with an installed electricity capacity of less than 400 kW.” 49

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3.82

3.83

Member States can introduce stricter rules regarding priority dispatch deciding not to apply priority dispatch to power-generating facilities that use renewable energy sources and have an installed electricity capacity of less than 400  kW with a start of operation at least six months after that decision, or to apply a lower minimum capacity than 400 kW. Such a decision has to be based on the provision of alternative conditions on the relevant markets allowing full participation of such sources in the markets in accordance to paragraph 3 of Article 12. In particular, the Member State has to prove that: (a)

it has well-functioning intraday and other wholesale and balancing markets which are fully accessible to all market participants;

(b)

redispatching rules and congestion management are transparent to all market participants;

(c)

the national contribution of the Member State towards the Union’s b­ inding overall target for share of energy from renewable sources63 is at least equal to the corresponding result of the formula set out in Annex II to Regulation (EU) 2018/199964 and the Member State’s share of energy from renewable sources is not below its reference points,65 or alternatively, the Member State’s share of energy from renewable sources in gross final electricity consumption is at least 50%;

(d)

the Member State has notified the planned derogation to the Commission setting out in detail how the conditions above are fulfilled; and

(e)

the Member State has published the planned derogation, including the detailed reasoning.

If a Member State decides to apply a derogation, no retroactive changes are allowed if they affect generating installations already benefiting from priority dispatch. However, voluntary agreements between a Member State and the opera63 64

65

In accordance with Article 3(2) of Directive (EU) 2018/2001 of the European Parliament and of the Council and point (a)(2) of Article  4 of Regulation (EU) 2018/1999 of the European Parliament and of the Council. Regulation (EU) 2018/1999 of the European Parliament and of the Council of 11 December 2018 on the Governance of the Energy Union and Climate Action, OJ L 328, 21.12.2018, p. 1–77. Annex II sets the formula to calculate the national contributions for the share of energy from renewable sources in gross final consumption of energy in 2030. In accordance with point (a)(2) of Article 4 of Regulation (EU) 2018/1999 which sets the Union’s binding target of at least 32% renewable energy in 2030 and the Member States contributions from 2021 onwards and in a stepwise approach.

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tor of a generating installation on a voluntary basis is allowed and can lead to further limitations of the priority dispatch cases. Such voluntary agreements are desirable and Member States may provide incentives to the benefiting installations to give up priority dispatch voluntarily without prejudice to the state aid rules of the TFEU. The Electricity Regulation opts for a stepwise limitation of priority dispatch rights for the power-generating facilities that use renewable energy sources and have an installed electricity capacity of less than 400 kW. For such power-­ generating facilities commissioned as from 1 January 2026, priority dispatch will apply only to such power-generating facilities that use renewable energy sources and have an installed electricity capacity of less than 200 kW.

3.84

The new rules do not have retroactive effect covering facilities which enjoyed priority dispatch before the entry into force of the Electricity directive.66 However, the right for of priority dispatch applies only as long as the relevant facilities are not significantly modified, in which case the relevant facilities lose their rights for priority dispatch.67

3.85

In terms of cross-zonal capacities, which have to be used to the maximum level possible, TSOs should not use priority dispatch as a justification for curtailment of cross-zonal capacities beyond what is provided for in Article 16 of the Electricity Regulation68 and shall be based on transparent and non-discriminatory criteria.

3.86

2.2.6 Data management Data management will play a crucial role in the future development of the electricity energy markets and integration of renewable energy and other energy sources, as storage and demand response. Under the Electricity Directive data means metering and consumption data as well as data required for customer switching, demand response and other services.69 66

67 68 69

This means that power-generating facilities that use renewable energy sources or high-efficiency cogeneration which were commissioned before 4 July 2019 and, when commissioned, were subject to priority dispatch under Article 15(5) of Directive 2012/27/EU or Article 16(2) of Directive 2009/28/EC of the European Parliament and of the Council will continue to benefit from priority dispatch. This seems to be the case at least where a new connection agreement is required or where the generation capacity of the power-generating facility is increased. This article provides for certain thresholds of minimum cross-zonal capacities that TSOs have to offer for allocation to the market. Derogations from such minimum thresholds are allowed under strict conditions and regulatory oversight. Article 23(1) of Electricity Directive.

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3.88

The reason for the introduction of the new rules is that Member States have developed or are developing different models for the management of data following deployment of smart metering systems. Independently of the model used it is important that Member States put in place transparent rules under which data can be accessed. These rules have to be non-discriminatory and ensure the highest level of cybersecurity and data protection as well as the impartiality of the entities that process data. Data management can therefore be assigned to DSOs or other persons who nevertheless have to provide for access to data of the final customer to any eligible party and in a non-discriminatory manner and simultaneously.70 Where DSOs have been assigned with this role, Article 34 of Electricity Directive sets the rules for the management of data as follows. Article 34 Tasks of distribution system operators in data management “Member States shall ensure that all eligible parties have non-discriminatory access to data under clear and equal terms, in accordance with the relevant data protection rules. In Member States where smart metering systems have been deployed in accordance with Article  19 and where distribution system operators are involved in data management, the compliance programmes referred to in point (d) of Article 35(2) shall include specific measures in order to exclude discriminatory access to data from eligible parties as provided for in Article 23.”

3.89

Where DSOs are not subject to the unbundling requirements, Member States have to take all necessary measures to ensure that vertically integrated undertakings do not have privileged access to data for the conduct of their supply activities. Article 55(1)(e) of the Electricity Directive provides further that the EU DSO entity71 to be established in accordance with the Electricity Regulation will have the task of supporting the development of data management next to cyber security and data protection in cooperation with relevant authorities and regulated entities. Regarding TSOs, article 40(1)(m) also assigns to them a role for data management as follows:

70 71

Article 23(2) of Electricity Directive. Articles 52 ff of Electricity Regulation.

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Article 40 Tasks of transmission system operators “[…] (m) data management, including the development of data management systems, cybersecurity and data protection, subject to the applicable rules, and without prejudice to the competence of other authorities. […]”

3.

Regulated third party access

The Directives require that regulated third party access be applied to all transmission and distribution networks (Article 32 gas, Article 6 electricity) ­including balancing services and, for gas, cross-border infrastructure and LNG facilities (Article 32 gas). “Third-party access” therefore covers rules for connection to the transmission and distribution networks, as well as rules on use of such networks including interconnectors.72

3.90

The gas Directive has been amended by Directive 2019/692 in order for the former to cover “transmission line between a Member State and a third country up to the territory of the Member States or the territorial sea of that Member State”. Unless exempted, such interconnectors are therefore techically covered,73 to some extent, by the third party access rules. This amendment to the gas Directive is discussed in more details in Chapter 17.

3.91

72

73

The new Electricity Directive includes also rules on citizen energy communities that manage distribution networks providing that they should offer third party access under the same conditions as other networks. Recital 43 of the Electricity Directive highlights that community energy offers an inclusive option for all consumers to have a direct stake in producing, consuming or sharing energy. Community energy initiatives focus primarily on providing affordable energy of a specific kind, such as renewable energy, for their members or shareholders rather than on prioritising profit-making like a traditional electricity undertaking. The goal of the new provisions in this Directive is to recognise certain categories of citizen energy initiatives at the Union level as ‘citizen energy communities’, in order to provide them with an enabling framework, fair treatment, a level playing field and a well-defined catalogue of rights and obligations. Household customers are allowed to participate voluntarily in community energy initiatives as well as to leave them, without losing access to the network operated by the community energy initiative or losing their rights as consumers. Therefore, access to a citizen energy community’s network should be granted and under fair and cost-reflective terms. Since 24 February 2020, Member States are supposed to have transposed Directive 2019/692 into national law.

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3.1 Connection to the transmission system 3.92

The third party access obligations include, as a first step, fair and non-discriminatory conditions for connection of new customers. The new Electricity Directive imposes certain obligations to Member States and network operators to ensure that all interested parties have a fair chance to get connected to the systems.

3.93

Regarding DSOs, the general obligation for such access is set in Article 31(2) and (3) (respectively 25) for the Recast Electricity Directive (respectively Gas Directive). According to these provisions DSOs should not discriminate between system users or classes of system users, particularly in favour of its related undertakings and to provide system users with the information they need for efficient access to, including use of, the system. In addition to this general task, the new role of the electricity DSOs to facilitate the integration of active customers that own an energy storage facility into the system is reflected into the right of these customers to a grid connection within a reasonable time after the request, provided certain conditions are met. Article 15 of the Electricity Directive sets these conditions as follows: Article 15 Active customers “(5) Member States shall ensure that active customers that own an energy storage facility: (a) have the right to a grid connection within a reasonable time after the request, provided that all necessary conditions, such as balancing responsibility and adequate metering, are fulfilled; (b) are not subject to any double charges, including network charges, for stored electricity remaining within their premises or when providing flexibility services to system operators; (c) are not subject to disproportionate licencing requirements or fees; (d) are allowed to provide several services simultaneously if technically feasible.”

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Similarly, electricity DSOs need to treat all parties interested to connect recharging points to the system in a fair and non-discriminatory way as provided for in Article 33(1) on connection of recharging points for electro-mobility (see above under section 2.2.2). Member States when transposing and implementing the Electricity Directive have to ensure that appropriate framework is established to enable the DSOs to fulfil their task.

3.94

Regarding electricity TSOs, article 42 of the Electricity Directive contains rules on the connection of new generating installations and energy storage facilities to the transmission system. It provides the following:

3.95

Article 42 Decision-making powers regarding the connection of new generating installations and energy storage facilities to the transmission system “The transmission system operator shall establish and publish transparent and efficient procedures for non-discriminatory connection of new generating installations and energy storage facilities to the transmission system. Those procedures shall be subject to approval by the regulatory authorities.”

Paragraphs 2 and 3 of this Article introduce some limitations for the cases where TSOs may want to refuse the connection of a new generating installation or energy storage facility. In principle, an electricity TSO is not allowed to refuse connection on the grounds of possible future limitations to available network capacities, such as congestion in distant parts of the transmission system or a new connection point, on the ground that it would lead to additional costs resulting from the necessary capacity increase of system elements in the close-up range to the connection point. The TSOs retain through the possibility to limit the guaranteed connection capacity or to offer connections subject to operational limitations, in order to ensure economic efficiency regarding new generating installations or energy storage facilities, provided that such limitations have been approved by the regulatory authority. When assessing such a case, the regulatory authority shall ensure that any limitations in guaranteed connection capacity or operational limitations are introduced on the basis of transparent and non-discriminatory procedures and do not create undue barriers to market entry. Important is that TSOs cannot apply such limitations when the generating installation or energy storage facility bears the costs related to ensuring unlimited connection.

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3.97

According to Article  59(1)(q) of the Electricity Directive, the regulatory authorities are responsible to monitor the time taken by TSOs and DSOs to make connections.

3.98

Next to the principles established with the new Electricity Directive, some connection requirements apply based on three connection network codes adopted under Regulation 714/2009 creating the legal framework for connecting different kind of generation and demand facilities to the interconnected system.

3.99

These network codes are:

3.100

–

The Requirements for Generators Code sets out the requirements for grid connection of power-generating facilities to the interconnected ­system, in particular with respect to synchronous power-generating ­modules, power park modules and offshore power park modules. These rules aim at ensuring fair conditions of competition in the internal electricity market, system security and the integration of electricity from renewable sources.74

–

The Demand Connection code sets harmonised rules for connecting large renewable energy production plants as well as demand response facilities. The code will ease the integration of 260 gigawatts of photovoltaic & wind (almost tripling the current installed capacity in Europe) as well as 11 gigawatts of demand response in Europe (which could mean the sparing of 11 coal generation plants).

–

The HVDC Code specifies rules for long distance direct current (DC) connections. Such assets are used to link offshore wind parks to mainland or to connect Member States over long distances.75

The connection network codes are directly applicable to all Member States who need to specify certain requirements nationally. This may lead to different ways of implementation to these codes and thus, less degree of harmonisation across the European Union. ENTSO-E has published a number of implementation guidance documents to ease the implementation of the connection network codes.76 74 75 76

Recital 18 of Electricity Regulation. For example, NorNed is an interconnector linking Norway and The Netherlands with an HVDC submarine cable of 580 km. See https://www.entsoe.eu/network_codes/cnc/cnc-igds/.

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3.2 Access and use of transmission and distribution systems The Directives require that regulated third party access be applied to all transmission and distribution networks (Article 32 electricity and gas), LNG facilities (Article 32 gas), balancing services and for gas, cross-border infrastructure. Regulated third-party access aims at creating a level playing field for all network users and more possibilities for customers, particularly at retail level. Access, i.e., use of the networks, is regulated in order to prevent system operators from taking advantage of their monopoly status or vertical integration as regards their competitive position on the market, in particular in relation to household customers and small non-household customers.

3.101

Article 6 (1) of the Electricity Directive and Article 32 (1) of the Gas Directive set the main principles of third-party access as follows:

3.102

Article 6(1) of the Recast “1. Member States shall ensure the implementation of a system of third-party access to the transmission and distribution systems based on published tariffs, applicable to all customers and applied objectively and without discrimination between system users. Member States shall ensure that those tariffs, or the methodologies underlying their calculation, are approved in accordance with Article 59 prior to their entry into force and that those tariffs, and the methodologies – where only methodologies are approved – are published prior to their entry into force.”

Article 32 (1) gas “1. Member States shall ensure the implementation of a system of third-party access to the transmission and distribution system, and LNG facilities based on published tariffs, applicable to all eligible customers, including supply undertakings, and applied objectively and without discrimination between system users. Member States shall ensure that those tariffs, or the methodologies underlying their calculation shall be approved prior to their entry into force in accordance with Article 41 by a regulatory authority referred to in Article 39(1) and that those tariffs – and the methodologies, where only methodologies are approved – are published prior to their entry into force.”

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3.103

In accordance with above, regulated third party access requires: a.

the publication of non-discriminatory tariffs, and

b.

prior to their entry into force, their approval by a regulatory authority.

3.104

Specific requirements for the use of transmission and distribution systems are foreseen in the Directives and Regulations as well as in network codes and guidelines, on subjects such as how to allocate scarce capacities. This particularly applies to interconnections but can, e.g. where flow-based capacity calculation and allocation methods77 are used for electricity or where gas entry-exit zones do not overlap with Member State borders, also include internal congestion.

3.105

Article  6(2) of the Electricity Directive provides that, under specific conditions, the transmission or distribution system operator may refuse access where it lacks the necessary capacity. In such a case, a duly substantiated justification shall be given, in particular having regard to the public service obligations set in Article 9 of Electricity Directive, and based on objective and technically and economically justified criteria. Member States or, where Member States have so provided, the regulatory authorities of those Member States, shall ensure that those criteria are consistently applied and that the system user who has been refused access can make use of a dispute settlement procedure. The regulatory authorities shall also ensure, where appropriate and when refusal of access takes place, that the TSO or DSO provides relevant information on measures that would be necessary to reinforce the network in order to enable third party access. Given the importance attributed to electro-mobility, in the new Electricity Directive it has been added that such information shall be provided in all cases when access for recharging points has been denied.78

3.2.1 Publication of standard tariffs 3.106

The Directives require that all tariffs for access to the electricity and gas transmission and distribution systems, including balancing services, as well as LNG facilities, are published. This must be done in a manner which ensures that they are easily accessible and transparent. The first sentence of Article  6(1) of the electricity Directive and Article 32(1) of the gas Directive makes it clear that 77 78

In accordance with these methods some internal lines may be considered as critical network elements and, thus, be taken into account for the calculation of cross-zonal capacities. The party requesting such information may be charged a reasonable fee reflecting the cost of providing such information.

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such tariffs, once published, must be applicable to all, without the possibility of individual renegotiation, discount or exemption. Under the second package Directives, this provision was meant to ensure that the often vertically integrated TSOs would not grant rebates from their­ standard tariffs to the benefit of their related supply companies. While such a conduct would favour the related supply companies over their competitors, it would not harm the vertically integrated company as a whole since the reduced revenue of the TSO would be compensated for by the reduced transmission costs of the related supply companies.

3.107

Since the third package Directives – as updated with the Clean Energy Package for electricity – still allow for vertical integration of distribution systems as well as for LNG and storage facilities, this requirement still seems to be necessary. Moreover, in the case of transmission systems, alternatives to full ownership unbundling are allowed, thus maintaining a degree of vertical integration and, hence, an inherent risk of discrimination. These provisions do not, however, require a single standardised tariff to be fixed for all users. Tariffs may be differentiated, for example, according to the type of capacity product (duration of the contract, interruptible or firm capacity, or location in the network).

3.108

This flexibility is somehow limited by the fact that, while deciding to differentiate between network users, Member States need to respect general Union rules and, in particular, state aid rules where applicable. For example, in the state aid case of the European Commission against Germany of 28 May 2018,79 Germany was obliged to recover illegal aid from certain large electricity users exempted from network charges in Germany in 2012-2013.

3.110

This case concerned to an exception put in place through an Ordinance in Germany80 according to which, between 2011 and 2013, electricity users that had an annual consumption above 10 gigawatt hours and a particularly stable electricity consumption were fully exempted from paying network charges under German law. In 2012, thanks to this provision, these users avoided paying an estimated €300 million in network charges.81 It was the first time that the Eu-

3.111

79 80 81

See Commission Decision (EU) 2019/56 of 28 May 2018 on aid scheme SA.34045 (2013/c) (ex 2012/ NN) implemented by Germany for baseload consumers under Paragraph 19 StromNEV, C/2018/3166 OJ L 14, 16.1.2019. § 19(2) of the German Network Charges Ordinance. These costs were instead financed by a special levy imposed on final electricity consumers (the so-called

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ropean Commission had to assess a full exemption from network charges under the state aid rules.82 It concluded that there is no objective justification under EU State aid rules for a full exemption from network charges for electricity users, even if they have a stable electricity consumption. All network users had according to the decision to pay for the costs they caused to the network. Large and stable electricity users also generate network costs and make use of network services and it is for them to bear these costs. The resources used to support the said customers were found to constitute state aid, thus, Germany was found to violate state aid rules and was called to reassess the charges for such customers based on the costs they cause to the network. The decision acknowledged that these customers may have caused fewer costs than other customers did in 2012 and 2013 thanks to their stable and predictable consumption and thus, some reductions may be justified. Germany abolished the exemption and replaced it with a possibility for industrial customers to request for a reduced network charge. The decision has been appealed by several affected undertakings before the Court of Justice.83

3.112

In particular, regarding electricity distribution tariffs, Article 18 of the ­Electricity Regulation requires that distribution tariffs are cost reflective and take into ­account the use of the distribution network by system users including active customers. It confirms that the tariffs may contain network connection ­capacity elements and may be differentiated based on system users’ ­consumption or ­generation profiles. In addition, in cases where smart metering systems are deployed, regulatory authorities have to consider time-differentiated network ­tariffs when fixing or approving transmission tariffs and distribution tariffs or their methodologies and, where appropriate, time-differentiated network ­tariffs may be introduced to reflect the use of the network, in a transparent, costefficient and foreseeable way for the final customer.

3.113

Regarding the pricing of electricity cross-zonal capacities, the CACM Regulation provides for implicit allocation through auctions where the price for access to cross-zonal capacity is determined by the single day-ahead coupling and based on an approved methodology on capacity calculation methodology. Re-

82

83

§ 19-surcharge), which Germany introduced in 2012. See European Commission – Press release State aid: Germany needs to recover illegal aid from certain large electricity users exempted from network charges in Germany in 2012–2013 Brussels, 28 May 2018. Other state aid cases related to subsidies that reduced electricity-related costs for certain undertakings but not fully exempted certain undertakings from network charges. See for example preferential electricity ­tariffs granted by Italy to ThyssenKrupp, Cementir and Nuova Terni Industrie Chimiche (case C36a/2006) or Greece to Aluminium of Greece (case SA.26117, 2010). See e.g., cases T-704/18 Wacker Chemie v Commission, Case T-704/18 – Air Liquide Deutschland v Com‑ mission, T-706/18 T-705/18 – Air Liquide Industriegase v Commission.

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garding intraday a pan–EU methodology has been developed by all EU TSOs and approved by ACER on how to price cross-zonal capacity in the single intraday coupling. This methodology sets auctions as the pricing method and the conditions for the performance of these auctions by the market operator.84 In the long-term timeframe, the FCA Regulation provides for explicit allocation of long-term transmission rights through auctions where the price is determined. No other fees or charges are imposed or allowed for use of cross-zonal capacity. Regarding electricity transmission tariffs, it has not been possible to further harmonise such tariffs in the EU. Initially Article 8(6) of Regulation 714/2009 and the following Commission Decision 2014/713/EU on the establishment of the annual priority lists for the development of network codes and guidelines for 201585 provided for the development of a network code on rules for harmonised transmission tariff structures and for the elaboration of a framework guideline setting out principles for such a network code. They would provide the minimum degree of harmonisation required to meet the aims of that Regulation and not go beyond what is necessary for that purpose.86 ACER was requested to prepare a framework guideline depending on the results of ACER’s scoping activity and decisions taken as part of the energy market design initiative.

3.114

ACER completed the scoping exercise in December 201587 and concluded the need for a framework guideline and a subsequent network code is not ­evident and that the existing policies, including implementation of the Agency’s ­Opinion No. 09/2014, are sufficient to prevent potential negative effects from any lack of harmonisation in electricity transmission tariff structures.88

3.115

84

85 86

87 88

Decision  01/2019 of ACER of 24 January 2019 establishing a single methodology for pricing of intraday cross-zonal capacity https://www.acer.europa.eu/Official_documents/Acts_of_the_Agency/Individual%20decisions/ACER%20Decision%2001-2019%20on%20intraday%20cross-zonal%20capacity%20 pricing%20methodology.pdf. 2014/713/EU: Commission Decision of 13 October 2014 on the establishment of the annual priority lists for the development of network codes and guidelines for 2015 Text with EEA relevance, OJ L 296, 14.10.2014, pp. 28–30. In case the scoping exercise of ACER would show that there is a need for a network code, the following Commission Implementing Decision (EU) 2015/1960 on the establishment of the annual priority list for 2016 for the development of network codes and guidelines also provided for such a code. OJ L 284, 30.10.2015, p. 187–189. See relevant information about the process and the conclusions here https://acer.europa.eu/en/Electricity/ FG_and_network_codes/Pages/Harmonised-transmission-tariff-structures.aspx. Scoping towards potential harmonisation of electricity transmission tariff structures Conclusions And Next Steps December 2015, available here: https://acer.europa.eu/en/Electricity/FG_and_network_codes/ Documents/Scoping%20conclusions%20for%20harmonised%20Transmission%20Tariff%20Structures%20in%20Electricity.pdf

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As a result of the negotiations on the Clean Energy Package, the new Electricity Directive does not include anymore a legal basis for a network code on tariffs. However, in a more pragmatic and forward looking manner, the compromise text of the Electricity Regulation includes in Article 18 principles for the Member States to follow when designing tariff structures. In addition, in order to increase transparency and comparability in tariff-setting where binding harmonisation is not seen as adequate, ACER has to provide a best practice report on tariffs transmission and distribution systems. The first ACER report was published on 5 October 2019,89 followed by reports issued every two years thereafter, which the Member States should take account of when setting their national tariff regimes.90

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Among the principles incorporated in the Electricity Regulation is that network tariffs should be applied in a way which does not positively or negatively discriminate between production connected at the distribution level and production connected at the transmission level. In order to provide for a level playing field between all market participants network tariffs should not discriminate against energy storage and should not create disincentives for participation in demand response or represent an obstacle to improving energy efficiency.91

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Lastly, whilst the role of the regulator may be either to approve tariffs or the underlying methodology (see below 3.2.2), actual tariffs must be published. It is not sufficient to publish a tariff methodology as the tariffs themselves must be published prior to their entry into force and cannot be applied to any contract before such publication.

3.2.2 Regulation of tariffs 3.119

Article 6(1) of the electricity and Article 32 (1) of the gas Directive allow the choice between the regulatory approval of tariffs prior to their publication and entry into force or the approval of the methodologies underlying the calculation of the tariffs. The corresponding provision with respect to the regulatory 89 90

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See the report published here: https://www.acer.europa.eu/Official_documents/Acts_of_the_Agency/ Publication/ACER%20Practice%20report%20on%20transmission%20tariff%20methodologies%20 in%20Europe.pdf That best practice report shall address at least: (a) the ratio of tariffs applied to producers and tariffs applied to final customers; (b) the costs to be recovered by tariffs; (c) time-differentiated network tariffs; (d) locational signals; (e) the relationship between transmission tariffs and distribution tariffs; (f ) methods to ensure transparency in the setting and structure of tariffs; (g) groups of network users subject to tariffs including, where applicable, the characteristics of those groups, forms of consumption, and any tariff exemptions; (h) losses in high, medium and low-voltage grids. Recital 39 of Electricity Regulation.

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authorities is set in Article 59 (1)(a) and 59 (7) – (9) of the electricity Directive and 41 (6)‑(7) of the gas Directive: Article 59 (1)(a) and (7) – (9)) electricity “1. The regulatory authority shall have the following duties: (a) fixing or approving, in accordance with transparent criteria, transmission or distribution tariffs or their methodologies, or both; (…) 7. The regulatory authorities, except where ACER is competent to fix and approve the terms and conditions or methodologies for the implementation of network codes and guidelines under Chapter VII of Regulation (EU) 2019/943 pursuant to Article 5(2) of Regulation (EU) 2019/942 because of their coordinated nature, shall be responsible for fixing or approving sufficiently in advance of their entry into force at least the national methodologies used to calculate or establish the terms and conditions for: (a) connection and access to national networks, including transmission and distribution tariffs or their methodologies, those tariffs or methodologies 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; (b) the provision of ancillary services which shall be performed in the most economic manner possible and provide appropriate incentives for network users to balance their input and off-takes, such ancillary services shall be provided in a fair and non-discriminatory manner and be based on objective criteria; and (c) access to cross-border infrastructures, including the procedures for the allocation of capacity and congestion management. 8. The methodologies or the terms and conditions referred to in paragraph 7 shall be published. 9. With a view to increasing transparency in the market and providing all ­interested parties with all necessary information and decisions or proposals for decisions 63

Chapter 3 Network regulation and third party access Floris Gräper & Christof Schoser – revised and updated by Floris Gräper and Markela Stamati concerning transmission and distribution tariffs as referred in Article  60(3), ­regulatory authorities shall make publicly available the detailed methodology and underlying costs used for the calculation of the relevant network tariffs, while preserving the confidentiality of commercially sensitive information.”

Article 41 (6) – (8) gas “6. 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 the terms and conditions for: (a) connection and access to national networks, including transmission and distribution tariffs, and terms, conditions and tariffs for access to LNG facilities. Those tariffs or methodologies shall allow the necessary investments in the networks and LNG facilities to be carried out in a manner allowing those investments to ensure the viability of the networks and LNG facilities; (b) the provision of balancing services which shall be performed in the most economic manner and provide appropriate incentives for network users to balance their input and offtakes. The balancing services shall be provided in a fair and non-discriminatory manner and be based on objective criteria; and (c) access to cross-border infrastructures, including the procedures for the allocation of capacity and congestion management. 7. The methodologies or the terms and conditions referred to in paragraph 6 shall be published. 8. In fixing or approving the tariffs or methodologies and the balancing services, the regulatory authorities shall ensure that transmission and 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.”

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These provisions have given rise to a number of questions of interpretation. Firstly, the third package added – in Article 59 (7)(c) (electricity) and Article 41 (6) (c) (gas) – an explicit reference to access to cross-border infrastructures, including capacity allocation and congestion management procedures. It can be 64

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argued that cross-border infrastructure is already covered by the general requirement in letter (a) given the interconnected character of the European transmission systems. On the other hand, given the explicit reference to ‘national’ networks in letter (a), the insertion of letter (c) seems to be meant to avoid any misunderstanding and to clarify that the general rule of tariff regulation applies equally to cross-border infrastructure. Moreover, in the case of gas, Article 13(1) of Regulation 715/2009 requires decoupled entry-exit tariff systems where tariffs may no longer be dependent on contract paths, notably including the case of cross-border flows. Secondly, two questions arise concerning the criteria that must be respected – or aimed at – by the regulatory authority when accepting the tariffs. (i) “who is responsible in setting the exact criteria contained therein or the tariffs and, in particular, whether the tariffs must be cost‑reflective?” and, (ii) “ how detailed must the methodology be?”. These issues are considered below in this order.

3.2.3 Cost reflectivity Under the second gas and electricity Directives, the main reason to require cost reflective tariffs for access resulted from the obligation to set non‑discriminatory tariffs. If tariffs are not cost‑reflective92 (i.e., if they may permit excessive or monopoly pricing of the TSO), a vertically integrated undertaking would acquire a significant and discriminatory advantage over its non‑vertically integrated ­rivals on the supply market through the potential cross subsidisation of its own subsidiaries. In such circumstances, the vertically integrated ­undertaking could afford to accept lower margins on the generation market to maintain or increase market share, because the overall group profitability is maintained through artificially high profits from its transmission business. This analysis is confirmed by a number of other provisions93 in the Directives as well as in the Regulation on cross‑border exchanges in electricity and the Regulation on gas transmission. This analysis is relevant for access to the distribution grids as well as for access to LNG facilities. For these facilities and grids, vertical 92 93

Cost reflective in this context should be taken to include a reasonable profit. See for example Article 31(5) of the Gas Directive which requires that gas undertakings, in their accounts, specify the rules for the allocation of assets and liabilities, expenditure and income as well as depreciation. This requirement only makes sense in the context of an obligation for the regulator to base its approval of tariffs on costs reflectivity; but also article 18 of the electricity Regulation and Article 41 (6) (b) of the gas Directive which require that tariffs and other terms and conditions must be approved by the national regulatory authority (either directly or on the basis of a methodology) in a non-discriminatory and cost reflective way and be published.

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integration is still allowed under the third Directives and cost reflective access tariffs are necessary to prevent discriminatory cross-subsidisation.

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It may be argued that the same holds true for transmission networks which are not subject to full ownership unbundling, thus maintaining a degree of vertical integration and hence an inherent risk of discrimination. From this, a need for additional regulatory oversight and control follows, which is reflected in the Articles on the Independent System Operator and the Independent Transmission Operator, as well as in Recital 72 in the electricity Directive and Recital 13 in the gas Directive: Recital 72 (electricity)

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“The setting up of a system operator or transmission operator that is ­independent from supply and generation interests should enable a vertically integrated undertaking to maintain its ownership of network assets while ensuring the effective separation of interests, provided that such independent system operator or independent transmission operator performs all of the functions of a system operator, and provided that detailed regulation and extensive regulatory control mechanisms are put in place.”

Recital 13 (gas)

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“The setting up of a system operator or a transmission operator independent from supply and production interests should enable a vertically integrated undertaking to maintain its ownership of network assets whilst ensuring an effective separation of interests, provided that such independent system operator or such independent transmission operator performs all the functions of a system operator and detailed regulation and extensive regulatory control mechanisms are put in place.”

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For ownership unbundled transmission networks, vertical integration and risk of discrimination in favour of affiliated companies is no longer an issue. In this case, the requirement that tariffs are cost reflective is weaker and in this case cost reflectiveness is a criterion necessary in order to prevent monopolistic pricing strategies.

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Therefore, Article 18(1) of the Electricity Regulation and 13(1) of the gas Regulation require that charges for access to networks including connection, use and where applicable for network reinforcements, at both transmission and distribution level, respect the following conditions: Article 13 (1) – (2) gas Regulation “Tariffs, or the methodologies used to calculate them, applied by transmission system operators and approved by the regulatory authorities pursuant to Article 41(6) of Directive 2009/73/EC as well as tariffs published pursuant to Article 32(1) of that Directive, shall be transparent, take into account the need for system integrity and its improvement and reflect actual costs incurred, insofar as such costs correspond to those of an efficient and structurally comparable network operator and are transparent, whilst including appropriate return on investments, and where appropriate taking account of the benchmarking of tariffs by the regulatory authorities. Tariffs, or the methodologies used to calculate them, shall be applied in a non-discriminatory manner.”

Article 18 Electricity Regulation “Charges for access to networks, use of networks and reinforcement “1. Charges applied by network operators for access to networks, including charges for connection to the networks, charges for use of networks, and, where applicable, charges for related network reinforcements, shall be cost-reflective, transparent, take into account the need for network security and flexibility 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 include unrelated costs supporting unrelated policy objectives.

Without prejudice to Article 15(1) and (6) of Directive 2012/27/EU and the criteria in Annex XI to that Directive the method used to determine the network charges shall neutrally support overall system efficiency over the long run through price signals to customers and producers and in particular be applied in a way which does not discriminate positively or negatively between production connected at the distribution level and production connected at the transmission level. The network charges shall not discriminate either positively or negatively against energy storage or aggregation and shall not create disincentives for self-generation, self-consumption or for participation in demand response. 67

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Chapter 3 Network regulation and third party access Floris Gräper & Christof Schoser – revised and updated by Floris Gräper and Markela Stamati Without prejudice to paragraph 3 of this Article, those charges shall not be distance-related.”

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The second sub-paragraph of Article  18(1) of the Electricity Regulation addresses issues that can potentially distort investment i.e. that of network charges on generators but also that of fair treatment of all users. This includes charges for use of the network, both at distribution-level and transmission-level (tariffs), as well as the charges applied to generators for their connection (connection charges). The European Commission identified in its impact assessment for the proposal on the Electricity Directive94 significant variations across the EU on the structure of these charges, which are set at Member State-level. For instance, some Member States do not apply any tariffs to generators, others apply them based on connected capacity and others based on the amount of electricity produced. With the new obligation on Member States, such tariffs should be fixed in a way which does not discriminate positively or negatively between production connected at different levels of the network.

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Further, the regulatory framework under Directive  2009/72 and Regulation 714/2009 as applied in many Member States did not fully address the new challenges such as the complex electricity flows caused by small-scale generation. Addressing this kind of challenges through the regulatory framework requires the cost recovery for innovative investments and the introduction of the right incentives for flexible solutions which can contribute in solving short-term and long-term congestion in the distribution grids.95

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It was thus widely accepted that the developments which are taking place in the distribution systems, such as the integration of vast amounts of renewable generation or the integration of new loads (e.g. heat pumps, electric vehicles), require distribution tariffs which provide the right economic signals for the use and development of the system, allocate costs in a fair way among system users and provide stability for investments for DSOs and connected infrastructure.96 94

95 96

See more in Commission Staff Working Document Impact Assessment Accompanying the document Proposal for a Directive of the European Parliament and of the Council on common rules for the internal market in electricity (recast) Proposal for a Regulation of the European Parliament and of the Council on the electricity market (recast) Proposal for a Regulation of the European Parliament and of the Council establishing a European Union Agency for the Cooperation of Energy Regulators (recast) Proposal for a Regulation of the European Parliament and of the Council on risk preparedness in the electricity sector, SWD/2016/0410 final - 2016/0379 (COD), section 2.2.1. https://eur-lex.europa.eu/legal-content/EN/ TXT/?uri=CELEX:52016SC0410. See “The future role for DSOs” (2015) CEER, “A Bridge to 2025 Conclusions Paper” (2014) ACER. See more in Commission Staff Working Document Impact Assessment Accompanying the document Proposal for a Directive of the European Parliament and of the Council on common rules for the internal

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Therefore, article 18 (1) second subparagraph second sentence calls for network charges which do not discriminate either positively or negatively against energy storage or aggregation and shall not create disincentives for self-generation, selfconsumption or for participation in demand response.

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Given the increased importance of cross-zonal trading of electricity paragraph 6 of Article 18 provides that there shall be no specific network charge on individual transactions for cross-zonal trading of electricity. Hence, any kind of network fee on top of the prices as calculated based on the single day ahead and single intraday coupling in accordance with the CACM Regulation should not be allowed.

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When assessing cost-reflectivity, it must be noted that both the gas and electricity Regulations refer to actual costs incurred, insofar these correspond “to those of an efficient and structurally comparable network operator”. It is submitted that this again is a clear reference to the non-discrimination requirement for vertically integrated operators. The requirement that the costs used for tariff setting must correspond to those of a structurally comparable and efficient operator was introduced to prevent costs of the supply or generation business to be allocated to the TSO. In that case, a TSO might argue that its tariffs were cost-based, but the costs would in that case still be artificially high. Thus, the notion of a structurally comparable network operator was introduced to ensure that vertically integrated operators would only take into account transmission-related costs.

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It is further submitted that the reference to a structurally comparable network operator does not mean that actual costs incurred by a (unbundled) TSO should not all be included in calculating tariffs. This provision does not, for example, give a legal basis for the exclusion of some actual costs incurred in carrying out transmission tasks. Such exclusion, on the basis of a comparison with a structurally comparable and efficient network operator, would not correspond with the equally important requirement of Article 49 of Electricity Regulation97 that the need to provide for an appropriate return on investments must be taken into account when setting tariffs. Furthermore, the exclusion of actual costs incurred,

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97

market in electricity (recast) Proposal for a Regulation of the European Parliament and of the Council on the electricity market (recast) Proposal for a Regulation of the European Parliament and of the Council establishing a European Union Agency for the Cooperation of Energy Regulators (recast) Proposal for a Regulation of the European Parliament and of the Council on risk preparedness in the electricity sector, SWD/2016/0410 final - 2016/0379 (COD), section 3.3.3. According to paragraph 6, the TSO costs shall be established on the basis of the forward-looking long-run average incremental costs, taking into account losses, investment in new infrastructure, and an appropriate proportion of the cost of existing infrastructure, in so far as such infrastructure is used for the transmission of cross-border flows, in particular taking into account the need to guarantee security of supply.

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would imply an interference with the enjoyment of property which is possible but requires more stringent conditions as provided for in the (First Protocol attached to the) European Charter of Fundamental Human Rights.

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Further, the requirement of cost reflectivity does not mean that profits should always be limited to ongoing low rates of return without incentives provided to reflect desirable objectives. The fact that a regulatory authority accepts a high return on investment for specific assets to reward past risk, efficiency or to encourage future investment does not mean that the tariffs cannot be cost-reflective. This flexibility will be even more relevant taking into account the investments needed by the TSOs and DSOs to accommodate the variety of network users in the future.

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This approach is followed in the note of the Commission services on the role of regulatory authorities,98 which states: “Although network tariffs need to be cost reflective in a general sense, this does not necessarily mean there should be a rigid and automatic correspondence between the costs of the regulated business and the revenues collected from network tariffs. Regulators are likely, for example, to wish to provide incentives to improve efficiency or to encourage ongoing investment or extension of the networks. A situation where companies have an incentive to preside over a deterioration of the assets should be avoided and regulators should be able to monitor the condition of assets on a regular basis as part of their work.”

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This is a rather important element that the Directives and, notably, the Regulations require that regulatory authorities ensure that tariffs are based on cost reflectivity while providing a margin of discretion in this regard. Indeed, the importance of incentive-based regulation has become widely recognised as the most appropriate manner in which to address the issue of limiting excess tariffs whilst at the same time motivating TSOs to actively improve their efficiency. This was already reflected in paragraph 8 of both Article 37 of the Directive 2009/72 and of Article 41 of the gas Directive: “8. In fixing or approving the tariffs or methodologies and the balancing services, the regulatory authorities shall ensure that transmission and distribution system operators are granted appropriate incentive, over both the short and long term, 98

Note of DG Energy &Transport on Directives 2003/54/EC and 2003/55/EC on the internal market in electricity and natural gas, The Role of the regulatory authorities, 14.1.2004.

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Regarding incentives that should be given to electricity DSOs and TSOs, Article 18(2) of the new Electricity Directive strengthens the principle of incentivebased regulation through the tariff methodologies. These methodologies have to reflect the DSOs/TSOs fixed costs and provide them with appropriate incentives over both the short and long run, in order to increase efficiencies, including energy efficiency, to foster market integration and security of supply, to support efficient investments, to support related research activities, and to facilitate innovation in interest of consumers in areas such as digitalisation, flexibility services and interconnection.

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Similarly, reference to pricing principles was already made in Article 14(2) of the gas Regulation:

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“2. Transportation contracts signed with non-standard start dates or with a shorter duration than a standard annual transportation contract shall not result in arbitrarily higher or lower tariffs that do not reflect the market value of the service, in accordance with the principles laid down in Article 13(1).”

Such application of market principles, i.e. reflecting the willingness to pay or sell for buyer and seller respectively, may or may not coincide with traditional costreflective prices.

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There are some differences in the wording between the gas and electricity Regulations regarding the requirement for cost reflectivity and/or other criteria.

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Whereas the electricity Regulation makes it clear that default rule is for cost reflectivity, the gas Regulation provides that the regulators may take into account benchmarking of tariffs in particular where effective pipe-to-pipe competition99 exists. This is reflected in Recital 8 of the gas Regulation. The above-cited Article 14 also make reference to the “market value” of the service – i.e., reflecting the willingness to pay or sell for buyer and seller respectively – which again may or may not coincide with traditional cost-reflective prices.

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In the case of electricity, on the other hand, deviations may take the form of locational signals in order to achieve a balance between generation and consump-

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99

Note that with the introduction of decoupled entry-exit systems the scope for pipe to pipe competition has diminished.

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tion of a region concerned. In some Member States locational signals are taken into account within the tariff, in others not. The electricity Regulation refers to the use of locational signals in several different provisions. Paragraph 3 of Article 18 provides that, where appropriate, the level of the tariffs applied to producers or final customers, or both shall provide locational signals at Union level, and take into account the amount of network losses and congestion caused, and investment costs for infrastructure.100

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Before the update of the electricity market design and the new wording of Article 18 of Electricity Regulation, there were other relevant differences between the gas and electricity Regulations. Indeed, the gas Regulation clearly set out other objectives than cost reflectivity that tariffs had to adhere to. For example, gas tariffs have to be non-discriminatory, avoid cross-subsidisation and facilitate efficient gas trading as well as the promotion of the interoperability of the networks. In practice, this means that there is a trade-off between the requirements of the Regulation.

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For example, there may be good grounds, and inevitable in the compulsory use of entry-exit tariff systems for a limited degree of cross-subsidisation among different entry and exit points and thus for an inevitably weaker link between costs and revenues. However, this is compensated for by the possibility to define a common notional balancing and trading point which in turn stimulates competition and secondary capacity trading. It is submitted that there is no pre-defined merit order for the rather varied set of requirements. In practice regulators are likely to focus on cost reflectivity as the main requirement, perhaps because it is the requirement that may lead to the most directly attributable effects: a tariff cut as a consequence of the implementation of a cost reflectivity requirement has a more visible impact than a change in the tariff system that will make more investment possible; the effects of which may not be tangible for some years. Similarly to the gas provisions, the new provision in Article 18(1) of the Electricity Regulation added other criteria for the network tariffs, which have to “be transparent, take into account the need for network security and flexibility 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-discriminato‑ ry manner.” These criteria and other requirements added in other paragraphs of the article as mentioned above clearly show that cost reflectivity is only one from a number of elements that the regulatory authorities need to take into account when assessing the needs and thus, costs of the networks.

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100 Recital 30, Article 18 (9)(d) Article 61(4)(b) of Electricity Regulation.

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To sum up, the wording of the Directives and Regulations still needs to be interpreted with respect to the pricing principles underlying the calculation of tariffs. It is clear that the legislation has a “default” preference for cost-reflectivity. However, the Regulations and Directives are largely silent as to which costs need to be taken into account. The issue therefore is partly left to Member States when transposing or applying the legislation, although network codes have provided more details on cost recovery in some cases. Furthermore, tariff systems may not contravene the general principle of non-discriminatory third party access and tariff setting, as laid down in the relevant articles of the Directives.

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3.2.4 Level of detail of a tariff methodology As mentioned above, the second important question regarding the interpretation of Article 59 of the Electricity Directive and Article 41 of the gas Directive is how detailed a tariff methodology must be. As there are still two options for Member States to implement at their discretion, the principle applies that regulatory authorities have to be entitled to perform control over tariff setting as effectively under the methodology approach as under the approach of approving the specific tariffs. Thus, where only an approval of a methodology takes place, there is an active duty on regulators: –

to ensure that the methodology is precise enough for it to be certain that tariffs are cost‑reflective and non‑discriminatory;101 and

–

to verify that the tariffs subsequently published comply with the approved methodology and, in practice, are non‑discriminatory. Where this is not the case the regulatory authority must require their modification.

For gas, Article 41 (8) of the gas Directive provides in this regard that: Article 41 (8) gas “Regulatory authorities shall have the authority to require transmission, LNG and distribution system operators, if necessary, to modify the terms and conditions, including tariffs and methodologies referred to in this Article, to ensure that they are proportionate and applied in a non‑discriminatory manner. (…)”

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Article 18(1) of the electricity Regulation and 32 (1) of the gas Directive.

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The similar article 37(8) in the Electricity Directive 2009/72 has been deleted in the new Electricity Directive. However, this does not limit the powers of the regulatory authorities to investigate and take measures where appropriate in accordance with Article 59(3) of Electricity Directive.

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It is therefore submitted that the methodology must be detailed; in essence permitting tariffs to be calculated from its provisions and not, for example, being limited to general principles. The real difference in the level of overview of tarification by the regulator between the ex‑ante approval of tariffs and the approval of a tariff methodology should be limited to the period in which verification and control take place. Where only a methodology is approved by the regulator prior to its entry into force, the control takes place before and after publication of tariffs. Where tariffs are regulated ex‑ante, almost all the scrutiny takes place prior to publication. The level of work and verification, however, should not significantly differ overall.

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Another significant element of the tariff setting is that the Member States must entrust independent regulatory authorities with the task to set the criteria for the tariff methodologies in a way that ensures that they fulfil the legal requirements and that they allow for a full judicial review. In this regard, the European Commission referred Germany and Hungary to the Court of Justice of the EU on 19 July 2018102 for reasons of non-compliance with the Third package rules on the independence of the regulatory authorities in setting the network tariffs or the methodologies therefor.

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In the case of Germany, the European Commission identified that the regulator does not enjoy full discretion in the setting of network tariffs and other terms and conditions for access to networks and balancing services. The main argument brought forward is that many elements for setting these tariffs and terms and conditions are to a large extent laid down in detailed regulations adopted by the Federal government which goes against the EU legal framework.

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Regarding Hungary, the European Commission decided that it has not implemented correctly the Third Energy Package requirements on network tariffs. The related provisions are the ones according to which (i) tariffs applied by network 102 A letter of formal notice was sent to Germany and Hungary in February 2015, followed by a reasoned opinion in April 2016 for Germany and two reasoned opinions for Hungary, respectively in December 2016 and April 2017. The decision againts Germany is still pending while the one against Hungary was published on 16 July 2020 accepting partially the Commission’s arguments. See the Court decision here (not available in English during the last update of this Chapter). http://curia.europa.eu/juris/document/document.jsf ?text =&docid=228671&pageIndex=0&doclang=DE&mode=lst&dir=&occ=first&part=1&cid=10737030

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operators for the use of electricity and gas networks have to be regulated in order to prevent anti-competitive behaviour and (ii) national regulatory authorities should be entrusted with the task of setting these tariffs or their methodologies. The reason of the referral was that Hungary adopted rules in the energy field, which exclude certain types of costs from the calculation of network electricity and gas tariffs, in violation of the principle of cost recovery of tariffs provided for in the Electricity and Gas Regulations. In addition, the European Commission found that the applicable legislation jeopardises the right of entitled persons to a full judicial review of the national regulator’s decisions on network tariffs.103

3.3 Capacity allocation and congestion management Regulated access aims to ensure the non-discriminatory allocation of capacities, enabling all interested parties to benefit from the key infrastructure required to participate in the markets for gas and electricity trading and supply. The gas and electricity Directives therefore have specific provisions to ensure non-discriminatory capacity allocation and congestion management. These provisions are further elaborated in the Regulations as well as the detailed Network Codes.

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3.3.1 Gas Regarding the management of congestion itself, the annex to the gas Regulation has already been modified, strengthening the provisions on non-discriminatory congestion management. Commission Decision  2012/490/EU of 24 August 2012 on amending Annex I to Regulation (EC) No 715/2009104 has introduced an oversubscription and buyback scheme to be applied, with the possibility to require firm day ahead use-it-or-lose-it, thereby strengthening access rights in case of contractual congestion and limiting capacity hoarding.

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The Network Code on Capacity Allocation Mechanisms in Gas Transmission Systems (CAM)105 provides that auctions shall be used to determine access to gas interconnectors. It sets minimum thresholds of 10% each of the technical capacity to be made available as annual and as quarterly products respectively, thus ensuring a minimum flexibility margin and enabling short-term trading. The Network Code requires standard products to be defined for yearly, quarterly, monthly, daily and within-day timeframes. Yearly products can be offered

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103 See – Press release of the European Commission of 19 July 2018, Infringement – Internal energy market: Commission refers Germany and Hungary to the Court of Justice of the EU for failure to fully comply with the Third Energy Package Brussels. The Hungary case is published on July 16, 2020. See footnote 102. 104 OJ 2012/L 231/16. 105 Regulation No 984/2013 of 14 October 2013, OJ 2013/L 273/5.

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several years ahead, but no longer than 15 years. For products with longer than daily timeframes, regular auctions shall be organized using an ascending clock mechanism. For daily and within-day products, uniform price algorithms with single bidding rounds shall be used. Adjacent TSOs shall offer bundled products, to avoid mismatches between exit products from one entry-exit zone and entry products at the next zone.

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TSOs shall also offer daily interruptible capacity products in both flow directions, thus including virtual (“backhaul”) capacity. Interruptible contracts shall be interrupted in the order that the contracts have entered into force.

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Third-party access to the electricity wholesale markets is only feasible through non-discriminatory allocation of capacities, including on interconnectors, ­enabling all interested parties to benefit from the key infrastructure required to participate in the markets for electricity trading and supply. For this purpose specific provisions are foreseen directly in the Third Package and the network codes and guidelines to ensure non-discriminatory capacity allocation and congestion management.

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In electricity, in order to ensure legal certainty and robustness of the European regulatory framework, the high level principles on capacity allocation and congestion management including rules for access to cross-zonal capacities have been lifted from the electricity guidelines to Chapters II (General rules for the electricity market) and III (Network access and congestion management) of the Electricity Regulation.106 With the high-level principles included in the main text of the Electricity Regulation and the adoption of CACM and FCA Regulations, Annex I of Regulation 714/2009 would be a duplication and partially confusing and has therefore been deleted from the new Electricity Regulation.

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Regarding electricity wholesale markets, the CACM and FCA Regulations contain rules on long-term and short term cross-zonal capacity calculation and allocation aiming at facilitating Union-wide trade in electricity, allowing more efficient use of the network and increasing competition, for the benefit of consumers. Among others, they both serve the objectives of ensuring optimal use of the transmission infrastructure, of optimising the calculation and allocation of cross-zonal capacity, of ensuring fair and non-discriminatory treatment of TSOs 106 Article 3 of the Electricity Regulation provides with the general principle of third party access to electricity wholesale markets for all electricity undertakings.

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and other market participants as well as the objective of fair and orderly markets and optimal price formation, which are all essential elements of third-party ­access. Like previously provided for in Annex 1 to the Electricity Regulation 714/2009, these Regulations provide that TSOs shall endeavour to accept all commercial transactions, including for cross-zonal trade. When defining network areas between which congestion management has to apply, the so-called bidding zones,107 TSOs have to minimise the negative impacts on the internal market. This means that where structural congestion appears inside a bidding zone, this congestion either has to be resolved or congestion management procedures have to be applied to this congestion. This may require redefinition of the bidding zone in question to ensure that congestion costs are appropriately reflected in the wholesale market.108

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Depending on the timeframe the capacity calculation and allocation procedures have common elements or they may vary. The CACM Regulation contains the rules for day-ahead and intraday capacity allocation whereas the FCA Regulation sets the conditions for forward capacity allocation. In all cases, the capacities should be calculated in a coordinated manner in mostly broader regions than just one bidding zone (the so-called capacity calculation regions)109 and based on a common grid model for all EU TSOs and for each timeframe. The CACM Regulation sets the process to establish capacity calculation regions to reduce inconsistencies between neighbouring TSOs and increase available capacities.110

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107 A bidding zone is the largest geographical area within which market participants are able to exchange energy without capacity allocation according to Article 2 (65) of the Electricity Regulation. 108 The CACM Regulation defines the process for the bidding zones review by relevant TSOs who need to propose changes of the bidding zone configuration to the Member States based on specific criteria and following predefined methodologies and scenarios. The first bidding zone review has been performed by TSOs in 2018 with no proposal for a bidding zone reconfiguration. Given the challenges met in this first bidding review, the process has been improved in the Electricity Regulation which now includes an additional obligation for TSOs to offer to the market at least 70% of cross-zonal capacity (Article 16). This new requirement serves the goal of further integration of EU electricity markets and less discretion to individual TSOs to limit crosszonal capacities. 109 A capacity calculation region (CCRs) is the geographic area in which the coordinated capacity calculation is applied (Article 2(21) of the Electricity Regulation). 110 There are currently ten CCRs following proposals by all EU TSOs and approval by NRAs or, where NRAs could not agree, following a decision by ACER. See first decision of ACER No. 06/2016 of 17 November 2016 determining the CCRs here https://acer.europa.eu/Official_documents/Acts_of_the_Agency/Individual%20decisions/ACER%20Decision%2006-2016%20on%20CCR.pdf. Also following decisions here: https://acer.europa.eu/en/Electricity/MARKET-CODES/CAPACITYALLOCATION-AND-CONGESTION-MANAGEMENT/IMPLEMENTATION/Pages/CAPACITY-CALCULATION.aspx

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The CACM Regulation sets further principles for a coordinated capacity calculation per CCR.111 In a meshed grid, capacities shall in principle be calculated based on a flow-based approach, taking into account congestion inside network areas and considering real electricity flows (i.e., not across a single line, but across the path of least resistance in a meshed grid). Under certain conditions, TSOs can propose an alternative approach, the coordinated net transmission capacity approach. Further, other coordinated methodologies as the coordinated redispatching and countertrading methodology shall ensure optimal use of resources (e.g., in case of different imbalances, imbalance netting can reduce the need for redispatch).112

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The CACM Regulation also foresees a review process and substantive criteria for bidding zone configuration (Article 32 ff ). Whereas this process foresees a final decision by the Member States, they will have to respect the obligations directly resulting from the Third Package and other legislation while taking their decision.

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The CACM Regulation sets, furthermore, detailed rules for TSOs and Nominated Electricity Market Operators (NEMOs) to perform the tasks of crosszonal capacity allocation and congestion management in the day-ahead and intraday markets. It establishes their rights and obligations when cooperating for the development and operation of the day-ahead and intraday markets including rules on governance and cost sharing and cost recovery.

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For day-ahead and intraday timeframe, the CACM Regulation and now also the Electricity Regulation require that cross-zonal capacity should be allocated using implicit allocation methods, in particular methods which allocate energy and capacity together. In the case of single day-ahead coupling, this method should be implicit auction and in the case of single intraday coupling it should be continuous implicit allocation potentially complemented by auctions. The implicit allocation relies on effective and timely coordination between TSOs, NEMOs and a series of other service providers to ensure capacity is allocated and congestion managed in an efficient manner.

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Regarding the single day-ahead coupling, the so-called “Price Coupling of Regions” (PCR) solution, designed by some TSOs and power exchanges as a regional project before the entry into force of CACM Regulation, served as basis for the implementation of the pan-European single day-ahead coupling. Similar111 See Articles 20ff of CACM Regulation. 112 These provisions are further detailed in the System Operation Regulation.

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ly regarding the development of the single intraday coupling, the Cross-Border Intraday (XBID) project is the basis for the implementation of the pan-European single intraday coupling under CACM Regulation. The XBID project will enable the single continuous intraday trading with a stepwise approach across the entire European Union. It went live on 12/13 June 2018 covering fourteen countries113 and with 16 million trades in its first year of operation.114 A second go-live took place in November 2019 allowing seven new Member States to join the pan-EU platform. The FCA Regulation sets out detailed rules on cross-zonal capacity allocation in the forward markets including rules for a common methodology to determine long-term cross-zonal capacity. The calculation of cross-zonal capacities in the forward timeframe can be based on a coordinated net transmission capacity approach or a flow-based approach. Differently as in the day-ahead and intraday market the flow-based approach is not the default approach but rather an alternative and to be applied by the TSOs in a given CCR if certain conditions are met. A condition is for example that the use of the flow-based approach leads to an increase of economic efficiency in the CCR with the same level of system security as the coordinated net transmission capacity approach.115 In any case the forward capacity calculation methodology has to be compatible with the capacity calculation methodologies for the day-ahead and intraday timeframes in accordance with the CACM Regulation.

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The FCA Regulation requires further explicit cross-zonal capacity allocation at least on yearly and monthly basis and based on harmonised allocation rules across the European Union. The long-term capacity allocation is performed by a single allocation platform at European level.116 This central platform is devel-

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113 Belgium, Denmark, Germany, Estonia, Finland, France, Latvia, Lithuania, Norway, the Netherlands, Austria, Portugal, Sweden and Spain. 114 See: https://www.entsoe.eu/news/2019/06/12/press-release-xbid-1st-anniversary-and-announcement-of2nd-wave-go-live/. For more details on the projects and the progress see also Report from the Commission to the European Parliament and the Council: https://ec.europa.eu/transparency/regdoc/rep/1/2018/ EN/COM-2018-538-F1-EN-MAIN-PART-1.PDF and the Commission Staff Working Document Accompanying the document: Report from the Commission to the European Parliament and the Council: file:///U:/01.%20IEM%20Harmonisation%20-%20NC%20and%20GL,%20etc/1a.%20Electricity%20 harmonisation%20–%20NCs%20and%20GL/1.%20CACM/Report%20on%20NEMOs%20competition/REPORT/FINAL/SWP%20annexed%20to%20the%20report.pdf 115 See Articles 8 ff FCA Regulation. 116 The EU TSOs have fulfil their obligation by appointing the Joint Allocation Office ( JAO), a service company that facilitates the electricity market by organising auctions for cross border transmission capacity, as the single allocation platform since 1 October 2018. JAO performs long- and short-term auctions of transmission capacity and offers annual, non-calendar annual, half-yearly, quarterly, monthly, weekly, weekend, daily and intra-day auctions. What type of auctions and what type of long-term transmission rights are allocated

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oped by all TSOs to facilitate the allocation of long-term transmission rights for market participants and provide for the transfer of long-term transmission rights from one eligible market participant to another. Long-term transmission rights may be allocated ether as physical transmission rights or financial transmission rights – options (‘FTRs – options’) and financial transmission rights – obligations (‘FTRs – obligations’). In some instances, Member States may decide after a thorough assessment that no long-term transmission rights are required on certain borders as other sufficient hedging opportunities exist or if not, they may ask TSOs to provide such hedging opportunities with other means than long-term transmission rights.117

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The harmonised allocation rules to be accepted by all market participants willing to join the long term auctions performed contain a detailed description of the allocation process/procedure for long-term transmission rights, including the minimum requirements for participation, financial matters, type of products offered in explicit auctions, nomination rules, curtailment and compensation rules, rules for market participants in case they are transferring their longterm transmission rights, the use-it-or-sell-it (hereinafter ‘UIOSI’) principle as well as rules on force majeure and liability.118

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The early stages of the implementation of FCA Regulation and CACM Regulation can overall be considered successful and an important step towards the development of a fully integrated electricity market across the EU. Despite the progress made, there are still important deliverables under development by TSOs and/or NEMOs and further harmonisation is required before meeting the goals set in the Third Energy Package. ACER identified in its latest Monitoring Report119 several points of attention and potential action by the relevant parties and/or the European Commission. on each border is decided by the regulatory authorities upon a proposal by the relevant TSOs. See more info about JAO here http://www.jao.eu/aboutus/aboutus/overview. See the status quo of relevant methodologies for forward capacity allocation and the single allocation platform in the following sites respectively: https://www.acer.europa.eu/en/Electricity/MARKET-CODES/FORWARD-CAPACITY-ALLOCATION/IMPLEMENTATION/Pages/FORWARD-CAPACITY-ALLOCATION.aspx.; and https://www.acer.europa.eu/en/Electricity/MARKET-CODES/FORWARD-CAPACITY-ALLOCATION/IMPLEMENTATION/Pages/SINGLE-ALLOCATION-PLATFORM.aspx. 117 This is the case on some borders in particular in the Nordic countries. See details on the alternative hedging opportunities in ACER’s Monitoring report on the implementation of the CACM Regulation and the FCA Regulation of 31 January 2019, pages 6ff, https://www.acer.europa.eu/Official_documents/Acts_of_the_ Agency/Publication/FCA_CACM_Implementation_Monitoring_Report_2019.pdf. 118 See the set of harmonised allocation rules here http://www.jao.eu/support/resourcecenter/overview. 119 See Recommendations in ACER’s Monitoring report on the implementation of the CACM Regulation and the FCA Regulation of 31 January 2019.

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Regarding the CACM Regulation some changes for legal clarification as well as other substantial amendments are recommended. Focus is given to the differences between regions using the flow-based capacity calculation approach and coordinated net transmission capacity approach as well as need to improve the governance of the market coupling operation function. The already performed bidding zone review is also criticised by ACER who requires an improvement of the process and methodology applied before a second review takes place in order to meet the objectives of the CACM Regulation. Regarding the FCA Regulation, the main concerns are that the harmonised allocation rules include regional specificities, which in a few instances significantly deviate from the HAR or even from the FCA Regulation itself. ACER recommends in its report that these annexes should remove all deviations and, where possible, all unnecessary regional specificities. Further, ACER sees with scepticism the decision of some regulatory authorities to maintain the status quo even where they identified a need to increase cross-zonal risk hedging opportunities. ACER recommends therefore the development of harmonised criteria and metrics based on which the need for hedging instruments issued by TSOs could be objectively identified.120

4.

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Negotiated third party access (storage ancillary and ancillary services)

With respect to electricity, the whole transmission and distribution system is subject to regulated third party access.121 Regarding storage, the Electricity Directive includes a new regime on energy storage and energy storage facilities as presented in section 2.2.4 above.

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For gas, however, an exception exists for gas storage and ancillary services for which according to Article 33 of the gas Directive, Member States may in principle chose between negotiated and regulated third party access:

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120 See Monitoring report on the implementation of the CACM Regulation and the FCA Regulation of 31 January 2019, summary in pages 3 and 4. 121 It should be noted that no TPA is foreseen for electricity storage. This can be justified by the still limited significance of electricity storage, and the easier availability of other flexibility options. In consequence, storage is under the electricity Directive rather treated as generation.

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Article 33 Access to storage “1. For the organisation of access to storage facilities and linepack when technically and/or economically necessary for providing efficient access to the system for the supply of customers, as well as for the organisation of access to ancillary services Member States may choose either or both of the procedures referred to in paragraphs 3 and 4. Those procedures shall operate in accordance with objective, transparent and non-discriminatory criteria.

Regulatory authorities where Member States have so provided, or Member States shall define and publish criteria according to which it may be determined which access regime shall be applicable to storage facilities and linepack. They shall make public, or oblige storage and transmission system operators to make public, which storage facilities, or which parts of those storage facilities, and which linepack is offered under the different procedures referred to in paragraphs 3 and 4. This obligation shall be without prejudice to the right of choice granted to Member States in the first subparagraph.

2. The provisions of paragraph 1 shall not apply to ancillary services and temporary storage that are related to LNG facilities and are necessary for the regasification process and subsequent delivery to the transmission system. 3. In the case of negotiated access, Member States or when Member States have so provided, the regulatory authorities shall take the necessary measures for natural gas undertakings and eligible customers either inside or outside the territory covered by the interconnected system to be able to negotiate access to storage facilities and linepack, when technically and/or economically necessary for providing efficient access to the system, as well as for the organisation of access to other ancillary services. The parties shall be obliged to negotiate access to storage, linepack and other ancillary services in good faith.

Contracts for access to storage, linepack and other ancillary services shall be negotiated with the relevant storage system operator or natural gas undertakings. Regulatory authorities where Member States have so provided, or Member States shall require storage system operators and natural gas undertakings to publish their main commercial conditions for the use of storage, linepack and other ancillary services by … and on an annual basis every year thereafter. When developing these conditions, storage operators and natural gas undertakings shall consult system users. 82

Chapter 3 Network regulation and third party access Floris Gräper & Christof Schoser – revised and updated by Floris Gräper and Markela Stamati 4. In the case of regulated access, the regulatory authorities where Member States have so provided, or Member States shall take the necessary measures to give natural gas undertakings and eligible customers either inside or outside the territory covered by the interconnected system a right to access to storage, linepack and other ancillary services, on the basis of published tariffs and/or other terms and obligations for use of that storage and linepack, when technically and/or economically necessary for providing efficient access to the system, as well as for the organisation of access to other ancillary services. Regulatory authorities where Member States have so provided, or Member States shall consult system users when developing these tariffs or the methodologies for these tariffs. This right of access for eligible customers may be given by enabling them to enter into supply contracts with competing natural gas undertakings other than the owner and/or operator of the system or a related undertaking.”

The main reason for the different treatment of storage is that gas storage is not necessarily a natural monopoly. Storage may simply be considered to be one of a number of “flexibility instruments” that a gas company uses to manage fluctuating demand. Other tools include supply flexibility (while gas is basically purchased on a constant off-take basis, it is usually possible to negotiate a limited degree of flexibility), demand flexibility and line pack.122 The gas storage business itself also allows for competition, providing that the technical and geographic possibilities for companies to invest in storage facilities exist. An important precondition in this respect is the availability of fair access to the transmission network, in which case there may be numerous opportunities for companies to invest in storage and use this to support their gas business across the European network. Especially where ownership of gas storage becomes sufficiently diversified (and unbundled from supply interests), there may be less need for regulation.

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The text of Article 33 gives rise to a number of points of interpretation.

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First of all, for TSOs line pack and ancillary services can only be subject to regulated access. Line pack is an integral consequence of the operation of a pipeline of network (and therefore an integral part of balancing requirements). It is difficult to see how regulated access and balancing can function alongside negotiated access to line pack.

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122 Gas transmission pipes can be used as temporary storage by increasing the pressure in the pipes. The higher the pressure, the more gas is held in the pipes.

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The same holds for ancillary services which, according to the definition in the Directive, include load balancing (i.e. balancing!) and blending. These services are typically both necessary for access to the networks as well as to the effective functioning of the market and are intractably linked to the operation of the network.

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Thus, access to line pack and ancillary services must, for gas transmission networks, be regulated. This is now also reflected in the Regulation on the Balancing Network Code, which states in article  43 that the offering of a line pack flexibility service must be on the basis of prior approval of the terms and conditions by the national regulatory authority. Although strictly speaking this would appear to be in contradiction to the Directive, it underscores the presumption of regulated terms and conditions to be applicable to all aspects of access to the transmission networks.

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Secondly system operators are only obliged to give third party access to their storage and line pack “when technically and/or economically necessary for providing efficient access to the system for the supply of customers”. It is submitted that in practice, with the possible exception of very small scale storage sites, this qualification will permit the rejection of few if any requests for third party access. The demand for gas of most customers varies very significantly according to the time of day and, particularly for customers using gas for heating purposes, according to the time of year. Thus, suppliers generally need to supply most gas during the day, and in winter. At the same time, however, because the use of gas transmission pipelines is expensive (particularly as most of the gas that is supplied in the EU travels considerable distances from its origin), and because gas producers wish to sell gas at a steady rate to reduce exploration and production costs, gas is generally123 purchased on a relatively constant off‑take basis during the whole year. To be able to deal with the difference between supply and demand, gas suppliers therefore need storage.

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A further consideration is that storage (or other flexibility instruments, if available) is often needed in order to underpin the security of supply of gas delivery contracts, for cases where access to the transmission network fails – as a form of “back-up” (for example because of technical failures or because of the nature of the network access conditions which may be based on interruptible or rather short-term contracts). 123 This is notwithstanding the fact that some production of gas can be quite flexible. In essence in those situations, the gas producer is likely to charge its customer a price which will reflect the market value of this flexibility, which will typically be based on seasonal storage.

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In these circumstances, there should be a presumption that a competing gas seller will require storage and/or line pack because it is “technically and/or eco‑ nomically necessary for providing efficient access to the system for the supply of customers”.

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In the gas Directive, Article 33 (1) requires Member States or the Regulatory authorities to define and publish criteria to determine which access regime is applicable to storage and line pack. In addition, the resulting regime for each (part of a) storage facility must be published. The requirement to determine and publish the criteria for the relevant access regime applies both to the question of whether access is required and which access regime (regulated or negotiated) is used.

3.185

The fact that Article 33(1) refers to storage facilities and requires Member States or regulatory authorities to create clarity as to the applicable regime per facility or part thereof resolves an old question under the second gas Directive. That directive was silent on the issue of exactly to what access needed to be given and in which way storage operators would offer flexibility services. It stated simply that operators should give access to “storage and line pack”.

3.186

The gas Regulation also provides additional guidance on these issues, as it sets out the regulatory framework for access to storage facilities in terms of the types of third-party access services to be offered, the principles of capacity allocation and congestion management as well as transparency requirements. It clearly emerges from these articles that access must be given on a facility by facility basis. Moreover, storage operators are required to offer services to storage users that comprise both bundled and unbundled products such as send-in capacity, send-out capacity and storage space, as well as firm and interruptible services, etc.

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The Regulation does not give further guidance on the issue of cost reflectivity for services provided by storage operators, however; but it is submitted that the answer to this question lies with the requirement that the third party access regime chosen must “operate in accordance with objective, transparent and non‑discriminatory criteria”. Thus, the question of the precise modalities of access is left to subsidiarity, reflecting the fact that the storage access regime will probably differ somewhat between Member States, due in particular to the differences in storage availability. This is also reflected in the interpretative note of the European Commission in which it is stated:

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Chapter 3 Network regulation and third party access Floris Gräper & Christof Schoser – revised and updated by Floris Gräper and Markela Stamati “In practice, three different situations can be derived from Article 33 of the Gas Directive. Either access is not technically and/or economically necessary or it is, in which case access can be regulated or negotiated. The choice of access procedure is explicitly left to Member States, as the use of storage, the geological potential for storage, and the function of storage differ between Member States. Moreover, as markets integrate, the geographical scope of that market may change, as may the uses and functions of storage. Therefore, Member States should be able to adapt their rules for access to storage based on changing market circumstances. Precisely for that reason, criteria have to be published, so as to ensure that under changing market circumstances, the rules governing access to storage facilities will be adapted accordingly. Such criteria are, moreover, needed for investors in storage facilities, to give certainty as to the access regime that will be applied to them when operating a storage facility. The obligation to establish delineating criteria refers not only to the determination of the choice between the options provided in Article 33(3) or (4) of the Gas Directive. Rather, the regulatory authorities (where Member States have so provided) or the Member States are also required to define and publish criteria according to which the technical or economic necessity may be determined. (…) The criteria under Article  33(1) of the Gas Directive must be established by the regulatory authorities (where Member States have so provided) or by the Member States and they must be applied correctly. It is left to Member States to decide who (e.g., the Member State, the National Regulatory Authority [NRA], or the SSO) determines, on the basis of the published criteria, the rules governing access to a specific storage facility, but this access regime has to be made public, pursuant to Article 33(1) second subparagraph of the Gas Directive.” The above issues underline the importance that the regulator has jurisdiction in the area of storage. Article 33 is ambiguous in this respect. The Member State is responsible for choosing the regulated or negotiated access procedure, but the definition and publication of the criteria according to which the relevant access regime may be determined are left either to the Member State or the regulator. Furthermore, for negotiated access it is principally the Member State, and where the Member State has so provided the regulator, which is responsible for ensuring that customers can negotiate freely with the storage system operator. In case of regulated access it is also either the Member State of the regulator (to be decided by the Member State) that may be responsible for ensuring access. Article 33 (4) on regulated access goes on to state that:

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Chapter 3 Network regulation and third party access Floris Gräper & Christof Schoser – revised and updated by Floris Gräper and Markela Stamati “Regulatory authorities where Member States have so provided, or Member States shall consult system users when developing these tariffs or the methodologies for these tariffs”

Hence, the regulated access regime for storage is different from regulated access to transmission networks and LNG in that there is no clear requirement on the regulator to fix or approve tariffs or the underlying methodologies on an ex-ante basis; the requirement is simply to ensure that system users are consulted.

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In contrast, Article 41 (1) (n) requires Member States to give the regulator jurisdiction to monitor and review access conditions to storage, excluding tariff review where negotiated access has been defined.124 Also, regulators must monitor the correct application of the criteria determining whether a storage facility falls under negotiated or regulated access125 and they must deal with complaints. Lastly, Article 41 (8) of the Directive gives regulators the power to oblige storage system operators to modify their terms and conditions when necessary,126 excluding tariffs for storage facilities that apply negotiated access. This means that whereas the ex-ante regulation of storage tariffs may be weak and the relevant powers and responsibilities divided between Member States and regulators, the ex-post regulation of storage tariffs is unequivocally given to the regulatory authority.

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Article 12 of the gas Directive requires gas companies owning storage to establish at least a separate business unit responsible for storage, the “storage system operator”. Article 15 goes further and obliges storage operators which are part of vertically integrated companies to be legally and organisationally unbundled from supply activities:

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Article 15 Unbundling of transmission system owner and storage system operator “1. A transmission system owner, where an independent system operator has been appointed, and a storage system operator which are part of vertically integrated undertakings shall be independent at least in terms of their legal form, organisation and decision-making from other activities not relating to transmission, distribution and storage. 124 Article 41 (1) (n) of Directive 2009/73/EC . 125 Article (41) (1) (s). 126 Article 41 (8).

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This Article shall apply only to storage facilities that are technically and/or economically necessary for providing efficient access to the system for the supply of customers pursuant to Article 33.

2. In order to ensure the independence of the transmission system owner and storage system operator referred to in paragraph 1, the following minimum criteria shall apply: (a) persons responsible for the management of the transmission system owner and storage system operator shall not participate in company structures of the integrated natural gas undertaking responsible, directly or indirectly, for the day-to-day operation of the production and supply of natural gas; (b) appropriate measures shall be taken to ensure that the professional interests of persons responsible for the management of the transmission system owner and storage system operator are taken into account in a manner that ensures that they are capable of acting independently; / (c) the storage system operator shall have effective decision-making rights, independent from the integrated natural gas undertaking, with respect to assets necessary to operate, maintain or develop the storage facilities. This shall not preclude the existence of appropriate coordination mechanisms to ensure that the economic and management supervision rights of the parent company in respect of return on assets regulated indirectly in accordance with Article  41(6) in a subsidiary are protected. In particular, this shall enable the parent company to approve the annual financial plan, or any equivalent instrument, of the storage system operator and to set global limits on the levels of indebtedness of its subsidiary. It shall not permit the parent company to give instructions regarding day-to-day operations, nor with respect to individual decisions concerning the construction or upgrading of storage facilities that do not exceed the terms of the approved financial plan, or any equivalent instrument; and (d) the transmission system owner and the storage system operator 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. 88

Chapter 3 Network regulation and third party access Floris Gräper & Christof Schoser – revised and updated by Floris Gräper and Markela Stamati 3. The Commission may adopt guidelines to ensure full and effective compliance of the transmission system owner and of the storage system operator 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 51(3).”

This legal and functional unbundling requirement applies only to storage facilities which are subject to providing access in the first place, i.e., those facilities for which Member States or the regulatory authority have defined an access regime on the basis of regulated or negotiated access. By requiring legal and functional unbundling, effective access will be enhanced. This is because in the case of vertically integrated storage operators it is no longer necessary for a customer requesting the use of a storage facility to deal directly with a competitor.

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Especially where the access regime is based on negotiated third party access the unbundling requirement makes it clear that – where the storage is part of a vertically integrated company – all capacity cannot simply be allocated to the integrated company and only the remainder being made available to the market. Moreover, Article 33 (1) requires that access must operate in “accordance with objective, transparent and non‑discriminatory criteria”. Thus the storage system operator must treat all customers, including the sales division of the vertically integrated company to which it belongs, in the same way, in terms of access, capacity reservation, and terms and conditions.127 If, therefore, it has congested capacity, it must make the capacity available on a non‑discriminatory basis. Similarly, the prices it charges to others must also be levied on its parent company.

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5.

Transit

The first electricity and gas Directives did not cover transit, which was regulated at Community level by specific legislation, the transit Directives, adopted in 1990 (electricity) and 1991 (gas). These Directives, whilst laudable in objective, were limited in scope, simply requiring Member States to “take the necessary measures to facilitate transit” of electricity and gas, envisaging non‑discriminatory negotiated third party access. Conciliation procedures had to be established, on the basis of a body to be set up and chaired by the Commission. 127 This point is underlined in a note of the Directorate General for Energy and Transport of the European Commission on Third-party access to storage facilities, where it states at point 4 that nondiscriminatory would mean that services required from a third party would, in absolute terms and under the same circumstances, result in the same economic consequences of all parties requiring the same service.

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The Commission set up this body, the “Committee of Experts on the Transit of Electricity and Gas between Grids”. The recommendations of this conciliation Committee were not binding on the parties. The Directives provided neither for unbundling nor for any effective regulation and had little real effect. The transit Directives were repealed in 2003 by the second electricity and gas Directives. From the implementation of these Directives, therefore, transit would, with respect to third party access, simply be considered as any other transmission service. This is logical; transit is simply the transmission of gas or electricity across the whole of a national system, rather than simply through a part of it. Thus, tariffs for transit would, like any other transmission tariff, need to be approved by a regulator either directly or on the basis of a methodology, prior to their entry into force, and be published. Whereas Article 32(1) of the second gas Directive (but not electricity) repealed the Transit Directive, it also stated that the contracts concluded under Article 3(1) of the Transit Directive should continue to be valid and implemented under the terms of that Directive. It was widely considered that, as a consequence of this provision, the terms and conditions for transmission and transit would only apply to new contracts as of the entry into force of the second gas Directive; old contracts remaining valid and unaffected by the repeal of the gas transit Directive. It was not clear, however, to precisely which contracts this provision in the second Directive applied, nor what the application of this provision to those contracts meant in practice. For example, did the level of “protection” which Article  32(1) of the Directive gave to these contracts extend to derogation from the prevalence of nondiscriminatory access (e.g., through the application of congestion management rules such as use-it-or-lose-it-rules) to the networks in the Directive? Also, it was not clear which contracts were covered by this Article, as notification of the Transit contracts was only foreseen in the Transit Directive as a procedural rule, not necessarily as a validity issue. Further, the accession of the 12 new Member States led to a question of whether similar existing contracts in these Member States would benefit from the same level of “protection”. The third gas Directive no longer has provisions regarding the continued validity and implementation of the old transit contracts, thus reducing the uncertainty regarding the scope of Article 32(1) of the second gas Directive. The provisions of the third package, notably those relating to congestion management and capacity allocation procedure, now apply in full to all transportation 90

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capacity managed by TSOs and thus would include transportation contracts predating the Directive, i.e., without specific regard to the contracts concluded under the Transit Directive. In this respect, there is also significance in the fact that the new Regulation no longer refers to a procedure to be used in (the rare) cases where the application of congestion management rules would prove to constitute an infringement of a contract. The old Regulation (1775/2005) contained such provision in Article 5(4), which has now been dropped.

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For electricity the concept of transit was never as prevalent as for gas. However, certain long-term purchase arrangements were agreed for the sale of electricity between electricity companies in different Member States in the 1990s. These agreements were often associated with blocks of capacity on specific interconnectors.

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6.

Jurisprudence and Commission decisions128

6.1 VEMW and others Until 2005, ît was argued that, due to the assumption at the time of signing the contract that interconnection capacity would be available, the parties to the contract would have this capacity reserved for them as a priority user. This assumption was overturned following the judgement of the Court of Justice in case C-17/03 issued on 7 June 2005.

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In 1998, The Netherlands transposed the first electricity Directive into national law. At that time the Dutch electricity system was run by SEP, a national body that ran both generation and transmission activities. All Dutch electricity companies were obliged to sell their electricity generation to SEP.

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Prior to the entry into force of the first electricity Directive, SEP had concluded three major electricity purchase contracts with foreign producers, notably:

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in 1989 with EDF for 600  MW per annum until 31 March 2002 and 750 MW per annum from 2002 until March 2009;

128 Further jurisprudence is presented in chapter 15.

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in 1989 with Preuß en Elektra AG for 300 MW per annum up to 31 December 2005;129

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in 1990 with Vereinigte Elektrizitätswerke Westfalen AG for the purchase of 600 MW per annum up to 31 March 2003.

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It is clear that these were intended to be “import” contracts. In fact, at the time the contracts were concluded, the German and French markets were completely closed to competition. SEP could therefore not resell the electricity in Germany or France, but only import it. However, there were no back-to-back capacity reservation contracts signed for the actual import capacity on the interconnectors. At the time, this was considered unnecessary in a wholly integrated company: why should one sign contracts with oneself ? The interconnection capacity between the Netherlands and its neighbours amounted to 3200 MW. At its peak, these import contracts therefore accounted for half of the available capacity: 1600 MW (750 + 300 + 600).

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As a central part of their implementation of the first Directive, in which the Netherlands took a conscious decision to follow an all-inclusive approach to market opening, the national law immediately moved to full ownership unbundling in the electricity sector. The transmission assets of SEP, including interconnectors, were therefore moved to a new state-owned company, TenneT, which remains the Dutch network operator. SEP continued in existence and retained ownership of the long-term contracts but ceased its role as “central buyer”. In addition, in the Dutch Electricity Act, an independent Regulator was established, the DTe. This body was given the responsibility to approve network access and tariff conditions, for both the domestic network and interconnectors. In particular, therefore, it had to approve the grid code, which took place in 1999. With respect to capacity on the interconnectors, the grid code reserved a maximum of almost 50% of the available capacity to SEP for the execution of its long-term contracts. In subsequent revisions of the code, this amount was reduced in line with the reduced quantities remaining under the above-mentioned contracts.

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The interconnector capacity in question was scarce and valuable because the electricity prices in the Netherlands were generally higher than in neighbouring countries. The decision of the DTe was challenged in the Dutch national Courts by the association of energy and water users VEMW, the Amsterdam Power Ex129 In the year 2000, Preuß en Elektra and Bayernwerk merged to form E.ON.

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change and electricity company Eneco. The national court made a reference under Article 234 of the EU Treaty to the European Court of Justice, asking it in effect whether this priority allocation of capacity was compatible with Article 86(2) of the EU Treaty and/or Article 7(5) of the first electricity Directive. The Court decided the case essentially on the basis of the first electricity Directive. Article 7(5), contained in the Article of the Directive that requires Member States to appoint a transmission operator and then defines the minimum set of competences that must be given to it, states that: Article 7(5) first electricity Directive “5. The system operator shall not discriminate between system users or classes of system users, particularly in favour of its subsidiaries or shareholders.”



The equivalent provision is contained in Article 12 (f ) of the third electricity Directive. In essence, the Court considered that the grant of priority capacity is discrimination within the meaning of Article 7(5). In reaching this conclusion it notes, at paragraph 48, that “the prohibition of discrimination, which is one of the fundamental principles of Community law, requires that comparable situations are not treated differently unless such difference in treatment is objectively justified.” The Dutch government argued that the very fact that these were “old” contracts justified this priority; in other words, that this was the necessary “objective justification” for the discrimination. The Court rejected this argument on the grounds that Article 24 of the Directive – on stranded costs – specifically catered for such situations. The relevant parts of Article 24 states the following:

Article 24 first electricity Directive “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 to them by the Commission, taking into account, among 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. 93

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Chapter 3 Network regulation and third party access Floris Gräper & Christof Schoser – revised and updated by Floris Gräper and Markela Stamati 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 Chapter IV, VI and VII of this Directive. Applications for a transitional regime must be notified to the Commission no later than one year after the entry into force of this Directive.”

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This provision enabled Member States, subject to the agreement of the Commission, to derogate from the requirements of the Directive in order to take account of old commitments made to companies prior to liberalisation that could no longer be upheld under the new rules established by the first Directive. In fact at least 10 Member States made use of Article 24, usually through the grant of state aid to national electricity companies to cover the cost of running inefficient electricity plants that would not be competitive in a liberalised market. In essence, the Court therefore stated that Article  7  (5) simply required that interconnection capacity be allocated in a non-discriminatory manner and that the actual priority allocation was discriminatory in nature. Any arguments that this discrimination could be objectively justified due to legitimate expectations were rejected on the grounds that Article 24 provided a specific mechanism for dealing with such issues. No such application had been made to cover the priority allocation and therefore no discriminatory allocation could be accepted. As the second electricity Directive contained no equivalent provision to Article 24 on stranded costs, it was then too late to make such an application. A number of additional arguments, linked to legal certainty and legitimate expectations were also rejected by the Court, noting in particular in paragraph 78 of its judgement that the Community institutions had always been clear that they considered that liberalisation was an ongoing process which had not necessarily been completed by the first Directive. It concluded: “It cannot therefore be argued that the Community 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 electricity until the expiry of the international contracts which had been entered into.”

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The Court’s conclusion that priority capacity reservations are not acceptable would still seem to be valid even though the stranded costs provision of Article 24 is no longer part of the electricity Directive. To the extent that electricity suppli94

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ers can still make a claim that liberalisation has affected their acquired rights, for example in the case of new Member States, they could potentially ask for state aid to compensate. However, as in the early stages of electricity market liberalisation, such state aid would be subject to the European state aid rules. Following the Court judgement, the Commission services published an interpretative note.130 This note covers two principal issues (i) the future validity of priority allocation of transport capacities and (ii) the applicability of the judgement to gas contracts.

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In addition to these two issues, three further issues are considered below: (iii) Does the judgement also apply to interconnectors located at the EU’s border (and notably Switzerland)? (iv) Could a Member State defend priority capacity rights on the basis of public service objectives? and (v) Can long-term capacity reservations be concluded following the judgement?

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(i)

The future validity of priority allocation of transport capacities.

The interpretative note of the Commission’s Services reaches a very clear conclusion on this issue:

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“As a consequence, the grant to an undertaking of preferential transmission or distribution capacities must be considered as being discriminatory and is precluded by Directive 2003/54/EC and Regulation (EC) No 1228/3003.”

As no further derogations can be made under the stranded cost provisions of the first Directive, such preferential allocations are therefore illegal and must be abandoned. As the Interpretative Note states at paragraph 7, this does not mean that long-term supply agreements are illegal (they need, however, to be considered under the EU competition rules),131 but they cannot result in the grant of priority capacity rights.

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In the case before the Court, there was in fact no formal capacity reservation contract. It could be argued that even if in parallel to supply contracts with the foreign suppliers, a back-to-back transmission agreement had been concluded between the sales arm of SEP and its transmission side, the Court would have arrived at the same conclusion. Otherwise, it would mean that the legal assess-

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130 Note on preferential access to transport network following the decision  C-17/03 of 7 June 2005 of the Court of Justice; SEC(2006) 547, 26.04.2006.. 131 See Article 37 (1) (l) of the electricity Directive and Article 41 (1) (l) of the gas Directive.

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ment of the capacity reservation would depend on the structure of the national electricity industry. If, for example, a separate transmission company had existed at the time of the contract, such a back-to-back transmission contract would have been concluded. In these cases, the situation differs from the case under discussion in so far as the discrimination took place in the past (when allocating the long-term capacities) and not in the present (when formalizing the implicit capacities). However, the impact is in both cases similar, allowing formerly vertically integrated undertakings to benefit from advantageous capacity allocation.

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Following the Court judgement, the preferential capacity reservation of crossborder lines had to be abandoned. Subsequently, the Commission opened proceedings against eight Member States for maintaining such preferential arrangements. Following the reasoned opinions on 12 December 2006, this issue could be settled with the Member States concerned. (ii) Applicability of the judgement to gas contracts. There are many differences between the gas and electricity industries in this respect: –

long-term supply contracts with foreign companies form the basis of the gas business in almost all Member States;

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the transit rights accompanying these import contracts are fundamental for their execution. Indeed, the contracts are in most cases specifically import contracts, usually with an obligation to import the gas into the destination country and, in the past, with an obligation not to re-export132.

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Recital 42 of the third gas Directive states that “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.”

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Article 32 (3) of the third gas Directive states that “the provisions of this Directive shall not prevent the conclusion of long-term contracts in so far as they comply with Community competition rules.”

132 The re-export obligation turns this into a destination clause, objected to by the Commission.

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Notwithstanding these differences, the Interpretative Note of the Commission services concludes on this point that “in substance and spirit, the Court ruling is therefore applicable to the grant of preferential transmission and distribution capacities of natural gas.” The third gas Directive has reinforced this interpretation by deleting Article 32(1) of the second gas Directive which defined an exemption for transit contracts that were concluded and implemented under the terms of the first gas Directive. To conclude, in spite of the greater importance of long-term supply contracts in the gas industry, the existence of such long-term contracts does not justify the automatic grant of priority capacity rights to the gas companies concerned. Where the renewal of a capacity contract takes place in the event of congestion, the gas company concerned will therefore have to acquire the respective capacity on the basis of a non-discriminatory market-based mechanism. If capacity is scarce, this means that the gas supplier may well have to pay a higher price for the capacity than originally expected.

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(iii) Application of the judgement to interconnectors located at the EU’s border (and notably Switzerland). Article 2 (13) of the electricity Directive defines interconnectors as “equipment used to link electricity systems”. As the Directive covers the whole of the Community territory, there seems to be no reason why the judgement should not also apply to capacities allocated by EU regulatory authorities (or rather TSOs subject to their regulatory oversight) on interconnectors with non-EU countries, such as Switzerland.133 With respect to the part of the interconnector capacity located outside the Community territory, the Directive does not apply (notwithstanding the possibility to apply similar requirements, especially pursuant to intergovernmental agreements).

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It would, however, be clearly inefficient and distortive if a different approach were taken by neighbouring countries in so far as they are closely linked to the EU’s internal energy market. Any such discrepancies would give rise to important issues of reciprocity to be solved in bilateral agreements. The ongoing negotiations between the Community and Switzerland indeed address the issue of long-term capacity reservation on interconnectors.

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133 In view of the definition of interconnector in Article 2 (17) of the third gas Directive which makes reference to the borders of Member States, the application of the gas Directive at external borders of the EU remains a more complex issue than in electricity.

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(iv) Could a Member State defend priority capacity rights on the basis of public service objectives?

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Article 3(2) of the gas and electricity Directives essentially permit a Member State to derogate from some of the key requirements of the Directives where (i) this is absolutely necessary to achieve a legitimate public service requirement and (ii) the measures in question are the least distortive of trade and competition reasonably necessary to achieve the objectives in question. Article 3(2) lists the public service objectives which might be relied upon in this context, which includes both “security, including security of supply”, regularity” and “quality and price of supplies”. Moreover, the third electricity and gas Directives have added the objective of “environmental protection, including energy efficiency, energy from renewable sources and climate protection.”

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Against this background, it appears not impossible that public service obligations may relate to capacity allocation. However, Article 3 (10) of the gas Directive provides only for a single provision (Article 4 on Authorisation Procedures) from which Member States may deviate insofar as its application would obstruct obligations imposed in the general economic interest. Contrary to Article 3 (14) of the electricity Directive, a deviation from the obligations under Article 32 on third-party access is thus not foreseen in the gas Directive. Thus, at least for the gas Directive, public service obligations do not allow for the allocation of priority capacity rights.

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(v) Can long-term capacity reservations be concluded following the judgement? The judgement does not prohibit such reservation agreements; only those that result in discrimination. Thus, if, following the introduction of competition, the transmission system operator offers capacity on a long-term basis, but in a nondiscriminatory manner (i.e. through an auction approved by the national regulator) the resultant priority will, subject to competition policy requirements, be valid.

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On 22  May 2008, the European Court of Justice issued a preliminary ruling stressing the crucial importance of the principle of third-party access in the electricity Directive.135 134 Case C-439/06 Citiworks [2008]. 135 Article 20(1) in the second electricity Directive, corresponding to Article 32(1) in the third Directive.

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The case referred to the Court of Justice for preliminary ruling concerned a provision in the German Energy Law (‘Energiewirtschaftsgesetz’) which transposed the second electricity Directive into national law. The law included a provision allowing regulatory authorities to classify local electricity networks as a ‘site network’ (‘Objektnetz’) and thus to exempt them from the application of large parts of the law, in particular from the obligation on operators of such site networks to grant anyone access to their system without discrimination. Paragraph 110 (1) of the German Energy Law provides for three alternative definitions of ‘site networks’. The definition most commonly applied and the one contested in the present case laid down the conditions under which the status of “site network” could be obtained, notably “ located on a geographically con‑ nected operation zone and predominantly serving to supply the energy needs of the undertaking itself or of connected undertakings”.

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The Court case was triggered by the German electricity supplier Citiworks. Since 2004, Citiworks supplied electricity to a customer on the Leipzig/Halle airport. The airport maintains its own electricity network with which it meets its own electricity requirements and those of 93 other undertakings established on the airport site. During 2004, the system supplied in total approximately 22,200 MWh, of which 85.4% was used by the airport company itself. The airport applied to be classified as a site network. By decision of 12 July 2006, the regulatory authority granted the airport’s application. Citiworks, which would be henceforth unable to supply its customer in the airport because it no longer had the right to third party access to the network, appealed against that finding to a national court which referred the following question to the Court of Justice for preliminary ruling:

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“Is the first point of Paragraph  110 (1) of the [German Energy Law] compatible with Article 20(1) of Directive 2003/54/EC … inasmuch as, in accordance with the conditions laid down in the first point of Paragraph 110 (1) …, a so-called ‘operation network’ is exempted from the general provisions on system access … even where such system access would not impose an unreasonable burden?”

The Court of Justice, firstly, found that the airport electricity network in question could indeed be classified as an electricity distribution system within the meaning of the electricity Directive. The Directive did not intend to exclude particular transmission or distribution systems from the scope of its application by reason of their size or consumption of electricity. Rather, the purpose of transporting electricity to supply customers was the decisive criterion.

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Secondly, the Court went on to investigate under which circumstances such a distribution system could possibly be exempted from regulated third party access or, in other words, how a provision such as the first point of Paragraph 110 (1) of the German Energy Law could come within the scope of any exemptions or derogations of the electricity Directive.

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While the Directive regards lack of necessary capacity as a potentially valid reason for a network operator to refuse third party access, the provision in question could not be justified on such grounds because it was general in nature and not based on a case-by-case assessment. This view was in fact already expressed by the national Court which, in the preliminary ruling question, described the exemption as applying ‘even where such system access would not impose an unreasonable burden’. The fact that Citiworks already supplied a customer on the airport, moreover, seemed to show that there was no technical incapacity of the system to allow for third party access.

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The Court also investigated whether the general exemption for site networks could be justified by public service requirements on the network operators according to Article 3(8) of the Directive or under the exemption for ‘small isolated systems’.136 The Court, however, concluded that none of the two provisions were applicable in the present case.

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The Court of Justice finally concluded that the first point of Paragraph 110 (1) of the German Energy Law on site networks was incompatible with the third party access rule of the electricity Directive. The widespread use of such derogations in Germany exempting hundreds of local distribution networks from the fundamental principle of third-party access became therefore illegal. The Court’s judgement in this case gives rise to some comments. Firstly, the Court has stressed the utmost importance of the third party access principle in the energy legislation. This core principle may be restricted only in very few, clearly defined circumstances. Any derogation for distribution systems such as the limited derogation for ‘closed distribution systems’ in Article 28 of the third electricity Directive thus has to preserve the general principle of third-party access. Secondly, the Court defended a broad definition of what constitutes a relevant electricity system. A small size or electricity consumption of a network can as such not limit the application of the Directive. For regulatory authorities this raises the question how to deal with the regulation of small networks with-

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136 The derogations for small isolated systems are included in Article 26(1) of the second and Article 44(1) of the third electricity Directive.

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out imposing a disproportionate burden on the operators of such networks. The limited derogation for ‘closed distribution systems’ may at least give part of the answer to this question.

6.3 Sabatauskas137 On 9 October 2008, the European Court of Justice issued a preliminary ruling which further clarified the fundamental principle of third-party access. The case referred to the Court of Justice for preliminary ruling concerned the Lithuanian Law on Electricity which transposed the second electricity Directive into national law. The law included a provision allowing customers to connect to the transmission system only if the local DSO refused to grant access to its distribution system for technical or operational reasons. The aim of the provision was to prevent large consumers from directly connecting to the transmission grid, thus avoiding distribution fees. The Lithuanian Law stipulates as follows: “A customer’s equipment may be connected to a transmission network only in cases where the distribution network operator refuses, on account of established technical or operating requirements, to connect to the distribution network the equipment of the customer which is on the territory indicated in the distribution network operator’s licence.”

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Some Lithuanian Members of Parliament including Mr Sabatauskas brought a complaint before a national court claiming that this provision failed to ensure the customers’ freedom to choose between having a connection with a transmission or distribution system for the purpose of ensuring supply. They argued that Article 20 of the second Directive on third-party access (corresponding to Article 32 in the third Directive) did not expressly restrict the ability of an electricity customer to connect its equipment to a transmission system nor did it oblige it to connect only to a distribution system. As a background, it should be noted that in Lithuania six industrial undertakings were connected directly to transmission systems. These connections dated from the Soviet era when no distinction was made between the generation, transmission and distribution of electricity.

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The national court referred the following question to the Court of Justice for preliminary ruling (par. 20):

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137 Case C-239/07 Sabatauskas [2008].

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The Court of Justice found that the electricity Directive distinguishes between the terms ‘access’ and ‘connection’. The term ‘access’ is linked to the supply of electricity, including inter alia the quality, regularity and cost of the service and is often used in the context of guaranteeing non‑discrimi­natory tariffs. In contrast, the term ‘connection’ is used, in particular, in a technical context and relates to physical connection to the system. Thus, the Court concluded that ‘access’ to the system includes the right to use electricity systems in general while ‘connection’ corresponds to physical connection to the system. Article  20 of the Directive imposes obligations on Member States only in respect of access to the system and not in respect of connection thereto. The customers’ freedom to choose supplier as required by the Directive can be guaranteed whether the supplier connects them to a transmission or to a distribution system.

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The Court of Justice deducted from the above that the decision on the physical connection to the system is in principle a matter of subsidiarity as long as the general access to the system is ensured. Member States thus retain a certain degree of flexibility in steering customers towards one or another type of system, provided, however, that they do so for non-discriminatory reasons and in accordance with objective considerations. In other words, customers 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. The criteria chosen by Member States to connect to either system, however, need to be objective and non-discriminatory (and respect the powers of the regulatory authority under Artilce 37 (6) a) of the Directive).

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The Court of Justice concluded that the third party access principle of the electricity Directive is to be interpreted as defining the Member States obligations only in respect of the access and not the connection of third parties to the electricity transmission and distribution systems. It does not therefore lay down that the system of network access that the Member States are required to establish must allow an eligible customer to choose, at its discretion, the type of system to which it wishes to connect.

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While the Court’s reasoning is essentially based on a strict interpretation of the wording of the electricity Directive, the outcome is also reasonable from an economic point of view. Firstly, the electricity networks, whether transmission or distribution, are natural monopolies in their respective areas and it would be illogical to attempt to introduce competition between them. The efficient operation and tariff setting of these networks is a matter for the national regulatory authorities and cannot be ensured by network competition. Secondly, allowing large industrial customers to connect directly to the transmission network could undermine the financing of the distribution network and would, in practice, leave a larger financial burden on households and smaller industrial customers which could not possibly connect to the transmission network. In the Court proceedings, the Lithuanian Government had brought forward that the price of electricity could rise by between 10% and 30% if only small customers were to pay for the distribution network. This type of behaviour on the part of large customers could be described as “cherry-picking” or as “snowball effect” if imitated by other large customers. The regulatory and economic risk of such behaviour is also apparent in exemptions for “direct lines” and will be discussed further in this context.

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6.4 Swedish Interconnectors138 On 14 April 2010 the European Commission has adopted a decision regarding third party access to interconnectors based on a potential violation of Article 102 of the Treaty on the Functioning of the European Union (TFEU) which prohibits the abuse of a dominant position which may affect trade within the EU’s Single Market and prevent or restrict competition. Such a decision does not reach a conclusion on whether EU antitrust rules have been infringed but legally binds the company to respect the commitments.

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Based on Article 9 of the EU’s Antitrust Regulation (Regulation 1/2003) allowing the Commission to conclude antitrust proceedings by accepting commitments offered by a company, it rendered legally binding commitments offered by the Swedish TSO, Svenska Kraftnät (SvK) in order to increase trade in electricity within Sweden and between Sweden and neighbouring countries. The aim of the decision was to ensure a fair treatment of network users and better allocation of resources contributing ultimately, to lower prices for customers and end consumers. SvK offered the commitments as the European Commission had expressed concerns that SvK may be abusing its dominant market position in the Swedish electricity transmission market by reducing the amount of

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138 Case 39,351 – Swedish Interconnectors (2010).

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export capacity on the interconnectors between Sweden and neighbouring EU and EEA Member States, thus, by discriminating between domestic and export electricity transmission services and segmenting the Single Market. (Article 102 TFEU). SvK committed to no longer limit cross-border trading, instead allowing electricity flows to adjust to transmission capacity through market prices.

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As a further commitment, SvK offered to split the Swedish electricity market into several bidding zones. Defining the bidding zones based on structural congestion within the Swedish electricity system would allow electricity trading to adjust to effectively available transmission capacity through market prices, rather than through arbitrary curtailment measures at the bidding zone borders. In addition, the configuration of the zones would be flexible as they could adapt quickly to changes in future electricity flow patterns in the Swedish transmission system. With these measures, SvK is managing congestion in the Swedish transmission system without limiting trading capacity on interconnectors.

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There was one exception to this system, i.e. congestion in the West-Coast-Corridor, due to specific technical constraints in the area concerned limiting the possibility of electricity trading with southern Norway and Denmark. SvK offered to alleviate congestion in the West-Coast-Corridor by building and operating a new transmission line in the area by 30 November 2011, at the latest. Transmission lines are currently still in the building phase in this area and planned to be operational in 2023.139

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This decision was a first of its kind and of high importance about the interpretation of third-party access to cross-zonal capacities, definition of bidding zones and measures needed to alleviate internal structural congestions in a fair and non-discriminatory way. The European Commission raised similar concerns in its second and recent case on the German Danish interconnector as described below.

6.5 DE/DK Interconnector140 3.249

The European Commission opened a formal investigation on 19 March 2018 against TenneT TSO GmbH (TenneT) which is the largest of the four electricity TSOs in Germany. The Commission was concerned that TenneT infringed EU antitrust rules by systematically limiting cross-zonal capacity at the electricity interconnector between Western Denmark and Germany. The European 139 See in particular the Skogssäter – Stenkullen project by SvK. 140 Case AT.40461 – DE/DK Interconnector [2018].

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Commission had concerns that TenneT discriminated against non-German electricity producers as this conduct prevented the export of cheap electricity from the Nordic countries, which is mainly produced from renewable energy sources (mostly wind and hydro) into Germany. This led to less competition between electricity producers on the German wholesale market and therefore higher electricity prices. Following the opening of the investigation and based on the process of article 9 of Regulation 1/2003 on 7 December 2018 the European Commission adopted a decision rendering legally binding commitments offered by TenneT to significantly increase cross-border flows of electricity between Denmark and Germany.

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The commitments, which will remain in force for nine years, included the following:

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–

TenneT offered to make available to the market the maximum capacity respecting the safe operation of the interconnector; and

–

in any case, to offer a minimum hourly capacity of 1300 megawatts on the interconnector which is approximately 75% of its technical capacity. TenneT had six months to implement this minimum guaranteed hourly capacity.

The commitments also included a timeline for increasing the offered capacities following plans for extension of the interconnector between Western Denmark and Germany in 2020 and 2022.141 The increased capacity will reach a guaranteed hourly capacity of 2,625 megawatts by 1 January 2026. Only under strict conditions and as a last resort solution, TenneT can reduce the capacity offered below the minimum guaranteed level.

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The investigation into TenneT complements the Commission’s efforts to address the systematic limitation of cross border capacity on electricity interconnectors across the EU. The Commission has proposed to update the Electricity Regulation as part of the ‘Clean Energy for All Europeans’ package, which is currently being discussed by the EU’s Council of Ministers and the European Parliament. Among other things, the proposal aims to improve EU rules on cross-border capacity in order to maximise the capacity made available and to ensure that TSOs do not unduly limit the volume of cross-border capacity.

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141 The East Coast Line and the West Coast Line projects respectively.

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This decision, similarly to the Swedish interconnector’s case, impose binding obligations on TenneT to increase capacity on the electricity interconnector between Denmark and Germany to allow more electricity producers to access the German wholesale market. On top of competition law concerns, this case had a relevance from the internal energy market perspective. Already Regulation 714/2009 and the network codes in place, in particular CACM Regulation, required that TSOs calculate cross-zonal capacities in a coordinated manner and offer to the market maximum available capacities. These rules allowed curtailments only as a last resort solution and only if other market-based solutions were not available. Therefore, such behaviour, had it been confirmed, would be contrary to the creation of an integrated Energy Union where energy flows freely across borders with no restrictions to competition and the best possible use of resources.

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This decision is, hence, fully in line with the goals of creating a more competitive and integrated European energy market in which participation is taking place without discrimination between cross-zonal trading and trading within a bidding zone. It is also in line with the new Electricity Regulation which contains concrete thresholds for TSOs to offer 75% of the cross-zonal capacities to the market under certain conditions while deviations therefrom are allowed only under specific reasons and with regulatory supervision.

7.

Direct lines

7.1 Direct lines electricity 3.256

The electricity and gas Directives provide for the possibility for an electricity or gas supply company or, in the case of very large consumers, an eligible customer, to construct a direct line. The relevant provisions are laid down in Article 7 of electricity Directive and Article 38 (gas).

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The text differs slightly between electricity and gas, and they will therefore be considered separately.

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A “direct line” in electricity Directive is defined as either an electricity line linking an isolated generation site with an isolated customer or an electricity line linking a producer and an electricity supply undertaking to supply directly their own premises, subsidiaries and customers.

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Article 7 of the electricity Directive defines the rights and obligations of Member States as follows:

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Article 7 of Electricity Directive Direct lines “1. Member States shall take the measures necessary to enable: (a) all producers and electricity supply undertakings established within their territory to supply their own premises, subsidiaries and customers through a direct line, without being subject to disproportionate administrative procedures or costs; (b) all customers within their territory, individually or jointly, to be supplied through a direct line by producers and electricity supply undertakings. 2. Member States shall lay down the criteria for the grant of authorisations for the construction of direct lines in their territory. Those criteria shall be objective and non-discriminatory. 3. The possibility of supplying electricity through a direct line as referred to in paragraph 1 of this Article shall not affect the possibility of contracting electricity in accordance with Article 6. 4. Member States may issue authorisations to construct a direct line, subject either to the refusal of system access on the basis, as appropriate, of Article 6 or to the opening of a dispute settlement procedure under Article 60. 5. Member States may refuse to authorise a direct line if the granting of such an authorisation would obstruct the application of the provisions on public service obligations in Article 9. Duly substantiated reasons shall be given for such a refusal.”

Article 7(1) is rather self-explanatory. It establishes the principle that any party may be supplied by a direct line. The remainder of the Article goes on, however, to qualify this principle. Not many changes took place on this text with the new Electricity Directive. The small adaptations refer rather to the reflection of the principle that persons affected undertakings are not subject to disproportionate administrative procedures and costs as well as the deletion of the work “eligible” as all customers are considered as eligible customers since 1 July 2007.142 142 Article 33(1)(c) of Directive 2009/72/EC.

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It is clear from Article  7 (2) that when implementing the Directive, Member States must ensure that the authorisation criteria relevant to the construction of a direct line (usually environmental planning rules) are laid down and published. It is not sufficient that a set of rules is drawn up only when an undertaking applies to build a direct line; they must be established and transparent when the Directive becomes applicable.

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Article 7(3) makes it clear that the fact that a company constructs a direct line in no way prevents it from also having access to the main grid, under the normal third party access rules. This gives rise to the question whether the direct line should be considered to be part of the transmission or distribution network, and third-party access applied to it. Such lines would clearly constitute transmission or distribution lines; they are used for the transmission or distribution of electricity. The rules on third-party access (appointment of TSOs/DSOs, unbundling, third party access) apply to transmission and distribution systems. Articles 2(40) and 2(41) provide definitions for the terms “interconnected system” and “direct line”, but these definitions do not provide a clear answer to this question as the term “direct lines” are not defined as being part of the distribution or transmission system. However, given that the existence of a large number of direct lines could prejudice the effective functioning of the internal market if they were closed to third party access, a direct line should be viewed as a transmission or distribution system and thus open to third party access. Given the general importance of ensuring third party access to all parts of the electricity network, it is therefore necessary to interpret this Article in the light of the objectives and spirit of the Electricity Directive. Where a company constructs a direct electricity line it is submitted that it will therefore have to comply with the provisions of the Electricity Directive on TSOs and DSOs, unbundling and regulated third party access.

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Article  7(4) provides a major limitation to the right of undertakings to construct a direct line. Many tarification systems at transmission and distribution level involve cross-subsidisation from customers located in major population centres towards those located in remote areas. This occurs when postage stamp tariff systems are implemented where all customers are charged the same transmission fee irrespective of the cost they incur to the network company. This approach may be taken for a number of reasons: –

economic; it makes no sense to implement distance-related charges in an enmeshed electricity network;

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social; ensuring that the price of electricity is largely the same throughout the territory; and

–

to encourage the introduction of countrywide competition.

For these reasons a Member State may wish to discourage direct lines. If a large company or industrial site is situated close to a power station or a neighbouring country, it may well be cheaper to construct a direct line than to use the standard postage stamp transmission tariff. By building a direct line one can avoid participating in the cross subsidies inherent in such a tariff system. However, to permit the construction of the direct line in such circumstances would artificially benefit a small class of customers, those wishing to build a direct line, meaning that if the single tariff were to continue, the remaining customers would have to pay higher tariffs. This could lead to a snowball effect, forcing the country to abandon its postage stamp tariff policy. An alternative, less laudable and unacceptable, motivation for not wishing to permit the construction of direct lines is to protect a rather inefficient domestic transmission or distribution company.

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Article 7(4) permits Member States to refuse permission to construct a direct line unless the company wishing to build it has requested access to the main grid to transport the electricity for which it intends to construct the line and that access has been refused on the grounds of a lack of capacity. The fact that a company considers that the tariffs are too high or that it could save money by building the line is not relevant. This is particularly the case given the fact that since the entry into force of the second Directives tariffs or tariff methodologies must in any event be approved by the regulator. This provision should ensure that TSOs cannot charge ‘abusive’ tariff fees.

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According to Article 7(4), a Member State may also choose to grant permission to construct subject to the “opening of a dispute settlement procedure under Arti‑ cle 60”. The term dispute settlement procedure dates back to the first electricity and gas Directives when Member States were not yet obliged to establish regulatory authorities.143 Since the second Directives, system users have a real right to complain to the regulator regarding tariffs, conditions, etc. set by transmission or distribution companies. Thus, the term dispute settlement procedure now refers to Article 360 (2) of the electricity Directive and 41 (11) of the gas Directive i.e. a complaint made to the regulatory authority which acts as “dispute settlement” authority.

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143 See Article 23 (3), first electricity Directive.

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It is interesting that Member States may make the grant of authorisation to construct subject to the “opening” of a dispute settlement procedure, and not the closure of the procedure with a finding in favour of the complainant. Nonetheless, the wording is clear and unequivocal, and if Member States choose this approach, it will suffice to lodge a well-founded complaint with the regulatory authority regarding tariffs or access conditions, and the right to build a direct line must then be granted. However, it is unlikely that Member States wishing to limit the construction of direct lines will go down this route; they will rather make construction subject to a refusal of system access due to lack of capacity. Article 34 (4) is clear that Member States may choose between these two options.

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Where Member States chooses the option of granting permission to build a direct line subject to the existence of a prior refusal of network access, the question arises whether they may also limit an authorisation to construct to cases where the transmission or distribution system refuses to remedy the capacity constraint within a reasonable period.144 Whilst this would not be an ­unreasonable extension of the possibilities given to Member States by Article 7, the text of the Directive makes no provision for such a limitation. Thus, it is not open to a Member State to do so, unless it relies on Article 7 (5).

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Article 7 (5) extends the possibility for Member States to refuse the authorisation to construct a new direct line to reasons connected to public service tasks, i.e. “security, including security of supply, regularity, quality and price of supplies and environmental protection, including energy efficiency, energy from renewable sources and climate protection.” It can be argued that the underlying reason for refusing an authorisation for a direct line on the grounds of a public service is similar to the more general reasoning mentioned above, namely that the extensive authorisation of direct lines would undermine the general network tariffs for those customers remaining inside the postage stamp system. However, this paragraph could be used to reinforce the possibility to refuse permission to construct a direct line unless the TSO/DSO refuses to resolve capacity constraints in a reasonable time, and in a manner accepted by the regulatory authority. In any event, any such limitation must be notified to the Commission which will determine whether the approach taken is justified i.e. that it is the least restrictive approach of trade and competition reasonably necessary to achieve the legitimate objectives in question.

144 For example, according to a timetable considered reasonable by the regulatory authority.

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It remains to be seen whether the extended justification for defining public service obligations in Article 9(2) to ‘environmental protection’ will have an indirect impact on the authorisation procedure for direct lines in so far as it adds another potential reason to refuse such authorisation. For the time being, it would seem that Article 7(5) adds in practice little to the preceding paragraphs, which already provide considerable room for manoeuvre for Member States to limit the construction of direct lines.

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7.2 Direct lines gas 3.271

With respect to gas, Article 38 states: Article 38 gas “1. Member States shall take the necessary measures to enable: (a) natural gas undertakings established within their territory to supply the eligible customers through a direct line; (b) any such eligible customer within their territory to be supplied through a direct line by natural gas undertakings. 2. In circumstances where an authorisation (e.g. licence, permission, concession, consent or approval) is required for the construction or operation of direct lines, the Member States or any competent authority they designate shall lay down the criteria for the grant of authorisations for the construction or operation of such lines in their territory. These criteria shall be objective, transparent and non-discriminatory. 3. Member States may make authorisations to construct a direct line subject either to the refusal of system access on the basis of Article 35 or to the opening of a dispute settlement procedure under Article 41.”

This may be interpreted in the same manner as with respect to electricity, subject to the qualification that this Article omits the text contained in: –

Article 34 (3) of the electricity Directive on the right to third party access even when a direct line is constructed, and

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Article 34 (5) of the electricity Directive on the possibility to refuse the construction of a direct line on public service grounds.

This is probably a reflection of the fact that it is more difficult to find valid arguments in favour of limiting direct lines for gas than electricity, at least at transmission level. In most cases, tariff mechanisms for gas are not fully postage stamp in nature and the main legitimate reason for refusing permission to construct direct lines is therefore less evident for gas than electricity. However, at local or distribution level, tariff systems may contain significant postage stamp elements, which, depending on the factual situation, may also exceptionally be present at national level (in the case of very small Member States). In certain circumstances, therefore, a Member State may wish to limit the right to build direct lines. It might also be considered necessary to do so to protect the “unity of the network”, because the proliferation of direct lines would, over time, make third party access and the development of effective competition more difficult and complicated. In any event, Member States retain the right to limit authorisation to construct a direct line to situations where there is a refusal of access due to lack of capacity, or, if a Member State chooses this option, a valid complaint regarding access conditions is lodged with the regulator. Unlike with respect to electricity, however, because the gas Directive omits the text of Article  34(5) of the electricity Directive, there are no grounds for extending the reasons for a refusal for authorisation to cover cases where a TSOs or DSOs refuses grid access because of congestion, but agrees to carry out the necessary extension of capacity. Thus, the omission of the text of Article 34(5) of the electricity Directive with respect to gas does have a substantive effect. However, the standard provisions of the gas Directive remain applicable when a direct line is constructed, even in the absence of explicit provisions to this effect. Indeed, as set out above, third party access should also be applicable to the direct line as well.

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Chapter 4 Unbundling of Transmission System Operators145

1.

Introduction

1.1 The need for unbundling Without non‑discriminatory access to the electricity and gas transmission and distribution networks, competition in these sectors is impossible. In Europe, many of these networks are, or have historically been, owned by vertically integrated companies responsible for generation, transmission, distribution and supply. Such vertically integrated companies have the incentive, as well as the means, to discriminate against their competitors regarding access to their transmission and/or distribution networks. This is exacerbated by the fact that electricity and gas transmission infrastructure is a so-called essential facility, i.e., it is indispensable for the provision of electricity and gas and can only be duplicated at great cost.

4.1

A vertically integrated undertaking There are various methods that can be used to prevent competitors from obtaining fair access to these networks. Obvious discriminatory methods aside, such companies may overtly refuse to give access to networks or charge higher prices to competitors than to their own vertically integrated company for equivalent services, using more subtle means. Examples of this include: –

manipulating tariff categories so that while the same tariffs appear to be applied to all parties, in practice, the vertically integrated company’s subsidiaries pay cheaper tariffs than its competitors;

145 We are grateful to Charles Clarke for his research assistance.

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preferential allocation of scarce capacity to the vertically integrated company (e.g., on a “first‑come‑first‑served” basis). The vertically integrated company will have prior warning and will therefore always be the first applicant;

–

making it difficult for final customers to switch from a vertically integrated supplier, for example, by implementing onerous or expensive procedures, such as an obligation to install a new meter, or to complete timeconsuming and burdensome administrative procedures; and

–

manipulating capacity availability so that lines required by competitors are “congested”.

4.3

In addition, a vertically integrated company might cross‑subsidise its generation and supply activities by using profits from its transmission and distribution activities. Demand elasticity for access to transmission and distribution grids is very low, particularly in the short to medium term, meaning that transmission and distribution companies are able to charge prices for network access which exceed costs by a large margin, without significantly reducing the demand for network (i.e., transmission and distribution) services. As the group to which the vertically integrated network business belongs receives the profits from network fees, high access tariffs combined with lower sales prices would not impact the group’s profitability, but would deter entry by new competitors.

4.4

Finally, the existence of vertically integrated companies also gives rise to discrimination in relation to the provision of commercially important information. First, network operators hold information of considerable commercial importance to electricity generators and sellers, notably information regarding maintenance programmes for major generation plants and load forecasts, expected levels of congestion, and the timing of congestion alleviating measures. If the vertically integrated company were to make such information available only to its own generation and sales departments, or provide it to them earlier than to competitors, this would provide its group companies with a clear advantage. Second, a clear risk exists that a network company will misuse commercial information relating to its competitors, for example by informing its sales department when a retail consumer notifies its intention to change supplier to a rival of its group company. This risk is particularly strong at the distribution level. The transmission or distribution operator may even require customers wishing to switch supplier to inform it of the details of the new contract, allowing its own sales department to selectively offer a better deal to the customer. 114

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The various opportunities which a vertically integrated company has to discriminate against competitors, combined with clear economic incentives to do so, has led to an understanding in Europe that unless generation and supply activities are separated from so-called network activities (i.e., transmission and distribution), effective competition will not emerge. Unbundling aside, other measures exist to limit opportunities for discrimination, notably regulated third party network access and the imposition of fines on network companies found guilty of discrimination (either through general competition law or under national sector‑specific powers given to regulators). However, given the incentives to discriminate, and the presence of numerous subtle methods for doing so are very difficult to detect and quasi-impossible to prove, such preventative measures have proved to be inadequate at ensuring fair network access.146

4.5

1.2 Unbundling There are four types of unbundling which have been introduced over the course of the three energy packages: 1.

accounting unbundling, which requires separate accounts for generation, transmission and distribution activities;

2.

management (functional) unbundling, which requires ensuring that (a) organisation and decision-making in relation to transmission is independent from other activities unrelated to transmission (i.e., generation/ supply, and distribution); and (b) organisation and decision-making in relation to distribution is independent from other activities unrelated to distribution (i.e., generation/supply, and transmission);

3.

legal unbundling, which requires that generation/supply, transmission and distribution are carried out in separate legal entities; and

4.

ownership unbundling, which requires that entities involved with generation/supply on the one hand, and transmission on the other hand have separate owners.

146 For example, the Commission’s Final Report on the Sector Inquiry found that one of the German gas incumbents offered a gas delivery contract for a new power plant requiring substantial import capacity to be shipped through the network of its associated network company. New entrants were not granted firm capacity on an almost identical pipeline path, although they had requested substantially lower amounts of capacity than the ones granted to the power plant. The Final Report noted that such discrimination was difficult to detect (Communication from the Commission (COM(2006) 851 final): Inquiry pursuant to Article 17 of Regulation (EC) No 1/2003 into the European gas and electricity sectors (Final Report) and its Technical Annex SEC(2006) 1724, para. 168).

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1.3 The first and second electricity and gas directives 4.7

Both the first and second Electricity and Gas Directives recognised the above issues in relation to vertically integrated undertakings and as a result, mandated differing levels of unbundling. In the first Directives of 1996 (electricity)147 and 1998 (gas),148 the unbundling requirements were limited: only accounting and management unbundling was required for electricity and only accounting unbundling was mandated for gas. With respect to gas, there was not even an obligation to nominate an identifiable transmission system operator (“TSO”), meaning that a TSO could remain fully vertically integrated with its supply business without any functional restraints. Furthermore, the text of the first Electricity Directive was very vague in relation to management unbundling, leaving open a wide scope for differing interpretations.149 Further, it applied only to transmission, and not to distribution.

4.8

It soon became clear, following the implementation of these Directives, that they were unable to achieve the unbundling goals it was hoped that they would achieve, both at transmission and distribution level.150 The provisions were transposed into national law incompletely, incorrectly and even not at all. Even when the provisions were transposed “as intended”, this did not mean that network operators complied with them, and in any event, the provisions failed to address the fundamental conflict of interest which remained.

4.9

The first Electricity Directive was intended to cultivate price transparency, combined with measures to facilitate electricity transits between high-voltage grids across Member States. The limited effect of the accounting unbundling duty and the lack of an obligation to establish national electricity regulators meant that little progress was made towards the goal of competitive markets. On the contrary, network tariffs increased and discrimination was commonplace. Market distortion resulted from the different results achieved by each Member States in opening the electricity market to competition. In the 1990s the European electricity market remained heavily dominated by national and regional verti147 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, OJ L27, 30.1.1997, pp. 20-29. 148 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, OJ L 204, 21.7.1998, pp. 1-12. 149 Article 7(6), of the Electricity Directive 96/92 provided only the following requirement regarding management unbundling: unless the transmission system is already independent from generation and distribution activities, the system operator shall be independent at least in management terms from the other activities not relating to the transmission system. 150 For example, the Sector Inquiry findings made clear that the unbundling provisions required by the Second Energy and Gas Directives were inadequate.

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cally integrated monopolies engaged in generation and supply. It was clear that Member States had made very few changes to the overall market structure. The European Commission (the “Commission”) monitored the development of competition and liberalisation through Benchmarking Reports.151 The conclusions of both the first and the second Benchmarking Reports (2001/2002) on the first Energy Package highlighted the ways in which the electricity and gas markets had failed to adequately liberalise in the different Member States, distorting competition and preventing new entry. The Benchmarking Reports also both found there was variation in power between companies within numerous Member States and that the ‘patchwork legislation’ was diminishing the development of a competitive market.152 Although Member States seemed to be implementing the Directives, there were many irregularities in implementation.153

4.10

The Commission’s 2001 proposals for a second package of measures (the “Second Energy Package”) put forward a much more robust approach to unbundling, providing legal, functional and accounting unbundling for TSOs and Distribution System Operators (“DSOs”). The Second Energy Package came into effect in 2003, and was designed to achieve full liberalisation of the European electricity154 and gas155 markets and introduced also a new Regulation on cross border exchanges in electricity.156 Although these proposals initially met with strong opposition, particularly from certain elements of the EU gas sector, and to a lesser extent electricity industry, in the end they made their way into the Second Energy Package.

4.11

151 https://ec.europa.eu/energy/data-analysis/market-analysis_en?redir=1#gas-and-electricity-market-reports. 152 Commission Staff Working Paper, Brussels, 3.12.2001, SEC (2001) 1957; First benchmarking report on the implementation of the internal electricity and gas market, pp. 9-12, 19. 153 EU Energy Infrastructure Policy Unintended Redistribution of Economic Opportunities?, Per Ove Eikeland Fridtjof Nansen Institute, Memo for CANES meeting, 09.11.2007, p. 1. 154 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, OJ L 176, 15.7.2003, p. 37 56 (the Second Electricity Directive). 155 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, OJ L 176, 15.7.2003, p. 57 78 (the Second Gas Directive , together with the Second Electricity Directive forming the Second Directives). 156 Regulation (EC) No 1228/2003 of the European Parliament and of the Council of 26 June 2003 on conditions for access to the network for cross-border exchanges in electricity, which was replaced by 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 (the Electricity Regulation ), which is discussed in Chapter 8.

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4.12

At the time of the Second Directives, there was already a general recognition that ownership unbundling (which involves obliging a vertically integrated company to sell its network business to third parties that are not active in the electricity or gas generation, production or sales businesses) would be the best way to prevent discrimination, minimise the need for regulation, and ensure that the network is operated in ways promoting a competitive market.157 At that time, however, the Commission could not, propose ownership unbundling because it would not have been acceptable to all or even a qualified majority of Member States. In addition, until at least all other options had been tried and demonstrated to be inadequate, such drastic measures would be legally questionable under the principles of subsidiarity and proportionality.158 When the proposals for the Second Directives were put forward, it could not be clearly established that the combination of accounting, legal and functional unbundling would be inadequate to achieve the desired objective. At that time it was therefore necessary to initially follow the more limited approach of legal and functional unbundling.

4.13

Nevertheless, this more limited approach subsequently proved to be inadequate, as barriers to competition remained. As a result, in 2005 the Commission launched a sector inquiry (“Sector Inquiry”) to identify the barriers which were preventing free competition in the electricity and gas markets.

1.4 The 2005 Sector Inquiry 4.14

The Sector Inquiry made the following observations: 1.

market concentration at the wholesale level in gas and electricity market remained at high, pre-liberalisation levels, which allowed the harmful exercise of market power;

2.

the current level of unbundling of network and supply interests resulted in negative results on market functioning and incentives to invest in networks, constituting an obstacle to new entry and a threat to security of supply;

157 ERGEG confirmed that full ownership unbundling was its preferred option. In addition, the European Parliament in its resolution of 10 July 2007 on prospects for the internal gas and electricity market referred to ownership unbundling at transmission level as 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 (OJ C 175 E, 10.7.2008, p. 206). 158 The subsidiarity principle means that measures taken at Community level must be limited to what is demonstrably necessary.

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4.

the lack of market integration caused by the lack of competitive constraint by cross-border sales and insufficient interconnector capacity;

5.

a lack of transparency in the market (i.e., a lack of reliable and timely information on the market);

6.

a lack of effective and transparent price formation;

7.

only limited competition at the downstream level, including that caused by the cumulative effect of long-term contracts; and

8.

problems with balancing markets, including the favouring of incumbents, the creation of obstacles for newcomers and the current size of balancing zones being too small (which led to increased costs and the protection of incumbents’ market power).

On this basis, the Sector Inquiry identified the following main deficiencies in the competitive structure of Union gas and electricity markets: 1.

structural and systemic conflicts of interest caused by insufficient unbundling of networks from competitive parts of the sector;

2.

persistent regulatory gaps, particularly for cross-border issues, and inconsistencies between the regulatory systems which were in place;

3.

a chronic lack of liquidity in both the electricity and gas wholesale markets; and

4.

a general lack of transparency in market operations.159

4.15

Following the 2005 Sector Inquiry, the Commission proposed new legislation in 2007 (the “Third Energy Package”) to strengthen competition in the electricity and gas markets, including introducing ownership unbundling.

4.16

In its 10 January 2007 Communication, the Commission acknowledged that progress had been made since 2004 in relation to the legal unbundling of TSOs, leading to an improvement in third party access to networks. A system based on the basic

4.17

159 Communication from the Commission: Inquiry pursuant to Article 17 of Regulation (EC) No 1/2003 into the European gas and electricity sectors (Final Report), Brussels, 10.1.2007, COM (2006) 851 final, paragraph 52.

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principles of non-discrimination had been established and, for the most part, tariff structures had been developed which encourage the development of competition.

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However, the Commission considered that both national reviews and its Sector Inquiry had provided evidence that legal and functional unbundling, as required by the Second Directives, remained a major source of both actual and potential distortion and could not ensure the development of a competitive European market for electricity and gas. The main problem identified by the Commission was that “ inherently, legal unbundling does not suppress the conflict of interest that stems from vertical integration, with the risk that networks are seen as strategic assets serving the commercial interest of the integrated entity, not the overall interest of network customers”.160

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The Commission highlighted three problems under the Second Energy Package which resulted from this conflict of interest.

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First, the legal and functional rules under the Second Directives were unable to eliminate the discrimination and access to information resulting from this conflict of interest.

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As regards discrimination, the Second Directives’ unbundling rules could not remove the incentives for TSOs to favour their affiliated companies over competing third parties and to (ab)use network assets to make competitors’ entry more difficult. The Commission also identified remaining discriminatory access conditions relating to the connection of new entrants’ power plants, unequal access to network capacity (hoarding), the maintenance of artificially small balancing zones, and failing to make unused capacities available.

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Non-discriminatory access to information also could not be guaranteed, as the information barriers put in place under the functional unbundling rules could not ensure that TSOs would not release market sensitive information to the generation or supply business of the integrated company.

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Second, the Commission highlighted the distortive effect of this conflict of interest on the TSO’s incentives to invest. Vertically integrated network operators have no incentive to develop the network for the overall benefit of the market, nor to facilitate new entry at generation or supply levels. On the contrary, they have an inherent interest in limiting new investment when it will benefit its competitors and bring new competition onto the incumbent’s “home market”. 160 DG Competition Report on energy sector inquiry, SEC(2006) 1724, 10 January 2007.

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Vertically integrated companies that are also historically national dominant suppliers are particularly disinclined to increase electricity interconnection capacity or gas import capacity with other Member States as this would increase competition in their home market. This had prevented progress from being made towards the creation of the single European internal energy market, and was also detrimental to security of supply within the European Union.

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The Commission concluded that this inherent conflict of interest was almost impossible to control through regulatory means, given that the independence of a TSO within an integrated company cannot be monitored without excessively burdensome and intrusive regulation. As a result of this, the Third Energy Package was introduced. This consisted of the following:

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–

the Regulation establishing an Agency for the Cooperation of Energy Regulators (ACER) (the “ACER Regulation”);161

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the Regulation on conditions for access to the network for cross-border exchanges in electricity (the “Electricity Regulation”);162

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the Regulation on conditions for access to the natural gas transmission networks (the “Gas Regulation”);163

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the Directive concerning common rules for the internal market in electricity (the “(Third) Electricity Directive”);164 and

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the Directive concerning common rules for the internal market in natural gas (the “(Third) Gas Directive”).165

The objective of the unbundling rules in Third Energy Package is the complete removal of any conflict of interest between generators/suppliers, on the one hand, and TSOs, on the other hand.

161 Regulation 713/2009 of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators. 162 Regulation 714/2009 of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity. 163 Regulation 715/2009 of 13 July 2009 on conditions for access to the natural gas transmission networks. 164 Directive 2009/72/EC of 13 July 2009 concerning common rules for the internal market in electricity. 165 Directive 2009/73/EC of 13 July 2009 concerning common rules for the internal market in natural gas. Together with the Electricity Directive, the Third Directives.

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1.5 The Third Energy Package: towards ownership unbundling 4.27

In September 2007, the Commission put forward a legislative proposal aimed at ensuring structural independence of network operation. This proposal contained the following three options on the unbundling of TSOs, which provide for different degrees of structural separation of network operations from production and supply activities: –

ownership unbundling;

–

the independent system operator (“ISO”); and

–

the independent transmission operator (“ITO”).166

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The first option of ownership unbundling was presented as the preferred option, i.e., a clear ownership separation between TSOs and any supply undertakings. In the Council this approach was viewed as being the most effective means of achieving effective unbundling and ensuring that network companies are not influenced by generation/supply interests, particularly with respect to investment decisions. This option also avoids excessively complex regulation and disproportionate administrative burdens.

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The second option is the independent system operator which enables vertically integrated companies to retain ownership of their network assets, while requiring the transmission network itself to be managed by an independent system operator – an undertaking or entity entirely separate from the vertically integrated company – which performs all of the functions of a network operator. The ISO approach was viewed as being less effective in addressing the disincentives to invest in networks, and as requiring more detailed, complex and prescriptive regulation in order to be effective.167 In the course of the legislative 166 With a fourth, ISO+ option which is discussed later. 167 Arguably, one of the reasons for the Commission presenting an alternative ISO proposal was to limit the risk of being accused of infringing 345 TFUE. This Article provides that : “The Treaties shall in no way prejudice the rules in Member States governing the system of property ownership”. It was argued, also at the time of the Second Energy Package, that this would prevent any proposal of the Commission of an exclusive system of ownership unbundling. It is submitted that ownership unbundling does not violate Article 345. This is because the objective underlying Article 345 is to guarantee that Member States wishing to retain certain industries within state ownership may continue to do so. Thus, even if it should wish to do so, the Commission cannot challenge the fact that in certain countries the dominant electricity/gas company remains in state ownership. It does not, however, prevent an obligation of ownership unbundling. The Third Energy Package provides clear rules allowing ownership unbundling to be implemented by public entities. In addition, the right to property is not

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process and as a result of the negotiations within the Council, a third option, the independent transmission operator, was added. This option allows TSOs to remain part of integrated undertakings while following detailed rules in relation to autonomy, independence and investment, which are very similar to the principles on functional and legal unbundling.168 In sum, the Third Electricity Directive and Gas Directives which were adopted on 3 September 2009 mandated structural separation between TSO activities, on the one hand, and activities relating to generation and supply, on the other hand. The ultimate aim of this type of unbundling is to avoid conflicts of interest, ensure that TSOs take independent decisions, and prevent discrimination towards all network users. These objections are relevant for both the daily operations of TSOs, as well as their strategic investment decisions.

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1.6 The Clean Energy Package The “Clean Energy Package for All Europeans” introduced in 2016 updated EU’s energy policy framework to facilitate the transition away from fossil fuel towards cleaner energy and to deliver on the EU’s Paris Agreement commitments for reducing greenhouse gas emissions. The package includes 8 legislative acts and a number of non legislative initiatives aimed at facilitating the clean energy transition.

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The Clean Energy Package updated the rules that govern the functioning of the internal electricity market and the transmission and distribution grids. Notably, the package introduces a new Electricity Directive, Directive (EU) 2019/944, and a new Electricity Regulation, Regulation (EU) 2019/943.

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Regarding the TSO main unbundling principles, the Clean Energy Package did not bring significant change to those provided in the Third Energy Package. The reference to “unbundling requirements” has been included in the first Article of the Directive 2019/944 which sets the common rules for the internal market in electricity.

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an absolute right: the exercise of this right may be restricted if those restrictions correspond to the objectives of general interest pursued by the EU and that the restrictions do not amount to a disproportionate interference with the rights which impairs the very substance of the rights guaranteed. Further, Article 345 does not exempt Member States systems of property ownership from the TFEU’s fundamental rules. 168 The Parliament voted for the deletion of the ISO option for gas and electricity. In the case of electricity, it has retained only ownership unbundling. In the case of gas, it has adopted an alternative unbundling option preserving vertical integration of the network similar to ITO but including a trustee which provides for stronger separation between the parent company and the TSO.

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However, some provisions have been amended as far as the tasks of the National Regulatory Authorities are concerned. Indeed, Article 40(2) provides for the possibility for the Member States to include in their national laws that TSO responsibilities may be assigned to a TSO other than the one which owns the transmission system.

1.7 Ownership unbundling under EU competition rules 4.35

It is important to understand the distinction between the sector specific rules (e.g., the unbundling rules) and the competition rules. The purpose of the sectorspecific rules is to ensure that a given sector is no longer based on a monopolylike structure. The competition rules alone cannot achieve this to a sufficient level. However, once the sector has undergone structural changes the competition rules alone should, in principle, be sufficient to regulate and control anticompetitive behavioural practices. In the meantime the competition rules serve to support the objectives behind the unbundling rules and can, through the commitments procedure, attain the same result as the ownership unbundling rules.

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For example, the Commission adopted two decisions, E.ON and RWE, during negotiations on the Third Energy Package, accepting commitments by these vertically integrated companies to sell parts of their networks to alleviate competition concerns under what is now Article 102 of the Treaty on the Functioning of the European Union (“TFEU”), which prohibits the abuse of a dominant market position.

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On 26 November 2008, the Commission obtained a commitment from E.ON that it would divest its extra-high voltage network in Germany. The Commission had concerns that E.ON had favoured its production affiliate for providing balancing services while passing the resulting costs on to final consumers, and preventing other power producers from exporting balancing energy into its transmission zone.169

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On 18 March 2009, the Commission accepted commitments from RWE that it would divest its entire Western German high-pressure gas transmission network. This was accepted as a remedy to the Commission’s concerns that RWE may have abused its dominant position to restrict its competitors’ access to its gas transmission network. The Commission’s suspicions related in particular to a possible refusal to supply gas transmission services to other companies.170 169 See IP/08/1774, Brussels, 26th November 2008. 170 See IP/09/410, Brussels, 18th March 2009.

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In April 2013, the Commission accepted commitments offered by the Czech electricity incumbent, ČEZ. The Commission had reached the preliminary view that ČEZ may have hindered entry into the Czech market for the generation and wholesale supply of electricity, in particular through pre-emptive reservations of transmission system network capacity which it did not need at that moment. ČEZ offered to divest 800-1000 MW of its generation capacity by selling one of its Czech generation assets, which would allow the purchaser to establish itself on the Czech market for the generation and wholesale supply of electricity. The commitments were accepted by the Commission, who held that the new entrant could then gradually develop its generation asset portfolio to compete effectively with ČEZ.

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On 4 February 2010, the Italian energy company ENI offered to divest its shares in three international transport pipelines: the TAG, the TENP and the Transitgas pipelines. The Commission accepted the remedies which responded to its concerns that ENI may have abused its dominant position on the Italian gas supply markets and the transport markets by refusing to grant competitors access to available capacity on the transport network (capacity hoarding), by granting access in an impractical manner (capacity degradation) and by strategically limiting investment (strategic underinvestment) in ENI’s international transmission pipeline system. This was found to be in breach of the EU antitrust rules on the abuse of a dominant market position.171

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In addition, the Commission has extracted behavioural commitments which strongly support the unbundling objectives. In October 2009, the Swedish TSO Svenska Kraftnät offered commitments to settle an antitrust procedure opened by the Commission. The Commission was concerned that Svenska Kraftnät might have breached the rules prohibiting the abuse of a dominant market position by limiting the export transmission capacity available on electricity interconnectors situated along Sweden’s borders. The objective was to relieve internal congestion on its network, which appeared to favour consumers in Sweden over those in other EU and EEA Member States by reserving domestically produced electricity for domestic consumption. To alleviate these concerns, Svenska Kraftnät offered to subdivide the Swedish transmission system into two or more bidding zones and to manage the congestion transmission system without limiting trading capacity on interconnectors. The Commission adopted a decision in April 2010 holding that apart from the amended implementation period for the bidding zones and clarification relating to the procedure applied in the interim period, the commitments were adequate to meet the above competition concerns.

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171 See MEMO/10/29, Brussels, 4th February 2010.

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Similarly, in 10 December 2015, the Commission extracted behavioural commitments from Bulgarian Energy Holding (BEH), the state owned Bulgarian energy incombant, suspected of having abused its dominant position. Following the market test, BEH committed to set up a power exchange with the assistance of an independent third party with expertise in the area, and transfer control of the ownership of the new power exchange to the Bulgarian Ministry of Finance. Furthermore, BEH committed to offer minimum stipulated volumes of electricity on the Bulgarian power exchange,for a period of five years, in order to ensure that sufficient volumes would be made available in the market.172

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On 17 April 2018, in the Greek Lignite Case,173 the Commission approved remedies submitted by Greece, which provide that the Public Power Corporation will divest certain lignite assets, removing the privileges created by special access rights granted to it. In fact, in its decision of March 2008, the Commission found that Greece had infringed competition rules by giving the state-owned electricity incumbent, PPC, privileged access rights to lignite, and called on Greece to propose measures to correct the anti-competitive effects of that infringement. Due to appeals at both the General Court and European Court of Justice, such corrective measures have not been implemented so far. In addition, to ensure that the purchaser of Divestment Business would have enough lignite supply to operate the units, Greece committed to carry out an appropriate procedure to grant mining, exploration and exploitation rights for part of certain lignite deposits that remained at the State’s disposal.

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On 7 December 2018, TenneT committed to make available to the market the maximum capacity compatible with the safe operation of the interconnector between Western Denmark and Germany. The entity committed also to guarantee a minimum hourly capacity of 1300 MW on the interconnector, around 75% of its technical capacity.

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On 24 May 2018, the Commission requested behavioural commitments from Gazprom, which significantly affect the way Gazprom operates in the european gas market. Notably, Gazprom cannot leverage its dominance in gas supply and act on any advantages concerning gas infrastructure.174

172 See AT.39767, Brussels, 10th December 2015. 173 See COMP/38700, Brussels, 15th February 2018. 174 See AT.39816, Brussels, 24th May 2018.

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The entity also committed to facilitate gas flows to and from Central and Eastern Europe that are still isolated from other Member Stated due to the lack of interconnectors. Last, the entity committed to remove any contractual restrictions placed on customers to re-sell gas cross-border.

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In a recent March 2020 case, the Commission has made commitments offered by Transgaz legally binding under EU antitrust rules.175 The company will make available to the market significant firm capacities for natural gas exports from Romania to neighbouring Member States, in particular Hungary and Bulgaria. The company committed also to ensure that its tariff proposals to the Romanian national energy regulator will not discriminate between export and domestic tariffs in order to avoid interconnection tariffs that would make exports commercially unviable. The commitments will remain in force until 31 December 2026.

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2.

The unbundling options under the Clean Energy Package

2.1 Background Under the Second Directives, the supplier and network operator could be part of the same vertically integrated undertaking. Some level of independence was allegedly guaranteed through the rules on legal, functional and accounting unbundling. The Clean Energy Package, in continuity with the Third Directives, aims to ensure the structural independence of network operation from supply and generation activities.

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The Clean Energy package has not repelled the Gas Regulation and the Third Gas Directive, which continue to apply. Therefore, references to those acts will be made regarding the gas sector, alongside the Clean Energy Package.

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175 See Case AT.40335, Brussels, 06.03.2020. Press release : https://ec.europa.eu/commission/presscorner/detail/en/ip_20_407

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2.2 Unbundling under the Clean Energy Package No control Only minority shareholding Generator/ Supplier

Dividends allowed No voting rights

TSO Network Ownership

No appointment of administrators

2.2.1 Ownership Unbundling 4.50

The above diagram shows how ownership unbundling should be implemented: the supplier and TSO owning the network are part of two different groups. Under ownership unbundling, the vertically integrated undertaking has the obligation to divest its controlling shares in the TSO, so that it does not maintain control over it nor has any influence over it. In practice this means that the same company cannot exercise control over a supply undertaking and, at the same time, have influence over a TSO or transmission system through majority shareholding, voting rights or the right to appoint administrators. This provision also applies vice versa, that is, control over a TSO precludes the possibility of influencing a supply undertaking.

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The vertically integrated undertaking can have minority shareholdings in a TSO and/or receive dividends. Some restrictions however apply to minority shareholding held by the same company in both a TSO and a supplier, to prevent influence being exercised.

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In order to promote investments, the network operator has to be the network owner. The requirement for the owner of the transmission system to “act as a transmission system operator” seems to imply that the company owning the TSO has to run the network itself and cannot lease it. Regulatory oversight is light under the ownership unbundling option as the TSO should have no incentive to discriminate, but rather have every incentive to invest: the more grid investment that it makes (that is accepted by the regulator as being covered by the regulated tariff ), the more profit it will make. An example of the limited regulatory oversight linked to ownership unbundling is that under this option 128

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national energy regulators are not granted the power, under EU law, to formally approve investment planning. The rules on ownership unbundling are set out in Article 43 of Directive 2019/944.176

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2.2.2 Independent System Operator (ISO) If a Member State does not wish to carry out ownership unbundling, it can unbundle under the ISO and ITO options provided that on entry into force of the Third Directives (i.e., on 3 September 2009), the company was vertically integrated. The following describes the ISO option.

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Vertically integrated undertaking Generator/Supplier

Legal & Functional Unbundling

Network leased to network operator

ISO

Network ownership

The above diagram shows how the ISO option should be implemented: the supplier and network can remain in the same group, but the network is leased to the network operator which has to be in a different group (Article 44 of Directive 2019/944). The ISO option therefore allows the vertically integrated company to retain ownership of its network assets, but requires that the transmission network itself is managed by an ISO which should be fully independent from supply interests and perform all the functions of a network operator. The owner must, however, still be legally and functionally unbundled from the vertically integrated undertaking.

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To avoid to the maximum extent possible any interference by the vertically integrated undertaking on investments, the ISO model also confers all decisionmaking powers relating to investments and network developments on the ISO. For this reason it is generally referred to as an “ISO+” model also in order to contrast it with a “pure” ISO model, (i.e., where the network owner has a major

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176 Article 9 of the Third Gas Directive sets out the same principles for gas.

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say on investments). In addition, to ensure that the operator remains and acts truly independently of the vertically integrated company, permanent regulatory monitoring must be put in place. For instance, under this option the national energy regulators have the power to formally approve investment planning.

2.2.3 Independent Transmission Operator (ITO) 4.57

If neither ownership unbundling nor the ISO model is chosen, Member States can choose the ITO model, provided that on 3 September 2009 the company was vertically integrated. Vertically integrated undertaking / Supplier Autonomy/Supervisory body /Independent Management / Compliance officer / Investments ITO Network ownership

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The above chart shows how the ITO option can be implemented: the supplier and network operator can remain in the same group but the network operator owns the network and must comply with rules ensuring its independence. The ITO option therefore allows for vertical integration to be preserved but provides strong rules aimed at safeguarding autonomy and the managerial independence of the transmission company, notably with the objective of ensuring that adequate investments are made. It is fundamentally different from the ISO option because network operation is not structurally unbundled from supply activities, and network ownership remains with the same entity as the operator. The individuals managing the company on a day-to-day basis are not directly appointed by the vertically integrated company and the majority of the management has to comply with strict independence rules, especially in terms of cooling off periods for being appointed (3 years) and returning to (4 years) the vertically integrated undertaking. Strict rules on the autonomy of the ITO are provided for and a Compliance Officer with significant standing, presence and role has to be appointed. More importantly this option provides to strong oversight over investments by the national energy regulator aimed at ensuring that the absence of structural separation and the possible remaining conflict of interest does not succeed in distorting investments. 130

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A comparison of the ISO and ITO tables above show that the ITO option is very similar to legal and functional unbundling. This is not surprising as by permitting vertical integration, the ITO model falls short of producing structural unbundling, which is achieved by ownership unbundling and the use of an ISO. As a result, given the lack of effective unbundling achieved under the Second Energy Package, which relied on legal and accounting unbundling, it may be argued that the ITO option does not succeed in achieving effective unbundling and guaranteeing independence from supply interests.

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A 2014 Commission Report on the ITO model concluded that it was too early to draw definite conclusions on whether the ITO model has led to effective unbundling and the actual independence of the ITOs in practice. It highlighted that compliance checks are still ongoing to ensure the correct implementation of the existing unbundling requirements under the Third Directives into Member States’ national law. A majority of network users responded that most requirements related to the ITO model seem to work in practice and are usually sufficient for ensuring effective separation of the transmission business from generation and supply activities in the day-to-day business.

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An important test will be whether the vertically integrated undertaking is able to legally consolidate an ITO’s accounts. Under accountancy rules, the concept of consolidation of accounts is very similar to the concept of control: logically a company can only consolidate the results of a company if it can have a significant influence over its policy. Consolidation of accounts therefore means that the vertically integrated undertaking can influence the activity of its consolidated subsidiaries and favourise its own overall commercial interests. This is precisely what effective unbundling aims at preventing in relation to the interaction between production and supply interests on the one hand and network operation and investments on the other.

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The Commission has also noted that the positive effects of unbundling in facilitating cross-border trade (as well as security of supply) can also be realised where the network is operated by an ITO. Moreover, although the ITO model has appeared to be burdensome for both the national authorities and the TSOs involved, it does not mean that the ITO model is not at all effective in separating transmission and generation. The Commission concluded that the ITO model is working well, but could nevertheless be improved, for example, by strengthening the independence of the Supervisory Board and harmonising the timeframe for network development plans at national European level.

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2.2.4 General Principles on the Unbundling Options 4.63

In principle the three unbundling options are on an equal footing: Member States were free to choose between the options. This “choice” is, however, qualified by a number of elements.

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First, in the legal drafting of the directives, the ISO and ITO options are presented as alternative ways to comply with unbundling rules allowing Member States to derogate from Article 43 of Directive 2019/944.177 From a legal standpoint, ISO and ITO are therefore derogations from the principle of ownership unbundling. This could justify a restrictive interpretation of their scope of application.

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Second, it is not possible to revert from ownership unbundling back to the ITO or ISO option: the ISO and ITO options can only be chosen for a TSO if, on entry into force of the Third Directives (i.e., on 3 September 2009), the transmission system belonged to a vertically integrated undertaking.178 For Member States having several TSOs, only the TSO(s) that were vertically integrated on the entry into force of the Third Directives may choose the ISO or ITO options.

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Third, a vertically integrated undertaking can always choose ownership unbundling. This is expressly stated in Article 43 (10) of Directive 2019/944. In other words, the fact that a Member State has opted for the ISO or ITO options cannot prevent a vertically integrated undertaking from divesting its network operations. A Member State with several TSOs has the freedom to opt for several options.

177 Article 43(7) of Directive 2019/944: Where on 3 September 2009, the transmission system belongs to a vertically integrated undertaking a Member State may decide not to apply paragraph 1. In such case, the Member State concerned shall either: (a) designate an independent system operator in accordance with Article 44 (Article 14 of the Third Gas Directive for gas); or (b) comply with Section 3 (Chapter IV of the Third Gas Directive for gas). 178 Article 43 (7) of Directive 2019/944 and Article 9(8) of the Third Gas Directive cited at footnote above. A vertically integrated undertaking is in substance a group of companies active in both network operation and production or supply. The concept is identical to the one used in the previous legislation. It is precisely defined in Article 2(21) of the Electricity Directive 2004 as an electricity undertaking or a group of electricity undertakings where the same person or the same persons are entitled, directly or indirectly, to exercise control, and where the undertaking or group of undertakings perform at least one of the functions of transmission or distribution, and at least one of the functions of generation or supply of electricity (Article 2.20 of the Gas Directive is identical). See Chapter 5 on Unbundling of DSOs.

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2.2.5 ITO+: “Unbundling à la carte” – a fourth unbundling option A careful reading of Directive 2019/944 shows that Member States are not necessarily limited to the above three unbundling options. Under Article 43(8) of the Directive:179

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“Where, on 3 September 2009, the transmission system belongs to a vertically integrated undertaking and there are arrangements in place which guarantee more effective independence of the transmission system operator than the provisions of [ITO], a Member State may decide not to apply paragraph 1 [on ownership unbundling].”

This fourth option for complying with the unbundling rules, the so-called ITO+ option, does not provide any precise obligations for vertically integrated undertakings and TSOs. It gives freedom to Member States to maintain their own systems of unbundling; a sort of “unbundling à la carte”.

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This provision has three important limitations. First, the structure of the TSO and the regulatory framework should guarantee more effective independence of the transmission system operator than the ITO option.180 Second, this structure and regulatory framework should have been in place on entry into force of the Third Directives, i.e., on 3 September 2009. Third, the transmission system must have been part of a vertically integrated undertaking on 3 September 2009. This provision was not in the Commission’s proposal and was added by the Council, during the adoption process of the Third Directives. It could have rendered the very precise regulatory framework imposed through the ISO and ITO options meaningless by permitting any other system providing for the same degree of independence as the ITO to be accepted. However, the requirement that the structure should have been in place on the entry into force of the Third Directives has meant that Article 9(9) of these directives, incorporated in Article 43(8) of Directive 2019/944, has had a limited application. In fact, amongst the only countries which have had national systems in place providing for more independence than the ITO system are Scotland, Ireland and Northern Ireland. In those cases, the Member States have demonstrated that they comply with the conditions of Article 43(8).181

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179 Article 9(9) of the Third Gas Directive lays out the same principle for gas. 180 In the opinion of the national authority. 181 In three decisions involving Scotland (https://www.ofgem.gov.uk/ofgem-publications/59304/sptl-certification-summary.pdf ), Ireland (https://ec.europa.eu/energy/sites/ener/files/documents/2013_060_ie_ en.pdf ) and Northern Ireland (https://ec.europa.eu/energy/sites/ener/files/documents/2013_059_uk_ en.pdf ), the Commission concluded that more effective independence than the ITO model was provided by the separation of ownership and operation of transmission networks, as well as the ring-fencing of legal

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However, there is a price to pay for this flexibility. Contrary to the other unbundling options, under the certification procedure for ISO+, the Commission has a binding role in verifying that the arrangements in place clearly guarantee more effective independence of the TSO than the provisions of ITO. It is clear that the national regulatory authority will have to comply with the Commission decision.182

2.2.6 Implementation by the Member States 4.71

When the Third Energy Package was launched, given that compliance with the unbundling rules would lead to the restructuring of vertically integrated undertakings, Member States benefitted from additional time to implement the rules on unbundling. The Third Energy Package Directives should have been transposed by Member States 18 months following their entry into force, i.e., by 3 March 2011. However, for the rules on unbundling of TSOs, 30 months following the entry into force of the Directives was allowed for the application of the rules i.e., by 3 March 2012.183 Further, the time allowed for the application of some parts of ownership unbundling could be further extended to 42 months after the entry into force of the directives, i.e., by 3 March 2013. Finally, the certification procedure in relation to third countries provided for in Article 11 of the Third Electricity Directive and Article 11 of the Third Gas Directive184 should have been transposed within 42 months of the entry into force of the Directives, i.e., by 3 March 2013.

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All options, including the ISO and ITO ones, were able to benefit from this extra time because these options are alternative ways of complying with ownership unbundling. Member States remained free to apply the ISO and ITO options at the end of the derogation period, provided that the TSO was vertically integrated on entry into force of the directives. The situation is different for ITO+, because this option is only available where the relevant regulatory arrangements were already in place at the time of the entry into force of the Directives.

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Following the expiry of the transposition deadline on 3 March 2011, the Commission has systematically assessed all the national transposition measures notientities from the vertically integrated undertaking. In the Decision relating to the Irish TSO, Eirgrid, the Commission required monitoring by the national regulatory authority and assessment of compliance with various criteria within a reasonable time period. 182 Article 9(10) of the Third Electricity Directive and Third Gas Directive combined with Articles 3(6) of the Electricity and Gas Regulations. 183 See paragraph 1 and 4 of Article 9 of the Third Electricity Directive and Article 9 of the Third Gas Directive. 184 Directive 2009/944, Article 53.

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fied by the Member States in order to verify whether they fully transpose the Third Energy Package Directives, i.e., whether they contain rules corresponding to all Directives’ provisions. However, none of the Member States had achieved full transposition of the Directives by the deadline. In 2011 the Commission opened 38 infringement proceedings against 19 Member States for not transposing, or not fully transposing, the Directives. During 2012 and 2013, the Commission was able to terminate many of these infringement procedures as the efforts of Member States to transpose the Directives gained momentum. In 2012, the Commission referred several Member States to the European courts,185 although in 12 of these cases, the Member States took appropriate measures to transpose the legislation after the referrals, therefore avoiding a judgment under Article 260(3) TFEU.186

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As of July 2013, in relation to electricity, 16 Member States had implemented ownership unbundling, 6 Member States had implemented the ITO framework, and 1 Member State had implemented the ISO framework. In relation to gas, 11 Member States had implemented ownership unbundling, 18 Member States had implemented the ITO framework and 1 Member State had implemented the ISO framework.

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In October 2014 the Commission released an analysis of the progress which had been made to date towards completing the Internal Energy Market.187 The Commission firstly focused on ensuring full transposition of the Electricity and Gas Directives within the national laws of the Member States (the “non-transposition” check), before secondly checking for incorrect transposition or bad application of the Third Energy Package rules (“non-conformity” check).

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As regards non-transposition, as of 13 October 2014, national legislation fully transposing the Directives was in place in all but two Member States. However, during 2014 the Commission filed infringement proceedings for partial trans-

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185 The commission referred the following Member States to the European courts: Poland, Slovenia, Bulgaria, Finland, Estonia, the UK, Romania (in relation to both the Electricity and Gas Directives) and Ireland (in relation to the Electricity Directive). The Member States who took the necessary transposition steps following referral were: the UK, Bulgaria, Finland, Poland, Slovenia and Estonia (in relation to both Directives). In addition the Commission also used EU Pilot cases against Spain and Romania in 2012. 186 Article 260(3) TFEU allows the Commission, at the first stage of referral, to ask the European Court of Justice to impose financial penalties on Member States in procedures for non-transposition. 187 See Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: Progress towards completing the Internal Energy Market COM (2014) 634 final. See also Commission Staff Working Document: Enforcement of the Third Internal Energy Market Package, SWD (2014) 315 final.

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position of the Electricity and/or Gas Directives against two Member States, one of which has recently adopted further transposition measures.188

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The Commission launched EU Pilot cases against several Member States in order to understand and evaluate the potential non-conformity problems. In some instances, these EU Pilot cases were already sufficient to persuade the Member States to correct their legislation or practices. However, where this was not successful, the Commission opened infringement procedures against the Member State concerned. For example, the Commission launched two infringement procedures in 2012 to address national import and export restrictions relating to electricity and gas.189

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Since 2012, the Commission started a total of 41 infringement proceedings.190 10 of these proceedings were closed without resulting in a formal notice.

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Under Article 63 of Regulation 2019/943, exemptions from the unbundling rules, third part access provisions and tariff regulation provisions can be granted in the case of a new interconnector, which means an interconnector not completed by 4 August 2003,191 the date of entry into force of the regulation. Regarding the gas sector, exemptions from the unbundling rules, third part access provisions and tariff regulation provisions can be granted in the case of a new infrastructure, under Article 36 of the Third Gas Directive.192 The rationale behind the exemptions is that some investments (including investments in major infrastructure such as interconnectors, storage facilities and LNG terminals) by entities other than incumbent TSOs may be substantial and subject to large amounts of risk, so should be exempted from the regulatory regime, to avoid 188 These are the cases against Romania (as regards both the Electricity and Gas Directives) and Ireland (as regards the Electricity Directive). 189 An infringement procedure was opened in 2012 against Spain for violation of the Electricity Regulation (EC) No 714/2009 and was closed in 2013 due to compliance. In 2012 the Commission also opened an infringement procedure against Romania concerning restrictions for the export of gas. 190 See, for electricity: https://ec.europa.eu/atwork/applying-eu-law/infringementsproceedings/infringement _decisions/index.cfm?lang_code=EN&typeOfSearch=false&active_only=0&noncom=0&r_dossier =&decision_date_from=&decision_date_to=&DG=ENER&title=2009%2F72%2FEC&submit=Sear ch. For gas : https://ec.europa.eu/atwork/applying-eu-law/infringements-proceedings/infringment_decisions/ index.cfm?lang_code=EN&typeOfSearch=false&active_only=0&noncom=0&r_dossier=&decision_ date_from=&decision_date_to=&DG=ENER&title=2009%2F73%2FEC&submit=Search 191 Article 2(5) of Regulation 2019/943. 192 ‘New infrastructure’ means an infrastructure not completed by 4 August 2003, as stated by the Recital 33 of the Third Gas Directive.

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discouraging new investments due to the level of uncertainty and possibility of state. By excluding third party access, tariff regulation and the unbundling rules from the equation, investors can control the investment without regulatory intervention. The third party access and tariff regulation exemptions permit underwriting by long-term capacity contracts without regulatory interference. Exemption decisions attempt to strike a balance between promoting open access to infrastructure and ensuring that investments which give rise to high levels of risk are made (where spreading the costs of these high levels of risk between all infrastructure users is not feasible). In order to apply for an exemption, investors are required to create a market test corresponding to the criteria set by the relevant national regulatory authority, in order to provide a clear understanding of the level of commercial demand for capacity; the greater the demand for capacity by third parties, the lower the expectation of an exemption. This market test should enable investors to gauge the project size as well as allowing the national regulatory authorities and Commission to evaluate whether the request is proportionate. Even where exemption is granted from the unbundling rules, the independence conditions still apply.193 Commission Decisions in exemption cases must be followed by the national regulatory authority in question.194 Dambořice In the first exemption decision of June 2011 adopted under the Third Energy Package, the Commission granted an exemption Article 36 of the Gas Directive, even though it had not yet been transposed with the Third Energy Package by the Czech legislator.195 The relevant national authority had granted a 15 year exemption from the obligation to provide negotiated third party access to a planned underground gas storage facility for 90% of the capacity. The Commission held that the planned new underground gas storage facility in question did qualify as a major gas facility within the meaning of Article 36 of the Third Gas Directive, but required the exemption to be withdrawn as the notified decision had not sufficiently demonstrated that the risk involved in building and operating the storage facility was sufficiently high. 193 For example, in 2011 the Commission granted an exemption from ownership unbundling in relation to the Gazelle pipeline, on the condition that the pipeline operator would be certified as an ITO (Commission Decision of 20 May 2011, C((2011) 3424). 194 The Commission previously could only issue an Opinion. The significance of being able to issue a Decision is that individuals are able to challenge it before the European courts. 195 Draft Commission Decision on the exemption of an Underground Gas Storage Facility in DamboYice , Czech Republic, from the internal market rules on third party access. This Decision is on appeal to the General Court.

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Porto Empedocle In its May 2012 Porto Empedocle decision, the Commission agreed with the Italian authorities that exemption of 100% of the capacity of an LNG terminal for 25 years from third party access and tariff regulation obligations could be granted on the condition that 20% of the re-gasification capacity was made available to all interested parties through a public procedure.196 Although the new LNG terminal would enhance competition, the Commission capped the access rights of companies with a dominant position to 5% of the terminal’s total capacity. It was held that the construction or operation should begin take place within 2-5 years following the granting of the exemption, in order to avoid the risk of losing the Commission’s approval.197 The Trans-Adriatic Pipeline The Trans-Adriatic Pipeline (“TAP”) is a major new project aimed at facilitating the transportation of gas from the Azerbaijian gas field, Shah Deniz, to Europe.198 It is planned to be approximately 800 km long and stretch from the Greek-Turkish border, through Albania and along the Adriatic Sea, to Italy, where it will enter the Italian gas transmission network. In May 2013, the Commission accepted exemption from the third party access requirement for 100% of the pipeline capacity, but required expansion capacity to be made available on a regulated basis, and that 5% of the initial capacity (and 10% of existing built capacity) be made available as ‘short-term’ products.199 The reverse flow was not covered by the exemption,200 due to the requirements to maintain security of supply.201 National regulators are required to monitor the capacity demand and order capacity expansion as soon as appropriate levels are reached.

196 Draft Commission Decision on the exemption of LNG Terminal in Porto Empedocle, Italy, from the internal market rules on third party access and of tariffs according to Article 36 of Directive 2009/73/EC. 197 Unless the delay is beyond the control of the project developers. These sunset provisions are designed to incentivise investors who have obtained an exemption to build the infrastructure within a reasonable period of time. 198 The TAP is one of two potential direct access paths to Europe from notable gas reserves in the Caspian, Middle East region and the Eastern Mediterranean Basin. This so-called Southern Gas Corridor for the supply of gas to Europe from the Caspian and Middle Eastern regions is one of the EU s priorities. 199 Commission Decision of 16.05.2013 on the exemption of the Trans Adriatic Pipeline from the requirements on third party access, tariff regulation and ownership unbundling laid down in Articles 9, 32, 41(6), 41(8) and 41(10) of Directive 2009/73/EC, Brussels, 16.5.2013, C(2013) 2949 final. 200 Reverse flow, otherwise known as backhauling, is the transportation of gas in the reverse direction to the pipeline’s main flow. This is not usually a physical movement but is rather carried out by swap arrangements. 201 This requirement is found in Regulation 994/2010 of 20 October 2010 concerning measures to safeguard security of gas supply, which was repealed by Regulation (EU) 2017/1938 of the European Parliament and of the Council of 25 October 2017 concerning measures to safeguard the security of gas supply and repealing Regulation (EU) No 994/2010.

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While the TAP is exempted from ownership unbundling obligations, each Member State it passes through must still certify it based on the ITO model before commencement of the project. In addition, the exemption will be lost after three years if the construction has not started, and after six years if operation has not commenced. In December 2014, the relevant Italian and Greek national authorities notified decisions to prolong the exemptions granted to the TAP project. In March 2015, Commission granted a prolongation of the exemption.202 ElecLink In a July 2014 decision ElecLink, the Commission examined a joint decision by the relevant British and French regulatory authorities to exempt a new interconnector linking the British and French electricity markets through the Channel Tunnel from its obligations to implement full ownership unbundling,203 to partially exempt it from normal third party access rules for 20 years, and to also partially exempt it from normal congestion revenue rules for 25 years.204 Toscana LNG Terminal While the Commission was of the opinion that the project met the criteria of Article 17(1) of the Electricity Regulation205 on new interconnectors, and that the exemptions could be granted it required amendments to be made to the joint decision, including adding sunset clauses. The Commission observed, however, that it should first be established that it cannot meet the Article 9 requirements by applying for certification under the ownership unbundling model.206 The Commission added that “… only if, based on the assessment conducted by the [national regulatory authorities] in the context of certification for ownership unbundling, it is concluded that ElecLink … does not meet the requirements of Article 9 of the Electricity Directive, ElecLink … [it] may apply for certification under the ITO model set out in … the Electricity Directive”. The Commission added that “the independent system operator model described in Articles 13 and 14 of the Electricity Directive presents an alternative to the ITO model in this case as it could facilitate the integrated operation of the ElecLink interconnector and the national transmission systems. Therefore this option should also be open to ElecLink…” 207 202 See C(2015) 1852 final. 203 Article 260(3) TFEU allows the Commission, at the first stage of referral, to ask the European Court of Justice to impose financial penalties on Member States in procedures for non-transposition. 204 Commission Decision of 28.7.2014 on the exemption of ElecLink Limited under Article 17 of Regulation (EC) No. 714/2009 for an electricity interconnector between France and Great Britain, Brussels, 28/7/2014, C(2014) 5475 final. For an update on the decision see, 10th June 2016, Brussels, C(2016)5285. 205 Article 63 of Directive 2019/944. 206 Article 43 of Directive 2019/944. 207 Paras 135 to 139.

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In a January 2015 decision, the Commission applied Article 22 of the second Gas Directive208 (the equivalent to Article 36 in the third Gas Directive) in order to allow a removal of the exemption from third party access and tariff provisions granted for an LNG terminal in Italy.209 The Commission had permitted this exemption granted by the Italian Ministry for Economic Development on the condition that sunset provisions were introduced, which the national authority duly complied with in 2009. In December 2012, the LNG terminal’s owner requested a removal of the exemption, asking the Ministry to acknowledge that the LNG terminal was an essential infrastructure which was indispensable for ensuring appropriate security, value for money, and competition in energy supplies. The Commission accepted this, observing that the full integration of a previously exempted infrastructure into the regulated system (via irrevocable withdrawal of an exemption) is, in principle, beneficial for the effective functioning of the internal gas market, although in certain cases, it could lead to undesirable results (for example, an abusive circumvention or violation of regulatory rules).

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In a December 2016 decision,210 the Commission granted an exemption from Article 16(6) of the Electricity Regulation and Article 9 of the Electricity Directive,211 regarding a high voltage underground cable connection between Italy and France. The Commission permitted the 10 year exemption from the obligation to implement ownership unbundling and from the the use of revenues resulting from the allocation of interconnection capacity, as the Commission recognised the risks attached to the investment in the two interconnectors were sufficient to justify an exemption. Specifically, risks might have originated from changes in flows caused by changes elsewhere in the system, as the use of the planned interconnector would depend on relative prices in Italy and France and on network developments by the French and Italian TSOs. On the other hand, the interconnector generated positive effects on competition as the new capacity would be available to all market participants and would be allocated according to the EU rules for cross border capacity allocation. The enhancement of competition pertained also to the fact that none of the stakeholders of the project had so far a significant presence in the electricity markets of both Italy and France.

208 Brussels, 16.01.2015, ENER/B2/EL/el D(2015) 133688. 209 Draft Commission Decision on waiver of the exemption from third party access and tariff provisions granted for an LNG terminal to OLT Offshore LNG Toscana S.p.A pursuant to Article 22 of Directive 2003/55/ EC. 210 See Brussels, 9.12.2016, C(2016) 8592 final. 211 Articles 19 and 43 of Directive 2019/944.

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In July 2018, an exemption was obtained for the Interconnector Greece-Bulgaria (“IGB”) project, from the requirements regarding third party access, tariff regulation and ownership unbundling.212 IGB is a major new infrastructure aiming to facilitate the transportation of all the southern corridor sources, including liquefied natural gas (LNG), to the Bulgarian and South Eastern European Markets and will reduce the isolation of the Bulgarian market. The Regulatory Authorities granted an exemption from the provisions of Article 43 for a period of 25 years starting from the commercial operation, subject to detailed conditions. These conditions are mainly the requirement to implement functional unbundling together with the submission of a compliance programme, approved jointly by the Regulatory Authorities, setting out measures taken to ensure the exclusion of discriminatory conduct and that no commercially sensitive information is communicated to its shareholders.

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2.2.8 Derogations set out in the Directives Cyprus benefit from express derogations from the unbundling rules regarding electricity213 whereas regarding gas, Cyprus, Luxembourg and Malta benefit from derogations.214 These derogations tend to be given to “energy islands”, otherwise known as “isolated electricity systems”.

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These derogations are dealt with in Chapter 11.

2.2.9 Application of the unbundling principles across the gas and electricity sectors Under the Directives, the three unbundling options apply in the same manner to both the electricity and gas sectors. In addition, Article 43(3) of Directive 2019/944215 mandates that the ownership unbundling provisions apply across the gas and electricity markets, in order to prevent undue influence arising from vertical relations between gas and electricity markets. In this regard, the provisions prohibit influence being held by an entity over an electricity supplier and a gas TSO, or a gas supplier and an electricity TSO.216

212 213 214 215 216

See Brussels, 25.7.2018 C(2018) 5058 final. Article 64 (2) of Regulation 2019/943. Article 49(6) of the Third Gas Directive. Article 9(3) of the Third Gas Directive. This rule only applies to the core requirements of ownership unbundling under the Third Gas Directive and Article 43(3) of Directive 2019/944 . It does not apply to the ancillary rules provided for in subparagraphs (c) and (d).

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In this respect the Council and Parliament followed the Commission’s view which considered that although the gas and electricity sectors differ significantly, the fundamental conflict of interest between supply and generation activities on the one hand, and network operation and development on the other, applies equally to both sectors and justifies the same solutions.

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Although this approach was accepted by the Council, in the course of the legislative procedure, the Parliament called for more stringent unbundling rules for electricity, voting in its First Reading217 in favour of a single ownership unbundling option for electricity, and a choice between ownership unbundling and an ITO option for gas. At Parliament, the arguments against ownership unbundling for gas were (i) the importance of owning the network to negotiate long-term supply agreements with upstream gas producers, (ii) there is reduced scope for discrimination by the TSO in the gas sector because there is no (or less) network congestion, and (iii) there is only limited risk that a TSO will deter investments in major new infrastructure, given that their livelihood depends on the ability to import gas. These factors played an important role in the Parliament’s thinking, combined with the fact that progress towards ownership unbundling is more advanced in the EU’s electricity sector than in the gas sector.

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The Commission’s view was, however, that: (i) the key to concluding long-term supply agreements with upstream gas producers is not ownership of the network, but rather the existence of a strong customer base, (ii) gas TSOs have a greater degree of control in defining the direction of flows and the capacity utilisation in the system than in electricity and therefore can easily engage in discrimination, and (iii) the regulatory framework permits temporary derogations from the ownership unbundling rules for the construction of new infrastructure in order to encourage investment by supply and production companies. The more stringent regime proposed for electricity were not implemented.

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Level Playing Field – Intra EU Acquisitions

During the negotiations for the Third Energy Package the existence of several unbundling models raised the issue of a “level playing field” between electricity and gas companies. To what extent could a vertically integrated company in 217 The EU legislative process can be summarised as follows; the Parliament gives a first opinion on the Commission proposal ( first reading ), after which the Council reaches a conclusion ( common position ). Where this differs from the Parliament s opinion, the latter has a second reading, giving its position on the Council s common position. Where the Council cannot accept the Parliaments second reading opinion, a conciliation procedure is established to permit the emergence of a common view.

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Member State A, having opted for the ITO model, acquire an ownership unbundled network or a supplier in Member State B which had opted for ownership unbundling? The acquired unbundled network operator or supplier would become vertically integrated through the acquisition. An agreement on this difficult issue could only be reached at the Energy Council on 10 October 2008, four months after overall agreement was found on the unbundling issues at the Energy Council of June 2008. The compromise agreed between Member States and untouched in the negotiation with Parliament is twofold. There is, first, an absolute prohibition against vertical integration of TSOs in Member States which have opted for ownership unbundling; and second, a more general provision allowing Member States to ensure a level playing field within their territory.

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3.1 Acquisition of rights within an ownership unbundled TSO Article 43(11) of Directive 2019/944 and Article 9(12) of Third Gas Directive expressly state that the independence of a network owner in a Member State which has opted for ownership unbundling should be preserved.

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Article 43(11) of Directive 2019/944 “Undertakings performing any of the functions of generation or supply shall not in any event be able to directly or indirectly take control over or exercise any right over unbundled transmission system operators in Member States which apply paragraph 1.”

As a consequence a vertically integrated undertaking in Member State A must comply with the rules on ownership unbundling when acquiring rights in a TSO in Member State B which has opted for ownership unbundling. This means that a vertically integrated supplier or ITO in Member State A cannot directly or indirectly exercise control, or any “right”, over a TSO from a Member State that has opted for ownership unbundling.

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The concept of “right” under Article 43(11) has the same meaning than under Article 43(11) of Directive 2019/944 and Article 9(2) of the Third Gas Directive and refers to the definition of ownership unbundling under the Directives. This effectively means that the ownership unbundling rules in relation to the independence of the ownership unbundled TSOs therefore do not apply on a Member State basis but over the whole of the EU.

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In practice the situations described in Chart I (below) are prohibited under Article 43(11): a supplier or ITO in Member State A cannot have or acquire control, have a majority shareholding, exercise voting rights or appoint any administrator in a TSO in Member State B which applies ownership unbundling. The same rule applies where the ITO or the vertically integrated undertaking is controlled by a holding company: the holding company cannot have or acquire control, have a majority shareholding, exercise voting rights, or appoint any administrator in a TSO in Member State B which applies ownership unbundling (Chart II). This is because the holding company should be considered as part of an “undertaking… performing any of the functions of generation or supply” within the meaning of Article 43(11).

Supplier or ITO in Member State A

Control or majority shareholding or exercise of voting rights or appointment of administrator

TSO in Member State B applying ownership unbundling

Chart I. Situations that are prohibited where TSO and supplier are parent and subsidiary. Holding company (located anywhere)

Control

Supplier or ITO in Member State A

Control or majority shareholding or exercise of voting rights or appointment of aministrator

TSO in Member State B applying ownership unbundling

Chart II. Situations that are prohibited where there is a holding company. 144

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3.2 General provision on level playing field Article 65 of Directive 2019/944 and Article 47 of the Third Gas Directive allow Member States to adopt measures in order to ensure a level playing field:

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Article 43 – Level playing field (Electricity Directive) “1. Measures that the Member States may take pursuant to this Directive in order to ensure a level playing field shall be compatible with the Treaty, in particular Article 36 thereof, and with Union law. 2. The measures referred to in paragraph 1 shall be proportionate, non‑discriminatory and transparent. Those measures may be put into effect only following the notification to and approval by the Commission. 3. The Commission shall act on the notification referred to in paragraph 2 within two months of the receipt of the notification. That period shall begin on the day following receipt of the complete information. In the event that the Commission has not acted within that two‑month period, it shall be deemed not to have raised objections to the notified measures”.

The measures adopted by Member States (i) must be compatible with the TFEU and EU law, as well as proportionate, non-discriminatory and transparent and (ii) can only be put into effect after they have been notified and approved by the Commission.218

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Given that acquisitions of ownership unbundled TSOs are already dealt with under Article 43(11), in practice Article 65 of Directive 2019/944 and Article 47 of the Third Gas Directive are likely to apply to the acquisition of rights in a generator or supplier of a Member State which has opted for ownership unbundling by a vertically integrated undertaking from another Member State which has opted for the ITO model.

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These provisions, which have resulted from politically charged discussions, appear to provide the Commission with an additional possibility of checking compliance with EU law, even though this possibility already exists under the general Treaty provisions. Furthermore, even in the absence of these provisions,

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218 Strangely, the corresponding Recital only refers to the Commission being consulted on the compatibility of the measures with the Treaty and Union law (Recital 21 of the Directive 2019/944 and Recital 19 of the Third Gas Directive).

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Member States would arguably still be able to seek compliance with ownership unbundling rules within their territories based on the general unbundling rules.

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In practice, a Member State seeking to prohibit the acquisition of an ownership unbundled TSO by an ITO or ISO will also need to comply with the EU rules on the free movement of capital and establishment and EU merger control rules.

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Designation of TSO and the certification procedure

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Under the Second Energy Package, TSOs must be designated as such by Member States in order to ensure transparency. The Third Energy Package added an additional certification procedure: before a body can be approved and designated as a TSO by the Member State, the company in question must be certified by the national regulatory authority. The aim of this certification procedure is to ensure that the unbundling conditions (whether under ownership unbundling, ISO, ITO or ITO+) are complied with. The Commission had proposed being given the competence to approve or oppose the regulator’s decision to grant certification. However, in the course of the negotiations with the Council, the Commission’s role was reduced so that under the adopted Third Energy Package, the regulators only have to take “utmost account” of the Commission’s opinion.

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Failure by a TSO to obtain its certification cannot lead to a situation where there is no TSO, because the network will always need to be operated. In such circumstances the network would be operated while infringing EU law, which would need to be remedied by the Member State in question. Furthermore, there is little scope for the selection of a TSO under the certification process. Under both the ownership unbundling, in both the Directive 2019/944 and the Third Gas Directive, the TSO can only be the network owner because this is a requirement of Article 43(1)(a).219 Under ITO, the TSO is always the owner of the network and a subsidiary of the vertically integrated undertaking because these are requirements of the ITO option.

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To some extent, a kind of selection process for an ISO is in theory, possible. In practice, however, this would be limited to the selection of the corporate person controlling the ISO undertaking, in particular its financial capabilities and network investment commitments under Article 44(2)(b) and (c) of Directive 2019/944 and Article 14 (2)(b) and (c) of the Third Gas Directive. This is be219 Article 9(1)(a) concerning gas.

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cause in practice the staff of the undertaking already acting as a TSO cannot be replaced without raising considerable human resources issues. Certification is therefore not a matter of selecting a TSO between competing companies, but rather of ensuring compliance with unbundling rules. The certification process normally involves ex ante intervention and preventing the implementation of financial operations that would lead to the TSO failing to comply with the relevant unbundling rules.

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4.1 Approval and designation of the TSO The obligation to approve and designate the TSO lies, as in the Second Energy Package, on the Member States. This is not exclusively reserved for the national regulator and can be carried out by, for example, ministries. This contrasts with certification, which falls within the regulator’s exclusive competence. A TSO can only be approved and designated as a TSO when it has been certified under the certification procedure described above. The designation of TSOs must be notified to the Commission and published in the Official Journal of the European Union.

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Article 52(2) Designation and certification of transmission system operators “2. Undertakings which have been certified by the regulatory authority as having complied with the requirements of Article 43 pursuant to the certification procedure below,, shall be approved and designated as transmission system operators by Member States. The designation of transmission system operators shall be notified to the Commission and published in the Official Journal of the European Union”.

4.2 General rules on certification The same certification procedure applies for ownership unbundled TSOs, ISOs220 and ITOs.221 This procedure is laid down in Article 52 of Directive 2019/944 and in Article 51 of Regulation (EU) 2019/943 (as well as in Article 10 of Third Gas Directive and Article 3 of the Gas Regulation).

220 Article 44(3) of the Directive 2019/944 and Article 14(3) of the Third Gas Directive. 221 Article Article 47(10) of Directive 2019/944 of the Third Gas Directive.

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Article 52 Designation and certification of transmission system operators (Directive 2019/944) “1. Before an undertaking is approved and designated as transmission system operator, it shall be certified according to the procedures laid down in paras 4, 5 and 6 of this Article and in Article 51 of Regulation (EU) 2019/943. (…) 3. Transmission system operators shall notify to the regulatory authority any planned transaction which may require a reassessment of their compliance with the requirements of Article 43. 4. Regulatory authorities shall monitor the continuing compliance of transmission system operators with the requirements of Article 43. They shall open a certification procedure to ensure such compliance: (a) upon notification by the transmission system operator pursuant to paragraph 3; (b) on their own initiative where they have knowledge that a planned change in rights or influence over transmission system owners or transmission system operators may lead to an infringement of Article 43, or where they have reason to believe that such an infringement may have occurred; or (c) upon a reasoned request from the Commission. 5. The regulatory authorities shall adopt a decision on the certification of a transmission system operator within a period of four months from the date of the notification by the transmission system operator or from the date of the Commission request. After expiry of that period, the certification shall be deemed to be granted. The explicit or tacit decision of the regulatory authority shall become effective only after the conclusion of the procedure set out in paragraph 6. 6. The explicit or tacit decision on the certification of a transmission system operator shall be notified without delay to the Commission by the regulatory authority, together with all the relevant information with respect to that decision. The Commission shall act in accordance with the procedure laid down Article 51 of Regulation (EU) 2019/943. 148

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Article 51 Certification of transmission system operators (Regulation 2019/943) “1. The Commission shall examine any notification of a decision on the certification of a transmission system operator as laid down in Article 52(6) of Directive (EU) 2019/944as soon as it is received. Within two months of the day of receipt of such notification, the Commission shall deliver its opinion to the relevant national regulatory authority as to its compatibility with Article 43 and either Article 52(2) or Article 53 of Directive (EU) 2019/944.

When preparing the opinion referred to in the first subparagraph, the Commission may request the Agency to provide its opinion on the national regulatory authority’s decision. In such a case, the two‑month period referred to in the first subparagraph shall be extended by two further months.



In the absence of an opinion by the Commission within the periods referred to in the first and second subparagraphs, the Commission shall be deemed not to raise objections to the regulatory authority’s decision.

2. Within two months of receiving an opinion of the Commission, the national regulatory authority shall adopt its final decision regarding the certification of the transmission system operator, taking the utmost account of that opinion. The regulatory authority’s decision and the Commission’s opinion shall be published together. 3. At any time during the procedure, regulatory authorities and/or the Commission may request from a transmission system operator and/or an undertaking performing any of the functions of generation or supply any information relevant to the fulfilment of their tasks under this Article.

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Under the ownership unbundling option, the regulator should check that the owner of the network complies with the rules of ownership unbundling under Article 43 of Directive 2019/944.222 Under the ISO and ITO options, the specific unbundling rules set out under these options must be complied with.

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These rules have to be applied for the first certification and any time a reassessment of the compliance of the TSO with the unbundling rules is required. The regulatory authorities have the obligation to open a certification procedure upon notification by the transmission system or upon a reasoned request from the Commission.

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It is primarily the TSOs’ responsibility to notify to the regulatory authority of any planned transaction which may require a reassessment of their compliance with the requirements under the ownership unbundling, ISO, ITO or ITO+ options. A network operator not complying with this obligation could be fined pursuant to Article 58(3)(d) of Directive 2019/944.223 The reference to “planned transaction” highlights that the control should normally be ex ante.

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It is also the responsibility of the national regulatory authority to monitor the continuing compliance of the TSO(s) with the unbundling rules, and to open a certification procedure on its own initiative where it has knowledge that a planned change in rights or influence over the TSO may lead to an infringement of the unbundling rules, or where the authority has reason to believe that such an infringement may have occurred.

222 Article 9 of the Third Gas Directive. 223 41(4)(d) of the Third Gas Directive.

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4.2.2 Procedure and timing Strict deadlines are imposed throughout the process. The national regulatory authority must adopt its certification decision within four months from the date of the notification by the TSO or from the date of a Commission request. After that period expires, the certification shall be deemed to be granted. This decision whether it is reached by explicit of tacit means, has to be notified without delay to the Commission by the regulatory authority. It should be accompanied by all the relevant information.224

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Within two months of the day of receipt of the notification, the Commission shall deliver its opinion to the relevant national regulatory authority on its compatibility with the ownership unbundling, ISO, ITO or ITO+ options.

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For the purpose of preparing this opinion, the Commission may request ACER to provide its opinion on the national regulatory authority’s decision. Where this request is made, the two‑month period is extended by two further months. In the absence of an opinion by the Commission within the two or four month period, it shall be deemed not to raise objections to the regulatory authority’s decision.

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Within two months of receiving the Commission’s opinion, the regulatory authority must adopt its final decision. For this purpose, it must take “utmost ac‑ count” of the Commission’s opinion. The legal strength of such an obligation is uncertain and guidance may eventually be needed from the European Court of Justice. However, it would appear that that in practice the regulator can only depart from the Commission’s opinion when it thoroughly justifies any divergence of views. As regards decisions concerning an ITO+, the rule is that “the regula‑ tory authority shall comply with the Commission decision”. The regulatory authority’s decision and the Commission’s opinion have to be published together.

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The national regulatory authorities and/or the Commission can request any information pertaining to the certification process from a TSO and/or an undertaking performing any of the functions of generation or supply at any time during the procedure. In this regard, the Commission and regulators are under a strict duty to preserve the confidentiality of commercially sensitive information.

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Under Articles 3(5) of both the Electricity and Gas Regulations, the Commission had been able to adopt detailed Guidelines under the comitology proce-

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224 Article 52(5) of Directive 2019/944 and Article 10(5) of the Third Gas Directive.

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dure. Harmonised rules on gas congestion management procedures, capacity allocation and balancing were adopted in 2013. Harmonised rules on electricity followed in 2015, on capacity allocation and congestion management, forward capacity allocation, balancing, emergency and restoration, demand connection, requirements for generators, high-voltage direct current and system operation.

4.3 Certification in case of control of an EU transmission system operator by a company from a non-EU country 4.3.1 Introduction 4.124

Where certification is requested because a company from a non-EU country wishes to acquire an EU TSO, the rules and procedure of Article 53 of Directive 2019/944 on certification in relation to third countries apply. Article 53 Certification in relation to third countries (Directive 2019/944) “1. Where certification is requested by a transmission system owner or a transmission system operator which is controlled by a person or persons from a third country or third countries, the regulatory authority shall notify the Commission.

The regulatory authority shall also notify to the Commission without delay any circumstances that would result in a person or persons from a third country or third countries acquiring control of a transmission system or a transmission system operator.

2. The transmission system operator shall notify to the regulatory authority any circumstances that would result in a person or persons from a third country or third countries acquiring control of the transmission system or the transmission system operator. 3. The regulatory authority shall adopt a draft decision on the certification of a transmission system operator within four months from the date of notification by the transmission system operator. It shall refuse the certification if it has not been demonstrated:

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Chapter 4 Unbundling of Transmission System Operators Emmanuel Cabau, revised and updated by Lena Sandberg (a) that the entity concerned complies with the requirements of Article 43; and (b) to the regulatory authority or to another competent authority designated by the Member State that granting certification will not put at risk the security of energy supply of the Member State and the Community. In considering that question the regulatory authority or other competent authority so designated shall take into account: (i) the rights and obligations of the Community with respect to that third country arising under international law, including any agreement concluded with one or more third countries to which the Community is a party and which addresses the issues of security of energy supply; (ii) the rights and obligations of the Member State with respect to that third country arising under agreements concluded with it, insofar as they are in compliance with Community law; and (iii) other specific facts and circumstances of the case and the third country concerned. 4. The regulatory authority shall notify the decision to the Commission without delay, together with all the relevant information with respect to that decision. 5. Member States shall provide for the regulatory authority or the designated competent authority referred to in point (b) of paragraph 3, before the regulatory authority adopts a decision on the certification, to request an opinion from the Commission on whether: (a) the entity concerned complies with the requirements of Article 43; and (b) granting certification will not put at risk the security of energy supply to the Community. 6. The Commission shall examine the request referred to in paragraph 5 as soon as it is received. Within a period of two months after receiving the request, it shall deliver its opinion to the national regulatory authority or, if the request was made by the designated competent authority, to that authority. In preparing the opinion, the Commission may request the views of the Agency, the Member State concerned, and interested parties. In the event that the Com153

Chapter 4 Unbundling of Transmission System Operators Emmanuel Cabau, revised and updated by Lena Sandberg mission makes such a request, the two‑month period shall be extended by two months.

In the absence of an opinion by the Commission within the period referred to in the first and second subparagraphs, the Commission shall be deemed not to raise objections to the decision of the regulatory authority.

7. When assessing whether the control by a person or persons from a third country or third countries will put at risk the security of energy supply to the Community, the Commission shall take into account: (a) the specific facts of the case and the third country or third countries concerned; and (b) the rights and obligations of the Community with respect to that third country or third countries arising under international law, including an agreement concluded with one or more third countries to which the Community is a party and which addresses the issues of security of supply. 8. Theregulatory authority shall, within a period of two months after the expiry of the period referred to in paragraph 6, adopt its final decision on the certification. In adopting its final decision the regulatory authority shall take utmost account of the Commission’s opinion. In any event Member States shall have the right to refuse certification where granting certification puts at risk the Member State’s security of energy supply or the security of energy supply of another Member State. Where the Member State has designated another competent authority to assess point (b) of paragraph 3, it may require the regulatory authority to adopt its final decision in accordance with the assessment of that competent authority.

The regulatory authority’s final decision and the Commission’s opinion shall be published together. Where the final decision diverges from the Commission’s opinion, the Member State concerned shall provide and publish, together with that decision, the reasoning underlying such decision.

9. Nothing in this Article shall affect the right of Member States to exercise, in compliance with Community law, national legal controls to protect legitimate public security interests. 10. This Article, with exception of point (a) of paragraph 3 thereof, shall also apply to Member States which are subject to a derogation under Article 66.” 154

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The concept of control is identical to the one used in the EU Merger Regulation (the “EUMR”)225 and should be interpreted accordingly.

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The original Commission proposal, endorsed by Parliament, prohibited investors from third countries from acquiring control of EU transmission networks unless this was authorised under an international agreement; however, the Council negotiations led to the removal of this general proposed prohibition, which was replaced by a requirement that such acquisitions should be notified to the Commission and rejected if either: (i) the TSO being acquired does not comply with the unbundling rules, or (ii) if the transaction puts at risk the security of energy supply of the Member State concerned or of the EU.

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While the Commission has to be consulted by the national regulatory authority, the latter is only under the duty to take “utmost account” of the Commission’s opinion, even when assessing compliance with unbundling rules and the EU’s security of supply. The rational for this is twofold.

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First, the rules on unbundling should be fully respected throughout the Community by both EU and non‑EU undertakings. In the case of acquisitions by non-EU companies of an EU TSO, particular difficulties can arise in ensuring that the unbundling rules will be respected, particularly where the purchaser is a vertically integrated company.

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Second, the acquisition of networks by foreign companies could potentially threaten the EU’s security of energy supply. Although the provision applies indifferently to all non EU States, countries that provide the EU with a significant proportion of their gas supplies (and have a very strong position with respect to certain regions or countries within the EU) would raise particularly important energy security issues. For example if the acquirer both owns the EU pipes necessary for supply and was also an important supplier, it could abuse its ownership of the pipes to prevent alternative sources of supply from emerging.

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The security of supply rationale for the clause is expressed in Recital 22 of the Third Gas Directive, as well as the former Electricity Directive:

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“The security of energy supply is an essential element of public security and is therefore inherently connected to the efficient functioning of the internal market in gas and the integration of the isolated gas markets of Member States. Gas can reach

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225 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EU Merger Regulation), OJ L 24, 29.1.2004, p. 1.

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the citizens of the Union only through the network. Functioning open gas markets and, in particular, the networks and other assets associated with gas supply are essential for public security, for the competitiveness of the economy and for the well being of the citizens of the Union. Persons from third countries should therefore only be allowed to control a transmission system or a transmission system operator if they comply with the requirements of effective separation that apply inside the Community. Without prejudice to the international obligations of the Community, the Community considers that the gas transmission system sector is of high importance to the Community and therefore additional safeguards are necessary regarding the preservation of the security of supply of energy to the Community to avoid any threats to public order and public security in the Community and the welfare of the citizens of the Union. The security of supply of energy to the Community requires, in particular, an assessment of the independence of network operation, the level of the Community’s and individual Member States’ dependence on energy supply from third countries, and the treatment of both domestic and foreign trade and investment in energy in a particular third country. Security of supply should therefore be assessed in the light of the factual circumstances of each case as well as the rights and obligations arising under international law, in particular the international agreements between the Community and the third country concerned. Where appropriate the Commission is encouraged to submit recommendations to negotiate relevant agreements with third countries addressing the security of supply of energy to the Community or to include the necessary issues in other negotiations with those third countries”.

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This Recital stresses the close link between the internal market rules and security of supply issues, and hints that networks are “strategic assets”. The references to “public order”, “public security” and “welfare of citizens” refers to exceptions in international trade law which may be invoked to justify the non-application of trade principles such as “most favoured nation” and “national treatment”. The clause also encourages the conclusion of agreements with third countries to ensure that network investments from third countries would qualify under the criteria of Article 11 the Third Gas Directive (and Article 53 of Directive 2019/944) relating to security of supply.

4.3.2 Substance and Procedure 4.133

TSOs are under an obligation to notify any circumstances to the national regulatory authority that would result in a non-EU third country entity acquiring control over it. The regulatory authority must adopt a draft decision on TSO certification within four months from the date of notification. 156

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The regulatory authority must notify the Commission: (i) if certification is requested by a TSO which is controlled by a third country entity; or (ii) of any circumstances arising that would result in a third country entity acquiring control of a TSO.

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The regulatory authority must refuse the certification if it has not been demonstrated that:

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(a)

the company seeking to acquire the EU TSO complies with the requirements of unbundling rules. This applies equally to ownership unbundling, ISO, ITO and ITO+; and

(b)

granting certification will not put the security of energy supply of the Member State and the EU at risk.

Article 53(3)(b) of Directive 2019/944 and 11(3)(b) of the Third Gas Directive provide the following rules on this security of supply test.

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First, contrary to the assessment of unbundling rules, which can only be done by the regulatory authority, the security of supply test can be performed by “anoth‑ er competent authority designated by the Member State”. This means in practice that the relevant Member State can keep control over this politically sensitive assessment.

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Second, the designated competent authority must, in making its assessment, take into account “the rights and obligations of the Community with respect to that third country arising under international law, including any agreement con‑ cluded with one or more third countries to which the Community is a party and which addresses the issues of security of energy supply”. It should also take into account “the rights and obligations of the Member State with respect to that third country arising under agreements concluded with it, insofar as they are in compliance with Community law”,226 as well as the “other specific facts and cir‑ cumstances of the case and the third country concerned”.227

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In practice this means that an international agreement concluded between the EU and a third country could set out the conditions for authorisation of the acquisition of control by a third country of EU TSOs.228 The conditions may re-

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226 Article 53(3)(b)(i) and (ii) of Directive 2019/944 and 11(3)(b)(i) and (ii) of the Third Gas Directive. 227 Article 53(3)(b)(iii) of Directive 2019/944 and 11(3)(b)(iii) of the Third Gas Directive. 228 Under EU law, international agreements between the EU and third countries override the Third Energy

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late to identical treatment being granted to EU companies in the third country (i.e., EU companies being authorised to acquire the third country’s network) or to require to open the third country’s energy market to allow access to EU producers and suppliers.229 It is the Commission’s role to negotiate these agreements and to make appropriate recommendations to the Council.230 This means that in practice, security of supply test should be dealt with in international agreements between the EU and third countries.

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The assessment of any threat to EU and the Member State’s security of supply relies on a factual assessment of the situation, which means that particular account should be taken of “the level of the Community’s and individual Member States’ dependence on energy supply from (the third country concerned)”.231

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The national regulatory authority must notify its decision to the Commission without delay, together with all the relevant information. Within two months, the Commission will provide an opinion on whether (a) the entity concerned complies with the relevant unbundling rules, and (b) whether granting certification will put the security of energy supply to the EU at risk.232

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In preparing the opinion, the Commission may request the views of ACER, the Member State concerned, and interested parties. In the event that the Commission makes such a request, the two-month period is extended by two months. In the absence of an opinion by the Commission within the two or four month period, the Commission shall be deemed not to have raised objections to the regulatory authority’s decision.

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Within a further period of two months the national regulatory authority then adopts its final decision on the certification. In adopting its final decision, the national regulatory authority must take “utmost account” of the Commission’s opinion.

229 230 231 232

Package s Directives. Some Member States for instance, especially those in Eastern and central Europe, have existing agreements with Russia setting out the conditions applying to Russian investment on their territory. These agreements can be taken into account but only to the extent that they comply with EU law. This is expressly referred to in Recital 22 of the Third Gas Directive: The security of supply of energy to the Community requires, in particular (& ) an assessment of the treatment of both domestic and foreign trade and investment in energy in a particular third country. Recital 25 of the Third Electricity Directive and Recital 22 of the Third Gas Directive refers to the fact that the Commission is encouraged to submit such recommendations to negotiate relevant agreements with third countries . Recital 22 of the Third Gas Directive. Article 53(6) of Directive 2019/944 and Article 11(6) of the Third Gas Directive.

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The national regulatory authority’s final decision and the Commission’s opinion must be published together. If the final decision of the national regulatory authority diverges from the Commission’s opinion, the Member State concerned must provide and publish, together with that decision, the reasoning underlying such decision (this last requirement being absent from the Article 52 procedure above concerning the general certification procedure). Directive 2019/944 clarifies in Articles 53(10) that the procedure also applies to Member States that benefit from a derogation from the rules on unbundling.233 For these Member States, only the issue of security of energy supply needs to be addressed during certification, not unbundling.

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A difficult situation would arise if a transaction puts a Member State’s security of energy supply at risk, but is nevertheless on balance, beneficial for the EU’s security of supply. In such circumstances the Member State would need to take utmost account of the Commission’s opinion and to balance both national and EU energy security concerns. In such a situation, both Directive 2019/944 and the Third Gas Directive clearly give precedence to national interests in a situation where the transaction threatens national energy security: “In any event Member States shall have the right to refuse certification where granting certifi‑ cation puts at risk the Member State’s security of energy supply or the security of supply of another Member State”.234 However, this would not justify granting certification when the transaction improves national energy security, but threatens the EU’s energy security as a whole. In this situation, the national regulatory authority has a clear duty to refuse certification. A further political safety net provision, contained in Article 53(9), indicates that, in any event, Member States shall have the right “to exercise, in compliance with Community law, na‑ tional legal controls to protect legitimate public security interests”.

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This is a recognition in compliance with existing EU Treaty principles, that Member States may derogate from Article 53 of Directive 2019/944 when this is justified by the protection of a legitimate public security interest. This could potentially allow a Member State to grant certification in a situation which is detrimental for EU security of supply. However, the Member State would need to demonstrate that this would be necessary to protect legitimate public security interests, which should only be possible in very exceptional circumstances.

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233 See Chapter 11 on Derogations and exemptions. 234 Article 53(8) of Directive 2019/944 and Article 11(8) of the Third Gas Package Directive.

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4.4 Commission Control of Certification By National Authorities 4.147

National regulatory authorities certify whether a conflict of interest exists in relation to a TSO, and more generally, whether the unbundling rules in Article 43 of Directive 2019/944. While the objective pursued by the Directive (as well as the Third Gas Directive) is the removal of any conflict of interest between generators or producers, suppliers and TSOs, it would not be in line with this objective if TSO certification were to be refused in a case where it is clearly demonstrated that there is no incentive for a TSO shareholder to influence the TSO’s decision making in order to favour his generation/production/supply interest to the detriment of other network users.235 This was found to be the case in various cases of national TSO certification, including Società Gasgotti Italia S.p.A.,236 Red Electrica de España,237 Enagas,238 Swedegas,239 50 Hertz Transmission,240 the three UK National Grid TSOs,241 TIGF242 and National Grid Electricity System Ltd.243 In reaching its decisions in these cases, the national authorities and the Commission took several elements into account, including: the value, nature, size, market share, and geographic location of the activities in question.

5.

The unbundling options under under the Clean Energy Package in detail

5.1 Ownership unbundling Transmission system owner as a TSO

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Article 43(1) of the Directive 2019/944 provides for the following main rules on ownership unbundling: 235 Recital 69 of Directive 2019/944 and Recital 9 of the Third Gas Directive. 236 Commission Opinion of 23 January 2013 on the certification of Società Gasgotti Italia S.p.A. (047 2012 IT). 237 Commission Opinion of 24 May 2012 on the certification of Red Electrica de España S.A.U. (021 2012 ES). 238 Commission Opinion of 15 June 2012 on the certification of ENAGAS S;A; (024 2012 ES). 239 Commission Opinion of 30 April 2012 on the certification of Swedegas AB (018 2012 SE). 240 Commission Opinion of 6 September 2012 on the certification of 50 Hertz Transmission GmbH (027 2012 - DE). 241 Commission Opinion of 19 April 2012 on the certification of National Grid Electricity Transmission plc (009 2012 UK), National Grid Gas plc (010 2012 UK), and National Grid Interconnector Ltd (011 2012 UK). 242 Commission’s Opinion on CRE’s draft certification decision for TIGFC(2014) 3837. 243 Commission Opinion of 25 September on the Certification of National Grid Electricity System Operator Limited.

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Chapter 4 Unbundling of Transmission System Operators Emmanuel Cabau, revised and updated by Lena Sandberg “1. Member States shall ensure that …: (a) each undertaking which owns a transmission system acts as a transmission system operator”

This means that compliance with ownership unbundling results in the same undertaking being the owner of the transmission system and the TSO.

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This raises the question of what happens when several TSOs create a joint venture which acts as a TSO in two or more Member States. If the networks continue to be owned by the parent companies and the parent companies do not have control of the joint venture, it is doubtful that this would be in compliance with paragraph 1(a) above. Paragraph 5 of Article 43 clarifies that ownership unbundled TSOs which create a joint venture acting as a TSO in two or more Member States can keep ownership of their network without contravening the requirement of paragraph 1(a) outlined above.

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5.1.1 Application of unbundling rules to companies controlling the TSO or supplier Article 43(1)(b) provides the following definition of ownership unbundling applicable in the case of a company controlling a TSO or a supplier. Article 43(1)(b) “1. Member States shall ensure that (...) (b) the same person or persons are not 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 exercise control or exercise any right over an undertaking performing any of the functions of generation or supply;” 161

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Article 43(1)(b)(i) sets out the essence of ownership unbundling: the same person is not entitled to exercise control over an undertaking performing any of the functions of production or supply, and to exercise control or exercise any right over a TSO or a transmission system.

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Article 43(1)(b)(ii) provides the same rule covering the alternative situation of a person exercising control over a TSO, and also exercising control or any right over an undertaking performing any production or supply functions. In other words, a company can control either an undertaking performing any of the functions of production or supply, or a TSO, but not both. It cannot also have any “right” in a supplier when it controls a TSO, or any “right” in a TSO when it controls a supplier.

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Article 43(2) defines the concept of control or “rights” as referred to in Article 43(1)(b). These concepts merit further consideration.

5.1.2 The concept of control 4.155

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The definition of the term “control” in Article 43(1)(b)(ii) of Directive 2019/944 is identical to the one in the EUMR and should be interpreted accordingly.244 Under Article 3(2) of the EUMR, control shall be constituted by “rights, contracts or any other means which, either separately or in combination and having regard to the considerations of fact or law involved, confer the possibility of exercising decisive influence on an undertaking”. The key concept in this regard is the concept of “decisive influence”. The EUMR clarifies that decisive influence can arise in particular from: 1.

“ownership or the right to use all or part of the assets of an undertaking; or

2.

rights or contracts which confer decisive influence on the composition, voting or decisions of the organs of an undertaking”.

In line with the concept of control under the EUMR, the reference to control includes both direct and indirect control, through an intermediate subsidiary for example. The concept of “person” is also in substance very similar to the one under the EUMR, covering both private individual and companies. Typically, this will be either the company controlling production supply or the network operation activity, or a parent company having subsidiaries acting as suppliers or network operators. 244 Recital 56 of Directive 2019/944.

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The EUMR clarifies that “control” is acquired by persons or undertakings which: 1.

“are holders of the rights or entitled to rights under the contracts concerned”; or

2.

“while not being holders of such rights or entitled to rights under such contracts, have the power to exercise the rights deriving therefrom”.245

The reference to persons in the plural form is to address the situation where several persons have joint control.246

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5.1.3 The concept of “rights” Article 43(2) of Directive 2019/944 provides the following definition of “rights” as referred to in Article 43(1):247 Article 43 “2. The rights referred to in points (b) and (c) of paragraph 1 shall include, in particular: (a) the power to exercise voting rights; (b) the power to appoint members of the supervisory board, the administrative board or bodies legally representing the undertaking; or (c) the holding of a majority share.”248

245 Article 3(3) EUMR. 246 For further guidance on these concepts, please refer to the Commission s Interpretation Notes on the EUMR: Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings of 10 July 2007, OJ C95 of 16.04.2008. Further explanations are also provided in Chapter 5 on Unbundling of DSOs. 247 The Commission’s original proposal had provided for even stronger unbundling rules by excluding the right to receive dividends and the holding of any share in the definition of rights. By contrast, the Council s Common Position of January 2009 only referred to the powers to exercise voting rights and to appoint board members. The prohibition on retaining majority ownership of shares was inserted in the final text following the negotiation between the Council and the Parliament. 248 There is some uncertainty as to whether this includes any majority share: i.e., the biggest share than any other shareholder, or whether this is limited to absolute majority, i.e., more than 50%. The reference to majority should clearly point to the first interpretation.

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If these principles on voting rights and board member appointments are applied to the unbundling rules, the result is that a shareholding can only result in financial rights, i.e., the right to receive dividends, but cannot confer any right to take part in the decision making process of the company or to exercise any influence on the company.

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The right to receive dividends will therefore in practice be limited to the unusual situations where shares are split between the “political” right of decision making and the financial right to receive dividends. Compliance with the rule would then mean that a formerly vertically integrated company retains only the financial right, while entrusting the “political” right to a fully independent trust or fund. This is a difficult situation to accept as it means accepting investments and financial risk without the right to participate in the decision making process. However, it is a precondition to preserving a financial interest in the TSO or supplier. Thus, a company owning a TSO can have a non-majority share in a supplier providing, inter alia, that it does not directly or indirectly exercise any voting rights as regards its shareholding.

5.1.4 The rule in practice 4.162

In taking action in order to comply with the ownership unbundling option, there is a distinction between the following two situations: 1. where there is a parent company (e.g. a holding company) holding an interest in, and/or having any influence on, both a TSO and a supply company; and 2.

where there is a direct capital link between a supplier and a TSO.

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In these two situations, the requirements of Article 43(1)(b) of the Directive can be complied with as follows. (a) Holding company situation

4.164

In the case of a parent company, such as a holding company directly or indirectly controlling a supplier, the parent company can keep a direct or indirect shareholding in a network operator or in a network system, provided the following cumulative conditions are complied with:

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1.

the parent company does not directly or indirectly have any form of control over the network operator or the network system,

2.

this shareholding is not a majority one,

3.

the parent company does not directly or indirectly exercise any voting rights as regards its shareholding in the network operator or the network system, and

4.

the parent company does not directly or indirectly exercise the power to appoint bodies legally representing the network operator or the network system such as members of the supervisory board, or the administrative board.

The same rule applies to a parent company directly or indirectly controlling a TSO or a network system. The parent company can keep a direct or indirect shareholding in a supplier, provided the following cumulative conditions are complied with: –

the parent company does not directly or indirectly have any form of control over the supplier

–

this shareholding is not a majority share,

–

the parent company does not directly or indirectly exercise any voting rights as regards its shareholding in the supplier, and

–

the parent company does not directly or indirectly exercise the power to appoint bodies legally representing the supplier such as members of the supervisory board, or the administrative board.

This can be illustrated by the following charts. Charts I and II show permitted situations under the ownership unbundling provisions of Directive 2019/944; Charts III and IV show prohibited situations under the same provisions.

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Situations that are permitted where there is a holding company

Holding

Non controlling minority shareholding and/or dividends

Control

Supplier

TSO

Chart I

Holding

Non controlling minority shareholding and/or dividends

Control

TSO

Supplier

Chart II

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Situations that are prohibited where there is a holding company

Holding Control or majority shareholding or exercise of voting rights or appointment of administrator

Control

Supplier

TSO

Chart III.

Holding Control or majority shareholding or exercise of voting rights or appointment of administrator

Control

TSO

Supplier

Chart IV. (b) TSO and supplier as parent and subsidiary (direct capital link situation) When there is no joint parent company involved, the “person” referred to in Article 43(1)(b) is the company or individual directly or indirectly controlling the TSO or supply undertaking. This person should not directly or indirectly hold any of the rights listed in Article 43(2) of the Directive.

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A producer or supplier may therefore retain a direct or indirect minority shareholding in a network operator or in a network system, provided the following cumulative conditions are complied with: 1.

the supplier does not directly or indirectly have any form of control over the network operator or the network system;

2.

this shareholding is not a majority share;

3.

the supplier does not directly or indirectly exercise any voting rights as regards its shareholding; and

4.

the supplier does not directly or indirectly exercise the power to appoint bodies legally representing the network operator or the network system such as members of the supervisory board, or the administrative board.

The same rule applies to a TSO having a direct or indirect shareholding in a producer or supplier. The following cumulative conditions should then be complied with: 1. the network operator does not directly or indirectly have any form of control over the supplier; 2.

this shareholding is not a majority share;

3.

the network operator does not directly or indirectly exercise any voting rights as regards its shareholding; and

4.

the network operator does not directly or indirectly exercise the power to appoint bodies legally representing the supplier such as members of the supervisory board, or the administrative board.

This can be illustrated as follows: Charts V and VI show the situations that are allowed; Charts VII and VIII show the situations that are prohibited under the rules on ownership unbundling of the directives.

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Situations that are allowed where TSO and supplier are parent and subsidiary

Supplier

Non controlling minority shareholding and/or dividends

TSO

Chart V

TSO

Non controlling minority shareholding and/or dividends

Supplier

Chart VI

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Situations that are prohibited where TSO and supplier are mother and subsidiary

Supplier

Control or majority shareholding or exercise of voting rights or appointment of administrator

TSO

Chart VII.

TSO

Control or majority shareholding or exercise of voting rights or appointment of administrator

Supplier

Chart VIII. Application of the unbundling rules to non-controlling companies Article 43(1)(c) of Directive 2019/944 “1. Member States shall ensure 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 170

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Article 43(1)(c) of the Directive provides that where a person only has a minority stake in both a TSO and a supplier without holding any form of control over either, that same person is not entitled to appoint members of the supervisory board, the administrative board or bodies legally representing the undertaking, members of a TSO or a transmission system. In addition, that same person is also not entitled to directly or indirectly exercise any right over an undertaking performing any of the functions of generation or supply.249

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This rule therefore adds a specific requirement to Article 43(1)(b) in relation to parent companies or other entities that do not have any controlling interest in a transmission network operator or a supplier. It aims at preventing a parent company from influencing a supplier. As a consequence, a parent company (or other entity) that holds a majority share, or has the power to appoint board members or exercise voting rights in a supplier, cannot appoint TSO board members.

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This rule has been criticised for placing undue limitations on minority shareholdings of financial institutions, thereby limiting access to bank financing for energy TSOs and suppliers. However, it was felt that the rule was needed to avoid any undue influence on TSOs. The restriction is limited to the appointment of TSO administrators. A financial investor may therefore still have a noncontrolling minority share in a TSO, as well as a non-controlling minority share in a supplier and appoint supplier board members.

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Chart IX below shows prohibited situations in relation to the above paragraphs under the ownership unbundling rules.

249 The provision also refers to control but then it does not add anything to the provision under subparagraph (b).

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Situations that are prohibited in the absence of control of both a TSO and a supplier

Holding Majority shareholding or exercise of voting rights or appointment of administrator

Appointment of administrators

TSO

Supplier

Chart IX Application of unbundling rules to board members Article 43(1)(d) of Directive 2019/944 “1. Member States shall ensure that: (…) (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.”

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Article 43(1)(d) addresses conflicts of interest for board members, by prohibiting the same person from being a member of the board of both a supply company and a TSO. It is irrelevant for the purposes of the prohibition whether or not the administrator was appointed by the same person. The rule aims at avoiding: scenarios in which (i) a legal person (an individual or company) is placed in a direct conflict of interest, and (ii) the legal person has access to business secrets from both a supplier and a TSO.

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Application of unbundling rules to public entities Article 43(5) of Directive 2019/944 “For the implementation of this Article, where the person referred to in points (b), (c) and (d) of paragraph 1 is the Member State or another public body, two separate public bodies exercising control over a transmission system operator or over a transmission system on the one hand, and over an undertaking performing any of the functions of generation or supply on the other, shall be deemed not to be the same person or persons.”

In line with Article 345 TFEU, which stipulates that Member States have sole competence in the area of property ownership,250 the rules on unbundling must respect the principle of non‑discrimination between public and private sectors.251 Ownership unbundling therefore applies to both private and public entities.

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However, state-owned companies are not required to sell their network to a privately owned company in order for them to comply with the ownership unbundling requirements within the meaning of the Directive. For instance, to comply with this requirement, any public entity or the State could transfer the rights to another publicly-owned independent legal person.

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Difficulties can however arise from the fact that two public entities could be considered as the same person under the EUMR and 43(1) of Directive 2019/944. Article 43(5) of the Directive clarifies that where the person exercising control over, or having rights in, a TSO and a supplier is the Member State or another public body, “two separate public bodies exercising control over a transmission system operator on the one hand, and over an undertaking performing any of the functions of generation or supply on the other, shall be deemed not to be the same person or persons”.

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Recital 20 of the Third Gas Directive and Recital 23 of the Third Electricity Directive further add that “provided that the Member State in question is able to demonstrate that the requirement is complied with, two separate public bodies should be able to control production and supply activities on the one hand and transmission activities on the other.”

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250 Article 345 TFEU: The Treaties shall in no way prejudice the rules in Member States governing the system of property ownership. 251 Recital 23 of the Third Electricity Directive and 20 of the Third Gas Directive.

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The situation resulting from these provisions in practice is as follows. First, a Member State can comply with ownership unbundling by organising its ownership of supply and TSO undertakings via two distinct and separate public bodies. Second, the Member State should be able to demonstrate, in practice through the certification procedure, that this scheme complies with the ownership unbundling requirement; this means in particular that the two distinct persons should not be under the direct/indirect control of the same person. For example, a ministry could control the supply branch and an independent agency could be set up to control the TSO. Provided the agency is ultimately independent from the Government this scheme could comply with the ownership unbundling rules.

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Another example would be a situation where two different ministries are each in control of the supply and TSO activities. This situation could in theory comply with ownership unbundling because the two ministries may be seen as two distinct entities for the purpose of the ownership unbundling rules. In practice, however, compliance could be made difficult by the fact that the two ministers are normally under the authority of the Government and/or the Prime Minister and thereby ultimately under the control of one and the same person. This situation would not comply with the ownership unbundling requirements. In order to render such a situation compliant with the ownership unbundling requirements, the Member State would need to demonstrate that strong legal safeguards prevent the Government, the Prime Minister or any other single entity from indirectly influencing both the TSO and the supply branch in violation of the rules provided for in Article 43(1) of Directive 2019/944.252 252 For example, in 2012, the Commission also received a notification from the Swedish regulator for energy Energimarknadsinspektionen (“EI”), of a draft decision on the certification of “Affärsverket svenska kraft‑ nät” (“Svenska Kraftnät”) as an electricity TSO. The Commission noted that from the draft decision it appears that Svenska Kraftnät was fully owned by the Swedish State, which also wholly owns Vattenfall AB, a company active in the generation and supply of electricity. While Svenska Kraftnät was within the area of competence of the Swedish Ministry of Enterprise, Energy and Communications, Vattenfall AB falls within the area of competence of the Ministry of Finance. The Commission was satisfied that two separate Ministries controlling, on the one hand transmission of electricity, and on the other hand activities of generation and supply of electricity, can under certain circumstances constitute bodies with a sufficient degree of separation as required under Article 9(6) Third Electricity Directive. According to the Commission it was clear that the Ministry of Enterprise, Energy and Communications, can take decisions independently with regard to Svenska Kraftnät’s transmission activities, without being influenced or controlled by the Ministry of Finance (or by any public authority), taking into account the interests of the Swedish State as shareholder in Vattenfall AB. However, the Commission invited EI to verify whether the Ministry of Enterprise, Energy and Communications, could indeed act in an independently or not, particularly in relation to non-day-today decisions concerning transmission activities carried out by Svenska Kraftnät, without being influenced or controlled by the Ministry of Finance or by any overarching public authority taking into account the interests of the Swedish State in Vattenfall AB, and to clarify this in the final decision. Further, in the same year the Commission also held in relation to the Danish TSO, Energinet.dk, “that two separate Ministries

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Application of the unbundling rules across the gas and electricity sectors Article 43(3) of Directive 2019/944 “For the purpose of point (b) of paragraph 1, the notion “undertaking performing any of the functions of generation or supply” shall include “undertaking performing any of the functions of production and supply” within the meaning of (the Gas Directive), and the terms “transmission system operator” and “transmission system” shall include “transmission system operator” and “transmission system” within the meaning of that Directive.”

Article 9(3) Third Energy Package Gas Directive “For the purpose of point (b) of paragraph 1, the notion “undertaking performing any of the functions of generation or supply” shall include “undertaking performing any of the functions of production and supply” within the meaning of (the Electricity Directive), and the terms “transmission system operator” and “transmission system” shall include “transmission system operator” and “transmission system” within the meaning of that Directive.”

In order to avoid undue influence arising from vertical relationships between gas and electricity markets, ownership unbundling applies across the gas and electricity markets, prohibiting joint influence over an electricity supplier and a gas transmission system operator, or a gas supplier and an electricity transmission system operator.253 This prohibition on cross-sector relations only applies to the core requirements of ownership unbundling (Article 43(3) of Directive 2019/944)254 and does not apply to non-controlling companies and administrators. This approach is logical; an electricity company often relies on gas supplies for its power plants, and if a generator owns the gas grid, it could make nondiscriminatory access to gas supplies difficult for its competitors. Similarly, gas controlling, on the one hand transmission of electricity and gas, and on the other hand activities of produc‑ tion, generation and supply of electricity and gas, can under certain circumstances constitute bodies with a sufficient degree of separation as requires by Article 9(6) Electricity Directive”. Energienet.dk, is fully owned by the Danish State. The Danish State also owns 76.49% of the shares in DONG Energy A/S, which is active in the production, generation and supply of electricity and gas. Energienet.dk s ownership is administered by the Danish Minister for Climate, Energy and Building, and DONG Energy A/S’s ownership is administered by the Danish Minister of Finance. 253 See Articles 43(3) of Directive 2019/944 and 9(3) of the third Gas Directive. 254 9(3) of the Third Gas Directive for gas.

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companies increasingly compete in electricity markets; owning the electricity grid would give potentially give rise to discrimination.

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In practice, this means that Charts I to VIII above apply regardless of whether a gas or electricity TSO is involved, and regardless of whether the supplier is a gas or electricity supplier.

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It is to be noted that, both the Third Gas and Electricity Directives contained within their Article 9(4) a specific extention of time regarding the transposition of part of the ownership unbundling rules, until 3 March 2013.255 Indeed, the rules in Article 9(3)(a) of both Third Directives concerning the obligation for the network owner to act as a network operator, and Article 9(3)(d) of both Third Energy Package Directives on the application of unbundling rules to board members had to implemented by 3 March 2012.

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However, the core rules on ownership unbundling contained in Article 9(3) (b) (ownership unbundling rules where there is “control”) and Article 9(3)(c) (ownership unbundling rules in the absence of control), only had to be implemented by 3 March 2013. This further time extension was granted because these provisions concern structural requirements, which needed time-consuming industry restructuring to take place. This time extension only applied if the TSO was not part of a vertically integrated undertaking from 3 March 2012. This means that after 3 March 2012, the TSO could not have been under the control of an undertaking active in supply in order for this additional extension to apply. As a consequence of this, an undertaking active in supply could continue to hold a minority shareholding, exercise voting rights, and appoint administrators in a TSO provided that it did not retain control. This allows a vertically integrated undertaking to progressively divest its TSO shares.

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Under the Clean Energy Package, this transition is assumed to have already taken place. Therefore, no extention period has been granted (except for the exemptions regarding the new interconnectors explained above).

255 Article 9(4) of both Third Directives ; “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.”

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Independent System Operator (ISO) Article 44 of Directive 2019/944 and Article 14 of the Third Gas Directive “1. 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 (…).”

As indicated above, Member States may decide not to apply the rules on ownership unbundling and instead designate an ISO. This is subject to the condition that the transmission system belongs to a vertically integrated undertaking at the time of the entry into force of the Directives. There are a number of specific rules in relation to the appointment and tasks of an ISO. There are also specific rules for the TSO, relating to its tasks and unbundling requirements, where an ISO is appointed. There are also provisions for strong regulatory oversight. Appointment of the ISO Article 44 of Directive 2019/944 “1. Where the transmission system belongs to a vertically integrated undertaking on 3 September 2009, Member States may decide not to apply Article 43(1)and designate an independent system operator upon a proposal from the transmission system owner. Such designation shall be subject to approval by the Commission. 2. The Member State may approve and designate an independent system operator only where: (a) the candidate operator has demonstrated that it complies with the requirements of Article 43(1)(b), (c) and (d); (b) the candidate operator has demonstrated that it has at its disposal the required financial, technical, physical and human resources to carry out its tasks under Article 40; (c) the candidate operator has undertaken to comply with a ten‑year network development plan monitored by the regulatory authority; 177

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Chapter 4 Unbundling of Transmission System Operators Emmanuel Cabau, revised and updated by Lena Sandberg (d) the transmission system owner has demonstrated its ability to comply with its obligations under paragraph 5. To that end, it shall provide all the draft contractual arrangements with the candidate undertaking and any other relevant entity; and (e) the candidate operator has demonstrated its ability to comply with its obligations under Regulation (EU) 2019/943, including the cooperation of transmission system operators at European and regional level. 3. Undertakings which have been certified by the regulatory authority as having complied with the requirements of Article 53 and paragraph 2 of this Article shall be approved and designated as independent system operators by Member States. The certification procedure in either Article 52 of this Directive and Article 51 of Regulation (EU) 2019/943 or in Article 53 of this Directive shall be applicable.”

Article 14 of the Third Gas Directive “1. Where on 3 September 2009 the transmission system belonged to a vertically integrated undertaking, a Member State may decide not to apply Article 9(1) and to designate an independent system operator upon a proposal from the transmission system owner.

As regards the part of the transmission system connecting a Member State with a third country between the border of that Member State and the first connection point with that Member State’s network, where on 23 May 2019 the transmission system belongs to a vertically integrated undertaking, that Member State may decide not to apply Article 9(1) and to designate an independent system operator upon a proposal from the transmission system owner.



The designation of an independent system operator shall be subject to approval by the Commission.

2. The Member State may approve and designate an independent system operator only where: (a) the candidate operator has demonstrated that it complies with the requirements of Article 9(1)(b), (c) and (d);

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Chapter 4 Unbundling of Transmission System Operators Emmanuel Cabau, revised and updated by Lena Sandberg (b) the candidate operator has demonstrated that it has at its disposal the required financial, technical, physical and human resources to carry out its tasks under Article 13; (c) the candidate operator has undertaken to comply with a ten-year network development plan monitored by the regulatory authority; (d) the transmission system owner has demonstrated its ability to comply with its obligations under paragraph 5. To that end, it shall provide all the draft contractual arrangements with the candidate undertaking and any other relevant entity; and (e) the candidate operator has demonstrated its ability to comply with its obligations under Regulation (EC) No 715/2009 including the cooperation of transmission system operators at European and regional level. 3. Undertakings which have been certified by the regulatory authority as having complied with the requirements of Article 11 and of paragraph 2 of this Article shall be approved and designated as independent system operators by Member States. The certification procedure in either Article 10 of this Directive and Article 3 of Regulation (EC) No 715/2009 or in Article 11 of this Directive shall be applicable.”

Because the ISO will run the network on behalf of its owner, the network owner is given a key role designating the ISO, and is explicitly provided with a right of proposal.256 The process of designation of the ISO is in substance identical to the designation of an ownership unbundled TSO.

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Thus, before it can be approved and designated as an ISO by the Member State, the ISO proposed by the network owner must be certified by the regulatory authority. The certification procedure is identical to the one for ownership unbundled TSOs.257 Where certification is requested for an ISO controlled by a person from a non-EU country, the procedure in relation to third countries is also applicable.258 Although the last sentence of Article 13(1) of the Third Electricity Directive and Article 14(1) of the Third Gas Directive refers to “approval

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256 Article 44(1) of Directive 2019/944 and Article 14(1) of the Third Gas Directive. 257 I.e., the procedure set out in Articles 51 of Regulation 2019/943 and 52 of Directive 2019/944, as well as Articles 10 of the Third Gas Directive and Article 3 of the Gas Regulation fully applies. 258 The procedure is under Article 53 of Directive 2019/944 and Article 11 of theThird Gas Directive.

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by the Commission” in designating the ISO, there is arguably ultimately only an obligation for the national regulator to take utmost account of the Commission’s opinion.

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As the ISO is not the network owner, it is subject to certain requirements and commitments in relation to investments, which are listed in Article 13(2) of the Third Electricity Directive and Article 14 of the Third Gas Directive. The ISO can only be certified if it complies with these requirements.

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Further, there are a number of rules which are designed to ensure that the ISO is independent. First, the candidate operator should be fully independent from any production and supply activities. To this effect, it should demonstrate that it complies with the rules on ownership unbundling. Second, the ISO should be autonomous: the candidate operator should demonstrate that it has the required financial, technical, physical and human resources at its disposal in order to carry out its tasks as a TSO in compliance with Directive 2019/944 and the Third Gas Directive,259 and in compliance with regulations, including the rules on cooperation of TSOs at European and regional level.

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Third, in relation to financing, the candidate operator should undertake to comply with a ten year network development plan under the monitoring of the regulatory authority. In practice, the ISO may be created out of the legally unbundled subsidiary of the vertically integrated undertaking in charge of network management (with network ownership remaining in a subsidiary of the vertically integrated undertaking). Tasks of the ISO Article 44(4) of Directive 2019/944 “4. Each independent system operator shall be responsible for granting and managing third-party access, including the collection of access charges, congestion charges, and payments under the inter‑transmission system operator compensation mechanism in compliance with Article 49 of Regulation (EU) 2019/943, as well as for operating, maintaining and developing the transmission system, and for ensuring the long‑term ability of the system to meet reasonable demand through investment planning. When developing the transmission system, the independent system operator shall be responsible for planning (including authorisation procedure), construction and commissioning of the new infrastruc259 See in particular Article 40and Article 13 of the third Gas Directive.

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Chapter 4 Unbundling of Transmission System Operators Emmanuel Cabau, revised and updated by Lena Sandberg ture. For this purpose, the independent system operator shall act as a transmission system operator in accordance with this Chapter. The transmission system owner shall not be responsible for granting and managing third-party access, nor for investment planning.”

Article 14(4) of the Third Gas Directive “4. Each independent system operator shall be responsible for granting and managing third-party access, including the collection of access charges and congestion charges, for operating, maintaining and developing the transmission system, as well as for ensuring the long-term ability of the system to meet reasonable demand through investment planning. When developing the transmission system the independent system operator shall be responsible for planning (including authorisation procedure), construction and commissioning of the new infrastructure. For this purpose, the independent system operator shall act as a transmission system operator in accordance with this Chapter. The transmission system owner shall not be responsible for granting and managing third-party access, nor for investment planning.”

The above directives clearly state “the independent system operator shall act as a transmission system operator”.260 This means that an ISO should be considered as a TSO and all the obligations applicable to TSOs are ipso facto applicable to an ISO. In particular each ISO is responsible for operating the system i.e., granting and managing third-party access, including the collection of access charges, congestion charges, and payments under the inter‑transmission system operator compensation mechanism in compliance with the Gas and Electricity Regulations.

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The ISO must also be given all the powers and responsibility necessary for the development of the transmissions system. For example, it must have full responsibility for ensuring the long‑term ability of the system to meet reasonable demand through investment planning. The above directives expressly state that when developing the transmission system, the ISO is responsible for planning (including obtaining authorisation), and for the construction and commissioning of new infrastructure. The ISO is also generally responsible for maintaining the transmission system. These tasks cannot be subcontracted to the vertically integrated undertaking owning the network.

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260 Article 44(4) of Directive 2019/944 and Article 14 of Third Gas Directive.

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The transmission system owner Article 44(5) of Directive 2019/944 and Article 14(5) of the Third Gas Directive “5. Where an independent system operator has been designated, the transmission system owner shall: (a) provide all the relevant cooperation and support to the independent system operator for the fulfilment of its tasks, including in particular all relevant information; (b) finance the investments decided by the independent system operator and approved by the regulatory authority, or give its agreement to financing by any interested party including the independent system operator. The relevant financing arrangements shall be subject to approval by the regulatory authority. Prior to such approval, the regulatory authority shall consult the transmission system owner together with the other interested parties; (c) provide for the coverage of liability relating to the network assets, excluding the liability relating to the tasks of the independent system operator; and (d) provide guarantees to facilitate financing any network expansions with the exception of those investments where, pursuant to point (b), it has given its agreement to financing by any interested party including the independent system operator.”

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Article 44(5) of Directive 2019/944 and Article 14(5) of the Third Gas Directivelay down obligations which apply to network owners.

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The above directives are clear that the transmission system owner may have no responsibility and no prerogatives regarding granting and managing third-party access. Equally, it may have no responsibility or prerogatives with respect to investment planning, which is the exclusive responsibility of the ISO.

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In principle, the network owner has an obligation to finance the investments decided upon by the ISO provided they are approved by the regulatory authority. One important exception to this obligation is the option for the network owner to agree to have new parts of the network financed by an interested third party (which can include the ISO) instead of financing the new developments 182

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itself. As a consequence, the network owner may not own the new parts of the network that it has not financed. In that way, the obligation of the network owner to finance can be perceived rather as a “right” to finance. The relevant financing arrangements are subject to approval by the regulatory authority. Prior to such approval, the regulatory authority shall consult the TSO together with the other interested parties. The network owner is also under the obligation to provide financial guarantees to facilitate the financing of the network expansion, with the exception of the investments which will be financed by another party. In addition, the network owner is also under the obligation to cooperate as necessary with the ISO for the fulfilment of its tasks, including in particular providing all relevant information concerning the network.

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Finally, the network owner is also under an obligation to provide coverage for liabilities relating to the network assets. This excludes liabilities relating to the TSO’s tasks. In practice, this means that the network owner must cover liability for the condition of the network, among other things, but not for its management. The regulatory authority must review and approve the arrangements between the ISO and the network owner within the scope of its monitoring role under Article 59(5) Directive 2019/944 and of Article 41 of the Third Gas Directive. Its main role will be to ensure that all possible liabilities are covered.

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The national competition authorities monitor the TSO’s compliance with its obligations to act in close cooperation with the regulatory authorities. Because the rules in Articles Article 44(6) of Directive 2019/944 and 14(6) of the Third Gas Directive are distinct from the competition rules, in practice this is likely to require the national competition authorities to be granted specific competences going beyond the enforcement of the competition rules.

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As part of the certification procedure, the TSO has the duty to demonstrate its ability to comply with the above obligations. In order to do this, it is obliged to provide to the regulator all the draft contractual arrangements with the candidate ISO and any other relevant entity.

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Specific duties of the regulatory authority Article 59(5) of Directive 2019/944 “In addition to the duties conferred upon it under paragraphs 1 and 3 of this Article, when an independent system operator has been designated under Article 44, 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 point (d) of paragraph 3; (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 60(2); (c) without prejudice to the procedure under point (c) of Article 44(2), for the first ten-year network development plan, approve the investments planning and the multi‑annual network development plan presented every two years 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; (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 19(2) of Regulation (EU) 2019/943.”

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Article 41(3) Third Gas Directive “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 14, 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 14(2)(c), for the first tenyear 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; and (e) have the powers to carry out inspections, including unannounced inspections, at the premises of transmission system owner and independent system operator.”

Where an ISO is designated, Article 59(5) of Directive 2019/944 and Article 41 of the Third Gas Directive provide for specific duties to be granted to regulatory authorities. These duties and powers are additional, and not alternative, duties to the general duties conferred on the regulatory authorities in relation to TSOs.261 In practice this means that: (i) all the obligations applying to ownership unbundled TSOs also apply to ISOs, and (ii) regulatory oversight is stronger over an ISO than over an ownership unbundled TSO. 261 Under Article 59(1) of Directive 2019/944 and Article 41 of the Third Gas Directive.

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The regulator shall generally monitor TSO and ISO compliance with their obligations under the Directives and issue penalties for non‑compliance in accordance with the general rules on penalties.262 The regulator must also actively control the relationship between the ISO and the network owner, and in particular: 1.

approve any contracts between the ISO and the transmission system owner;

2.

generally monitor of the relations and communications between the ISO and the transmission system owner;

3.

act as a dispute settlement authority between the ISO and the transmission system owner;263

4.

ensure that the network access tariffs collected by the ISO include remuneration for the network owner. This remuneration must provide for adequate remuneration of the network assets and of any new investments made therein, provided they are economically and efficiently incurred. In practice, this means that the investments taken into consideration for the remuneration have been approved by the regulatory authority.

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As regards investments, the regulator has the power to approve the investment planning and the multi‑annual network development plan presented annually by the ISO. This is in addition to the approval of the first ten year network development plan under the certification procedure in compliance with Article 44(2) (c) of Directive 2019/944 and 14(2)(c) of the Third Gas Directive.

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As for the ITO, the regulator is granted the power to carry out inspections, including unannounced inspections, at the premises of the transmission system owner and ISO.

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Finally, the regulator shall monitor the use of congestion charges collected by the electricity ISO in accordance with the rules under Article 16(6) of Regulation 2019/943.

262 The general rules on penalties are found under Article 59(3)(d) of Directive 2019/944 and Article 41 of the Third Gas Directive. 263 This applies in particular to complaints submitted by either party pursuant to Article 59(5) of Directive 2019/944 and Article 41 of the Third Gas Directive.

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Unbundling of transmission system owners Article 45 of Directive 2019/944 and Article 15 of the Third Gas Directive “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 (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. […]”

The transmission system owner has a limited role to play in relation to the network. The network owner should therefore benefit from a certain degree of independence from the production and supply branches. For this purpose, the Clean Energy Package, as well as the Third Directives, require legal and functional unbundling of the transmission system owners from their supply branches.

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The rules on legal unbundling that the network owner must follow in relation to the supply branches require network ownership by a separate company which should be responsible for all the decisions granted to the “transmission system owner” under the Clean Energy Package. Functional unbundling rules must ensure this entity is independent in terms of its “organisation and decision making from other activities not relating to transmission”.

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To ensure the transmission system owner’s independence, the Directives provide for the following additional criteria which must be satisfied by Member States when transposing the Directives into national law:

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the persons responsible for the management of the transmission system owner cannot participate in the company structures of the integrated electricity undertaking directly or indirectly responsible for the day‑to‑day operation of the generation, distribution and supply of electricity;

2.

appropriate measures should 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

3.

the transmission system owner must establish a compliance programme which sets out the measures taken to ensure that any discriminatory conduct is excluded, and set out the specific obligations of employees to meet those objectives. An annual report shall be submitted by the person or body responsible for monitoring the compliance programme to the regulatory authority and shall be published.264

These rules are very similar to the rules on legal and functional unbundling applying to DSOs under the Second Energy Package and maintained in the Third and Clean Energy Packages, and should be interpreted accordingly.

264 Article 45(2) (a), (b), (c) of the Directive 2019/944 and Articles 15(2), (a), (b), (d) of the Third Gas Directive.

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These rules are likely to be similar to the rules contained in the Commission’s interpretative document on unbundling under the Second Directives, which outlines the Commission’s interpretation of the rules on legal and functional unbundling.265 Contrary to the Commission’s interpretative document, guidelines adopted under the comitology procedure would be binding.

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The Independent Transmission Operator (ITO) Under the ITO model, the TSO may remain part of an integrated undertaking. However, the Clean Energy Package lays down detailed rules designed to ensure effective unbundling.266 The rules on ITO can be summarised as follows. 1.

the ITO can only apply to undertakings that were already vertically integrated at the time of the entry into force of the Directive;

2.

the ITO shall have effective decision-making powers regarding the operation, maintenance and development of the transmission system;

3.

the transmission company must have all the financial resources and assets, and human and material resources, to run the grid autonomously and independently from the parent company;

4.

an independent management committee of the ITO should be in charge of the grid’s day-to-day operation. It cannot be directly appointed by the parent company but must be appointed by the “ITO Supervisory Body”. Its appointment and revocation is subject to regulatory oversight. The management should comply with ex ante and ex post cooling off periods prohibiting them, for specified periods, from (three years for the majority of the board, six months for the minority), or returning (for four years) after termination of employment to the parent company;

5.

a supervisory body, appointed by the vertically integrated undertaking and possibly other shareholders in proportion of their shareholding within the ITO, is in charge of preserving the financial interest of the

265 Note of the Directorate General for Energy and Transport of the European Commission on unbundling, Appendix 13, Section 4.2.2. Whilst this document is not formally binding on the Commission, as the College of Commissioners never formally discussed or approved it, it provides a good reflection of the Commission s approach on the issue. The rules provided for as regards legal and functional unbundling of DSOs in the Interpretative note on the Third Directives are in substance identical. 266 See Chapter VI of the Directive 2019/944 (Articles 46 to 51) and Chapter IV of the Third Gas Directive (Articles 17 to 23).

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shareholders. It cannot be involved in the day-to-day management of the ITO. All of its members should be subject to regulatory oversight as regards termination of office. Strong ex-ante and ex-post cooling off periods and regulatory oversight applies to half minus one of the members of the board (review of appointment, cooling off periods of three years ex ante and four years ex post); 6.

a compliance officer with wide-ranging powers must be appointed to ensure non-discrimination in practice;

7.

if the vertically integrated company refuses to invest in network projects that the regulator considers necessary, the regulator can force the ITO to invest, or impose tendering of the investments to third investors, or even impose a capital increase of the ITO to allow for third party investors to acquire shares of the ITO. Member States may choose which of these powers they grant to the regulator;

8.

the regulator has the power to ensure that the ITO meets its obligations, including the power to impose severe fines of up to 10% of the TSO or even of the vertically integrated undertaking’s turnover, for failing to do so;

9.

as is the case with other options, the TSO has to be certified by the national regulator taking utmost account of the Commission’s position.

Overall structure of ITO ITO autonomy: Rules on assets, equipment, staff and identity (Article 17) Article 46 of Directive 2019/944 (below) and Article 17 of the Third Gas Directive “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: (a) assets that are necessary for the activity of electricity transmission, including the transmission system, shall be owned by the transmission system operator;

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Chapter 4 Unbundling of Transmission System Operators Emmanuel Cabau, revised and updated by Lena Sandberg (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 49, 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. 2. The activity of electricity transmission shall include at least the following tasks in addition to those listed in Article 40: (a) the representation of the transmission system operator and contacts to third parties and the regulatory authorities; (b) the representation of the transmission system operator within the European Network of Transmission System Operators for Electricity (ENTSO for Electricity); (c) granting and managing third-party access on a non‑discriminatory basis between system users or classes of system users; (d) the collection of all the transmission system related charges including access charges, balancing charges for ancillary services such as purchasing of services (balancing costs, energy for losses);

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Chapter 4 Unbundling of Transmission System Operators Emmanuel Cabau, revised and updated by Lena Sandberg (e) the operation, maintenance and development of a secure, efficient and economic transmission system; (f ) investment planning ensuring the long‑term ability of the system to meet reasonable demand and guaranteeing security of supply; (g) the setting up of appropriate joint ventures, including with one or more transmission system operators, power exchanges, and the other relevant actors pursuing the objectives to develop the creation of regional markets or to facilitate the liberalisation process; and (h) all corporate services, including legal services, accountancy and IT services. 3. Transmission system operators shall be organised in a legal form as referred to in in Annex I to Directive (EU) 2017/1132 of the European Parliament and of the Council.267 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. 5. The transmission system 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. 6. The accounts of transmission system operators shall be audited by an auditor other than the one auditing the vertically integrated undertaking or any part thereof ”.

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The Clean Package Directives (as well as the amended Third Gas Directive) impose a general obligation on the ITO to be fully autonomous. They also provide specific rules regarding the assets, the personnel and the financial resources that are necessary for the activity of electricity or gas transmission. The assets must be legally owned by the ITO. This primarily concerns the network which therefore cannot be leased to the ITO by the vertically integrated undertaking (Article 46(1)(a)). 267 Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law (OJ L 169, 30.6.2017, p. 46).

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It is also made clear that the personnel necessary for the activity of electricity or gas transmission must be directly employed by the ITO. This includes in particular the corporate tasks of the ITO which must be understood as referring to all of the company’s core activities such as management, and the core of the network operation business. Article 46)(2)(h) of the Directive268 also refers to corporate services, including legal services, accountancy and IT services. In practice, this means that the ITO must directly employ the personnel necessary for its core day-to-day activities, including legal, accountancy or IT competences, or for example the maintenance of the system. Provided that the ITO has the personnel needed for its day-to-day activities, it may however, in specific circumstances, additionally subcontract legal, IT, or accountancy services, as well as, for example, a specific workforce needed for the development or repair of the network. This rule does not include ancillary activities that do not directly concern the activity of gas or electricity transmission and are not corporate services, such as office cleaning or office security. In relation to these ancillary activities, the leasing of personnel and subcontracting of services is not prohibited.

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As the ITO cannot be dependent on the vertically integrated undertaking, the leasing of personnel and subcontracting of services from the vertically integrated undertaking and any part thereof to the ITO is prohibited. However, the provision of services from the ITO to the vertically integrated undertaking is permitted, provided this provision is not discriminatory in relation to other system users, does not restrict competition in generation or supply, and is approved by the regulatory authority.269 Additionally, the TSO cannot share IT systems or equipment, physical premises or security access systems with any part of the vertically integrated undertaking. It also cannot use the same consultants or external contractors for IT systems or equipment, security access systems or auditing.270

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As regards financing, Article 46 of Directive 2019/944 provides for a general rule that: “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”. These resources have to be approved by the supervisory body in compliance with Article 49. The ITO must inform the regulatory authority of these financial resources.271

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268 269 270 271

Article 17(2)(h) of the Third Gas Directive. Paragraph 1(c). Paragraphs 5 and 6. Article 47(8).

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In addition the TSO may not create confusion between its corporate identity, communication, branding and premises with the separate identity of the vertically integrated undertaking. This is part of a general obligation to avoid creating any confusion for the consumers between the TSO and the supply company.272

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The concept of “confusion” refers to any “likelihood of confusion on the part of the public” under trade mark law and should be interpreted in compliance with the relevant provisions of EU legislation.273 In practice, this means that the vertically integrated undertaking’s trademarks, in particular that of its supply branch, may not resemble the ITO’s trade mark. Arguably, the requirement also means that the ITO’s premises of should not be in the same location as the vertically integrated, and in particular the supply branch. A similar rule was inserted by the Third Energy Package, maintained in the Clean Energy Package, in the provisions on legal and functional unbundling of DSOs.274 TSO independence Article 47 of Directive 2019/944 ( below) and Article 18 of the Third Gas Directive “1. Without prejudice to the decisions of the Supervisory Body under Article 49, 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 and develop and maintain an efficient, secure and economic transmission system.

272 Paragraph 4. 273 Regulation (EU) 2017/1001 of the European Parliament and of the Council of 14 June 2017 on the European Union trade mark, OJ L 154, 16/6/2017, p. 1-99 and Directive (EU) 2014/2436 of the European Parliament and of the Council of 16 December 2015 to approximate the laws of the Member States relating to trade marks OJ L 336, 23/12/2015, p. 1-26. 274 See Chapter 5.

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Chapter 4 Unbundling of Transmission System Operators Emmanuel Cabau, revised and updated by Lena Sandberg 3. Subsidiaries of the vertically integrated undertaking performing functions of generation or supply shall not have any direct or indirect shareholding in the transmission system operator. The transmission system operator shall neither have any direct or indirect shareholding in any subsidiary of the vertically integrated undertaking performing functions of generation or supply, nor receive dividends or any other financial benefit from that subsidiary. 4. 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 and management of the network, or in relation to activities necessary for the preparation of the ten‑year network development plan developed pursuant to Article 51. 5. In fulfilling their tasks in Article 40 and Article 46(2) of this Directive, and in complying with Articles 16, 18, 19 and 50 of Regulation (EU) 2019/943, transmission system operators shall not discriminate against different persons or entities and shall not restrict, distort or prevent competition in generation or supply. 6. Any commercial and financial relations between the vertically integrated undertaking and the transmission system operator, including loans from the transmission system operator to the vertically integrated undertaking, shall comply with market conditions. The transmission system operator shall keep detailed records of such commercial and financial relations and make them available to the regulatory authority upon request. 7. The transmission system operator shall submit for approval by the regulatory authority all commercial and financial agreements with the vertically integrated undertaking. 8. The transmission system operator shall inform the regulatory authority of the financial resources, referred to in point (d) of Article 46(1), available for future investment projects and/or for the replacement of existing assets. 9. The vertically integrated undertaking shall refrain from any action impeding or prejudicing the transmission system operator from complying with its obligations in this Chapter and shall not require the transmission system operator to seek permission from the vertically integrated undertaking in fulfilling those obligations. 195

Chapter 4 Unbundling of Transmission System Operators Emmanuel Cabau, revised and updated by Lena Sandberg 10. An undertaking which has been certified by the regulatory authority as being in compliance with the requirements of this Chapter shall be approved and designated as a transmission system operator by the Member State concerned. The certification procedure in either Article 52 of this Directive and Article 51 of Regulation (EU) 2019/943 or in Article 53of this Directive shall apply”.

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Article 47 provides that the ITO must have effective decision‑making rights which are independent from the vertically integrated undertaking, with respect to assets necessary to operate, maintain or develop the transmission system. This provides for a general requirement of independence as regards network ownership and operation.

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In particular, the vertically integrated undertaking cannot directly or indirectly determine the TSO’s competitive behaviour in relation to its day-to-day activities and network management, nor in relation to activities necessary for preparing the ten year network development plan.

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This principle of “effective decision-making rights” is buttressed by the following rules: 1.

the ITO must have the power to raise money on the capital markets;

2.

there may be no direct or indirect corporate or financial relations between the parts of vertically integrated undertaking performing functions of generation or supply, and the ITO;

3.

no direct or indirect shareholding can exist between the ITO and the parts of vertically integrated undertaking performing functions of generation or supply, and they cannot receive dividends from each other;275

4.

in order to avoid any preferential treatment, all commercial and financial relations between the vertically integrated undertaking and the ITO must comply with market conditions, the details of which must be available to the regulatory authority upon request. All commercial and financial relations with the vertically integrated undertaking that give rise to a formal agreement, oral or written, must be submitted for approval to the regulatory authority; and

275 In practice this means that the supply branch and the ITO can be under a common parent company but cannot be direct or indirect subsidiaries one of each other.

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5.

the vertically integrated undertaking must refrain from any action impeding the TSO from complying with its obligations and shall not require the TSO to seek permission from the vertically integrated undertaking in fulfilling those obligations.

The overall management structure and the corporate statutes of the ISO must provide for the decision making structure and the rules ensuring effective independence of the TSO in compliance with these provisions.

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From a procedural viewpoint, only an ITO complying with the rules of the Directives can be certified, and therefore approved and designated as a TSO by the Member State concerned. The certification procedures of Article 52 or Article 53 of the Directive and Article 51 of Regulation (EU) 2019/943276 are fully applicable to the ITO option.

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The rules on independence are generally without prejudice to the role and decisions of the supervisory body under Article 49. In practice this means that, first, as a corporate entity the ITO has to be independent from its vertically integrated parent company; but secondly, this does not prevent the vertically integrated parent company from exercising its prerogatives as a shareholder through the appointment of members of the supervisory body and the role of the supervisory body of preserving the financial interest of the mother company as precisely defined in Article 49. Direct instructions from the CEO of the vertically integrated undertaking or of its supply branch to the CEO of the ITO would clearly infringe Article 47 and should lead to heavy fines being imposed on the vertically integrated undertaking. Control of the management by the supervisory body does not infringe Article 48 provided it remains within the limits of Article 49.

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Under Article 43(8) of the Directive,277 a Member State can derogate from the rules of ITO under Chapter VI where, on on 3 September 2009, the transmission system belonged to a vertically integrated undertaking and there were arrangements in place guaranteeing more effective independence of the TSO than the provisions of Chapter VI. This is known as the “ITO+” option. Under the certification procedure, the Commission has a binding role in verifying that the arrangements in place clearly guarantee more effective independence of the TSO than the provisions of Chapter VI, and the relevant regulatory authority has to comply with the Commission decisions.

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276 Articles 10 and 11 for gas. 277 Article 9(9) of the Third Gas Directive.

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Independence of the staff and the management of the transmission system operator Article 48 of Directive 2019/944 (below) and Article 19 of the Third Gas Directive “1. Decisions 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 49. 2. The identity and the conditions governing the term, the duration and the termination of office of the persons nominated by the Supervisory Body for appointment or renewal as persons responsible for the executive management and/or as members of the administrative bodies of the transmission system operator, and the reasons for any proposed decision terminating such term of office, shall be notified to the regulatory authority. Those conditions and the decisions referred to in paragraph 1 shall become binding only if the regulatory authority has raised no objections within three weeks of notification.

The regulatory authority may object to the decisions referred to in paragraph 1 where: (a) doubts arise as to the professional independence of a nominated person responsible for the management and/or member of the administrative bodies; or (b) in the case of premature termination of a term of office, doubts exist regarding the justification of such premature termination.

3. No 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.

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Chapter 4 Unbundling of Transmission System Operators Emmanuel Cabau, revised and updated by Lena Sandberg 4. The persons responsible for the management and/or members of the administrative bodies, and employees of the transmission system operator 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. 5. The persons responsible for the management and/or members of the administrative bodies, and employees of the transmission system operator shall hold no interest in or receive any financial benefit, directly or indirectly, from any part of the vertically integrated undertaking other than the transmission system operator. Their remuneration shall not depend on activities or results of the vertically integrated undertaking other than those of the transmission system operator. 6. Effective rights of appeal to the regulatory authority shall be guaranteed for any complaints by the persons responsible for the management and/or members of the administrative bodies of the transmission system operator against premature terminations of their term of office. 7. After termination of their term of office in the transmission system operator, the persons responsible for its management and/or members of its administrative bodies shall have no professional position or responsibility, interest or business relationship with any part of the vertically integrated undertaking other than the transmission system operator, or with its controlling shareholders for a period of not less than four years. 8. Paragraph 3 shall apply to the majority of the persons responsible for the management and/or members of the administrative bodies of the transmission system operator.

The 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.



The first subparagraph of this paragraph and paragraphs 4 to 7 shall be applicable to all the persons belonging to the executive management and to those directly reporting to them on matters related to the operation, maintenance or development of the network.”

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Article 48 of the Directive provides rules on the independence of an ITO’s management. The management of the ITO is referred to as “the persons responsible for the management and/or members of the administrative bodies” of the ITO. In practice, this includes any person having the power of decision within the ITO over management issues that can affect the company’s commercial behaviour. Depending on the form of the companies and its statutes, this will normally be the President, the Director General, and/or Chief Executive Officer, as well as any member of a board with decision-making competences (other than the supervisory body under the Directives).

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The supervisory body is in charge of taking all decisions regarding the appointment and renewal, working conditions (including remuneration), and termination of the management’s term of office. These decisions must be notified to the relevant regulatory authority and can become binding only if the regulatory authority has raised no objections within three weeks of notification. In practice the regulatory authority shall ensure that the management of the ITO is professionally independent and that its working conditions can ensure such independence. It may object to any such decision if it believes there may be a lack of professional independence on the management’s part or as to the justification for the revocation.

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In addition to the control of the regulatory authority, the Directive provides some rules aimed at ensuring that any conflict of interest is avoided in relation to both the management and the employees of the ITO. These rules include the following:278 1.

The management cannot directly or indirectly have any professional position or responsibility, interest or business relationship, with the vertically integrated undertaking or any part of it for a period of three years before its appointment. There is a derogation from this rule for the TSO’s management, which may stay in place before the undertaking is restructured in compliance with the ITO requirements (provided it has not worked for other parts of the vertically integrated undertaking for the last three years).

2.

The ITO’s management and employees may have no other professional position or responsibility, interest or business relationship, directly or indirectly, with any other part of the vertically integrated undertaking. This rule prevents, for example, the management and employees from holding shares in the vertically integrated undertaking.

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Article 19 of the Third Gas Directive.

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3.

The ITO’s management and employees may hold no interest in or receive any financial benefit, directly or indirectly, from any part of the vertically integrated undertaking other than the ITO. In addition, its remuneration shall not depend on activities or results of the vertically integrated undertaking other than those of the TSO. This last rule prevents, for example, the granting of stock options to the management based on the shares of the vertically integrated undertaking.

Following termination of their term of office in the ITO, the management may have no professional position or responsibility, interest or business relationship with any part of the vertically integrated undertaking for a period of not less than four years. There is a derogation to this rule for the ITO which allows the management to stay in a non-managerial position at the ITO. This rule also applies to all the persons belonging to the executive management and to those directly reporting to them on matters related to the operation, maintenance or development of the network.

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The rule in Article 48(3) prohibiting any professional position/responsibility/ interest/business relationship being held by the TSO with the vertically integrated undertaking, any part of it or its controlling shareholders only applies to the majority of the management (including all the persons belonging to the executive management and to those directly reporting to them on matters related to the operation, maintenance or development of the network). Where management functions are exercised by a board or a college, this rule applies to half plus one of the members of the board or of the college. If one person has essentially all the executive powers within the ITO, the majority rule implies that this rule applies to him or her. The members of the management team who are not subject to Article 48(3) should not have exercised management or other relevant activity in the vertically integrated undertaking for a period of at least six months before their appointment.

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Supervisory Body Article 49 of Directive 2019/944 (below) and Article 20 of the Third Gas Directive “1. The 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 201

Chapter 4 Unbundling of Transmission System Operators Emmanuel Cabau, revised and updated by Lena Sandberg 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 to activities necessary for the preparation of the ten‑year network development plan developed pursuant to Article 51. 2. 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. The first subparagraph of Article 48(2) and Article 48(3) to (7) shall apply to at least half of the members of the Supervisory Body minus one. Point (b) of the second subparagraph of Article 48(2) shall apply to all the members of the Supervisory Body.”

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The presence of a supervisory body is a key requirement under the ITO option. In addition to taking the decisions concerning the appointment of management, the supervisory body also takes all the decisions which may have a significant impact on the value of the shareholders’ assets in the ITO. This includes decisions on the approval of annual and longer-term financial plans, the level of indebtedness of the TSO, and the amount of dividends distributed to shareholders. However, the supervisory body cannot interfere in the day-to-day activities of the TSO, the management of the network, or with the preparation of the 10‑year network development plan under Article 51. In many cases the company law of Member States will need to be adapted so as to comply with these specificities of the supervisory body.

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The members of the supervisory body are appointed by the ITO’s shareholders in proportion to their shareholding, and represent these shareholders within the board. This primarily includes the vertically integrated undertaking, but can also concern third party shareholders and, where the relevant legislation of a Member State so provides, members representing other interested parties such as TSO employees.

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In order to guarantee some independence of the supervisory body’s members, the “independence rules” which apply to management also apply to the supervisory body. However, the only rule applying to all members of the supervisory board is the one allowing the regulatory authority to object to the revocation of the members of the Supervisory body if it has any doubt as to the justification for their revocation. The other rules only apply to half of the members of the Supervisory Body minus one (the “Minority Members”). These rules are as follows: 1.

The identity and the conditions governing the term, the duration and the termination of office of the supervisory body’s Minority Members, and the reasons for any proposed decision terminating such term of office, must be notified to the regulatory authority, which can object to them within three weeks of notification. The regulatory authority shall ensure that the supervisory body’s Minority Members are professionally independent, that such independence is ensured by their working conditions, and that any revocation is only for reasons relating to professional failure: It may object to any such decision if it has any doubt as to the professional independence of the Minority Members or as to the justification for their revocation.

2.

The Minority Members of the supervisory body cannot exercise any professional position or responsibility, interest or business relationship, directly or indirectly, with the vertically integrated undertaking or any part of it for a period of three years before their appointment. A derogation to this rule concerns the transmission system operator itself: the Minority Members can always come from the management or the employees of the TSO even though it was a legally and functionally unbundled subsidiary of the vertically integrated undertaking under the Second Directives or an ITO under the Clean Package and the Third Gas Directive (provided they have not worked for other parts of the vertically integrated undertaking for the last three years);

3.

The Minority Members of the supervisory body of the ITO shall have no other professional position or responsibility, interest or business relationship, directly or indirectly, with any other part of the vertically integrated undertaking;

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4.

The Minority Members of the supervisory body of the ITO shall hold no interest in or receive any financial benefit, directly or indirectly, from any part of the vertically integrated undertaking other than the ITO. In addition, their remuneration shall not depend on activities or results of the vertically integrated undertaking other than those of the transmission system operator; and

5.

After termination of their term of office in the ITO, the Minority Members of the supervisory body shall have no professional position or responsibility, interest or business relationship with any part of the vertically integrated undertaking for a period of not less than four years. A derogation to this rule concerns the ITO itself: the Minority Members can always take a position within the management or as employees of the ITO.

Compliance programme and compliance officer Article 50 of Directive 2019/944 and Article 21 of the Third Gas Directive “1. Member States shall ensure that transmission system operators establish and implement a compliance programme which sets out the measures taken in order to ensure that discriminatory conduct is excluded, and ensure that the compliance with that programme is adequately monitored. The compliance programme 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. 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 48(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 programme;

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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. This shall occur at the latest when the management and/or the competent administrative body of the transmission system operator submits them to the Supervisory Body. 5. Where the vertically integrated undertaking, in the general assembly or through the vote of the members of the Supervisory Body it has appointed, has prevented the adoption of a decision with the effect of preventing or delaying investments, which under the ten-year network development plan was to be executed in the following three years, the compliance officer shall report this to the regulatory authority, which then shall act in accordance with Article 51. 6. The conditions governing the mandate or the employment conditions of the compliance officer, including the duration of its mandate, shall be subject to approval by the regulatory authority. Those conditions shall ensure the independence of the compliance officer, including by providing him with all the resources necessary for fulfilling his duties. During his mandate, the compliance officer shall have no other professional position, responsibility or interest, directly or indirectly, in or with any part of the vertically integrated undertaking or with its controlling shareholders. 7. The compliance officer shall report regularly, either orally or in writing, to the regulatory authority and shall have the right to report regularly, either orally or in writing, to the Supervisory Body of the transmission system operator.

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Chapter 4 Unbundling of Transmission System Operators Emmanuel Cabau, revised and updated by Lena Sandberg 8. The compliance officer may attend all meetings of the management or administrative bodies of the transmission system operator, and those of the Supervisory Body and the general assembly. The compliance officer shall attend all meetings that address the following matters: (a) conditions for access to the network, as laid down in Regulation (EU) 2019/943, in particular regarding tariffs, third party access services, capacity allocation and congestion management, transparency, ancillary services and secondary markets; (b) projects undertaken in order to operate, maintain and develop the transmission system, including interconnection and connection investments; (c) energy purchases or sales necessary for the operation of the transmission system. 9. The compliance officer shall monitor the compliance of the transmission system operator with Article 41. 10. The compliance officer shall have access to all relevant data and to the offices of the transmission system operator and to all the information necessary for the fulfilment of his task. 11. The compliance officer shall have access to the offices of the transmission system operator without prior announcement 12. After prior approval by the regulatory authority, the Supervisory Body may dismiss the compliance officer. It shall dismiss the compliance officer for reasons of lack of independence or professional capacity upon request of the regulatory authority.”

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The ITO is under an obligation to establish and implement a compliance programme setting out the measures taken in order to ensure that discriminatory conduct is excluded. The compliance programme is normally approved by the regulatory authority. However, under Article 6(10) of the ACER Regulation, ACER must approve the compliance programme of a joint undertaking of vertically integrated transmission system operators. The supervisory body should appoint a compliance officer, subject to the approval by the regulatory authority. The compliance officer is specifically in charge of ensuring compliance with the compliance programme, but also has a general role as regards guaranteeing 206

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that the ITO is independent in practice and does not pursue discriminatory conducts. The compliance programme and the compliance officer are subject to detailed rules under Article 50 the Directive279 which can be summarised as follows.

4.236

The compliance officer, which can be an individual or a company or another entity such as a certification body, is appointed by the supervisory body, subject to the approval by the regulatory authority which can oppose appointment only for reasons of lack of independence or professional capacity. The supervisory body may dismiss the compliance officer only after prior approval by the regulatory authority; it shall dismiss it if requested by the regulator for reasons of lack of independence or professional capacity.

4.237

The compliance officer is subject to the same independence rules as the management of the ITO (ex ante and ex post cooling off period, etc.). The conditions governing the mandate or the employment conditions of the compliance officer, including the duration of its mandate, shall ensure its independence and are subject to approval by the regulatory authority.

4.238

The compliance officer is in charge of monitoring the implementation of the compliance programme, reporting annually to the regulatory authority on its implementation, and issuing recommendations on the compliance programme and its implementation to the supervisory body. It is under the duty to notify the regulatory authority on any substantial breaches with regard to the implementation of the compliance programme. It also reports to the regulatory authority on any commercial and financial relations between the vertically integrated undertaking and the transmission system operator.

4.239

It is generally in charge of monitoring and reporting to the regulatory authority on decisions of the ITO on network investments. This is especially important: due to its understanding of the ITO, and by attending all the meeting of the management and supervisory boards, the compliance officer should be able to form an idea as to whether an investment proposed by the management to the supervisory body is rejected not on its merits but because of a conflict of interest involving the vertically integrated undertaking. If it feels that the Supervisory body is attempting to block a sound investment decision, it should immediately report this to the regulatory authority.

4.240

279 Article 21 for gas.

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4.241

The compliance officer can attend all meetings of the management or administrative bodies of the transmission system operator, and those of the Supervisory Body and the general assembly. It shall have access to all relevant data and to the offices of the transmission system operator and to all the information necessary for the fulfilment of his task. Network development and powers to make investment decisions Article 51 of Directive 2019/944(below) and Article 22 of the Third Gas Directive “1. At least every two years, transmission system operators shall submit to the regulatory authority a ten‑year network development plan based on existing and forecast supply and demand after having consulted all the relevant stakeholders. That network development plan shall contain efficient measures in order to guarantee the adequacy of the system and the security of supply. The transmission system operator shall publish the ten-year network development plan on its website. 2. The ten‑year network development plan shall in particular: (a) indicate to market participants the main transmission infrastructure that needs to be built or upgraded over the next ten years; (b) contain all the investments already decided and identify new investments which have to be executed in the next three years; and (c) provide for a time frame for all investment projects. 3. When elaborating the ten‑year network development plan, the transmission system operator shall make reasonable assumptions about the evolution of the generation, supply, consumption and exchanges with other countries, taking into account investment plans for regional and Union‑wide networks. 4. The regulatory authority shall consult all actual or potential system users on the ten‑year network development plan in an open and transparent manner. Persons or undertakings claiming to be potential system users may be required to substantiate such claims. The regulatory authority shall publish the result of the consultation process, in particular possible needs for investments.

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If any doubt arises as to the consistency with the Union‑wide network development plan, the regulatory authority shall consult ACER. The regulatory authority may require the transmission system operator to amend its ten‑year network development plan.

6. The regulatory authority shall monitor and evaluate the implementation of the ten‑year network development plan. 7. In circumstances where the transmission system operator, other than for overriding reasons beyond its control, does not execute an investment, which, under the ten-year network development plan, was to be executed in the following three years, Member States shall ensure that the regulatory authority is required to take at least one of the following measures to ensure that the investment in question is made if such investment is still relevant on the basis of the most recent ten-year network development plan: (a) to require the transmission system operator to execute the investments in question; (b) to organise a tender procedure open to any investors for the investment in question; or (c) to oblige the transmission system operator to accept a capital increase to finance the necessary investments and allow independent investors to participate in the capital.

Where the regulatory authority has made use of its powers under point (b) of paragraph 7, it may oblige the transmission system operator to agree to one or more of the following: (a) financing by any third party; (b) construction by any third party;

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Chapter 4 Unbundling of Transmission System Operators Emmanuel Cabau, revised and updated by Lena Sandberg (c) building the new assets concerned itself; (d) operating the new asset concerned itself.

The transmission system operator shall provide the investors with all information needed to realise the investment, shall connect new assets to the transmission network and shall generally make its best efforts to facilitate the implementation of the investment project.



The relevant financial arrangements shall be subject to approval by the regulatory authority.

8. Where the regulatory authority has made use of its powers under paragraph 7, the relevant tariff regulations shall cover the costs of the investments in question.”

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As indicated above, although the ITO option arguably does not result in structural independence, this is compensated for by significant regulatory control on investments. The objective is to ensure that the necessary investments are made under the ITO option despite the remaining link with the supply branch.

4.243

First, the ITO is under the obligation to submit annually to the regulatory authority a ten year network development plan. This ten year network development plan should strictly follow the procedure set out in Article 51.

4.244

The ten year network development plan should in particular: (a) indicate to market participants the main transmission infrastructure that needs to be built or upgraded over the next ten years;

4.245

(b)

contain all the investments already decided and identify new investments which have to be executed in the next three years; and

(c)

provide for a time frame for all investment projects. (paragraph 2).

The network development plan shall take into account the evolution of the generation, supply, consumption and exchanges with other countries, as well as investment plans at regional and Community wide levels. The regulatory authority shall consult all actual or potential system users on the ten year network development plan. The result of the consultation process is to be published.

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The regulatory authority shall examine whether the ten year network development plan covers all investment needs identified during the consultation process, and whether it is consistent with the nonbinding Community wide ten year network development plan developed under the Gas and Electricity Regulations. It may consult the Agency. In the end, the regulatory authority may require the transmission system operator to amend its ten year network development plan.

4.246

Secondly, if the ITO does not execute an investment, which, under the ten year network development plan, was to be executed in the following three years, the Member States shall ensure that the regulatory authority is required to take at least one of the following measures:

4.247

(a)

to oblige the transmission system operator to execute the investments in question;

(b)

to organise a tender procedure open to any investors for the investment in question; or

(c)

to oblige the transmission system operator to accept a capital increase to finance the necessary investments and allow independent investors to participate in the capital.

The wording of the provision clearly indicates that there is an obligation on the regulatory authority to apply one of these measures with the strong objective to ensure that the investment in question is made . It would also seem that Member States do not have an obligation to give all three competences to the regulatory authorities. It should be noted however that only option (a), which provides for an obligation to execute the investments can ensure that the investment is made as requested by the Directive. Measures (b) and (c) can only be effective if the market provides the relevant financing, which will not always be the case. It remains therefore to be seen whether a Member State complies with Article 22 if it only grants to the regulatory authority the powers under measures (a) and/ or (b) and this does not lead to the investments being made.

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Decision making powers regarding the connection of new power plant, storage facilities, LNG regasification facilities and industrial customers to the transmission system Article 42 of Directive 2019/944 Decision-making powers regarding the connection of new generating installations and energy storage facilities to the transmission system “1. The transmission system operator shall establish and publish transparent and efficient procedures for non-discriminatory connection of new generating installations and energy storage facilities to the transmission system. Those procedures shall be subject to the approval of regulatory authorities. 2. The transmission system operator shall not be entitled to refuse the connection of a new generating installation or energy storage facilityon the grounds of possible future limitations to available network capacities, such as congestion in distant parts of the transmission system. The transmission system operator shall supply necessary information. 3. The first subparagraph shall be without prejudice to the possibility for transmission system operators to limit the guaranteed connection capacity or to offer connections subject to operational limitations, in order to ensure economic efficiency regarding new generating installations or energy storage facilities, provided that such limitations have been approved by the regulatory authority. The regulatory authority shall ensure that any limitations in guaranteed connection capacity or operational limitations are introduced on the basis of transparent and non-discriminatory procedures and do not create undue barriers to market entry. Where the generating installation or energy storage facility bears the costs related to ensuring unlimited connection, no limitation shall apply. 4. The transmission system operator shall not be entitled to refuse a new connection point, on the ground that it will lead to additional costs linked with necessary capacity increase of system elements in the closeup range to the connection point.”

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Article 23 of the Third Gas Directive Decision making powers regarding the connection of storage facilities, LNG regasification facilities and industrial customers to the transmission system “1. The transmission system operator shall establish and publish transparent and efficient procedures and tariffs for non-discriminatory connection of storage facilities, LNG regasification facilities and industrial customers to the transmission system. Those procedures shall be subject to approval by the regulatory authority. 2. The transmission system operator shall not be entitled to refuse the connection of a new storage facility, LNG regasification facility or industrial customer on the grounds of possible future limitations to available network capacities or additional costs linked with necessary capacity increase. The transmission system operator shall ensure sufficient entry and exit capacity for the new connection.”

Article 42 additionally provides some specific rules concerning connection to the transmission system of new power plant, storage facilities, LNG regasification facilities, and industrial customers. The objective is to ensure that ITO do not discriminate against producers that are competing with the supply branch of their mother vertically integrated undertaking as regards network connection.

4.249

The main requirement is that the TSO cannot refuse to connect to the grid new power plants, new storage facilities, new LNG regasification facilities or gas industrial customers on the grounds of possible future limitations to available network capacities or additional costs linked with the necessary capacity increase. In other words, network capacity limitations do not by themselves justify a refusal to connect. To this rule of substance is added a procedural rule which imposes in particular transparency requirements: ITOs have to draft and publish the rules and tariffs which are applicable to the connection of new power plants, new storage facilities, new LNG regasification facilities or gas industrial customers. These rules must ensure non-discriminatory conditions for connection and be approved by the regulatory authority.

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Specific duties of the regulatory authority

4.252

Where an ITO is designated, Article 59(6) of Directive 2019/944 and Article 41 of the Third Gas Directive provide for specific duties and powers to be granted to regulatory authorities.

4.253

The Directives are clear that these duties and powers are additional and not alternative to the duties and powers conferred on the regulatory authorities as regards TSOs under Article 59(6) of Directive 2019/944 and Article 41 of the Third Gas Directive. They clearly indicate that the list is a minimum set of duties but that Member States can grant more powers to regulatory authorities.

4.254

These specific duties mainly concern increased powers to control the behaviour of the ITO and sanction any discriminatory behaviour. This is justified by the added risk of discriminatory behaviour arising from the remaining structural links with the supply branch of the group.

4.255

As regards control, the regulatory authorities are granted the following added competences: (a)

to monitor communications between the TSO and the vertically integrated undertaking so as to ensure compliance of the TSO with its obligations;

(b)

to monitor commercial and financial relations between the vertically integrated undertaking and the TSO;

(c)

to approve all commercial and financial agreements between the vertically integrated undertaking and the TSO on the condition that they comply with market conditions;280

(d)

to request justification from the vertically integrated undertaking when notified by the compliance officer of a decisions on investment plans or individual investments, in particular as regards absence of discriminatory behaviour to the advantage of the vertically integrated undertaking; and

280 It is understood that points (a) and (b) above aim to prevent the vertically integrated undertaking from favouring the transmission system operator, and vice versa, as regards commercial and financial relations. All commercial and financial relations have to be monitored. When the relations give rise to a formal agreement the regulator must ensure that this complies with market conditions.

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(e)

to carry out inspections, including unannounced ones, on the premises of the vertically integrated undertaking and the TSO (paragraph g). This power is very wide and should be interpreted by analogy with the identical power granted to the Commission under competition rules. The rights of defence of the vertically integrated undertaking and the TSO will of course have to be fully respected within this process.

The second set of powers concerns sanctions.

4.256

The first power is the ability to impose penalties. Although this is a general power under Article 59(3) of Directive 2019/944 and Article 41 of the Third Gas Directive for a TSO’s non-compliance with its obligations, the specific provision for ITOs clarifies that any discriminatory behaviour in favour of the vertically integrated undertaking should be treated as non-compliance and result in penalties. In addition, where an ITO is involved, penalties are calculated by reference to the turnover of the vertically integrated undertaking, and not just by reference to the TSO’s turnover.

4.257

The second power is the ability to appoint another TSO to carry on all or some of the ITO’s functions. This can only intervene in case of a persistent breach by the ITO of its obligations “ in particular in case of repeated discriminatory behaviour to the benefit of the vertically integrated undertaking”. This extreme measure seems more likely to be used as a deterrent than to be actually applied. It would seem in particular raise complicated financial and social issues as regards the financial balance and workforce of the ITO.

4.258

One final power concerns the ITO’s duty to act as a dispute settlement authority between the vertically integrated undertaking and the TSO in relation to any complaint submitted pursuant to Article 60(2) of Directive 2019/944 and Article 41 of the Third Gas Directive.

4.259

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Chapter 5 Unbundling of Distribution System Operators

1.

Introduction

Whilst the general rationale for unbundling is common to both TSOs and DSOs and is explained under the Chapter on TSO unbundling, there are some differences between TSOs and DSOs in this respect. For instance, congestion often exists at transmission level, but is rare or non-existent at distribution level and, therefore, the need for rules or mechanisms to guarantee non-discriminatory capacity allocation is arguably stronger at TSO level. Furthermore, the threat of a lack of investment and the need for adequate incentives or obligations in this respect may be seen as a more prominent issue at transmission level where investments are not directly driven by the need to bring gas or electricity to consumers and lack of investments can be detrimental to both security of supply and the formation of a single internal market. The risk of discriminatory behaviour as regards connection of competitors’ generation capacities also mainly arises at transmission level to which major generation facilities are connected (although, with the onset of increasing levels of generation from renewable energy sources (“RES”) connected at the distribution level, this will plays a more significant role in future).

5.1

On the other hand, DSOs are in contact with final consumers, which gives them a strong possibility to influence the consumer’s choice of supplier. Where DSOs are both suppliers and network operators, the inherent conflict of interest gives them just as much incentive to discriminate against competitors seeking access to “their” network to supply “their” customers as is the case with TSOs, and they have equally good possibilities for such actions. Discrimination concerning the connection of distributed generation,281 in particular as regards small renew-

5.2

281 Distributed generation refers to small generation capacities that are directly connected to the distribution

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able production capacities, can also originate from a DSO vertically integrated with a producer. The opportunity for this sort of discrimination also became increasingly important given the steep increase of distributed energy generation from small scale renewable energy sources connected to the distribution grid over the last decade. On balance, therefore, the need for effective unbundling of TSOs and DSOs is similar. The Third Package

5.3

The Third Energy Package pursued the general objectives of improving competition, security of supply and sustainability in the internal energy market. One of its improvements to competition was the deepening of the unbundling of energy suppliers from network operators, both TSOs and DSOs. With regard to DSO unbundling in particular, the intervention aimed mainly at ensuring non-discriminatory and transparent third party access to distribution networks through the unbundling of vertically integrated distribution undertakings.

5.4

The Third Package maintained, in principle, the rules on legal, management and accounting unbundling for vertically integrated DSOs already contained in the Second Package. These rules were as follows: –

first, DSOs must be established as legally separate companies from the generation (i.e., production) and supply branch;

–

secondly, DSOs must be separated in terms of their “organisation and decision making” from the generation (i.e., production) and supply branch;

–

thirdly, DSOs must keep separate accounts for their distribution activities with a view to avoiding discrimination, cross-subsidisation and distortion of competition;

–

fourthly, because for small distribution companies the economies of scale may not exist to justify all the rules on unbundling, Member States may derogate from the first two (legal and management) of the three above rules for DSOs serving fewer than 100,000 connected customers or serving small isolated systems.

system.

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The Third Package reinforced these rules in four important respects.

5.5

First, the distribution system operator must have at its own disposal the necessary resources to run the grid, including human, technical, physical and financial resources. It must not, therefore, have to call on its parent company for these resources or assets, which might give the vertically integrated company an opportunity to influence the behaviour of its network company.

5.6

Second, a compliance officer has to be appointed by the DSO with the express role of preparing and enforcing the compliance programme already provided for under the Second Directives. The compliance officer must be fully independent and have access to all the necessary information of the distribution system operator to fulfil his or her task.

5.7

Third, a specific rule is created to avoid that a vertically integrated supplier takes advantage of vertical integration with a DSO to influence customers in its favour to the detriment of its competitors.

5.8

Lastly, the EU regulatory framework concerning the implementation of unbundling rules by distribution companies is considerably strengthened with the attribution of the specific task and powers to regulatory authority – including financial sanctions – to ensure compliance of distribution system operators with their obligations under unbundling rules.282

5.9

The evaluation of the Third Package as regards electricity, carried out before the adoption of the new electricity market design, showed that “the Third Package has positively contributed to competition and performance of the internal electric‑ ity market, delivering tangible market benefits that have translated into added net social welfare”. The evaluation further concluded that “the reinforced un‑ bundling rules had a positive effect on competition and helped to limit problems of market foreclosure”. For DSOs specifically, the conclusion of the evaluation was that “there [was] no evidence that the intervention within the boundaries of the unbundling requirements, did not achieve the objective of promoting competi‑ tion in the market”. Therefore, the Commission took the view that there was no need to deepen or change the rules on DSOs unbundling.

5.10

282 Art. 59(1) b of the Recast Electricity Directive and 41(1) b of the Third Gas Directive. See Chapter 6.

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5.11

The current unbundling rules have thus largely remain unchanged from those in force before the adoption of the Recast Electricity Directive (Directive (EU) 2019/944). Notably, the core of the unbundling rules between, on the one hand, DSOs and, on the other hand, generation and supply remain almost completely unchanged in the Recast Electricity Directive. Article 26 of the Third Electricity Directive has been basically entirely recuperated under the new Article 35.

5.12

However, the commitment to decarbonize the economy and the accompanying increase in the importance of renewable and intermittent energy sources lead to significant changes in the organisation and operation of the electricity grid and market. Most notably, electricity produced from these sources is often produced in a decentralized way and is fed directly into local distribution grids. New levels of distribution grid expansion and management are therefore needed to integrate locally produced renewable energy. In parallel to the rise of renewables, the digitalisation of energy markets and increased used of (smart-)metering enables an increasing level of flexibility from both production and consumption (including ‘demand response’). The market design rules of the Third Package were not fit to regulate the electricity market in the light of these major evolutions and prevented network operators from operating more innovatively and efficiently.

5.13

As a consequence, the electricity market design as a whole, and the tasks entrusted to the DSOs in particular, needed to evolve. Under the Recast Electricity Directive, DSOs are notably entrusted with the use of flexibility to manage their distribution networks and are under the obligation to submit a network development plan to the national regulatory authority at least once every two years (see Article 32). Member States also have the possibility to involve DSOs in electricity market data management (see Articles 23 and 34). Furthermore, previous unbundling rules, whose efficacy had been established by the aforementioned assessment, needed to be extended to preserve the DSOs’ role as neutral market facilitators. Therefore, new prohibitions and obligations have been adopted, most notably under Articles 32, 33 and 36, respectively on the use of flexibility services by DSOs as well as the integration of electro-mobility and energy storage solutions on the grid by DSOs.

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2.

Definition of a vertically integrated company

The unbundling requirements of the Second and Third Directives remain applicable where the distribution system operator is part of a vertically integrated undertaking.283 Article 2 (53) of the Recast Electricity Directive and Article 2 (20) of the Gas Directive define a vertically integrated undertaking as follows:

5.14

Article 2 (53) electricity “vertically integrated undertaking” means an electricity undertaking or a group of electricity undertakings where the same person or the same persons are entitled, directly or indirectly, to exercise control, and where the undertaking or group of undertakings perform at least one of the functions of transmission or distribution, and at least one of the functions of generation or supply of electricity.”284

Article 2 (20) gas “vertically integrated undertaking” means a natural gas undertaking or a group of natural gas undertakings where the same person or the same persons are entitled, directly or indirectly, to exercise control, and where the undertaking or group of undertakings perform at least one of the functions of transmission, distribution, LNG or storage, and at least one of the functions of production or supply of natural gas.”285

Thus, the unbundling requirements are applicable where: (i)

the activities of generation or supply, together with distribution or transmission, are carried out within a single company, normally as a series of different departments within the same, unified, legal structure; or

(ii)

a holding company controls a number of subsidiary companies, some of which are active in the generation and supply business whilst others are network companies.

283 Article 26(1) of the Gas Directive and Article 35 of the Recast Electricity Directive. 284 This definition is word for word the same as that in the Third Electricity Directive. 285 Although not drafted in the same way, the definition is identical to the definition under the Second Package: “Vertically integrated undertaking means a natural gas undertaking or a group of undertakings whose mutual relationships are defined in Article 3(3) of Council Regulation (EEC) No 4064/89 of 21 December 1989 on the control of concentrations between undertakings and where the undertaking/group concerned is performing at least one of the functions of transmission, distribution, LNG or storage, and at least one of the functions of production or supply of natural gas.”

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5.16

The first of these two categories of vertically integrated undertakings poses no particular difficulties of interpretation: the company in question evidently operates in both distribution and generation or sales. The distribution assets must therefore be separated into a new subsidiary company.

5.17

The second category, where separate network companies already exist, does, however, pose a potential difficulty. Unbundling is only necessary where the holding company actually controls a distribution company. Thus, if a distribution company exists, and its shares are held diversely, the fact that a generation company holds 10% of the shares, giving it no ability to direct the activities of the network company, does not mean that the Directives’ requirements on unbundling (and in particular those on management unbundling) are applicable.

5.18

The test applied by the Directives to determine whether a holding company which is active in generation or sales actually controls a distribution business has been borrowed from the Merger Regulation.286 The fact that the concept of control is identical between these two legal texts is stated explicitly by Recital 10 of the Gas Directive. Although it is no longer expressly stated in the Recast Electricity Directive (contrary to the previous Directive which explicitly stated it under its Recital 13), the history of this notion and the fact that the definition’s wording is completely identical to the version of the previous Directive leaves little doubt that it remains the same notion.

5.19

It is notable that this definition only refers only to “and at least one of the func‑ tions of generation or supply of electricity” rather than “and at least one of the functions of generation or supply of electricity, aggregation, demand response and energy storage”.287 This means that if the activity of distribution and aggregation or energy storage are carried out inside a single legal entity, such an undertaking would not qualify as a ‘vertically integrated undertaking’. This means that the requirements of article 35 (see hereunder) do not apply to such an undertaking and that only the specific unbundling rules (discussed section 6) apply. 286 Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings, OJ L 24, 29.1.2004, p. 1. This Regulation gives the power to the Commission to vet large­scale mergers. In this context the definition of ‘control’ is vital – it is imperative to determine whether one company has gained “control” over another – i.e. whether a merger has taken place. 287 Indeed, the definition of ‘electricity undertaking’ has been amended in the Recast Electricity Directive to become: “‘electricity undertaking’ means a natural or legal person who carries out at least one of the follow‑ ing functions: generation, transmission, distribution, aggregation, demand response, energy storage, supply or purchase of electricity, and who is responsible for the commercial, technical or maintenance tasks related to those functions, but does not include final customers”. The part in bold are the amendments from the definition as it was in the Third Electricity Directive. This definition makes it clear that the function of aggregation is separate from that of generation or supply.

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Article 3 (2) of the Merger Regulation defines “control” as:

5.20

“Control shall be constituted by rights, contracts or any other means which, either separately or in combination and having regard to the considerations of fact or law involved, confer the possibility of exercising decisive influence on an undertaking, in particular by: (a) ownership or the right to use all or part of the assets of an undertaking; (b) rights or contracts which confer decisive influence on the composition, voting or decisions of the organs of an undertaking.”

In addition to a number of individual cases that have clarified the meaning of this Article,288 the Commission has adopted an official Notice289 indicating its view of when control exists.

5.21

In summary, ‘control’ exists where one company either (i) holds a majority of the shares of another (and thus the latter is a fully controlled subsidiary) or (ii) where it is a minority shareholder but, in fact, nonetheless de facto controls the company in question. This de facto control can exist in two basic situations. First, when a contract exists giving the company the right to direct the operations of the other. Thus, even if an electricity company owns no shares in a separate distribution undertaking, or a small percentage of the equity, the management/functional unbundling requirements of the Directive apply if it has the contractual right to manage the company in question. Second, where due to the disparate nature of the ownership of the shares, although a company only has, say 40% of the shares in another, in reality it always has an absolute majority of the votes at the annual general meetings (due to the absence of many smaller shareholders). In all of these situations, the unbundling provisions of the Directives apply.

5.22

288 See in particular Arjomari/Wigins Teape, Commission Decision of 10.12.1990, CMLR 4 [1992] 854 at paragraph 4, Ameritech/Tele Denmark, Commission Decision of 5.12.91, OJ 4 [1998] 206 at paragraph 4, and CCIE/GTE, Commission Decision of 25.9.92 at paragraphs 6-12. These decisions can best be found at the Commission’s web site: http://ec.europa.eu/competition/mergers/cases/. A more in depth examination of the concept of control under the Merger Regulation can be found in Volume II of EU Energy Law, “EU Competition Law and Energy Markets”, fifth edition, 2019 (Claeys & Casteels). 289 Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings (the “Merger Regulation”) of 10 July 2007, OJ  C95 of 16.04.2008. Also available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2008:095:0 001:0048:EN:PDF

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3.

Legal unbundling

3.1 Definition 5.23

Article 35 (1) of the Recast Electricity Directive and Article 26 (1) of the Third Gas Directive require that: “Article 35 (1) electricity Article 26 (1) gas “Where the distribution system operator is part of a vertically integrated undertaking, it shall be independent at least in terms of its legal form, organisation and decision-making from other activities not relating to distribution. Those rules shall not create an obligation to separate the ownership of assets of the distribution system from the vertically integrated undertaking.”

5.24

Thus, distribution companies must be established as legally separate companies, which may be subsidiaries of a vertically integrated gas or electricity company. This approach results from a compromise, dating back to the Second Package, between those who argued that ownership unbundling was necessary and those who considered that accounting and/or management separation would be sufficient.

5.25

It may be argued that the requirement for legal unbundling, in fact, adds little to the obligation to ensure separate functional management of the network business. If the management of the network operations is already truly separate, one can argue that it makes little difference whether the entity in question is a legally separate subsidiary or a distinct business unit of a vertically integrated company. However, it is clear that the Commission considered that real added value existed in creating a separate subsidiary. In particular it believed that if the network company is a distinct, identifiable company, employees would have a clear and separate corporate identity which would reinforce their ability and willingness to think and act independently from the commercial interests of the parent company, especially at management level. In terms of the precise legal form of the subsidiarity, this depends on national law.

5.26

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grated undertaking” has to be read in the light of paragraphs 35(2)(c) electricity and 26(2)(c) gas, which outline the measures necessary to ensure that the distribution system operator can decide on the effective management, operation, maintenance and upgrading of the network assets when these assets remain the property of the parent company. Thus, the actual ownership of the assets can remain with the holding company, but the distribution company has to have the exclusive right to decide on their usage. A further qualification to this is provided in paragraph (c) which is examined in detail in Section 4.5 below.290

3.2 Combined network operator Article 39 electricity “Article 35(1) shall not prevent the operation of a combined transmission and distribution system operator provided that operator complies with Articles 43(1), or 44 and 45, or Chapter VI or falls under Article 66(3).”

Article 29 gas “Article 26(1) shall not prevent the operation of a combined transmission, LNG, storage and distribution system operator provided that operator complies with Articles 9(1), or 14 and 15, or Chapter IV or falls under Article 49(6).”

As it obliges vertically integrated DSOs to implement legal and management unbundling from “activities not relating to distribution”, Articles 35(1) and 26(1) would also impose unbundling requirements between a TSO and a DSO.291 However, this is not the intention since acting as a TSO and a DSO does not raise issues of conflict of interest or discrimination. Article 39 of the Recast Electricity Directive and 29 of the Gas Directive therefore clarify that these former Articles “shall not prevent the operation of a combined transmission and distribution system operator”.

5.27

Of course, such a “combined operator” must comply with the rules on unbundling of TSOs, either ownership unbundling (“OU”), ISO or ITO. In practice, this means that a TSO which complies with the requirements of OU, ISO or ITO292 could combine the activities of transmission, LNG, storage and distribution. A natural exception to the need for a combined network operator to

5.28

290 See book paras 5.53-5.67. 291 Article 26(1): “Where the distribution system operator is part of a vertically integrated undertaking, it shall be independent at least in terms of its legal form, organisation and decision making from other activities not relating to distribution. (…)” 292 See Chapter 4.

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comply with TSO unbundling rules is when the Member State in question benefits from a derogation to the rules on TSO unbundling. Articles 39 and 29, in this regard, refer expressly to Article 66(3) of the Recast Electricity Directive or Article 49(6) of the Gas Directive granting express derogations to Cyprus, Luxembourg and Malta.293 The same applies to the other derogations from unbundling rules contained in the Directives294 as a Member State exempted from TSO unbundling rules, e.g., as a small isolated system, would also comply with the rules on TSO unbundling.

4.

Management unbundling

4.1 Introduction 5.29

Whilst accounting and legal unbundling are important, the key element to ensure that distribution system operators act independently is, in the absence of ownership unbundling, management unbundling. In the First Electricity Directive, management unbundling was required, without actively specifying what this meant. The resultant margin of manoeuvre led to many different forms of management unbundling, from the effective to the inadequate. The Second and Third Directives therefore specified not only in general terms what is required by management unbundling, but they also provided a number of specific requirements that must be met.

4.2 General definition of management unbundling 5.30

Article 35 (1) of the Recast Electricity Directive and Article 26 (1) of the Third Gas Directive set out the basic criteria with respect to management unbundling of the distribution system operator. Article 35 (1) electricity Article 26 (1) gas “Where the distribution system operator is part of a vertically integrated undertaking, it shall be independent at least in terms of its legal form, organisation and decision-making from other activities not relating to distribution.

293 See book para 11.94 and 11.98. 294 See Chapter 11.

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In addition to the requirement of legal unbundling, creating one or more subsidiaries responsible for network operation, the distribution companies must therefore be separate in terms of their “organisation and decision-making”. These are key concepts in understanding the requirement to ensure effective management unbundling.

5.31

If a distribution system company is to operate the network in a manner independent of the generation, production and sales interests of the parent company, it must firstly have separate decision-making processes. Decisions must be taken by a separate management team, on the basis of the commercial interest of the network company, and not of the group as a whole. Thus, the parent company cannot interfere in the day-to-day decisions of the network business. Aside from the financial supervision rights that the parent company must necessarily have over the operation of its assets,295 it must de facto step out of the management of the network business.

5.32

In addition to the issue of decision-making, these Articles require separate “organisation”. As this is mentioned separately from the issue of decision-making, it appears to concern separation of the network business in terms of premises, services and infrastructure.

5.33

Where a company is situated in different offices from the remainder of the group, and acquires its services independently and has a different logo and public corporate identity, the employees’ perception of unbundling and willingness to act independently will be reinforced. Furthermore, separation of premises and different IT systems will limit the possibilities for the exchange of commercial information. However, such a statement, whilst undoubtedly correct, does not make any qualitative judgment as to the importance of such separation in achieving independence of action, nor does it consider the cost/benefit issues: the use of common service providers can bring substantial savings to a vertically integrated group.

5.34

Thus, it does not appear logical to interpret this provision as an absolute obligation to ensure that no shared services exist, but that a reasonable approach must be taken, separating services and premises in a manner appropriate to ensure effective independence.

5.35

295 Which are specified in paragraph (c) of the same Articles, see below, Section 4.5 of this Chapter. Book paragraphs 5.53-5.67.

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5.36

This issue is addressed along these lines in the Commission’s interpretative document on unbundling under the Third Package296 which is quoted below;297 “An important question in the context of management separation is the extent to which it is permissible to have common services, i.e., services that are shared between transmission/distribution, supply and possibly other businesses within the vertically integrated undertaking. Such services could relate to personnel and finance, IT services, accommodation and transport. It is appropriate to look at this issue on a case-by-case basis. Under Article  26(2)(c) Electricity and Gas Directives, the DSO must have at its disposal the necessary resources, including human, technical, physical and financial resources, in order to fulfil its tasks of operating, maintaining and developing the network. This means that the DSO cannot unduly rely on the services of other parts of the vertically integrated undertaking, as the DSO itself must have the necessary resources at its disposal to operate, maintain and develop the network. Provision of services by other parts of the vertically integrated undertaking to the DSO will therefore be limited. Where such services are provided, conditions should be fulfilled to reduce competition concerns and to exclude conflicts of interest. In particular, any cross-subsidies being given by the DSO to other parts of the vertically integrated undertaking cannot be accepted. To ensure this, the service must be provided at market conditions and laid down in a contractual arrangement. It is recalled that the DSO is not entitled to provide any services to the related ITO (Article 17(1)(c) Electricity and Gas Directives).”

5.37

It should be highlighted that, although this unbundling obligation has not changed in substance since the Second Package, its implementation has in practice been considerably strengthened with the general powers given to the national regulatory authority to ensure compliance of the DSO with its unbundling obligations under the Third Package. These powers have not been rolled back (nor strengthened) under the Recast Electricity Directive. 296 Although this note concerns the interpretation of the Third Electricity Directive and although no similar interpretative note has yet been published regarding the Recast Electricity Directive, this interpretative note should apply to the interpretation of its Article 35 as a whole, given that its wording and context of its adoption are identical to the previous Article 26 of the Third Electricity Directive. This interpretative note will therefore be relied on to comment on the likely interpretation of Article 35 of the Recast Electricity Directive, but the reference to Article 26 of the previous electricity Directive will not be changed in the quotes. 297 Interpretative Note of 22 January 2010 on the Directives on the Unbundling Regime (Appendix 10, Section 3). Whilst this document is not formally binding on the Commission, as the College of Commissioners never formally discussed or approved it, it provides a good reflection of the Commission’s approach on the issue.

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In addition to this general definition, the Articles mentioned above specify five specific criteria that must be met with respect to management unbundling: –

independent management;

–

separation of professional interests;

–

autonomy and control over assets by the network operator;

–

the existence of a compliance officer and a compliance programme; and

–

prohibition to take advantage of vertical integration to distort competition, in particular in respect of the separate identity of the supply branch of the vertically integrated undertaking.

5.38

5.39

These merit individual examination.

4.3 Independent Management Article 35 (2) (a) of the Recast Electricity Directive and Article 26 (2) (a) of the Gas Directive provide: Article 35 (2) (a) electricity “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 and supply of electricity.”

Article 26 (2) (a) gas “Those persons responsible for the management of the distribution system operator must not participate in company structures of the integrated natural gas undertaking responsible, directly or indirectly, for the day-to-day operation of the production, transmission and supply of natural gas.”

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5.41

This gives rise to the following comments.

5.42

The phrase “those persons responsible for the management” is not defined. It should therefore be interpreted in the light of the objectives sought by the provisions. Thus, it applies to all those employed by the network company who play a significant role in the commercial decisions relevant to the operation of the business. In principle, this includes all of the members of the Board of Directors of the company and will also include middle and even junior management who occupy commercially sensitive posts. This is reflected in the Interpretation Note of the European Commission on unbundling which states that “Article 26 does not restrict the group of persons responsible for the management of the DSO to the top management, such as members of the executive management and/or members of a board having decision-making powers. Article 26 addresses a wider group of persons, including the operational (middle) management of the DSO.” 298

5.43

Thus, the top and middle management of the distribution company may not “participate in company structures of the integrated [electricity/gas] undertaking responsible, directly or indirectly, for the day-to-day operation” of the generation, supply or sales activities of the group, and vice versa.

5.44

The next question to be considered is: what exactly are “company structures ... responsible, directly or indirectly, for the day to day operation...”? It is submitted that, in this respect, a distinction should be drawn between the Board of Directors of a holding company of a vertically integrated company and the Board of individual subsidiaries responsible for transmission, distribution, sales, etc. A Board of a holding company does not in principle deal with “day-to-day” issues. Such questions are much more likely to be considered at board level in the various operational subsidiaries. As a consequence, Directors sitting on distribution companies may in principle also sit on the Board of the holding company, but not on the Board of a sales/generating subsidiary.

5.45

In this respect, the Interpretation Note of the Commission on unbundling states: “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. Whether and to what extent a manager of the DSO can work at the same time for the holding company of the vertically integrated undertaking if the holding company is not at the same time directly involved in production or supply, because legally separate 298 Appendix 10, point 3.3.1.

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4.4 Separation of personal interests Article 35 (2) (b) of the Recast Electricity Directive and Article 26 (2) (b) of the Gas Directive state the following:

5.46

Article 35 (2) (b) electricity Article 26 (2) (b) gas “Appropriate measures must be taken to ensure that the professional interests of the persons responsible for the management of the distribution system operator are taken into account in a manner that ensures that they are capable of acting independently.”

The simple fact that an identifiable management is appointed to a distribution company does not guarantee that it will act independently. There are many ways that a holding company can influence the management of its subsidiary companies, both legally (through the contractual relationship between parent and subsidiary) and practically. This paragraph deals with the second of these issues. It requires that the professional/career interests of the managers of the network business are not organised in such a way that they will be likely to act in a manner that they believe will be viewed favourably by the parent company. This therefore concerns issues such as salary and promotions.

5.47

There are no specific standard requirements on the method of achieving this objective. However, the Interpretative Note on Unbundling indicates that it believes that the following three issues need to be addressed;299

5.48

“Independence 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 299 See Appendix 10, Point 4.2.1.

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5.49

Thus, the Directives specify that the role of the parent company is limited to the approval of the “annual financial plan or any equivalent instrument” and thereby to “set global limits on indebtedness levels”. However, once this annual plan is approved, the network company has to have complete and free control over the management of the business. This is confirmed in the Commission’s Interpretative Note on unbundling in paragraph 3.3.2, which notes that: “regarding the limits of the supervision rights, the Directives are equally clear: any detailed day-to-day oversight of the network function by parts of the vertically integrated undertaking other than the DSO is not permitted. Also instructions regarding decisions on the construction or upgrading of the network, if these decisions stay within the terms of the approved financial plan, are not permitted”.

5.50

This does not mean, however, that the parent company can have no influence over the decisions of the network subsidiary regarding future infrastructure projects. It is perfectly usual that before completing annual investment plans a network company will have extensive discussions with its customers, and notably electricity and gas sellers. However, such discussions must be held with all companies, on a non-discriminatory basis.

4.5 Autonomy and control over assets by the network operator 5.51

Article 35 (2) (c) of the Recast Electricity Directive and Article 26 (2) (c) of the Third Gas Directive state the following:

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Article 35 (2) (c) electricity Article 26 (2) (c) gas “The distribution system operator must have effective decision-making rights, independent from the integrated electricity undertaking, with respect to assets necessary to operate, maintain or develop the network. In order to fulfil those tasks, the distribution system operator shall have at its disposal the necessary resources including human, technical, physical and financial resources. This should not prevent the existence of appropriate coordination mechanisms to ensure that the economic and management supervision rights of the parent company in respect of return on assets, regulated indirectly in accordance with Article 59(7) [41(6) gas], in a subsidiary are protected. In particular, this shall enable the parent company to approve the annual financial plan, or any equivalent instrument, of the distribution system operator and to set global limits on the levels of indebtedness of its subsidiary. It shall not permit the parent company to give instructions regarding day-to-day operations, nor with respect to individual decisions concerning the construction or upgrading of distribution lines that do not exceed the terms of the approved financial plan, or any equivalent instrument.”

The Directives provide for the general rule that the distribution system operator must have effective decision-making rights, independent from the integrated electricity undertaking, with respect to assets necessary to operate, maintain or develop the network. This gives rise to the following comments.

5.52

The original proposal of the Commission for the Second Electricity and Gas ­Directives, unchanged in the Third Package and the Recast Electricity Directive, maintained that all the assets relevant to the network had to be placed within the legally separate transmission/distribution companies. However, during negotiations in the Council, this approach was changed, as a number of Member States wished to retain the ownership of the assets in a different part of the vertically integrated company, usually at group level. There are two possible reasons for this insistence; first it provides greater flexibility for accounting and tax purposes, second the large number of employees working for a network company may see merit in remaining within the structure of the “main” company, fearing that the logical next step from legal unbundling is ownership separation.

5.53

Where, therefore, the assets are owned by the parent company, the Directives require that the network operator have “effective decision-making rights…. to operate, maintain and develop the network.”

5.54

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5.55

The owner must therefore be merely a passive recipient of the dividend paid to it by the network company. For most issues, this does not raise particular problems, as the network operator simply decides on operational issues. This is clarified in the Interpretative Note on unbundling, which states that: “Where another part of the vertically integrated undertaking remains the owner of the assets and puts these at the disposal of the DSO, the basic decisions concerning the assets must remain with the DSO, while the other part of the vertically integrated undertaking may be involved in the implementation of these decisions, provided that safeguards are put in place ensuring that the other part of the vertically integrated undertaking only executes the decisions taken by the DSO.”

5.56

An important question in the context of management separation is the extent to which it is permissible to have common services, i.e., services that are shared between transmission/distribution, supply and possibly other businesses within the vertically integrated undertaking. The Commission’s Interpretative Note indicates the following: “The DSO cannot unduly rely on the services of other parts of the vertically integrated undertaking, as the DSO itself must have the necessary resources at its disposal to operate, maintain and develop the network. Provision of services by other parts of the vertically integrated undertaking to the DSO will therefore be limited. Where such services are provided, conditions should be fulfilled to reduce competition concerns and to exclude conflicts of interest. In particular, any cross-subsidies being given by the DSO to other parts of the vertically integrated undertaking cannot be accepted. To ensure this, the service must be provided at market conditions and laid down in a contractual arrangement.” 300

5.57

Where the network assets are owned by the transmission or distribution company, it is necessary to spell out to what extent the parent company can give instructions regarding the use of the assets. As mentioned above, the Commission’s Interpretative Note states that, in such circumstances, the basic decisions must remain with the network company. However, as the owner of the assets, the parent must be able to play some role, at least to protect the value of its assets and ensure that it receives a reasonable rate of return. If not, in reality, ownership unbundling has taken place. The relationship between a parent and subsidiary is almost always set out in the documents establishing a company, supplemented by possible contractual provisions. These set out the extent to which the management of the subsidiary is free to decide on issues, and when 300 See Appendix 10, Section 3.3.1.

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it must request the authorisation of its shareholders. In certain cases, a parent exercises very close and regular supervision of a subsidiary, in other (more usual) cases, the subsidiary has a wider margin of discretion. It is therefore necessary, in order to ensure real management independence, to specify the limits of this relationship for a network business. To this requirement of independence in terms of effective decision-making rights, already contained in the Second Directives, the Third Package added to Article 26(2)(c) a second sentence providing for a strong principle of autonomy (which was kept in Article 35(2)(c) of the Recast Electricity Directive): “ in or‑ der to fulfil those tasks, the distribution system operator shall have at its disposal the necessary resources including human, technical, physical and financial resources”. This means that, in addition to having managerial independence, the DSO must be autonomous from the vertically integrated undertaking. This, however, does not prevent “the existence of appropriate coordination mechanisms” to ensure that “the economic and management supervision rights of the parent company in re‑ spect of return on assets in a subsidiary are protected”.

5.58

This in particular concerns the approval by the parent company of the annual financial plan of the DSO. Such approval is normal as the network remains one of the major assets of the parent company. If the management of the network would excessively increase indebtedness levels, this would impact on the overall credit rating of the group. In addition, as mentioned above, as in any parent/ subsidiary relationship, the expected return on assets of the network business is of clear legitimate interest to the parent, and an integral part of such a financial plan.

5.59

The term “any equivalent instrument” to a financial plan is not defined in the Directives. However, in a formal statement to the minutes on the occasion of the adoption of the Directives under the Second package, which remains valid under the Third Directives and in the Recast Electricity Directive, the Commission noted:

5.60

“The Directives refer to the financial plan or ‘any equivalent instrument’. The latter term must be interpreted restrictively in the sense that only instruments that are functionally equivalent to a financial plan, but which according to the applicable national terminology are not denominated a ‘financial plan’, may be subject to approval of the vertically integrated undertaking.”

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5.61

However, neither the Directives, nor the Interpretative Note under the Second Package specify how detailed the annual financial plan must be. By requiring the financial plan to be very detailed, specifying every single projected infrastructure spending, a company could circumvent many of the provisions mentioned above and in fact exercise a very close degree of control over its network subsidiary. It is submitted that such an approach would infringe paragraph (c) of Article 26(2) of the Third Gas Directive and Article 35(2)(c) of the Recast Electricity Directive as it would eliminate the independence of the network company and deprive it of “effective decision-making rights, independent from the integrated electricity undertaking, with respect to assets necessary to operate, maintain or develop the network”. Furthermore, it would de facto give the parent company the ability to give instructions regarding individual decisions concerning the construction or upgrading of transmission lines.

5.62

Excessive influence by the group company over a subsidiary DSO may also interfere with the conduct of regulation of the network business. The regulator is often in the position where it has to set the return on capital that is appropriate for the businesses it regulates as well as the asset base to which the regulated return should apply. If the owner of the DSO were to abruptly change the capital structure of the regulated business (e.g., by paying a large special dividend from the DSO to the Group) or to block important projects that had been agreed with the regulator as included in the regulated asset base, the whole basis of regulated tariff setting could be made very unstable.

5.63

Thus, it is submitted that any financial plan must be general in nature, without specifying individual projects. It should be limited to agreed global debt levels, and be consistent with the agreed return on assets set out by the regulator.

5.64

The phrase “regulated indirectly according to Article 59(7) [41(6) gas]” which figures in paragraph (c) of the unbundling Articles, referring to the return on assets of the network business, concerns the approval of tariffs or tariff methodology. As the tariffs represent the income of the network operator, this addition therefore makes it clear that the regulator has the task of ensuring cost reflectiveness.

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4.6 Compliance officer and compliance programme “Article 35 (2) (d) electricity Article 26 (2) (d) gas “The distribution system operator must 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 that objective. An annual report, setting out the measures taken, shall be submitted by the person or body responsible for monitoring the compliance programme, the compliance officer of the distribution system operator, to the regulatory authority referred to in Article 57(1) [39(1) for gas] and shall be published. The compliance officer of the distribution system operator shall be fully independent and shall have access to all the necessary information of the distribution system operator and any affiliated undertaking to fulfil his task.”

The function of a compliance programme is threefold. First, it ensures that all the employees of a network company are fully aware of their obligation not to discriminate. Second, it requires the company, in drawing up the compliance programme, to reflect carefully on the procedures and safeguards necessary to ensure non-discrimination. Third, through the annual report, it requires the company to examine whether these procedures and safeguards have worked in practice. A compliance programme sets out the obligations and rights of all employees dealing with issues relevant to ensuring non-discrimination, which means almost all, if not all, non-clerical and non-secretarial staff. It certainly includes all staff dealing directly or indirectly with requests for access to the network, its planning and expansion. Whilst each compliance programme will vary according to the company structure in question, the Interpretative Note of the Commission on unbundling indicates the following:301 “The compliance programme contains rules of conduct which have to be respected by staff in order to exclude discrimination. Such rules relate, for example, to the obligation to preserve the confidentiality of commercially sensitive and commercially advantageous information (Article 27 Electricity and Gas Directives). The compliance programme may lay down in detail the kind of information that is to be considered confidential in this sense and how the information should be treated. It may also refer to the sanctions imposed under national legislation in case of non-respect 301 Appendix 10, Section 3.3.3.

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Chapter 5 Unbundling of Distribution System Operators Christopher Jones, revised and updated by William-James Kettlewell of confidentiality rules. Another set of rules which, for example, can form part of a compliance programme relates to the behaviour of staff vis-à-vis network customers. Employees of a DSO must refrain from any reference to the related supply business in their contacts with customers of the DSO.”

5.66

With respect to enforcement of the compliance programme, the Interpretative Note states:302 “The compliance programme must be actively implemented and promoted through specific policies and procedures. Such policies may consist, inter alia, of the following elements: – active, regular and visible support of the management for the programme, for example through a personal message to the staff from the management stating its commitment to the programme; – written commitment of staff to the programme by signing up to the compliance programme; – clear statements that disciplinary action will be taken against staff violating the compliance rules; – training on compliance on a regular basis and notably as part of the induction programme for new staff.”

5.67

The Second Package was silent as to the person in charge of the compliance programme. The interpretative note of DG TREN under the Second Package only indicated that the person or body responsible for the report must be on the “senior management body or a member of this body”.

5.68

So as to strengthen the monitoring of the proper implementation of functional unbundling rules, the Third Package created an obligation for the DSO to appoint a compliance officer which is a “person or body” (possibly a certification company) responsible for monitoring the compliance programme. The Directives further clarify that the compliance officer of the distribution system operator has to be fully independent and have access to all the necessary information of the distribution system operator and any affiliated undertaking to fulfill his task. The Interpretative Note indicates in this regard that: “There is a clear obligation of result. When shaping the specific rules and guarantees for independence of the compliance officer of the DSO, the rules on the compliance officer of the ITO as laid down in Article 21(2) Electricity and Gas Directives may serve as a point of reference, where appropriate.” 302 Appendix 10, Section 3.3.3.

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It should be underlined that, in the absence of any express provision to this effect, the specific more stringent and more detailed rules concerning the compliance officer of the ITO (see book paragraphs 4.235-4.241) cannot be deemed to strictly apply to the compliance officer of the DSO, although, of course, it can give some guidance as to the interpretation of the rules applicable to DSOs.

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4.7 Prohibition to take advantage of vertical integration to distort competition Despite functional unbundling, vertical integration between a supplier and a distributor can give a competitive advantage to the supplier and thereby distort competition on the supply market. One important risk is that the supplier is perceived by final consumers as having such a strong link with the distributor that e.g., it provides stronger guarantees in terms of security of supply. This risk is especially significant in markets where customers are used to an historical incumbent supplier and distributor and will continue to identify the vertically integrated supplier as the “normal” supplier. This can also be very detrimental to consumer awareness of market opening.

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So as to ensure more effectiveness of the functional unbundling rules, the Third Package therefore added the important rule that a distribution system operator that is part of a vertically integrated undertaking cannot take advantage of its vertical integration to distort competition. The Directives expressly envisage the situation where the suppliers and distributors use similar signs in their communication and branding which creates confusion in respect of the separate identity of the supply branch of the vertically integrated undertaking. This is now prohibited, and the regulatory authorities are given the task to monitor the activities of the vertically integrated undertaking so as to ensure that this does not happen.

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The concept of “confusion” is very wide and provides for a general obligation to avoid any confusion for the consumers between the TSO and the supply company. This concept is used under trademark law which refers to any “ likelihood of confusion on the part of the public”; the Directives should in this respect be interpreted in compliance with the relevant provisions of EU legislation.303

5.72

303 Council Regulation (EC) No 40/94 of 20 December 1993 on the Community trademark (Official Journal L 011, 14/01/1994, p. 0001–0036) and First Council Directive 89/104/EEC of 21 December 1988 to approximate the laws of the Member States relating to trade marks (Official Journal L 040, 11/02/1989, p. 1–7).

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5.

Accounting unbundling

5.1 The requirements of the Directives 5.73

Article 56 of the Recast Electricity Directive and Article 31 of the Gas Directive provide for the following: Article 56 electricity “1. Member States shall take the necessary steps to ensure that the accounts of electricity undertakings are kept in accordance with paragraphs 2 and 3. 2. Electricity undertakings, whatever their system of ownership or legal form, shall draw up, submit to audit and publish their annual accounts in accordance with the rules of national law concerning the annual accounts of limited liability companies adopted pursuant to Directive 2013/34/EU. Undertakings which are not legally obliged to publish their annual accounts shall keep a copy of these at the disposal of the public in their head office. 3. Electricity undertakings shall, in their internal accounting, keep separate accounts for each of their transmission and distribution activities as they would be required to do if the activities in question were carried out by separate undertakings, with a view to avoiding discrimination, cross-­subsidisation and distortion of competition. They shall also keep accounts, which may be consolidated, for other electricity activities not relating to transmission or distribution. Revenue from ownership of the transmission or distribution system shall be specified in the accounts. Where appropriate, they shall keep consolidated accounts for other, non-electricity activities. The internal accounts shall include a balance sheet and a profit and loss account for each activity. 4. The audit referred to in paragraph 2 shall, in particular, verify that the obligation to avoid discrimination and cross-subsidies referred to in paragraph 3 is respected.”

Article 31 gas “1. Member States shall take the necessary steps to ensure that the accounts of natural gas undertakings are kept in accordance with paragraphs 2 to 5 of this Article. Where natural gas undertakings benefit from a derogation from this provision on the basis of Article 49(2) and (4), they shall at least keep their internal accounts in accordance with this Article. 240

Chapter 5 Unbundling of Distribution System Operators Christopher Jones, revised and updated by William-James Kettlewell 2. Natural gas undertakings, whatever their system of ownership or legal form, shall draw up, submit to audit and publish their annual accounts in accordance with the rules of national law concerning the annual accounts of limited liability companies adopted pursuant to the Fourth Council Directive 78/660/EEC of 25 July 1978 based on Article 44(2)(g) of the Treaty on the annual accounts of certain types of companies304. Undertakings which are not legally obliged to publish their annual accounts shall keep a copy thereof at the disposal of the public at their head office. 3. Natural gas undertakings shall, in their internal accounting, keep separate accounts for each of their transmission, distribution, LNG and storage activities as they would be required to do if the activities in question were carried out by separate undertakings, with a view to avoiding discrimination, cross-subsidisation and distortion of competition. They shall also keep accounts, which may be consolidated, for other gas activities not relating to transmission, distribution, LNG and storage. Until 1 July 2007, they shall keep separate accounts for supply activities for eligible customers and supply activities for non-eligible customers. Revenue from ownership of the transmission or distribution network shall be specified in the accounts. Where appropriate, they shall keep consolidated accounts for other, non-gas activities. The internal accounts shall include a balance sheet and a profit and loss account for each activity. 4. The audit, referred to in paragraph  2, shall, in particular, verify that the obligation to avoid discrimination and cross-subsidies referred to in paragraph 3 is respected. 5. Undertakings shall specify in their internal accounting the rules for the allocation of assets and liabilities, expenditure and income as well as for depreciation, without prejudice to nationally applicable accounting rules, which they follow in drawing up the separate accounts referred to in paragraph 3. Those internal rules may be amended only in exceptional cases. Such amendments shall be mentioned and duly substantiated. 6. The annual accounts shall indicate in notes any transaction of a certain size conducted with related undertakings.”

These Articles, which are largely self-explanatory, give rise, however, to the following comments. 304 OJ L 222, 14.8.1978, p. 11.

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Firstly, whilst it is possible to set up a combined transmission and distribution network business,305 separate accounts must always be kept for each activity. This assists in ensuring that no cross-subsidisation takes place and that tariffs are cost reflective. All electricity and gas companies have to make available consolidated group accounts for public inspection, irrespective of whether they have a legal obligation requiring such disclosure under national law. However, unless required to do so under national law, they have no obligation to make available for public inspection the separate accounts that the Directives require, notably for transmission, distribution, LNG, storage, other electricity and gas activities and other non-electricity and gas activities.

5.76

Secondly, one specific issue that must be addressed by the auditor, specified in Article 56 (4) of the Recast Electricity Directive and 31 (4) of the Gas Directive, is a verification that the obligation to avoid discrimination and cross-subsidies referred to in paragraph 3 thereof is respected.

5.77

In understanding this provision, it is important to note that ensuring non-discrimination and the absence of cross-subsidies is, primarily, a task for the Regulator. The input of an independent accounting expert on this issue will be of assistance to the regulator in carrying out its functions. It implies, in particular, that unbundled companies will be obliged to submit a set of “regulatory” accounts to be consistent with the regulator’s requirements and separately audited.

5.78

As mentioned above, the Directives do not require public access to the separate accounts for transmission, distribution and other electricity and gas activities. However, Article 55 of the Recast Electricity Directive and Article 30 of the Third Gas Directive require that Member States, and in particular the regulators, have full access to such unbundled accounts. These Articles provide as follows: Article 55 electricity Article 30 gas “Member States or any competent authority they designate, including the regulatory authorities referred to in Article 57 [39(1) for gas], shall, insofar as necessary to carry out their functions, have right of access to the accounts of electricity undertakings as set out in Article 56 [31 for gas].

305 See book para 5.27.

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Chapter 5 Unbundling of Distribution System Operators Christopher Jones, revised and updated by William-James Kettlewell Member States and any designated competent authority, including the regulatory authorities, shall preserve the confidentiality of commercially sensitive information. Member States may provide for the disclosure of such information where this is necessary in order for the competent authorities to carry out their functions.”

It is normal that Member States and regulators are placed under an obligation to preserve the confidentiality of any commercially sensitive information that they acquire, notably through the access to unbundled accounts. Where necessary, however, Member States and regulators may disclose such information where this is necessary to carry out their functions. The implementation of this provision is wholly left to subsidiarity.

5.79

It is rather curious that in the Second and Third Gas Directive, two extra paragraphs are provided for which are not contained in the Second, Third or Recast Electricity Directives:

5.80

Article 31 (5) – (6) gas “5. Undertakings shall specify in their internal accounting the rules for the allocation of assets and liabilities, expenditure and income as well as for depreciation, without prejudice to nationally applicable accounting rules, which they follow in drawing up the separate accounts referred to in paragraph 3. These internal rules may be amended only in exceptional cases. Such amendments shall be mentioned and duly substantiated. 6. The annual accounts shall indicate in notes any transaction of a certain size conducted with related undertakings.”

Regarding electricity, these Articles were included in a slightly amended form in Article 17 (4) and (5) of the First Electricity Directive, but are omitted in the Second and Third Electricity Directives as well as in the Recast Electricity Directive. Article 31 (5) of the Gas Directive thus addresses the question of how to value assets in the context of regulated third party access. The tariffs are set or agreed by the regulator (either directly or on the basis of a tariff methodology) on the basis of ensuring a given return on investment of the transmission and distribution company, thus ensuring that they are cost reflective.306 Thus the value of the assets is vital. Transmission and distribution companies will endeavour to revalue their assets upwards wherever possible to ensure higher income levels under regulated tariffs. Article 31 (5) assists the regulator in ensuring that 306 See book paras 3.123-3.149.

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the asset valuations are justified, but is probably not essential, as the regulator will always have the power to accept or reject asset valuations when approving the tariffs or tariff methodologies. Thus, its omission after the First Electricity Directive is curious, but not problematic.

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Article 31 (6) is aimed at preventing hidden cross-subsidies through the provision by the transmission/distribution company of goods or services to its parent company at below cost. This is helpful to the regulator, and complements the provisions on management unbundling set out below.

6.

New ‘unbundling’ rules for electricity DSOs

5.83

Due to the evolution of the electricity market following the commitment to decarbonize the economy and the digitalisation of the economy, new types of service providers are expected (and incentivized) to participate to the goodfunctioning of the electricity market. There providers are expected to sell, among others, such services as electricity storage services, aggregation, ‘demandresponse’ or flexibility services and electro-mobility-related services.

5.84

DSOs are also expected to adopt a more active role on the electricity market. This is explicitly provided by (i) Article 31 (10) of the Recast Electricity Directive which provides that “Member States (…) may allow distribution system op‑ erators to perform activities other than those provided for in this Directive and in Regulation (EU) 2019/943, where such activities are necessary for the distribu‑ tion system operators to fulfil their obligations under this Directive or Regulation (EU) 2019/943, provided that the regulatory authority has assessed the necessity of such a derogation” and (ii) Article 34 that foresees explicitly that DSOs can be charged with the management of electricity market data, including their communication to different market actors. 

5.85

To preserve the role of the DSOs as neutral market facilitators and ensuring that they do not unfairly compete with such new service providers or distort the electricity market, voluntarily or not, through their new activities, new ‘unbundling’ rules were adopted under the Recast Electricity Directive. Although these new rules do not apply to the way the DSOs are operated in themselves (contrary to the requirements laid down under Article 35 discussed above), they explicitly allow or prohibit DSOs from carrying out certain activities, which implicitly entails that DSOs must (or do not need to) be separate from market actors carrying out these activites. 244

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6.1 Citizen Energy Communities Article 2 (11) of the Recast Electricity Directive defines “citizen energy com‑ munities” as follows:

5.86

Article 2 (11) electricity “‘Citizen energy community’ means a legal entity that: (a) is based on voluntary and open participation and is effectively controlled by members or shareholders that are natural persons, local authorities, including municipalities, or small enterprises; (b) has for its primary purpose to provide environmental, economic or social community benefits to its members or shareholders or to the local areas where it operates rather than to generate financial profits; and (c) may engage in generation, including from renewable sources, distribution, supply, consumption, aggregation, energy storage, energy efficiency services or charging services for electric vehicles or provide other energy services to its members or shareholders;”

As paragraph ‘(c)’ in this definition implies, Member States are allowed, under Article 16 (4) of the Recast Electricity Directive, to “grant citizen energy communities the right to manage distribution networks in their area of operation and establish the relevant procedures, without prejudice to Chapter IV or to other rules and regula‑ tions applying to distribution system operators”. Hence, citizen energy communities can become DSOs, either under the general regime or as a closed distribution system (in accordance with Article 38, see section 7.2, para. 5.118-5.129).

5.87

Furthermore, according to Article 16 (3) b, Member States must ensure that citizen energy communities “are treated in a non-discriminatory and proportionate manner with regard to their activities, rights and obligations as (…) distribution system operators (…)”.

5.88

A citizen energy community that would also manage distribution networks would thus be subject to the same obligations as other DSOs (unless it is covered by an exemption regime, see section 7) and be subject to same surveillance by national regulatory authorities as other DSOs. They must therefore comply with the other unbundling rules described in this Chapter 5.

5.89

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6.2 Electro-mobility-related services 5.90

Regarding the integration of electro-mobility into the electricity network, although there are no recitals stating it clearly (contrary to Recital 62 for storage services, see hereunder section 6.3, para 5.100-5.104), it is clear that the objective of the provisions of the Recast Electricity Directive is that electro-mobility related services (and, in particular, recharging services for electric vehicles) become market-based and competitive.

5.91

As a general principle (see Article 33(1) and (2)), with limited exceptions, DSOs shall therefore not be allowed to own, develop, manage or operate recharging points for electric vehicles and must cooperate with recharging service providers on a non-discriminatory basis. Article 33 provides that: Article 33 electricity “1. Without prejudice to Directive 2014/94/EU of the European Parliament and of the Council, Member States shall provide the necessary regulatory framework to facilitate the connection of publicly accessible and private recharging points to the distribution networks. Member States shall ensure that distribution system operators cooperate on a non-discriminatory basis with any undertaking that owns, develops, operates or manages recharging points for electric vehicles, including with regard to connection to the grid. 2. Distribution system operators shall not own, develop, manage or operate recharging points for electric vehicles, except where distribution system operators own private recharging points solely for their own use. 3. By way of derogation from paragraph 2, Member States may allow distribution system operators to own, develop, manage or operate recharging points for electric vehicles, provided that all of the following conditions are fulfilled: – other parties, following an open, transparent and non-discriminatory tendering procedure that is subject to review and approval by the regulatory authority, have not been awarded a right to own, develop, manage or operate recharging points for electric vehicles, or could not deliver those services at a reasonable cost and in a timely manner; – the regulatory authority has carried out an ex-ante review of the conditions of the tendering procedure under point (a) and has granted its approval; 246

Chapter 5 Unbundling of Distribution System Operators Christopher Jones, revised and updated by William-James Kettlewell – the distribution system operator operates the recharging points on the basis of third-party access in accordance with Article 6 and does not discriminate between system users or classes of system users, and in particular in favour of its related undertakings.

The regulatory authority may draw up guidelines or procurement clauses to help distribution system operators ensure a fair tendering procedure.

4.  Where Member States have implemented the conditions set out in paragraph 3, Member States or their designated competent authorities shall perform, at regular intervals or at least every five years, a public consultation in order to re-assess the potential interest of other parties in owning, developing, operating or managing for electric vehicles. Where the public consultation indicates that other parties are able to own, develop, operate or manage such points, Member States shall ensure that distribution system operators’ activities in this regard are phased out, subject to the successful completion of the tendering procedure referred to in point (a) of paragraph 3. As part of the conditions of that procedure, regulatory authorities may allow the distribution system operator to recover the residual value of its investment in recharging infrastructure.”

Two cases are foreseen by paragraphs 3 and 4 of this Article 33, where Member States can choose to provide for an exemption to the general principle.

5.92

The first case is that DSOs can be allowed to own private recharging points solely for their own use. The notion of “ for their own use” is not defined in the Recast Electricity Directive. Furthermore its precise meaning is not clarified in any of the Recitals and no specific mention of this wording is made in the legislative documents that lead to its inclusion.307 Given the purpose of the general principle, it should however be understood as prohibiting DSOs from owning, operating or using recharging points in a way that competes with other marketbased recharging service providers.

5.93

The second case concerns situations where there is a definite market failure on the recharging services market, i.e., no recharging service provider has been awarded the right to own and operate recharging points despite the fact that an open, transparent and non-discriminatory tendering procedure, approved by the national regulatory authority, has been carried out. However, even if a DSO

5.94

307 See the Proposal for a Directive of the European Parliament and of the Council on common rules for the internal market in electricity (recast) – General approach, ST 14,572 2017 INIT - 2016/0380 (COD), 29 November 2017, available at https://eur-lex.europa.eu/procedure/EN/2016_380.

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is granted an exemption to the prohibition of owning and operating recharging points, this exception will be both precarious and limited.

5.95

It is precarious because any exemption allowing a DSO to operate recharging points must be “phased out” if a tendering procedure successfully designates an authorised recharging service provider. Although this is not explicitly stated in Article 33 (nor in Article 36, see below), this ‘phasing out’ of the DSO’s activities should most likely be understood in the way that obliges the DSOs to sell (or otherwise dispose of ) its recharging infrastructure. Indeed, from a textual point of view, the ‘activities’ at stake refer rather clearly to the fact of “owning” as well as “ developing, operating or managing” recharging points since Article 33 always uses all four concepts (in a row) to designate the activities that the DSO cannot undertake (in all four paragraphs of the Article). Moreover, from a practical perspective, if the DSO were allowed to keep using the recharging point (even for their own sake), it would contravene the Directive’s market-based approach. Yet, it would seem incoherent to allow DSOs to keep the recharging infrastructure but not to use it in any way.

5.96

The exemption is also limited because it only allows the said DSO to provide recharging services on the same ‘regulated-tariff-basis’ as the rest of the services provided by the DSO. Indeed, paragraph 3 (c) of Article 33 explicitly refers to Article 6 of the Recast Electricity Directive on ‘third-party access’. This notably means that, even in a scenario where a DSO would be allowed to provide recharging services, the underlying methodology for the calculation of the fees charged for the provision of recharging services should be approved in advance by the national regulatory authority.

6.3 Storage services 5.97

Article 36 of the Recast Electricity Directive provides for the following: Article 36 electricity “1. Distribution system operators shall not own, develop, manage or operate energy storage facilities. 2. By way of derogation from paragraph 1, Member States may allow distribution system operators to own, develop, manage or operate energy storage facilities, where they are fully integrated network components and the regulatory authority has granted its approval, or where all of the following conditions are fulfilled: 248

Chapter 5 Unbundling of Distribution System Operators Christopher Jones, revised and updated by William-James Kettlewell a) other parties, following an open, transparent and non-discriminatory tendering procedure that is subject to review and approval by the regulatory authority, have not been awarded a right to own, develop, manage or operate such facilities, or could not deliver those services at a reasonable cost and in a timely manner; b) such facilities are necessary for the distribution system operators to fulfill their obligations under this Directive for the efficient, reliable and secure operation of the distribution system and the facilities are not used to buy or sell electricity in the electricity markets; and c) the regulatory authority has assessed the necessity of such a derogation and has carried out an assessment of the tendering procedure, including the conditions of the tendering procedure, and has granted its approval.

The regulatory authority may draw up guidelines or procurement clauses to help distribution system operators ensure a fair tendering procedure.

3. The regulatory authorities shall perform, at regular intervals or at least every five years, a public consultation on the existing energy storage facilities in order to assess the potential availability and interest in investing in such facilities. Where the public consultation, as assessed by the regulatory authority, indicates that third parties are able to own, develop, operate or manage such facilities in a cost-effective manner, the regulatory authority shall ensure that the distribution system operators’ activities in this regard are phased out within 18 months. As part of the conditions of that procedure, regulatory authorities may allow the distribution system operators to receive reasonable compensation, in particular to recover the residual value of their investment in the energy storage facilities. 4.  Paragraph 3 shall not apply to fully integrated network components or for the usual depreciation period of new battery storage facilities with a final investment decision until 4 July 2019, provided that such battery storage facilities are: a) connected to the grid at the latest two years thereafter; b) integrated into the distribution system; c) used only for the reactive instantaneous restoration of network security in the case of network contingencies where such restoration measure starts immediately and ends when regular re-dispatch can solve the issue; and 249

Chapter 5 Unbundling of Distribution System Operators Christopher Jones, revised and updated by William-James Kettlewell d) not used to buy or sell electricity in the electricity markets, including balancing.”

5.98

In essence, this new provision prohibits DSOs from owning, developing, managing or operating energy storage facilities but allows Member States to provide exceptions to this rule in limited cases. Exceptions to these rules for DSOs are very similar to those for TSOs, because the principle behind them is the same. Recital 62 explains explicitly that “ in the new electricity market design, energy storage services should be market-based and competitive”. This prohibition and the limited exceptions (for both DSOs and TSOs) therefore aim at ensuring that this market is and remains undistorted and to avoid “cross-subsidisation be‑ tween energy storage and the regulated functions of distribution or transmission”.

5.99

The first case where Member States may provide for an exemption is where such storage facilities are “ fully integrated network components”. This concept is defined by Article 2 (51) as “network components that are integrated in the trans‑ mission or distribution system, including storage facilities, and that are used for the sole purpose of ensuring a secure and reliable operation of the transmission or distribution system, and not for balancing or congestion management”. The examples given by Recital 63 are “capacitors or flywheels” that “provide important services for network security and reliability, and contribute to the synchronisation of different parts of the system”. The use of such components are still, however, subject to the prior approval of the national regulatory authority.

5.100

The second of such cases is, just as was foreseen for recharging services, the case of market failure on the storage services market. If there is a network need for storage services and DSOs cannot procure them on the market because no storage service provider has been awarded the right to own and operate storage facilities, despite the fact that an open, transparent and non-discriminatory tendering procedure, has been carried out, then an exemption may be envisaged. As for the operation of recharging points, the national regulatory authority is involved both in the assessment of the DSOs’ need for storage services and the continued lack of market interest for their provision. Furthermore, paragraph 3 of Article 36 makes it clear that any exemption allowing a DSO to provide storage services is also precarious, since as soon as third parties are “able to own, develop, oper‑ ate or manage [storage] facilities in a cost-effective manner”, the DSO’s activities must be “phased out within 18  months”. Although this is not explicitly stated in Article 36, for the same reasons as those developed above for Article 33, this phasing out of the DSO’s activities should most likely be understood in the way that obliges the DSOs to sell (or otherwise dispose of ) the storage infrastructure. 250

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This 18-month period is specific to Article 36. No such period is specified in the case of the exception to the prohibition to own and operate recharging facilities. This gives less flexibility to DSOs in the case they provide storage services compared to recharging services. However, the exception for storage services under Article 36 does not explicitly refer to Article 6 and to the third party access regime. DSOs should therefore be freer in their price-setting ability when providing electricity storage services than for their other activities, without prejudice to their other obligations such as their non-discrimination obligation.

5.101

A transitory regime is instituted by paragraph 4 for certain storage facilities.

6.4 Aggregation and flexibility services No explicit ‘unbundling’ rules (or other equivalent prohibition) are provided for by the Recast Electricity Directive concerning aggregation and the provision of flexibility services by DSOs. Article 32, the only Article specifically regarding the use of flexibility in distribution networks, reads as follows: Article 32 electricity “1. Member States shall provide the necessary regulatory framework to allow and provide incentives to distribution system operators to procure flexibility services, including congestion management in their areas, in order to improve efficiencies in the operation and development of the distribution system. In particular, the regulatory framework shall ensure that distribution system operators are able to procure such services from providers of distributed generation, demand response or energy storage and shall promote the uptake of energy efficiency measures, where such services cost effectively alleviate the need to upgrade or replace electricity capacity and support the efficient and secure operation of the distribution system. Distribution system operators shall procure such services in accordance with transparent, non-discriminatory and market-based procedures unless the regulatory authorities have established that the procurement of such services is not economically efficient or that such procurement would lead to severe market distortions or to higher congestion. 2. Distribution system operators, subject to approval by the regulatory authority, or the regulatory authority itself, shall, in a transparent and participatory process that includes all relevant system users and transmission system operators, establish the specifications for the flexibility services procured and, where appropriate, standardised market products for such services at least at national level. The 251

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Chapter 5 Unbundling of Distribution System Operators Christopher Jones, revised and updated by William-James Kettlewell specifications shall ensure the effective and non-discriminatory participation of all market participants, including market participants offering energy from renewable sources, market participants engaged in demand response, operators of energy storage facilities and market participants engaged in aggregation. Distribution system operators shall exchange all necessary information and shall coordinate with transmission system operators in order to ensure the optimal utilisation of resources, to ensure the secure and efficient operation of the system and to facilitate market development. Distribution system operators shall be adequately remunerated for the procurement of such services to allow them to recover at least their reasonable corresponding costs, including the necessary information and communication technology expenses and infrastructure costs. 3. The development of a distribution system shall be based on a transparent network development plan that the distribution system operator shall publish at least every two years and shall submit to the regulatory authority. The network development plan shall provide transparency on the medium and long-term flexibility services needed, and shall set out the planned investments for the next five-to-ten years, with particular emphasis on the main distribution infrastructure which is required in order to connect new generation capacity and new loads, including recharging points for electric vehicles. The network development plan shall also include the use of demand response, energy efficiency, energy storage facilities or other resources that the distribution system operator is to use as an alternative to system expansion. 4. The distribution system operator shall consult all relevant system users and the relevant transmission system operators on the network development plan. The distribution system operator shall publish the results of the consultation process along with the network development plan, and submit the results of the consultation and the network development plan to the regulatory authority. The regulatory authority may request amendments to the plan. 5. Member States may decide not to apply the obligation set out in paragraph 3 to integrated electricity undertakings which serve less than 100,000 connected customers or which serve small isolated systems.”

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Contrary to Articles  33, 35 or 36, DSOs are not expressly forbidden by Article  32 from acting as aggregators or to provide flexibility services. Member States are simply obliged to provide a regulatory framework that incentivizes DSOs to procure flexibility services. Likewise, there is no such prohibition, express or implied, in the definition of ‘aggregation’ nor under Articles 12, 13, 17 regarding aggregation and demand response.

5.103

There are, however, multiple provisions that provide for the transparent and non-discriminatory nature of (i) any regulatory framework that Member States would put into place with regard to aggregation or flexibility and the role of the DSOs therein (e.g., Article 32 (1), last sentence) and (ii) the procurement procedure and/or behaviour of the DSOs (e.g., Article 32 (2) or Article 31 (6)). Such provisions could be said to indirectly prohibit DSOs from acting as aggregators for, or to provide flexibility services relating to, their own distribution network. Indeed, one could argue that DSOs would be inherently incapable of procuring flexibility services in a non-discriminatory manner if they are in a position to provide themselves with such services. However, even such an interpretation could be contradicted, notably by arguing that the prohibitions under Articles 33 and 36 are clear and explicit and that, if the European legislator had intended for DSOs not to be allowed to act as aggregators or flexibility services providers for their own network, this would have been provided for clearly. It seems that, for this case at least, the final interpretation of the interplay of these Articles will be decided by the Courts.

5.104

A fortiori, there seems to be little textual grounds to interpret the Recast Electricity Directive in a way that prohibits Member States from allowing DSOs to act as aggregators or flexibility services providers when such services or aggregation relate to other DSOs’ (or TSOs’) networks. There is even one case where the Directive explicitly allows it, since Member States “must ensure that citi‑ zen energy communities (…) are treated in a non-discriminatory and transpar‑ ent manner with regard to their activities rights and obligations as (…) market participants engaged in aggregation” and Member States, “may decide to grant [them] the right to manage distribution network”.

5.105

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7.

Exemptions

7.1 Exemption for small distributors 5.106

The final sentence of Article 35 (4) of the Recast Electricity Directive and Article 26 (4) of the Gas Directive, state that: Article 35 (4) electricity Article 26 (4) gas “Member States may decide not to apply paragraphs 1 and 2 and 3 to integrated electricity undertakings serving less than 100,000 connected customers, or serving small isolated systems.”

5.107

In small distribution companies, the economies of scale may not exist to justify the creation of separate units, or indeed separate subsidiaries, to carry out the different functions of a vertically integrated company. Employees may be responsible for more than one of the areas of generation, network activities and sales. The imposition on such companies of the normal unbundling requirements outlined above may therefore add significant costs to the operation of very small distribution companies.

5.108

The Commission, Council, and European Parliament recognised therefore, as part of the negotiations for the Second Package, that a cost-benefit analysis was necessary to decide upon the level of unbundling that such companies must carry out. The result of this analysis is the inclusion in the Directives of an exemption based on the number of “connected customers” that a distribution company has. Despite the Commission’s announcement, in its Communication of 10 January 2007 preparing the Third Package, of its intention to “re-examine the suitability of the 100,000 threshold”, this provision was kept unchanged in the Third Package and in the Recast Electricity Directive.

5.109

The term “connected customers” is not defined. However, it is clear that it means the number of physical connections, not the number of consumers or citizens concerned. Thus, if a distribution company is responsible for connecting only an apartment block in its entirety, it is irrelevant that the block has 10 apartments that are served from this single connection. Possibly the best manner to easily judge the number of connected customers is to determine the number of billed addresses. Thus, if an apartment block has separate supply and connection to 254

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all apartments concerned, with separate bills by an electricity supplier to each apartment, all are considered to be a “connected customer”. If, however, only the apartment block owner is billed, who then charges his or her tenants a standard charge, only one connected customer exists.308 This definition is logical. The level of work for a distribution company depends primarily on the number of physical connections it has to manage, not the number of actual users. As the objective of the exemption threshold is to estimate the likely size of the distribution company, this makes sense.

5.110

The second issue in determining whether a distribution company is considered as having 100,000 connected customers concerns the number of distribution undertakings within a vertically integrated group. If a group only controls309 one distribution company, this is easily understood. If this company has more than 100,000 connected customers, then legal, functional, management and accounting unbundling are necessary. If it has fewer than 100,000 connected customers, only accounting unbundling is required. However, if a group controls more than one distributor, and the cumulative number of connected customers of all those distribution companies exceeds 100,000, then all must be fully unbundled, irrespective of their size. As stated in the Interpretative Note of the Commission on unbundling:

5.111

“If an undertaking involved in supply and/or generation controls one or more legally separate DSOs and the group of companies as a whole forms one single vertically integrated company, all connected customers of all the DSOs served by the undertaking have to be aggregated. Where applicable, the customers connected to a distribution network which is operated in the same company structure as the supply/ generation business in question have to be added as well.”

Such a rule could probably not, however, be applied to a company which had a holding in companies with fewer than 100,000 customers in two separate Member States. The exemption from unbundling could, for example, be given to two companies with 75,000 customers in separate Member States, even if owned by the same company.

5.112

The exemption for such undertakings is by no means obligatory – it is up to each Member State to determine if and to what extent an exemption is necessary. Experience, however, shows that Member States make extensive use of these dero-

5.113

308 See Section 3.5 of the Interpretative Note on unbundling, Appendix 10. 309 Within the meaning of the merger regulation.

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gations from unbundling at distribution level. Notably, a 2016 survey by the CEER310 showed that 15 Member States311 applied the exemption at national level related to DSOs serving fewer than 100,000 connected customers. Figures 1 and 2 on the next two pages illustrate the proportion of DSOs concerned in each Member States, both for electricity and for gas.312

5.114

It should be noted that, even if a Member State exempts its small distributors from the obligations of legal and management unbundling, the Gas and Electricity Directives still require that accounting unbundling takes place (since such unbundling is not required by Article 35 [26 for gas] but by article 55 [31 for gas). Furthermore, a clear obligation lies on distributors of any size not to “ discriminate between system users or classes of system users, particularly in favour of its related undertaking” (Article 31 (2) [25 (2) for gas]). Thus, an obligation as to result lies on Member States to take other appropriate measures to ensure that discrimination does not take place. In the event of systematic discrimination in a Member State, a clear failure to implement the Directives would exist and one might expect the Commission to commence infringement proceedings requiring the Member State in question to take additional appropriate measures. However no such procedures of this type have been initiated to date.

310 Council of European Energy Regulators, CEER Status Review: Status Review on the Implementation of Distribution System Operators’ Unbundling Provisions of the 3rd Energy Package, Ref: C15-LTF-43-03, 1 April 2016, p. 13. 311 Austria, France, Croatia, Denmark, Estonia, Germany, Hungary, Italy, Latvia, Poland, Romania, Slovenia, Spain, Slovak Republic and Sweden. The following precisions apply: “In [Austria and Hungary] these provi‑ sions refer only to gas DSOs (…). In Spain, electricity DSOs serving less than 100 000 connected costumers are exempted from the provisions regarding functional unbundling, but must meet the requirements of legal unbundling by 2016. In Italy there are also different exemptions for electricity and gas sectors: electricity DSOs serving less than 100 000 connected costumers are exempted from legal but not from functional un‑ bundling, whereas respective gas DSOs are exempted from functional but not from legal unbundling”. 312 Council of European Energy Regulators, op.cit., pp. 11-12.

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Figure 5.1. Electricity DSOs 2015-2018.

Figure 5.2. Electricity DSOs with less than 100.000 connexted customers 20152018.

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Gas DSOs 2015-2018.

Gas DSOs with less than 100.000 connected customers 2015-2018.

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7.2 Exemption for closed distribution systems In the “Citiworks” case of 22 May 2008,313 the European Court of Justice found that a provision of German law exempting certain operators of small and closed energy supply systems from the obligation to provide third-party access on the grounds that they were located on a geographically connected operation zone and that they predominantly served the energy needs of the undertaking owning the closed network did not comply with the rules on third party access of the Second Directives (for further details of this case, see book paragraphs 3.903.105).

5.115

In the case in question, the applicability of the Second Directives to the “closed distribution system” of the Leipzig-Halle airport was at stake. The Court decided that the third party access rules under Article 20(1) of the Second Electricity Directive prevented Germany from exempting DSOs such as the distributor of electricity of the airport from the obligation to grant third party access even though the distribution system was located on a geographically “closed” area (the airport) and predominantly served to supply the energy needs of the distributor itself and of connected undertakings.

5.116

Following this decision, concerns were raised that the requirements of the Directives were too heavy on some “closed distribution systems”, such as industrial sites or airports.

5.117

Following this judgment, the Parliament voted in summer 2008, in First Reading, for a derogation from the scope of the Directive for such industrial sites in the Third Directives. The derogation finally adopted under the Third Package does not go that far but provides for a possibility for Member States to grant derogations for these sites from ex-ante tariffs setting by the regulator; no derogation to third-party access can, however, be granted. Article 38 of the Recast Electricity Directive and 28 of the Gas Directive provide for the main following rules.

5.118

313 Case C-439/06; judgment of the Court (Third Chamber) of 22 May 2008 (reference for a preliminary ruling from the Oberlandesgericht Dresden, Germany) – Energy management proceedings between citiworks AG (Intervening party: Sächsisches Staatsministerium für Wirtschaft und Arbeit als Landesregulierungsbehörde), on the one hand, and Flughafen Leipzig/Halle GmbH and Bundesnetzagentur, on the other. Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:62006CJ0439

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Article 38 electricity “1. Member States may provide for national regulatory authorities or other competent authorities to classify a system which distributes electricity within a geographically confined industrial, commercial or shared services site and does not, without prejudice to paragraph 4, supply household customers, as a closed distribution system 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 primarily to the owner or operator of the system or their related undertakings. 2.  Closed distribution systems shall be considered to be distribution systems for the purposes of this Directive. Member States may provide for regulatory authorities to exempt the operator of a closed distribution system from: (a) the requirement under Article 31(5) and (7) to procure the energy it uses to cover energy losses and the non-frequency ancillary services in its system in accordance with transparent, non-discriminatory and market-based procedures; (b) the requirement under Article 6(1) that tariffs, or the methodologies underlying their calculation, are approved in accordance with Article 59(1) prior to their entry into force; (c) the requirements under Article 32(1) to procure flexibility services and under Article 32(3) to develop the operator’s system on the basis of network development plans; (d) the requirement under Article 33(2) not to own, develop, manage or operate recharging points for electric vehicles; and (e) the requirement under Article 36(1) not to own, develop, manage or operate energy storage facilities. 3. Where an exemption is granted under paragraph 2, the applicable tariffs, or the methodologies underlying their calculation, shall be reviewed and approved in accordance with Article 59(1) upon request by a user of the closed distribution system. 260

Chapter 5 Unbundling of Distribution System Operators Christopher Jones, revised and updated by William-James Kettlewell 4. Incidental use by a small number of households with employment or similar associations with the owner of the distribution system and located within the area served by a closed distribution system shall not preclude an exemption under paragraph 2 being granted.”

Article 28 gas “1. Member States may provide for national regulatory authorities or other competent authorities to classify a system which distributes gas within a geographically confined industrial, commercial or shared services site and does not, without prejudice to paragraph 4, supply household customers, as a closed distribution system 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 gas primarily to the owner or operator of the system or to their related undertakings. 2. Member States may provide for national regulatory authorities to exempt the operator of a closed distribution system from the requirement under Article 32(1) that tariffs, or the methodologies underlying their calculation, are approved prior to their entry into force in accordance with Article 41. 3. Where an exemption is granted under paragraph 2, the applicable tariffs, or the methodologies underlying their calculation, shall be reviewed and approved in accordance with Article 41 upon request by a user of the closed distribution system. 4. Incidental use by a small number of households with employment or similar associations with the owner of the distribution system and located within the area served by a closed distribution system shall not preclude an exemption under paragraph 2 being granted.”

This gives rise to the following comments.

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7.2.1 Definition of closed distribution systems 5.120

Closed distribution systems are therefore systems that distribute gas or electricity: –

within a geographically confined industrial, commercial or shared­ services site; and where

–

for specific technical or safety reasons, the operation or the production process of the users of that system is integrated; or that system distributes electricity primarily to the owner or operator of the system or their related undertakings.

5.121

The site should be an industrial, commercial or shared services site. Recital 66 of the electricity Directive and 28 of the Gas Directive give as possible examples “train station buildings, airports, hospitals, large camping sites with integrated facilities or chemical industry sites”. In particular, the network should not supply household customers. However, “ incidental use by a small number of households with employment or similar associations with the owner of the distribution system and located within the area served by a closed distribution system” does not preclude the application of the exemption.

5.122

The addition of the sentence “closed distribution systems shall be considered to be distribution systems for the purposes of this Directive”, clarifies beyond any doubt that, besides the possible derogation allowed by Article 38, closed distribution systems must follow all unbundling rules applicable to DSOs.

7.2.2 Scope of the derogation 5.123

The derogation aims at allowing closed distribution systems to be excluded from obligations which would constitute an unnecessary administrative burden because of the particular nature of the relationship between the distribution system operator and the users of the system.

5.124

Firstly, both gas and electricity closed distribution systems can be exempted from the requirement that network tariffs (or the methodologies underlying their calculation) are approved by the regulator prior to their entry into force. However, where an exemption is granted, the tariffs or methodologies can still be reviewed and approved by the regulator upon request by a user of the closed distribution system. The wording of the Directives implies that the regulator 262

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is bound to approve the tariffs following any request to this effect. Arguably, Member States could probably make this review subject to procedural conditions such as a legitimate interest to act for the third party (normally be a supplier or a customer) requesting the regulatory oversight. Secondly, electricity (not gas) closed distribution systems can be exempted from the obligations of Article  31(5) & (7) of the Electricity Directive, which requires DSOs to procure the energy that they use to cover energy losses and reserve capacity in their systems according to transparent, non-­discriminatory and market-based procedures.

5.125

Lastly, since the scope of the tasks of, and unbundling obligations applicable for, electricity DSOs have been extended under the Recast Electricity Directive, the scope of the derogation allowing Member States to exempt electricity closed distribution systems from these additional obligations is also extended. Member State can therefore derogate from (i) the obligations for DSOs to procuring flexibility services in a non-discriminatory manner, (ii) the obligation of developing their network on the basis of network development plans, (iii) the prohibition from owning or operating recharging points for electric vehicles and (iv) the prohibition from owning or operating energy storage facilities.

5.126

7.2.3 Procedure Member States may require national regulatory authorities or other competent authorities to classify (i.e., to approve) a system as a closed distribution system. As a second step, Member States may provide for national regulatory authorities to exempt the operator of these closed distribution system.

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Chapter 6 National Regulatory Authorities

1.

The need for a strong sector-specific regulator

Given the nature of the monopoly held by the electricity and, to a somewhat lesser extent, gas networks, and the fact that they are an essential facility for anyone selling grid-bound goods or services in these areas, a regulator is necessary to ensure effective and non‑discriminatory access. Whilst competition policy can deal with certain cases of discrimination by dominant companies, and the Commission has been active in this domain over the past years,314 its procedures and remedies are not best equipped to address possible shortcomings in an entire network industry where competition for the services in question is completely non‑existent or at best very limited. This is why in monopoly network industries fair access is generally safeguarded by sector-specific regulators. In the case of electricity and gas regulators, they also perform tasks which would go beyond the capacity of competition authorities, such as ex ante approval of terms and conditions, setting or approving tariffs or methodologies, continuous market monitoring and facilitating infrastructure investment.

6.1

A requirement for Member States to establish regulators with specific competences was introduced by the Electricity and Gas Directives contained in the

6.2

314 The most recent examples of this are case COMP/AT.40461 “DE-DK Interconnector” where the Commission imposed in December 2018 binding commitments on Tennet, the largest German electricity TSO, to increase electricity trading capacity between Denmark and Germany; COMP/AT.39849 “BEH gas”, where the Commission levied a EUR 77m fine on the Bulgarian vertically integrated gas undertaking (its holding) for foreclosing the Bulgarian gas market by restricting access to gas market infrastructure; as well as in COMP/AT.40335 “Romanian gas interconnectors” where the Commission investigated possible export restrictions by the Romanian gas TSO Transgaz and accepted commitments by the latter in March 2020 to to address the Commission’s concerns. Transgaz committed to make available to the market significant firm capacities for natural gas exports from Romania to neighbouring Member States, in particular Hungary and Bulgaria.

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Second Internal Market Package of 2003.315 As a result, energy regulators were established in all Member States. Though it succeeded in imposing sector specific regulators in all Member States, the regulatory framework under the Second Package suffered from several shortcomings. First, the requirements for independence were insufficient, as there was no obligation for regulators to be independent from governments but only from the energy industry. Second, the set of regulatory powers under EU law was limited: decision-making powers were only granted as regards tariffs, terms and conditions and complaints. Other competences were limited to monitoring of the activities of network operators.

6.3

Therefore, the Commission’s assessment of the role of regulators in 2007 showed a number of deficiencies. Overall, the effectiveness of regulators was frequently constrained by a lack of independence from government and insufficient powers. The country reviews done at the time in particular showed that, on many issues, regulators did not have sufficient discretionary and effective ex ante powers, and that this could lead to inconsistent decision-making. In many cases, the Commission found that regulatory powers were distributed among different bodies; in particular they were often split between the regulatory authority and the ministry. Lack of uniformity of regulators’ effective powers across Europe was also deemed to create a barrier to efficient cooperation on cross border issues and the development of a “level playing field”.

6.4

The Commission’s Communication of 10 January 2007 concluded as follows: “– There is evidence that both TSOs and regulators tend to be over-oriented to short term national concerns rather than pro-actively trying to develop integrated markets. For example, congestion has been in some countries shifted to national borders and cross border capacity is the first to be constrained. Some regulators have been slow to agree how to implement the basic provisions already contained in the legislation – for example, market-based capacity allocation. – On many issues, certain regulators are constrained in their relations with the industry, lacking the appropriate powers and discretion. This is particularly the case for subjects where, in the Directives, the regulator is not responsible ex-ante such as rules for functional unbundling, non-tariff access conditions, provision of information to network users and gas storage.

315 Directive 2003/54/EC concerning common rules for the internal market in electricity; Directive 2003/55/ EC concerning common rules for the internal market in natural gas.

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Chapter 6 National Regulatory Authorities Emmanuel Cabau, revised and updated by Kristóf Kovács – Regulators have, on occasion, been put in a position where their decisions clearly go against the objective of creating a single internal market for electricity and gas, usually due to direct or indirect influence from national governments. The clearest, although not the only, example of this is inappropriate regulated supply tariffs. – Concentrated national markets have tended to encourage regulators to introduce intrusive regulation into wholesale and balancing markets, for example price caps, which are a strong disincentive to invest. At the same time, capacity mechanisms are wholly uncoordinated, leading to potential distortions.”316

These findings were confirmed by a separate consultant’s report on regulatory competences, which concluded: “there remain insufficiencies in respect of the scope of activities, available powers and regulators’ ability to exercise independent regulation” and that this “causes residual problems of regulatory asymmetry and in some cases prevents the appropriate development of competition.” 317

6.5

As part of the Third Package, the 2009 Electricity and Gas Directives318 laid down a number of rules governing the formal set-up and independence of regulatory authorities, their duties, powers and obligations. These rules were, by and large, the same for electricity and gas. Referring to the Second Package, Recital 33 of the Third Package Electricity Directive and Recital 39 of the Gas Directive summarized the motivation for strengthening national regulatory authorities by explaining that “the effectiveness of regulation is frequently hampered through a lack of in‑ dependence of regulators from government, and insufficient powers and discretion”.

6.6

Since 2009 work on the internal market for electricity and gas has progressed steadily, numerous aspects of which are described in this book. The rules of the Third Package Directives relating to national regulatory authorities have largely tested well over time and Member State regulatory authorities, alongside ACER, have been of crucial importance to the deepening of integration in EU electricity and gas markets. However, a number of infringement cases launched by the Commission on regulatory independence and a referral to the Court of Justice, as well as overall experience gathered over the past years has brought to light certain areas for further legislative action. Therefore, in the context of

6.7

316 Commission, Prospects for the internal gas and electricity market, COM(2006) 841, 10.1.2007, p 7-8. 317 Study of the Powers and Competencies of Energy and Transport Regulators, Europe Economics and TIS, October 2006. 318 Directive 2009/72/EC concerning common rules for the internal market in electricity (the Electricity Directive); Directive 2009/73/EC concerning common rules for the internal market in natural gas (the Gas Directive).

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the Commission’s “Clean Energy for all Europeans Package”319 specific provisions were proposed for modification Electricity Directive, touching on the legal framework for national regulators. Specifically, these areas are: i) further strengthening regulatory independence; ii) clarifying regulatory cooperation and coordination rules; and iii) adding new duties stemming from the strengthened provisions on electricity consumers and distribution systems.

6.8

The “Clean Energy for all Europeans” package and its specific electricity market design aspects focused on the regulatory framework in the EU electricity market. No amendments have to date been tabled concerning the Third Package Gas Directive though the Commission has announced its intention to work on a future gas market design as well. In assessing the provisions on regulatory authorities this chapter will be therefore be based on the Electricity Directive, noting where the two Directives now have asynchronous provisions.320

6.9

Going forward therefore, “Electricity Directive” will refer to Directive 2019/692/ EU, whereas “Gas Directive” will refer to Directive 2009/73/EC, the Third Package Directive, which remains in force. The term “Directives” will be used when referring to provisions in those pieces of legislation while “Third Package Directives” will refer to Directives 2009/72/EC and 2009/73/EC.

6.10

In order to support the implementation of the Third Package Directives by Member States, the Commission published an Interpretative Note on the regulatory authorities in 2010.321 Whilst this document is not formally binding for Member States (or, in fact, the Commission), it reflects the Commission’s interpretation of the relevant legislative provisions and thus constitutes an important guidance document for transposing the Directives into national law. As most of the provisions from the Third Package Directives relative to regulatory authorities are carried over into the Electricity Directive, the Interpretative Note continues to be an important source of analysis of the respective norms and will be referred to throughout this chapter.

319 Proposed on 30 November 2016 (COM(2016) 864); a political agreement was reached on 18 December 2018. 320 This has been done in particular in the frame of the Madrid Forum meetings held since 2017. There have also been earlier considerations of mirroring key non-electricity-specific general amendments of the Electricity Directive into an amended Gas Directive but these plans were later dismissed. 321 Appendix 13.

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The provisions of the Directives limit the legislative room for manoeuvre of Member States in relation to the establishment of regulatory authorities considerably. As with all shared competences under Article 4 TFEU, they need to be justified against the principles of subsidiarity and proportionality enshrined in Article 5 TEU – and more specifically, the principles of institutional and procedural autonomy acknowledged by the European Court of Justice.322 The evidence mentioned above supports the assumption that the criteria of these principles are met by the Directives.

6.11

However, it must be emphasised that the Electricity and Gas Directives are somewhat more prescriptive and detailed in terms of institutional requirements, duties and powers of regulatory authorities than comparable pieces of EU legislation, such as for electronic communications or postal services.323 Considering more recent examples from other sectors, such as railways or credit institutions,324 the degree of harmonisation at EU level generally seems to have increased over time. At the same time, cooperation requirements between national regulatory authorities were generally strengthened and, in several areas, additional bodies (agencies) at EU level have been created.325

6.12

2.

Designation of a single regulatory authority

Under the Second Package, Member States could appoint several authorities as regulators and split tasks between them, for example between an independent regulator, a ministry, and/or a competition authority.326 In practice therefore, Member States were free to appoint more than one regulatory authority.

6.13

Articles 57(1) of the Electricity Directive and 39(1) of the Gas Directive provide that, when setting up the regulatory authority:

6.14

322 See, for instance, ECJ, Joined cases 205 to 215/82 Deutsche Milchkontor [1983] ECR 2633, paragraph 17. Cf. paragraph 6.119. below. 323 Cf. Article 3 of Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services (as amended by Directive 2009/140/EC); Article 22 of Directive 97/67/EC on common rules for the development of the internal market of Community postal services and the improvement of quality of service (as amended by Directive 2008/6/EC). 324 Cf. Articles 55 to 57 of Directive 2012/34/EU establishing a single European railway area; Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, in particular Articles 4 to 7, 40 to 45, 102 to 110 and 143 to 144 thereof. 325 See Chapter 7 on the Agency for the Cooperation of Energy Regulators, the EU agency with responsibilities in the energy sector. 326 Article 23(1) of the former Electricity Directive 2003/54/EC and Article 25(1) of the former Gas Directive 2003/55/EC: 269 ‘Member States shall designate one or more competent bodies with the function of regulatory authorities’.

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“Each Member State shall designate a single [national]327 regulatory authority at national level”.

6.15

The Directives therefore clearly establish the principle that one entity must be granted all the powers (as a “one-stop shop”) to regulate the national electricity and gas sectors. The details of the organisational structure and composition of national regulatory authorities are to be elaborated by the Member States. In particular, Member States are free to set up several bodies within a national regulatory authority, e.g. a director, a board, a commission, a chamber etc.328 In case competences are split between different bodies, Member States must ensure that, taken together, all competences and duties listed in the Directives are assigned to the authority and that each of the bodies meets the independence requirements prescribed in the Directives.

6.16

As mentioned above and will be detailed in the section below, there are certain aspects in terms of regulatory independence that the amended provisions of the Electricity Directive intend to improve upon. Overall, however, the concept of a single regulator acting on the national level and working together with its peers on cross-border and European matters has worked out very successfully since the implementation of the Third Package. Regulatory cooperation, whether in the frame of ACER, the Council of European Energy Regulators (CEER) or on ad hoc cross-border issues, has become more intense and generally fruitful. That said cooperation has not always delivered success in resolving common issues which is why the Electricity Directive contains provisions to improve upon the respective procedures for regulatory cooperation, as will be detailed below. Regulatory authorities at national level may be entrusted with additional powers in areas not covered by the Directives such as security of supply, energy efficiency, renewable energy or energy statistics. Where this is the case, given the nature of those tasks, it is questionable whether the strict institutional requirements stipulated by the Directives, notably the independence of national regulatory authorities, also apply. In this respect it should be noted that the Directives distinguish between regulatory and other tasks: Several provisions indicate that the institutional guarantees of the Directives specifically relate to the exercise of regulatory duties and powers listed in the same Directives (or other EU legislation referring to national regulatory authorities).329 Moreover, in those cases not

6.17

327 The reference to national has been removed in the Electricity Directive and the Title of Chapter VII of the Electricity Directive is also simplified to “Regulatory Authorities” instead of the former “National Regulatory Authorities”. 328 Cf. the Commission’s Interpretative Note on regulatory authorities, p 4. 329 Article 57(4) of the Electricity Directive and Article 39(4) of the Gas Directive explicitly refer to regulatory

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under the Directives, the authorities may be subject to different administrative, procedural or budgetary rules. Regulatory authorities designated pursuant to the Electricity and Gas Directives may also be assigned regulatory functions in other areas including telecommunications, media, postal services or transport.330 An integrated regulatory structure of this kind is unobjectionable with regard to the requirement of a single regulatory authority. With regard to its independence, as any other regulatory authority under the Electricity and Gas Directives, it has to meet the requirement of being legally distinct and functionally independent from any other public or private entity.331

6.18

2.1 Regional regulatory authorities Articles 57(2) of the Electricity Directive and Article 39(2) of the Gas Directive, respectively, allow for the designation of other regulatory authorities at regional level within Member States, provided there is only one senior representative per Member State at the Union level in the ACER Board of Regulators.

6.19

As part of the compromise leading to the acceptance of a single regulator at national level, the Third Package Directives enabled Member States to designate regulatory authorities at regional level. This is also upheld in the Electricity Directive. “Regional” in this context means a specific region at infra-national level within a Member State, not a regulator encompassing several regions of Europe at supra-national level. To date only Belgium and Germany have instituted such a system of regional authorities.

6.20

The reference to “other” regulatory authorities at regional level implies that the regional regulatory level should not replace the national (i.e. federal) regulatory level but add to it. This leads to the question whether competences may be divided or shared between the national regulator and regional regulatory authorities. Under a strict interpretation, the national regulator would have to be granted all the competences under the Directives; only additional competences, which

6.21

authorities “carrying out the regulatory tasks conferred upon it by this Directive and related legislation”. When acting outside these regulatory tasks, Article 57(4)(b)(ii) of the Electricity Directive and Article 39(4)(b)(ii) of the Gas Directive allow for general policy guidelines issued by the government. 330 The Bundesnetzagentur in Germany is a prime example of such a multi-sectoral regulator and has the broadest mandate of all European regulatory authorities. Several other national regulators have however mandates beyond the electricity and gas sector, most typically in water and waste services as well as, separately, being organizationally merged with the national competition agency. 331 Article 57(4)(a) of the Electricity Directive and Article 39(4)(a) of the Gas Directive. See Section 3 in this chapter on the regulatory authorities’ independence.

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are not foreseen in the Directives, may be granted to regional authorities. Such a reading is supported by the fact that, in contrast to the rule on geographically separate regions in paragraph 3, the provision relating to the regional regulator in paragraph 2 does not constitute a “derogation” from paragraph 1. However, competences outside the scope of the Directives may be assigned to other authorities in any event. What is more, the requirement to have one senior representative for representation and contact purposes at Union level makes sense only if, otherwise, several representatives would come into consideration.

6.22

A less restrictive, and more plausible, interpretation thus allows for tasks listed in the Directives to be exercised by regional authorities, subject to a certain degree of coordination and review by the national regulator. In Germany, for instance, there are 10 regional regulatory authorities tasked with overseeing, on the basis of the provisions of the Directive, the electricity and gas distribution systems falling into their geographic areas. Belgium, also a federal state, has established regional regulatory authorities in all three of its regions. In view of their structural specificities332, both Member States have thus managed to balance well the effectiveness of the “one-stop shop” principle contained in the Directives with the institutional flexibility granted to (federal) Member States by the legislator.

2.2 Small and separated systems 6.23

Article 57(3) of Electricity Directive and Article 39(3) of the Gas Directive, respectively, allow for the designation of regulatory authorities for small systems333 in a geographically separate region whose consumption in 2008 accounted for less than 3 % of the total consumption of the Member State of which it is part, provided there is only one senior representative per Member State at the Union level in the ACER Board of Regulators. As a derogation from the “one-stop shop” principle, this provision allows Member States to set up more than one regulatory authority per Member State. However, since there is no derogation from the duties and powers given to national regulatory authorities (notably) under Articles 59 (Electricity) and 39 (Gas) of the Directives, it must be assumed that the regulatory authorities designated for small systems, in principle, need to be vested with all the tasks and competences listed in the Directives. As the Commission pointed out,334 the requirements of this derogation are likely to be met only by islands. Correspondingly, to date, only the UK has a regulator responsible for Northern 332 The Bavarian Ruling Chamber for instance oversees 330 electricity and gas DSO with less than 100.000 customers, all operating within the geographic boundaries of the State of Bavaria. 333 Note that this differs from the definition of a “small isolated system” according to Article 2(42) of the Electricity Directive. 334 Interpretative Note on regulatory authorities, p. 4.

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Ireland that falls under these provisions. As in the case of regional authorities, a single senior national representative has been appointed for the United Kingdom as well for representation and contact purposes at Union level. With the UK’s departure from the EU there is thus no Member State applying this derogation.

3.

Independence of regulatory authorities

Minimum requirements of regulatory authorities’ independence are a common feature of sector specific regulation. Regulators should enjoy a high degree of independence when exercising their duties as this constitutes “a key principle of good governance and a fundamental condition for market confidence”.335

6.24

It should be pointed out that, according to Article 57(4) of the Electricity Directive and Article 39(4) of the Gas Directive, regulatory authorities must be independent when acting under the Directives “and related legislation”. The Directives thus differentiate between regulatory and non-regulatory tasks and powers. “Related legislation” certainly includes other acts setting out the rules of the internal electricity and gas market, i.e. the Electricity and Gas Regulations as well as the ACER Regulation.336 Nevertheless, while Regulation (EU) No 1227/2011 on wholesale energy market integrity and transparency (REMIT), Directive 2012/27/EU on energy efficiency337 and Regulation (EU) No 347/2013 on guidelines for trans-European energy infrastructure explicitly refer to national regulatory authorities as defined by the Electricity and Gas Directives, they should not be considered as related legislation.338 In any case, to the extent national regulatory authorities have been granted additional competences outside the scope of the Directives and related legislation, they are not subject to the same independence requirements (or other provisions of the Directives).

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335 See the Commission’s proposals for the Third Package Directives, COM(2007) 528 and 529, paragraph 2.2. The proposal for the Electricity Directive makes no specific mention of regulatory independence in the explanatory memorandum. 336 Regulation (EU) 2019/943 on the internal market for electricity; Regulation (EC) No 715/2009 on conditions for access to the natural gas transmission networks; Regulation (EU) 2019/942 establishing a European Union Agency for the Cooperation of Energy Regulators. 337 As amended by Directive (EU) 2018/844. 338 Cf. the Commission’s Interpretative Note on regulatory authorities, p. 5, which explicitly mentions only the Electricity and Gas Regulations in that context.

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6.26

Regulatory independence from government is, however, important to prevent the protection or support of ‘national champions’; and to prevent decisions being influenced by (short term) political considerations. The Third Package therefore extended the notion of independence and added organisational as well as procedural safeguards to support the practical implementation of the principle of independence.

6.27

The implementation of the Third Package has nevertheless shown that effective regulatory independence across all Member States is an elusive objective. By way of example, the Commission has taken specific enforcement steps on the matter, launching a number infringement cases and referring Germany to the Court of Justice for failing to ensure full respect of the rules on regulatory independence.339 ACER has also weighed in on the matter with its formal recommendation on ensuring its own independence and that of national regulatory authorities.340 Furthermore, in its 2017 paper on regulatory independence in conjunction with the Commission’s “Clean Energy Package” proposal, CEER identified the following categories where a further strengthening of regulatory independence was deemed necessary: i) avoiding that national regulators are given instructions on regulatory decisions by the government341; ii) giving national regulators the power to issue final and binding decisions, without ministry scrutiny; iii) giving the head of the regulatory authority more legal comfort that the term of office is respected; and iv) ensuring adequate resources for the regulator, without government interference.

3.1 Principle of independence 6.28

The principle of independence of national regulatory authorities is enshrined in paragraph 4 of Article 57 of the Electricity Directive and of Article 39 of the Gas Directive:

339 Cf. IP/18/4487. 340 Cf. ACER Recommendation No. 1/2016 of 30 May 2016. The Recommendation calls for the following measures: a clear definition in legislation of the respective roles of the Member States and the NRAs; enshrining in law the accountability of NRAs to national parliaments rather than to their governments; clear and explicit rules for nomination, appointment and dismissal of board members and top management; financial independence to be enshrined and adequate resourcing to be ensured; and inclusion of a general legislative provision requiring NRAs to cooperate at Union level within ACER, and that, as a minimum, all NRAs regularly participate in meetings of the Board of Regulators. 341 According to the CEER study this was still the case in five Member States.

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Chapter 6 National Regulatory Authorities Emmanuel Cabau, revised and updated by Kristóf Kovács “Member States shall guarantee the independence of the regulatory authority and shall ensure that it exercises its powers impartially and transparently. For this purpose, Member State shall ensure that, when carrying out the regulatory tasks conferred upon it by this Directive and related legislation, the regulatory authority: (a) is legally distinct and functionally independent from other public or private entities; 342 (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 direct instructions from any government or other public or private entity when carrying out the regulatory tasks. 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 regulatory powers and duties under Article 59 [gas: Article 41].”

As indicated above, the requirement of independence not only relates to market participants but also to any other public or private body including government structures. The Directives therefore require Member States to create a specific regulatory body outside of the government administration typically characterised by a hierarchical organisation and political responsibility of their management. The Member States’ influence on regulatory authorities must be limited to a few formal rights such as appointment, approval of the budget or reporting. Point (b)(ii) mentions “close cooperation […] with other relevant national au‑ thorities” and “policy guidelines issued by the government”. In practical terms it is impossible to operate a regulatory body in a policy vacuum therefore it is only natural that these items are mentioned. At the same time there may often only be a very thin line between forms of cooperation or acceptance of policy guidelines that potentially impinge on the independence of a particular regulatory authority or those that do not.

342 The text of the Gas Directive still corresponds to the Third Package Directives text which is slightly different: (a) is legally distinct and functionally independent from any other public or private entity;

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3.1.1 Organisational requirements and transparency 6.30

In terms of organisation, the key provision is the requirement for regulatory authorities to be “ legally distinct and functionally independent from any other public or private entity”.343 The term “legally distinct” implies organisational autonomy separating the regulator from other entities.344 It requires Member States to adopt a tailor-made legal framework serving as the legal basis for the regulator’s actions and conferring the duties and powers listed in the Directives. As a rule, regulatory authorities can thus not be part of a governmental structure, e.g. a separate department within a ministry would not qualify as “legally distinct”.

6.31

Functional independence refers to the regulatory practice of the national regulatory authorities and all activities enabling them to fulfil their duties, including the adoption of (legal and/or administrative) acts, the procurement of goods and services and human resource management. Taking into account the relevant case law of the ECJ,345 functional independence requires national regulatory authorities to remain free from instructions of any kind in the performance of their duties and, in particular, to take autonomous decisions within the meaning of Article 57(5)(a) of the Electricity Directive and Article 39(5)(a) of the Gas Directive.

6.32

Article 57(4) of the Electricity Directive and Article 39(4) of the Gas Directive require national regulatory authorities to exercise their powers transparently. To that end Article 59(7) of the Electricity Directive and Article 41(16) of the Gas Directive generally oblige national regulatory authorities to publish their decisions while preserving the confidentiality of commercially sensitive information.346 In addition, the Directives provide standards of transparency especially for tariffs and methodologies347 and network development.348

343 Note that the same wording is used in Article  3(2) of Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services. 344 Cf. the Commission’s Interpretative Note on regulatory authorities, p 6. 345 Cf. in particular the judgments on supervisory agencies under Directive 95/46/EC on the protection of individuals with regard to the processing of personal data and on the free movement of such data, Cases C-518/07 Commission v Germany [2010] ECR I-1885, paragraph 25; C-614/10 Commission v Austria [2012] EU:C:2012:631, paragraph 42; C-288/12 Commission v Hungary [2014] EU:C:2014:237, paragraph 52 (here the ECJ uses the term “operational independence”). 346 Note that the Agency is subject to a similar transparency requirement under Article 17(3) of the ACER Regulation. 347 Article 59(1)(a) of the Electricity Directive and Article 41(1)(a) of the Gas Directive. 348 Articles 51(4) and 22(4), respectively, of the Electricity and Gas Directives.

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3.1.2 Personnel requirements As for the obligations imposed on management and staff, independence from “market interest” required by Article 57(4)(b)(i) of the Electricity Directive and Article 39(4)(b)(i) of the Gas Directive primarily refers to electricity and gas undertakings but, in principle, it also extends to their customers who must be regarded as market participants. Whereas a single consumer may usually not be considered as having a market interest from which the personnel of the regulator needs to stay independent, a lobby group defending the (aggregated) interests of a particular sector of energy customers may clearly be representing such market interest that needs to be considered by the regulator when engaging with that counterparty. In this context, it is noteworthy that while regulatory authorities should help to ensure consumer protection,349 in general, they have to exercise their tasks in a neutral and objective manner.350 This is particularly important when acting as a dispute settlement authority.351

6.33

Holding a position with electricity or gas undertakings or holding shares of such undertakings must be considered incompatible with the requirement to act independently of any market interest.352

6.34

The prohibition to seek or take instructions is part of the concept of political independence.353 According to the Commission’s analysis, the provisions of the Second Package, requiring only independence of the interests of the electricity and gas industry, did not guarantee independence from short-term political interests.354 However, regulators’ independence from (other) public entities, which is required starting with the Third Package Directives, raises the issues of democratic accountability and legal protection. The Directives address these issues by stating that:

6.35

“This precludes neither judicial review nor parliamentary supervision in accordance with the constitutional laws of the Member States.”355

349 350 351 352 353

Article 58(g) of the Electricity Directive, Article 40(g) of the Gas Directive. Cf. the Commission’s Interpretative Note on regulatory authorities, p. 6. Article 59(2) of the Electricity Directive, Article 41(11) of the Gas Directive. Cf. the Commission’s Interpretative Note on regulatory authorities, p. 8. Similar provisions can be found, for instance, in Article 3(3a) of Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services and in Article 55(3) of Directive 2012/34/EU establishing a single European railway area. 354 See the Commission’s proposals for the Third Package Electricity and Gas Directives, COM(2007) 528 and 529, paragraph 2.2. 355 Recital 80 of the Electricity Directive, Recital 30 of the Gas Directive.

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6.36

Here the Directives aim to strike a delicate balance. National regulators must not act according to political considerations; their administrative acts should solely be based on the relevant legislation they have to implement, guided by the general objectives of the internal energy market as laid down in the Directives. While they are not subject to instructions from government, they must be subject to parliamentary control in order to ensure the necessary democratic accountability and legitimacy. In addition, Member States have to provide effective legal remedies against administrative acts adopted by national regulatory authorities, so that their decisions may be subject to judicial review.356

6.37

The prohibition of direct instructions works both ways: seeking and taking instructions would both violate the principle of political independence.357

6.38

“Public entities” within the meaning of Article 58 of the Electricity Directive and Article 40 of the Gas Directive cover not only national entities but also EU institutions including the Commission and ACER. For the latter, the ACER Regulation introduced a similar independence requirement for the Director and the Board of Regulators which was carried forward in the amended text and even strengthened as regards the independence provision of the ACER Director.358

6.39

The Directives also clarify that the rules on independence do not preclude cooperation with other relevant national authorities such as competition authorities.359 Indeed, regulatory authorities are under an obligation to cooperate nationally and internationally, especially in relation to cases of access to and operational security of cross border infrastructure.360 Another issue concerns regulatory authorities that are part of a larger regulatory body such as the competition authority or a joint regulatory institution merging several sector-specific regulators. If one accepts the possibility for national regulatory authorities to be entrusted with additional competences outside the scope of the Directives, this kind of organisational integration must also be regarded as compatible with the Directives – as long as the “political” independence of the regulatory authorities is ensured.

6.40

356 Cf. Article 60(4) of the Electricity Directive, Article 41(12) of the Gas Directive. 357 Cf. the Commission’s Interpretative Note on regulatory authorities, p. 7. 358 Articles 22(3) and 23(1) of the ACER Regulation. A sentence was added that the Director was only accountable to the Administrative Board in relation to administrative, budgetary and managerial matters. 359 Articles 59(2) and 59(3)(b) of the Electricity Directive; Articles 41(2) and 41(4)(b) of the Gas Directive. 360 Article 61(1) of the Electricity Directive, Article 42(1) of the Gas Directive. Cf. Section 8 as well as the Commission’s Interpretative Note on regulatory authorities, p. 8.

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3.2 Rules protecting independence Accompanying rules on financing and the appointment of the management should help protect regulators’ independence, notably to avoid indirect attempts to influence the regulatory practice of authorities. Preserving almost entirely the text of the Third Package Directives, the Electricity Directive clarifies in Article 57(5) the formulation on functional independence by enumerating specifically the requirements vis-á-vis Member States:

6.41

“In order to protect the independence of the regulatory authority, Member States shall in particular ensure that: (a) the regulatory authority can take autonomous decisions, independently from any political body; (b) the regulatory authority has all the necessary human and financial resources it needs to carry out its duties and exercise its powers in an effective and efficient manner; (c) the regulatory authority has a separate annual budget allocation with and autonomy in the implementation of the allocated budget; and (d) 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 fixed term of five up to seven years, renewable once.”361

Point (a) reiterates the principle of political independence: the decisions of regulatory authorities are not subject to approval or review by any political body. In order to enable regulatory authorities to act independently in practice, new point (b) of the Electricity Directive contains the largely existing provisions on financial autonomy and adequate resources. Crucially, compared to the text of the Third Package Directives, the objective to “[…] exercise its powers in an ef‑ fective and efficient manner.” was added in relation to the functional autonomy. This is clearly a stronger formulation than “carry out its duties” and shows that the legislator saw it necessary to further specify the notion to respond to the experience and recommendations of the years since the implementation of the Third Package. As explained in the Commission’s Interpretative Note, regulatory authorities may either be granted separate global budgets on an annual basis, 361 Article 57(5) of the Electricity Directive. Article 39(5) of the Gas Directive is less pronounced in the enumeration of the financial autonomy terms.

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or be allowed to collect fees from electricity and gas customers.362 Both financial and human resources will have to be assessed with regard to the tasks of the regulatory authority.

6.43

As regards financing, Member States must ensure that regulatory authorities have separate annual budget allocations, with autonomy in the implementation of the allocated budget. Both reformulated points show the evident tension: on one side, trying to push for autonomy also from the political level in order to achieve as independent regulatory authorities as possible; and on the other the overall reticence of Member States to give free hand on the matter. During the Third Package negotiations the notion of “budgetary autonomy” was still on the table, but was finally decided against in favour of “autonomy in the implementa‑ tion of the allocated budget” as a compromise solution. Nevertheless, as stated above, implementation of the Third Package Directives has shown that further efforts needed to be made in terms of strengthening regulatory independence. Consequently, new points (b) and (c) and the limited reformulation go another small step but still uphold overall the delicate political balance of the Third Package.

6.44

The Directives further provide that: “approval of the budget of the regulatory authority by the national legislator does not constitute an obstacle to budgetary autonomy. The provisions relating to the autonomy in the implementation of the allocated budget of the regulatory authority should be implemented in the framework defined by national budgetary law and rules”.363

6.45

Under paragraph 5 point (d) of the Electricity Directive on the ‘designation and independence of regulatory authorities’, the members of the board of a regulatory authority or, in the absence of a board, the regulatory authority’s top management, are to be appointed for a fixed term of five up to seven years, renewable once.364 Additionally, an appropriate rotation scheme for the board or top management must be put into place. This should contribute to making appointments less susceptible to political influence by preventing all members of the board or top management from being appointed or resigning at the same 362 Interpretative Note on regulatory authorities, p. 9. 363 Recital 80 of the Electricity Directive and Recital 30 of the Gas Directive (differs only in small linguistic revision). 364 At the time of the negotiation of the Third Package the Commission, supported by the Parliament, proposed a non-renewable appointment to guarantee more independence, which was rejected by the Council. The end result can be interpreted as a compromise solution.

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time. No change has been made to this arrangement with the new Electricity Directive. The members of the board or, in the absence of a board, the top management may be relieved from office during their term only if they no longer fulfil the conditions set out in this Article or have been found guilty of misconduct under national law.

6.46

As some small Member States were afraid that they would not have sufficient competent human resources to properly implement this provision, the Directives provide some mitigation by indicating that:

6.47

“While contributing to the regulatory authorities’ independence from any political or economic interest through an appropriate rotation scheme, it should be possible for Member States to take due account of the availability of human resources and of the size of the board.”365

Neither board members nor staff of regulatory authorities are subject to cooling-on or cooling-off periods under the Directives before joining or after leaving the regulatory authority.366

6.48

New provisions (points 5(e)-(g)) added in the Electricity Directive aim to further ensure that the appointment of regulatory authority board members is objective and transparent and that the candidates have the required skills and experience. The requirement to heed conflict of interest and confidentiality provisions for board members – even beyond the end of the mandate – has been added. Finally, a potential dismissal of regulatory board members may henceforth only be done on the basis of transparent criteria that have been established in advance.

6.49

In order to provide for a monitoring cycle on the implementation of the respective independence provisions – “the compliance of national authorities with the principle of independence” – Article 57(7) of the Electricity Directive sets out that the Commission must present a report to the European Parliament and the Council three years after the entry into force of the Directive and every four years thereafter.

6.50

365 Recital 80 of the Electricity Directive, Recital 30 of the Gas Directive (differs only in small linguistic revision). 366 Unlike, for instance, regulatory bodies for railways under Article 55(3) of Directive 2012/34/EU.

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4. 6.51

General objectives of the regulatory authorities

Article 58 of the Electricity Directive and Article 40 of the Gas Directive provide for a list of general objectives that are assigned to the regulatory authorities;367 “In carrying out the regulatory tasks specified in this Directive, the regulatory authority shall take all reasonable measures in pursuit of the following objectives within the framework of its duties and powers as laid down in Article 59, in close consultation with other relevant national authorities, including competition authorities, as well as authorities, including regulatory authorities, from neighbouring Member States and neighbouring third countries, as appropriate, and without prejudice to their competence: (a) promoting, in close cooperation with regulatory authorities of other Member States, the Commission and ACER, a competitive, flexible, secure and environmentally sustainable internal market for electricity within the Union, and effective market opening for all customers and suppliers in the Union, and ensuring appropriate conditions for the effective and reliable operation of electricity networks, taking into account long-term objectives; (b) developing competitive and properly functioning regional cross-border markets within the Union with a view to achieving the objectives referred to in point (a); (c) eliminating restrictions on trade in electricity between Member States, including developing appropriate cross-border transmission capacities to meet demand and enhancing the integration of national markets which may facilitate electricity flows across the Union; (d) helping to achieve, in the most cost-effective way, the development of secure, reliable and efficient non-discriminatory systems that are consumer-oriented, and promoting system adequacy and, in accordance with general energy policy objectives, energy efficiency, as well as the integration of large and small-scale production of electricity from renewable sources and distributed generation in both transmission and distribution networks, and facilitating their operation in relation to other energy networks of gas or heat;

367 Text of the Electricity Directive.

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Chapter 6 National Regulatory Authorities Emmanuel Cabau, revised and updated by Kristóf Kovács (e) facilitating access to the network for new generation capacity and energy storage facilities, in particular removing barriers that could prevent access for new market entrants and of electricity from renewable sources; (f ) ensuring that system operators and system users are granted appropriate incentives, in both the short and the long term, to increase efficiencies, especially energy efficiency, in system performance and to foster market integration; (g) ensuring that customers benefit through the efficient functioning of their national market, promoting effective competition and helping to ensure a high level of consumer protection, in close cooperation with relevant consumer protection authorities; (h) helping to achieve high standards of universal service and of public service in electricity supply, contributing to the protection of vulnerable customers and contributing to the compatibility of necessary data exchange processes for customer switching.”

Regulatory authorities have the obligation to take all reasonable measures to implement this list of objectives. Even so, the Directives clearly state that these general objectives do not by themselves confer additional competences upon the regulatory authorities: The objectives are to be pursued within the framework of the duties and powers given to regulators under Articles 59 of the Electricity Directive and 41 of the Gas Directive.368 The general objectives, however, may serve as an interpretative guideline for the tasks and powers granted to national regulatory authorities and the exercise of these tasks and powers.

6.52

The list of general objectives emphasises the role of regulatory authorities in relation to the achievement of an effective integrated internal market within the Union (paragraphs a, b, c and f ). Clearly, regulators should not only focus on their national markets but be strongly involved in driving market opening at European level. In this respect, they have a specific responsibility for developing competitive and properly functioning regional markets within the Union (paragraph b); and for eliminating restrictions on trade between Member States, including developing appropriate cross border transmission capacities and enhancing the integration of national markets so as to facilitate flows across the Union (paragraph c).

6.53

368 See the Commission’s Interpretative Note on regulatory authorities, p. 12.

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6.54

Another key objective is the effective and reliable operation of networks. The Directives stress in this respect the need to put into place appropriate conditions, including incentives for both system operators and system users to foster long term objectives. The aim is to avoid that regulators limit themselves to short term policies with detrimental impact on long term investments and security of supply. Efficiency objectives are also included, notably in that the development of the system should be undertaken to increasing efficiencies in system performance (paragraphs a, d and f ).

6.55

Regulators should also have a specific focus on promoting effective competition, (paragraphs a, b and g) and facilitating access to the network for new market entrants and new generation or production capacity (paragraph e).

6.56

Environmental concerns have to be an important element of the regulators’ policy in order to promote, in line with their general energy policy objectives, energy efficiency as well as the integration of large and small-scale production of electricity from renewable energy sources and distributed generation in both transmission and distribution networks (paragraph (e) of the Electricity Directive).

6.57

The regulatory policy has to be consumer oriented, including the general obligation to ensure that consumers ultimately benefit from the efficient functioning of their national market. The Directives recognise the role of regulatory authorities in customer protection, public service obligations and the protection of vulnerable customers although they indicate that the regulator is only to contribute to these policies (or provide “help”), implying that the primary responsibility in this area remains with the government or other entities such as consumer authorities (paragraphs d, g and h).369 To this effect paragraph (g) of this Article in the Electricity Directive has been amended to clarify that the high level of consumer protection was to be ensured in close cooperation with consumer protection authorities.370

6.58

Finally, the pursuit of these objectives is not an exclusive competence of the regulatory authorities: rather, they must be implemented “in close consultation with other relevant national authorities” and “without prejudice” to the competencies of other authorities. This in particular concerns national energy ministries (departments, agencies) and competition authorities but also consumer protection bodies and others. 369 See Chapter 10. 370 Cf. the duty to cooperate with other relevant national authorities pursuant to Article 59(2) of the Electricity Directive and Article 41(2) of the Gas Directive.

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5.

Duties of regulatory authorities

Articles 59(1) of the Electricity Directive and 41(1) of the Gas Directive are the key articles that contain the duties of national regulatory authorities.

6.59

As explained above, these responsibilities should be seen in conjunction with the general objectives listed in Article 58 of the Electricity Directive and Article 40 of the Gas Directive. Moreover, the list of duties of the regulatory authorities is complemented by a list of powers that must be granted to them. The Directives thus provide for a number of such competences to be conferred upon regulatory authorities so as to enable them to carry out the tasks assigned to them with a view to pursuing the catalogue of general objectives. Both duties and powers granted under the Directives constitute a minimum standard. Member States may foresee additional tasks and additional competences for regulatory authorities.371 Those must, however, not encroach upon the duties and powers assigned by the Directives, nor the independence guaranteed by the Directives.

6.60

5.1 General principles applicable to the duties Articles 59(2) of the Electricity Directive and 41(2) of the Gas Directive provide some important clarifications as regards the regulators’ duties and powers.

6.61

First, Member States have the possibility to decide that the monitoring duties set out in paragraph 1 are carried out by authorities other than the regulatory authority. Where this is the case, the information resulting from such monitoring activities must be made available to the regulatory authority as soon as possible. It must be emphasised that the possibility to entrust duties to other authorities only concerns the tasks explicitly limited to monitoring and, in particular, does not cover decision making or enforcement powers.

6.62

Second, when exercising their powers, regulatory authorities have a general obligation to cooperate with any other relevant national authority. The Directives indicate that this should be done while preserving their independence and without prejudice to each authority’s own specific competencies.

6.63

Third, regulatory authorities also have the obligation to consult transmission system operators.

6.64

371 Article 57(4)(b)(ii) of the Electricity Directive and Article 39(4)(b)(ii) of the Gas Directive recognize that national regulatory authorities may be assigned non-regulatory duties and powers.

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6.65

6.66

Finally, the Directives indicate that any approvals given by regulatory authorities (or ACER) under the Directives are without prejudice to any duly justified future use of the powers of the regulatory authority or to any penalties imposed by other relevant authorities or the Commission. Here, the Directives limit the legal effects of approval decisions on further decisions or proceedings. For instance, the approval of a network operator’s general terms and conditions, assuming the network operator acted in full compliance with those terms and conditions, would not preclude the regulatory authority from adapting tariffs or their methodologies if the network operator’s costs were found to have been inefficiently incurred. What is more, other relevant authorities, in particular national competition authorities and the Commission, are not bound by decisions of the regulator: Terms and conditions e.g. for the provision of balancing services may, even though approved by the national regulatory authority, still be found to contradict EU competition law. This is in line with the jurisprudence of the ECJ.372 Regulatory authorities enjoy a certain degree of discretionary power when exercising their duties, which has been recognised by the ECJ: “In carrying out those regulatory functions, the NRAs have a broad discretion in order to be able to determine the need to regulate a market according to each situation on a caseby-case basis.”373

5.2 Content of the duties 6.67

Articles 59(1) of the Electricity Directive and 41(1) of the Gas Directive provide, respectively, a list of 26 and 21 duties.374 Regulatory authorities must be assigned additional tasks in case an independent system operator (ISO) or an independent transmission operator (ITO) has been designated. Further tasks are listed in paragraphs 59(7)-(10) and 60(1) of the Electricity Directive and paragraphs 6 to 10 of Article 41 of the Gas Directive. Modifications made from the Third Package Directives to the Electricity Directive entail the removal of the paragraph on incentives to network operators (37(8)) and the addition of paragraph 59(9) on ensuring greater transparency in relation to tariff methodology and underlying costs while nonetheless preserving the necessary confidentiality.

372 Cf. e.g. case C-280/08P Deutsche Telekom v Commission [2010] ECR I-9555, paragraph 84. 373 Case C-424/07 Commission v Germany [2009] ECR I-11431, paragraph 61; see also case C-55/06 Arcor [2008] ECR I-2931, paragraphs 151-159. 374 The Third Package Directives both had 21 duties defined for regulatory authorities which was supplemented by five additional duties in the frame of the amendment of the Electricity Directive.

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Article 59(1) of the Electricity Directive “1. The regulatory authority shall have the following duties: (a) fixing or approving, in accordance with transparent criteria, transmission or distribution tariffs or their methodologies, or both; (b) ensuring the compliance of transmission system operators and distribution system operators and, where relevant, system owners, as well as the compliance of any electricity undertakings and other market participants, with, their obligations under this Directive, Regulation (EU) 2019/943 the network codes and the guidelines adopted pursuant to Articles 59, 60 and 61 of Regulation (EU) 2019/943 and other relevant Union law, including as regards cross-border issues, as well as with ACER’s decisions; (c) in close coordination with the other regulatory authorities, ensuring the compliance of the ENTSO for Electricity and the EU DSO entity with their obligations under this Directive, Regulation (EU) 2019/943, the network codes and guidelines adopted pursuant to Articles 59, 60 and 61 of Regulation (EU) 2019/943 and other relevant Union law, including as regards cross-border issues, as well as with ACER’s decisions, and jointly identifying non-compliance of the ENTSO for Electricity and the EU DSO entity with their respective obligations; where the regulatory authorities have not been able to reach an agreement within a period of four months after the start of consultations for the purpose of jointly identifying non-compliance, the matter shall be referred to the ACER for a decision, pursuant to Article 6(10) of Regulation (EU) 2019/942; (d) approving products and procurement process for non-frequency ancillary services; (e) implementing the network codes and guidelines adopted pursuant to Articles 59, 60 and 61 of Regulation (EU) 2019/943 through national measures or, where so required, coordinated regional or Union-wide measures; (f ) cooperating in regard to cross-border issues with the regulatory authority or authorities of the Member States concerned and with ACER, in particular through participation in the work of ACER’s Board of Regulators pursuant to Article 21 of Regulation (EU) 2019/942;

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Chapter 6 National Regulatory Authorities Emmanuel Cabau, revised and updated by Kristóf Kovács services, the relationship between household and wholesale prices, the evolution of grid tariffs and levies, and complaints by household customers, as well as any distortion or restriction of competition, including by providing any relevant information, and bringing any relevant cases to the relevant competition authorities; (p) monitoring the occurrence of restrictive contractual practices, including exclusivity clauses which may prevent ¦customers from contracting simultaneously with more than one supplier or restrict their choice to do so, and, where appropriate, informing the national competition authorities of such practices; (q) monitoring the time taken by transmission system operators and distribution system operators to make connections and repairs; (r) helping to ensure, together with other relevant authorities, that the consumer protection measures are effective and enforced; (s) publishing recommendations, at least annually, in relation to compliance of supply prices with Article 5, and providing those recommendations to the competition authorities, where appropriate; (t) ensuring non-discriminatory access to customer consumption data, the provision, for optional use, of an easily understandable harmonised format at national level for consumption data, and prompt access for all customers to such data pursuant to Articles 23 and 24; (u) monitoring the implementation of rules relating to the roles and responsibilities of transmission system operators, distribution system operators, suppliers, customers and other market participants pursuant to Regulation (EU) 2019/943; (v) monitoring investment in generation and storage capacities in relation to security of supply; (w) monitoring technical cooperation between Union and third-country transmission system operators; (x) contributing to the compatibility of data exchange processes for the most important market processes at regional level; (y) monitoring the availability of comparison tools that meet the requirements set out in Article 14; 289

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Article 41(1) of the Gas 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; (b) ensuring compliance of transmission and distribution system operators, and where relevant, system owners, as well as of any natural gas undertakings, with their obligations under this Directive and other relevant Community legislation, including as regards cross‑border issues; (c) cooperating in regard to cross‑border issues with the regulatory authority or authorities of the Member States concerned and with the Agency; (d) complying with, and implementing, any relevant legally binding decisions of the Agency and of the Commission; (e) reporting annually on its activity and the fulfilment of its duties to the relevant authorities of the Member States, the Agency and the Commission. Such reports shall cover the steps taken and the results obtained as regards each of the tasks listed in this Article; (f ) ensuring that there are no cross‑subsidies between transmission, distribution, storage, LNG and supply activities; (g) monitoring investment plans of the transmission system operators, and providing in its annual report an assessment of the investment plans of the transmission system operators as regards their consistency with the Community‑wide network development plan referred to in Article  8(3)(b) of Regulation (EC) No 715/2009; such assessment may include recommendations to amend those investment plans;

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Based on these comprehensive lists – largely identical for electricity and gas in the Third Package Directives but the amendment of the Electricity Directive has introduced important additions – the duties of regulatory authorities can be grouped as follows: –

Tariffs;

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Prevention of cross-subsidies;

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Compliance and enforcement;

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Cooperation;

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Monitoring and assessment;

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Reporting and publication;

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Consumer protection;

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Specific duties vis-á-vis Regional Coordination Centres [Electricity Directive only].

5.2.1 Tariffs One of the core tasks of national regulatory authorities is the fixing or approval of network tariffs or the pertaining methodologies. A tariff may be regarded as the price of network access, i.e. of connecting to or using a transmission or distribution system. Article 59 of the Electricity Directive and Article 41 of the Gas Directive allow for two approaches, respectively, as regards the type of regulatory intervention: fixing or approving as well as to the subject of regulatory intervention: tariffs or methodologies. As a result, some Member States’ network operators are required to submit their methodologies to regulatory authorities for approval, but they may set tariffs themselves. In other Member States, tariffs are fixed by regulatory authorities. The Third Package Directives were open as regards the specific approach both in terms of the type and the subject, using the word ”or” in the article. The text of the Electricity Directive clarifies that the national regulatory authority may fix or approve the tariffs, their methodologies or “both”. The matter of regulatory authority competence in relation to this matter came to the fore during the negotiations of the network code on gas tariffs. Therefore, while this is a step forward in clarifying the role of the regulatory authority, it is a weaker formulation than the one proposed by the Commission for the Electricity Directive, which insisted on the regulatory authority having to either fix or approve both tariffs and methodologies.

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In any case, the determination of tariffs for transmission services is subject to a set of high-level principles contained in Article 18 of the Electricity Regulation and Article 13 of the Gas Regulation.375 Further harmonised rules on the calculation of tariffs are set out in the network code tariffs in gas.376

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5.2.2 Prevention of cross-subsidies Article  59(1)(j) of the Electricity Directive and Article  41(1)(f ) of the Gas Directive prohibit cross-subsidies between regulated areas (transmission, distribution) and non- or less regulated areas (supply, storage, LNG) and, specifically in the case of the Electricity Directive, “other electricity or non-electricity

375 The issue of network tariffs is analysed in more detail in Chapter 3. 376 Cf. Commission Regulation (EU) 2017/460 of 16 March 2017 establishing a network code on harmonised transmission tariff structures for gas

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activities”.377 These provisions relate to the unbundling requirements stipulated in the Directives. In particular, they target vertically integrated undertakings attempting to support their activities in competitive markets by using revenues generated in regulated areas. As a result of vertical integration suppliers may thus benefit from additional financing which is not available to competitors. The addition in the Electricity Directive also clarifies that new activities such as electricity storage also fall under the purview of these provisions and need to be addressed adequately. The prevention of cross-subsidies therefore serves a twofold purpose, i.e. to implement the principle of non-discrimination and to avoid distortions of competition.

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Under Article 59(1)(b) of the Electricity Directive and Article 41(1)(b) of the Gas Directive the regulatory authorities are given the general task to ensure compliance by gas and electricity undertakings378 with any of their obligations under the Directives and any other relevant Union legislation.

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The reference to “other relevant Union law”379 appears rather far reaching; however, it is in effect limited by the “relevance” of a given piece of legislation for a particular behaviour as well as the duties of other authorities. Compliance with taxation rules or environmental standards, for instance, will be typically ensured by other competent authorities. The scope of “other relevant” legislation pursuant to Article 59(1)(b) of the Electricity Directive and Article 41(1)(b) of the Gas Directive therefore is likely to be similar to the reference to “related legislation” contained in Article 57(4) of the Electricity Directive and Article 39(4) of the Gas Directive on independence requirements for regulatory authorities. Crucially, the Electricity Directive now lists explicitly ACER’s decisions under this point in conjunction with compliance, adding weight to the latter’s role.

377 Cf. the specific requirement for gas transmission tariffs (or methodologies) to avoid cross-subsidies pursuant to Article 13 of the Gas Regulation. Reconciling this requirement with that of cost-reflectivity and nondiscrimination is challenging. This requirement was not included in either the Third Package or the new Electricity Directive. 378 See the definitions in Article 2(35) of the Electricity Directive and Article 2(1) of the Gas Directive. The definition specifically excludes final customers. 379 The specific formulation is other relevant Community legislation in the pre-Lisbon (Third Package) Gas Directive.

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5.2.4 Cooperation and coordination Article 59(1)(f ) of the Electricity Directive and Article 41(1)(c) of the Gas Directive place national regulatory authorities under a comprehensive obligation to cooperate among each other and with ACER on cross-border issues. In order to further specify the elusive notion of “cooperation”380 the Electricity Directives adds that the cooperation should be done in particular through participation in the ACER Board of Regulators. This is a very natural supplement of having further underlined the weight of ACER decisions which are taken by the Board of Regulators. Moreover, regulators have the obligation to comply with and implement all relevant legally binding decisions of the Agency and of the Commission (paragraph g in the Electricity Directive and d in the Gas Directives). Regulators must also contribute to the compatibility of data exchange processes for the most important market processes at regional level (paragraphs x and u, respectively, in the Electricity and Gas Directives). In the new Electricity Directive (Article 59(1)(c)) the notion of ‘cooperation’ between regulatory authorities was changed to ‘coordination’ focusing specifically on ensuring the compliance of the ENTSO for Electricity, the EU DSO Entity and the Regional Coordination Centres. Here too a further procedure was introduced to overcome disagreement between regulatory authorities in that their case is to be referred to ACER if no agreement is reached in four months.

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5.2.5 Monitoring Monitoring duties may be regarded as ancillary to other duties such as tarification or enforcement; however, in order to detect market failures or misbehaviour by market participants and to identify the need for adapting rules and standards, it is essential for national regulatory authorities to implement a system of comprehensive and continuous monitoring. Roughly half of the duties listed in Articles 59(1) of the Electricity Directive and 41(1) of the Gas Directive are about monitoring. They include the monitoring of 380 Authorities that have national remits and powers are in all likelihood able to cooperate and coordinate well in an informal sense but may face challenges in the context of formal cooperation as that may require certain competences to be given up in conjunction with adopting joint and coordinated decisions. The implementation of the Third Package showed precisely how difficult it is to move from a strong informal cooperation to a formal cooperation on the basis of aligned or joint decisions of regulatory authorities.

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investment plans;

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compliance with past performance of network security and reliability rules;

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transparency;

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level and effectiveness of market opening and competition; in the case of electricity the role of dynamic electricity price contract and the use of smart metering systems as well as the relationship between household and wholesale prices and the evolution of grid tariffs and levies;

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prices for household customers, switching rates, disconnection rates;

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charges for and execution of maintenance services and complaints, distortion or restriction of competition;

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restrictive contractual practices;

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time taken to make connections and repairs;

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implementation of the Electricity and Gas Regulations;

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technical cooperation between EU and third-country TSOs;

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safeguards measures;

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electricity only: investment in generation capacities, congestion management; development of a smart grid that promotes energy efficiency and the integration of renewable energy; the removal of unjustified obstacles to and restrictions on the development of consumption of self-generated electricity and citizen energy communities;

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gas only: access conditions to storage, linepack and other ancillary services; application of criteria for negotiated versus regulated access to storage.

Monitoring duties may be carried out by other authorities than the regulatory authority.381 381 Article 59(2) of the Electricity Directive and Article 41(2) of the Gas Directive.

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5.2.6 Reporting and Publication According to Article 59(1)(i) of the Electricity Directive and Article 41(1)(e) of the Gas Directive regulatory authorities are obliged to report annually on their activity and the fulfilment of their duties to the relevant authorities of the Member States (usually the ministries or departments in charge of energy), ACER and the Commission. Such reports must cover the steps taken and the results obtained as regards each of the tasks listed in Article 59 of the Electricity Directive and Article 41 of the Gas Directive. In their annual reports regulators must provide an assessment of the investment plans of the TSOs as regards their consistency with the Union-wide network development plan (TYNDP) developed under the Gas and Electricity Regulations; this assessment may include recommendations to amend those investment plans.

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5.2.7 Consumer protection As regards consumer protection, the regulator is under the duty to “help to ensure”, together with other relevant authorities, that the consumer protection measures of the Directives are effective and enforced.382 Regulators are thus assigned a supporting role in the field of consumer protection. A particular added value of their engagement in this area can be seen in their expertise on the specific features of energy markets including tariffs, quality of service and terms and conditions, which should complement the general tasks of national authorities in charge of consumer protection.383 Regulators should, in particular, help implement the measures listed in Annex I of the Directives. While focusing on the same matters, Annex I of the Electricity Directive has been substantially amended and is now called “Minimum requirements for billing and billing information”.

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According to Article 20 of the Electricity Directive (in the context of smart metering systems) and Annex I point 1(h) of the Gas Directives, consumers must, in particular, have access to their consumption data, and must have the possibility, free of charge, to give any competing supply undertaking access to these data. Member States have the obligation to define a format for the data, i.e. the way the consumption data are presented in particular in the bill. Regulatory authorities are required to implement this provision by ensuring prompt access for all customers to such data, by ensuring that proper access to customer consumption data is given to any other supplier and by providing a harmonised format of presentation for the consumption data at national level.

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382 Article 59(1)(r) of the Electricity Directive, Article 41(1)(o) of the Gas Directive. 383 See Chapter 10.

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5.2.8 Specific duties related to ISOs and ITOs 6.82

To some extent, the intensity of regulatory oversight depends on the unbundling model implemented for a given TSO. Article 59(5) and (6) of the Electricity Directive and Article 41(3) and (5) of the Gas Directive include additional duties for regulators in case an ISO or ITO has been designated. As regard investment planning, in case of ownership unbundled TSOs, national regulatory authorities are confined to monitoring their investment plans and including an assessment, accompanied by recommendations, if necessary, in the regulators’ annual reports. More stringent regulatory intervention, i.e. approval of planning instruments, applies to TSOs certified as ISOs or ITOs.384

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If an ISO or ITO has been designated, the national regulatory authority has additional monitoring obligations, notably as regards the relations between the ITO or ISO and the vertically integrated undertaking, as well as additional enforcement powers such as (unannounced) inspections. Particularly far reaching competences have been granted to regulators in case of an ITO – here the regulator has to approve all commercial and financial agreements between the vertically integrated undertaking and the TSO on the condition that they comply with market conditions.

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A new paragraph (59(1)(c) introduced in the Electricity Directive sets out the duty of regulatory authorities to ensure the compliance of the ENTSO for Electricity as well as the newly created EU DSO Entity with their obligations enshrined in all internal electricity market legislation.385 Here too the Directive foresees that the regulatory authorities identify the non-compliance jointly. However, given the experiences with coming to an agreement between regulatory authorities, the provision foresees that the consultation between authorities for the purpose of jointly identifying any such non-compliance must not last longer than four months. Thereafter it is for ACER to take a decision on the matter pursuant to the ACER Regulation.

384 Cf. Chapter 4. 385 This includes the Electricity Directive, the Electricity Regulation, all network codes and guidelines adopted pursuant to the latter as well as ACER’s decisions.

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5.2.10 Specific duties related to the Regional Coordination Centres New Article 62 of the Electricity Directive foresees a series of key tasks for regulatory authorities for the regional coordination centres within the geographic scope.386 Here too a crucial aspect is that regulatory authorities coordinate closely in performing the respective duties. Correspondingly, in case regulatory authorities are not able to agree within four months on the identification of possible non-compliance (paragraph 1(f )), ACER takes over the matter as in the case of the ENTSO for Electricity and the EU DSO Entity. Duties to be performed by the regulatory authorities in relation to regional coordination centres are approving their establishment, costs (which in turn are to be borne by the respective TSOs) and their cooperative decisions-making process (paragraphs 1(a), (b) and (c)); and ensuring their have all necessary resources and the level of independence to carry out their obligations as per the Electricity Directive (paragraph 1(d)). Regulatory authorities are also at liberty to propose to the relevant Member States additional tasks and powers for the regional coordination centres in their purview and must monitor the performance of the regional coordination centres and report their findings to ACER.

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Paragraph 2 of the article gives the regulatory authorities the specific power to oversee the operation of the regional coordination centres. Specifically they are able to request information, carry out (unannounced) inspections and issue joint decisions. These powers are in all likelihood sufficient for regulatory authorities to fulfil their duties vis-á-vis these new entities in an effective manner. They will certainly also further test regulatory cooperation and coordination.

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5.3 Additional duties granted by other legal acts The Electricity and Gas Directives contain the basic duties and powers of national regulatory authorities. Since their entry into force, however, several other legal acts have conferred additional duties on regulators. It should be noted that several provisions contained in the acts of the Third Package are not applicable to duties set out in other legal acts, e.g. the possibility to initiate an ACER review procedure under Article 6 of the ACER Regulation or Article 63 of the Electricity Directive and Article 43 of the Gas Directive.

386 The Directive mentions that the specific duties apply to regulatory authorities of the system operation region within which the regional coordination centre is established.

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The Third Package introduced the establishment of harmonised market and technical rules which are designed to operationalise the provisions of the basic legal acts by adding more detailed rights and obligations. Article 59 of the Electricity Regulation (EC) 2019/943 and Article 6 of the Gas Regulation (EC) 2009/715 provide for the adoption of network codes elaborated by the ENTSOs on the basis of framework guidelines of ACER.387 In addition, the Regulations as well as the Directives enable the Commission to produce guidelines detailing various issues listed in the basic acts. Both network codes and Commission guidelines are adopted as Commission regulations.388 All of them include additional competences for national regulatory authorities typically requiring them to approve specific terms and conditions or methods submitted by TSOs.389 While these tasks generally complement the tasks listed in the Directives in a useful manner, they may turn into a challenge for regulators.

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Regulation (EU) 2011/1227 on wholesale energy market integrity and transparency (REMIT) prohibits abusive practices affecting wholesale energy markets (insider trading, market manipulation). To ensure enforcement follow-through REMIT creates extensive reporting and publishing duties for market participants and requires the Agency, in cooperation with the regulatory authorities, to monitor trading activities and collect data on a regular, standardized basis. While it is primarily for ACER to perform surveillance, data collection and analysis tasks, regulatory authorities do have complementary duties including registration of market participants, monitoring, data collection and the application and enforcement of the prohibitions mentioned above.

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Regulation (EU) 2013/347 on guidelines for trans-European energy infrastructure provides for the designation of selected infrastructure projects as “projects of common interest” (PCI), thereby granting various benefits to such projects. These benefits may include faster and more streamlined approval procedures, allocation of costs among several TSOs, regulatory incentives and additional funding under the “Connecting Europe Facility”. According to the Regulation, national regulatory authorities are involved in the process of selecting PCIs, cost allocation and incentives. In particular, in case of an investment request submit387 See Chapter 12. 388 The exception is the first Guideline on Congestion Management Procedures which is a decision: Commission Decision (EU) 2015/715/EU amending Annex I to Regulation (EC) 715/2009 on conditions for access to the natural gas transmission networks. 389 See for instance the competence to approve specific terms and conditions for surrendering capacity pursuant to point 2.2.4. of Annex I to Regulation (EC) No 715/2009 (Guidelines on congestion management procedures) or the approval of the daily imbalance charge calculation methodology pursuant to Article 20 of Commission Regulation (EU) No 312/2014 establishing a Network Code on Gas Balancing of Transmission Networks.

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ted pursuant to Article 12 of the Regulation, the relevant national regulators must agree on how to share the costs of a certain project based on the benefits it delivers in the Member States concerned.390 Regulatory authorities are also assigned additional responsibilities by the Directive 2012/27/EU391 on energy efficiency. These include a general obligation to pay due regard to energy efficiency in carrying out the regulatory tasks392 as well as, for instance, the provision of incentives for grid operators to make available system services to network users permitting them to implement energy efficiency improvement measures in the context of the continuing deployment of smart grids.

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In the gas sector, Regulation (EU) No 1938/2017 concerning measures to safeguard security of gas supply confers certain tasks on national “competent authorities”. According to Article 3(2) of the Regulation, however, Member States are free to designate either the national regulatory authority or a governmental authority as the competent authority. No change in the 2017 gas security of supply regulation was undertaken from the previous version in relation to the role of regulatory authorities.393

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6.

Powers of regulatory authorities

In order to carry out the duties listed in, respectively, paragraphs 1 and 3 of Article 59 of the Electricity Directive and paragraphs 1 and 4 of Article 41 of the Gas Directive provide for a list of general powers that Member States have to grant to regulatory authorities. Article 59(3) of the Electricity Directive: “Member States shall ensure that regulatory authorities are granted the powers enabling them to carry out the duties referred to in this Article in an efficient and expeditious manner. For this purpose, the regulatory authority shall have at least the following powers:

390 391 392 393

Cf. paragraph 7.112. Amended by Directive (EU) 844/2018. Cf. Article 15 and Annex XI of Directive 2012/27/EU. Regulation (EU) 994/2010

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Chapter 6 National Regulatory Authorities Emmanuel Cabau, revised and updated by Kristóf Kovács (a) to issue binding decisions on electricity undertakings; (b) to carry out investigations into the functioning of the electricity markets, and to decide upon and impose any necessary and proportionate measures to promote effective competition and ensure the proper functioning of the market. Where appropriate, the regulatory authority shall also have the power to cooperate with the national competition authority and the financial market regulators or the Commission in conducting an investigation relating to competition law; (c) to require any information from electricity undertakings relevant for the fulfilment of its tasks, including the justification for any refusal to grant third-party access, and any information on measures necessary to reinforce the network; (d) to impose effective, proportionate and dissuasive penalties on electricity undertakings not complying with their obligations under this Directive, Regulation (EU) 2019/.... or any relevant legally binding decisions of the regulatory authority or of ACER, or to propose that a competent court impose such penalties, including the power to impose or propose the imposition of penalties of up to 10 % of the annual turnover of the transmission system operator on the transmission system operator or of up to 10 % of the annual turnover of the vertically integrated undertaking on the vertically integrated undertaking, as the case may be, for non-compliance with their respective obligations pursuant to this Directive; and (e) appropriate rights of investigation and relevant powers of instruction for dispute settlement under Article 60(2) and (3).

Article 41(4) of the Gas Directive: “Member States shall ensure that regulatory authorities are granted the powers enabling them to carry out the duties referred to in paragraph 1, 3 and 6 in an efficient and expeditious manner. For this purpose, the regulatory authority shall have at least the following powers: (a) to issue binding decisions on natural gas undertakings; (b) to carry out investigations into the functioning of the gas markets, and to decide upon and impose any necessary and proportionate measures to promote effective competition and ensure the proper functioning of the market. Where 302

Chapter 6 National Regulatory Authorities Emmanuel Cabau, revised and updated by Kristóf Kovács appropriate, the regulatory authority shall also have the power to cooperate with the national competition authority and the financial market regulators or the Commission in conducting an investigation relating to competition law; (c) to require any information from natural gas undertakings relevant for the fulfilment of its tasks, including the justification for any refusal to grant third-party access, and any information on measures necessary to reinforce the network; (d) to impose effective, proportionate and dissuasive penalties on natural gas undertakings not complying with their obligations under this Directive or any relevant legally binding decisions of the regulatory authority or of the Agency, or to propose to a competent court to impose such penalties. This shall include the power to impose or propose the imposition of penalties of up to 10 % of the annual turnover of the transmission system operator or of up to 10 % of the annual turnover of the vertically integrated undertaking on the transmission system operator or on the vertically integrated undertaking, as the case may be, for non-compliance with their respective obligations pursuant to this Directive; and (e) appropriate rights of investigations and relevant powers of instructions for dispute settlement under paragraphs 11 and 12.”

The Directives clarify that this list is a minimum set of powers to be granted (“at least”) and that it should enable regulators to carry out the duties assigned to them by the Directives “ in an efficient and expeditious manner”.

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By conferring these powers, the Directives also contribute to harmonising the administrative tools available to regulatory authorities across the Union. One should bear in mind that cooperation between national authorities can only be effective if all of them have a minimum set of regulatory competences at their disposal (in addition to the shared objectives described above).

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In accordance with Recitals 84 of the Electricity Directive and 33 of the Gas Directive, regulatory authorities should also be granted 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. The provision of the Gas Directive (as also of the former Electricity Directive) was an Article in the Commission’s original proposal, softened and transformed into a Recital in the course of the negotiations at the time. While the amended Electricity Directive recital has now been transformed into a more classical text foreshadowing the norms to

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follow, recital 33 of the Gas Directive is still drafted in a rather prescriptive way and does not have any immediate corresponding provisions in the operative part of the Directive.

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These Recitals do not directly oblige Member States to create additional competences for regulators but do set out that within the framework of regulators’ powers under the Articles mentioned above, regulatory authorities should be able to contribute to the objectives set out in the Recitals.

6.1 Adopting binding decisions 6.98

The first power is of a very general nature: Regulators shall have the power to issue binding decisions on gas and electricity undertakings.394 Seen in conjunction with the general provisions of Article 59(1)(b) of the Electricity Directive and Article 41(1)(b) of the Gas Directive, this power enables regulatory authorities to establish and, if necessary, to enforce compliance with the relevant obligations under EU law. Moreover, binding decisions will have to be adopted, for instance, when approving terms and conditions and when fixing or approving tariffs or methodologies or both.395 Crucially, in view of the increased need to coordinate and the corresponding enhanced role of ACER, the Electricity Directive already mentions ACER’s specific competence to “fix and approve the terms and conditions or methodologies for the implementation of network codes and guidelines under Chapter VII of Regulation (EU) 2019/943 pursuant to Article 5(2) of Regulation (EU) 2019/942 because of their coordinated nature”.

6.99

In terms of procedure, where civil rights and obligations are at stake, regulatory authorities must ensure that the right to a fair trial set out in Article 6(1) of the European Convention on Human Rights (ECHR) is protected, which includes, in particular, the right to a public hearing before an independent and impartial tribunal within a reasonable time. The right to a fair trial is also enshrined in Article 47(2) of the Charter of Fundamental Rights of the European Union 394 According to the definition in Article 2(57) of the Electricity Directive an electricity undertaking means a natural or legal person who carries out at least one of the following functions: generation, transmission, distribution, aggregation, demand response, energy storage, supply or purchase of electricity, and who is responsible for the commercial, technical or maintenance tasks related to those functions. According to Article 2(1) of the Gas Directive a natural gas undertaking means a natural or legal person carrying out at least one of the following functions: production, transmission, distribution, supply, purchase or storage of natural gas, including LNG, which is responsible for the commercial, technical and/or maintenance tasks related to those functions. In both cases, the definition does not include final customers. The amended Electricity Directive added the functions of aggregation, demand response and energy storage to the list in view of the evolving sector. 395 Article 59(7) of the Electricity Directive, Article 41(6) of the Gas Directive.

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(CFR)396 which, in its substance, corresponds to Article 6(1) ECHR but covers any rights granted under Union law.397 Therefore, the fundamental right to a fair trial (and other rights included in the CFR) must be adhered to not only in case of binding decisions affecting “civil rights” as defined by the ECHR but whenever provisions of the Third Package are being implemented. Decisions adopted by regulatory authorities are subject to judicial review according to Articles 60(8) of the Electricity Directive and 41(17) of the Gas Directive.

6.2 Promoting effective competition and ensuring the proper functioning of the market Article 59(3)(b) of the Electricity Directive and Article 41(4)(b) of the Gas Directive provide for the power to carry out investigations into the functioning of the electricity and gas markets and to decide upon and impose any necessary and proportionate measures to promote effective competition and ensure the proper functioning of the markets.

6.100

The importance of this provision should not be underestimated. Far beyond a role limited to regulating network operators, the Directives require Member States to give the regulators a general power to intervene, inter alia, in production, supply or storage markets.

6.101

In amending Recitals 84 (formerly 37) of the Electricity Directive the legislator shortened it substantially and removed all specific references in relation to the promotion of effective competition, such as virtual power plants.398 However, Recital 33 of the Gas Directive still contains the corresponding reference to gas release programmes399 as a possible measures that can be implemented by the regulatory authorities in order to promote effective competition and to ensure the proper functioning of the market. There continues to be a debate as regards the effectiveness and implications of gas release programmes. The 2019 Madrid Forum invited the Commission to consider their use while several Member States continue to oppose it. It is, as yet, unclear whether gas release programmes will play any prominent role in a planned amendment of the Gas Directive.400

6.102

396 397 398 399

The Charter became legally binding with the entry into force of the Treaty of Lisbon on 1 December 2009. Cf. Article 51 CFR. This modification was already done by the Commission in submitting its proposal. A virtual power plant or gas release programme may be defined as a release programme whereby an undertaking is obliged, either to sell or make available a certain volume of electricity or gas or to grant access to part of its generation capacity to interested suppliers for a certain period of time. 400 Cf. Conclusions of the October 2019 Madrid Forum: “The Forum invites the Commission to consider capacity and/or commodity release programs as part of targeted measures applicable to specific situations in order to achieve overall improvements of the market.”

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6.103

Where appropriate, a regulatory authority must have the power to cooperate with the national competition authority and the financial market regulators or the Commission in conducting an investigation relating to competition law. The Commission’s Interpretative Note regards the power to carry out investigations as a law enforcement power, which includes carrying out inspections on the premises of electricity and gas undertakings.401

6.3 Information provision 6.104

Under Article  (3)(c) of the Electricity Directive and Article  41(4)(c) of the Gas Directive, regulators are given a general power to require any information from gas and electricity undertakings relevant for the fulfilment of their tasks, including the justification for any refusal to grant third-party access, and any information on measures necessary to reinforce the network.

6.105

In practice, this is a highly important competence since regulators are usually dependent on information provided by market participants. While the exact scope and of a data request and/or of its legal basis needs to be determined (and justified) on a case-by-case basis, electricity and gas undertakings, in principle, cannot refuse to provide data (including commercially sensitive data) if the regulatory authority demonstrates that the data are relevant to the fulfilment of its duties. It should, however, be kept in mind that Article 52(8) of the Electricity Directive and 10(8) of the Gas Directives obliges regulatory authorities to preserve the confidentiality of commercially sensitive information.

6.106

Where an issue of cross border relevance requires cooperation between two or more regulatory authorities, information gathered from market participants may be exchanged between the authorities concerned in accordance with Article 61 of the Electricity Directive and Article 42 of the Gas Directive.

6.4 Penalties 6.107

Article  59(3)(d) of the Electricity Directive and Article  41(4)(d) of the Gas Directive confer a general right on regulators to impose penalties on gas and electricity undertakings not complying with their obligations under the Directives or any relevant legally binding decisions of the regulatory authority or of ACER. To meet constitutional concerns raised by some Member States, as an alternative option, regulators may be given the right to propose that a competent 401 Cf. the Commission’s Interpretative Note on regulatory authorities, p. 17.

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court impose such penalties instead of imposing the penalty themselves.402 New articles on penalties introduced by the Electricity Directive ensure that regulatory authorities also have the powers to impose proportionate and dissuasive penalties on the ENTSO for Electricity and the EU DSO Entity (Article 59(4)) as well as the regional coordination centres (Article 62(3)). In both cases it is the regulatory authority located in the member states in which the latter entities are established that has the power to impose those penalties. Naturally, as set out above, the decision to ultimately levy any fine must be a coordinated one. The penalties have to be effective, proportionate and dissuasive. The rule applies to all gas and electricity undertakings. In addition to this, as regards non-compliance of TSOs and vertically integrated undertakings, the Directives grant national regulatory authorities the power to impose or propose the imposition of penalties of up to 10 % of the annual turnover of the TSO on the TSO or of up to 10 % of the annual turnover of the vertically integrated undertaking on the vertically integrated undertaking, as the case may be.

6.108

The threshold of 10 % is taken from EU competition rules.403 This is of course a ceiling which, as under competition law, should have a deterrent effect, but is rather unlikely to be reached in practice. It should be emphasized that the Directives focus on the calculation of fines; other elements of penalties including fault or liability of natural versus legal persons are not addressed and therefore to be determined on the national level.

6.109

While the wording of the provisions mentioned covers vertically integrated undertakings of any kind, the Commission’s Interpretative Note reveals a more targeted interpretation. Following the objective of the provisions as well as their history, the reference to vertically integrated undertakings aims to include the situation where an ITO is appointed, whereas the reference to TSOs is designed to apply to TSOs certified as ownership unbundled or as ISOs.404 In the first case, the fine imposed on the ITO or the vertically integrated undertaking can be up to 10% of the annual turnover of the entire vertically integrated undertaking. This means that an ITO can face a fine of up to 10% of the annual turnover of the overall vertically integrated undertaking, not just of the ITO. Although the 10% rule only provides for a ceiling, the reference to the turnover of the verti-

6.110

402 It should be noted that, strangely, the wording of the (English translation of the) Gas Directive (“or to propose to a competent court to impose such penalties”) is slightly more precise than the wording of the Electricity Directive (“or to propose that a competent court impose such penalties...”). 403 Cf. Article 23(2) of Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 101 and 102 of the Treaty. 404 Interpretative Note on regulatory authorities, p. 18.

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cally integrated undertaking implies that the turnover of the vertically integrated undertaking should be taken as a reference point when calculating the fines to be imposed on an ITO. This means that if the regulator decides to impose a fine of say 1% of the turnover for serious discriminatory conduct of a network operator, in the case of an ownership unbundled TSO or ISO that this would result in a fine of 1% of the turnover of the TSO. In the case of an ITO, it would result in a fine of 1% of the turnover of the vertically integrated undertaking).

6.5 Investigations and instructions 6.111

According to the analysis of the Council of European Energy Regulators (CEER) of 9 October 2017, national legislations provide for sufficient investigatory and sanctioning regimes to national regulators and their powers are complementary with those of ACER.405

6.112

Under Article 59(3)(e) of the Electricity Directive and Article 41(4)(e) of the Gas Directive regulators must be given the powers necessary to enable them to effectively conduct investigations and relevant powers of instructions for dispute settlement mechanisms provided under Article 60(11) and (12) of the Electricity Directive and paragraphs 11 and 12 of Article 41 of the Gas Directive.

6.113

Outside the Electricity and Gas Directives, specific investigatory and enforcement powers are conferred upon regulatory authorities by Article 13 REMIT. These powers were regarded as necessary to effectively enforce the prohibitions of insider trading and market manipulation.

7.

Procedural issues

7.1 Dispute settlement 6.114

Article 60(2) of the Electricity Directive and Article 41(11) of the Gas Directive provide for a specific procedure regarding complaints from third parties against a transmission, storage, LNG or distribution system operator. The provision in the amended Electricity Directive is identical, save for linguistics, to the provision set out in the Directives of the Second Package.

405 https://www.ceer.eu/documents/104400/-/-/77e728b7-b7ed-c463-e01d-4b7ece8b6a24

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Article 60(2) of the Electricity Directive and Article 41(11) of the Gas Directive: “Any party having a complaint against a transmission [storage, LNG]406 or distribution system operator in relation to that operator’s obligations under this Directive may refer the complaint to the regulatory authority which, acting as dispute settlement authority, shall issue a decision within two months of receipt of the complaint. That period may be extended by two months where additional information is sought by the regulatory authority. That extended period may be further extended with the agreement of the complainant. The regulatory authority’s decision shall have binding effect unless and until overruled on appeal.”

Third parties have the right to refer a complaint against a transmission or distribution (gas: also storage or) system operator to the regulatory authority. The regulator then acts as a dispute settlement authority. When dealing with consumer disputes regulatory authorities also have to act in line with the relevant legal framework on alternative dispute resolution and online dispute resolution.407

6.115

In terms of timing, the regulatory authority must in principle decide within two months unless it seeks additional information. In that case the deadline is extended by a further two months. The four-month deadline can be further extended as long as the complainant agrees. Especially in complex cases therefore, the regulatory authority may inform the complainant that the issue at hand requires additional data or more extensive investigations and will correspondingly necessitate a longer timeframe.

6.116

In the absence of a particular provision in the Directives, Member States will have to consider whether a dispute settlement procedure may be initiated while a formal action against the system (or storage or LNG) operator is pending before a court. Article 5(4)(c) of the ADR Directive grants Member States the discretion to enable ADR entities to refuse to deal with a dispute because it is being or has previously been considered by a court. In order to avoid parallel proceedings on the same subject matter (and, possibly, diverging outcomes) it would seem most efficient to prohibit a formal action as long as the dispute settlement procedure has not been concluded (and vice versa), or to require a dispute settlement decision by the national regulatory authority before an action can be brought before a court.

6.117

406 Article 41(11) of the Gas Directive. 407 Directive 2013/11/EU on alternative dispute resolution for consumer disputes (ADR Directive); Regulation (EU) No 524/2013 on online dispute resolution for consumer disputes.

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6.118

The regulatory authority’s decision has binding effect upon the parties to the procedure unless and until overruled on appeal. According to Article 60(6) of the Electricity Directive and Article  41(15) of the Gas Directive complaints initiating a dispute settlement procedure under, respectively, Articles 60(2) or 37(11) of the two Directives are without prejudice to the exercise of rights of appeal under Union or national law.

7.2 Complaints against tariffs or methodologies 6.119

Article 60(3) of the Electricity Directive and Article 41(12) of the Gas Directive provide for procedural rules in case of appeal against the decisions, or proposed decisions, of the regulators on tariffs or the methodologies underlying the tariffs. Article 60(3) of the Electricity Directive and Article 41(12) of the Gas Directive: “Any party who is affected and who has a right to complain concerning a decision on methodologies taken pursuant to Article 59 or, where the regulatory authority has a duty to consult, concerning the proposed tariffs or methodologies, may, within two months, or within a shorter period as provided for by Member States, after publication of the decision or proposal for a decision, submit a complaint for review. Such a complaint shall not have suspensive effect.”

6.120

The purpose of this paragraph is not to establish whether undertakings or individuals can take legal action against regulators’ decisions on methodologies.408 It only lays down procedural restrictions for the submission of complaints. These restrictions relate to the deadline for complaints (two months or less following publication) and their legal effects (not suspensive). The objective of this provision therefore is to ensure that, while any affected party must have suitable legal instruments at its disposal,409 complaints should only be possible for a limited period of time in order to avoid long periods of legal uncertainty and they should not prevent the application of (new) tariffs. This is to maintain the regulatory authorities’ capacity to act while legal proceedings are pending.

408 Article 60(6) of the Electricity Directive and Article 41(15) of the Gas Directive explicitly state that complaints referred to in, respectively Articles 60(2) and (3) and Articles 37(11) and (12) of the Directives are without prejudice to the exercise of rights of appeal under [Union] or national law. 409 Cf. Article 60(8) of the Electricity Directive and Article 41(17) of the Gas Directive.

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Where the regulator has an obligation to consult before adopting a decision on tariffs or methodologies, those wishing to complain about the proposed decision by the regulator must do so within two months (or a shorter time period as provided by Member States). At this stage the complaint will not constitute a fully-fledged legal action because no decision has yet been adopted; it will rather be (similar to) a written comment or observation. In spite of this, it requires the regulatory authority to take into account the arguments brought forward, review its proposal and justify its final decision.

6.121

7.3 Judicial review Paragraphs 6, 7 and 8 of Article 60 of the Electricity Directive and 15, 16 and 17 of Article 41 of the Gas Directive contain general principles concerning a party’s right of appeal against the decision of the regulator:

6.122

“6/15. Complaints referred to in paragraphs 2[11] and 3[12] shall be without prejudice to the exercise of rights of appeal under Union or national law. 7/16. Decisions taken by regulatory authorities 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. 8/17. Member States shall ensure that suitable mechanisms exist at national level under which a party affected by a decision of a regulatory authority has a right of appeal to a body independent of the parties involved and of any government.”

Paragraphs 60(6) and 37(15), respectively, of the Electricity and Gas Directives clarify that the complaints aimed at initiating a dispute settlement procedure referred to in paragraphs 60(2) and 37(11) and the specific procedure for tariffs or methodologies under paragraphs 60(3) and 37(12) are without prejudice to the exercise of rights of appeal under Union or national law. In this context it should be noted that the ECJ has developed the principle of effective judicial protection of the rights derived from the EU acquis.410 In general, when implementing EU legislation, Member States must provide for access to a court and must ensure proper judicial review in case of a (suspected) violation of rights conferred by EU law. Extensive case law on various aspects of this principle has 410 ECJ, Case C-222/84 Johnston [1986] ECR 1651, paragraph 18, referring to the European Convention for the Protection of Human Rights and Fundamental Freedoms; Case C-50/00 P, Unión de Pequeños Agri‑ cultores v Council [2002] ECR I-6677, paragraph 39; Case C-263/02 P, Jégo-Quéré [2004] ECR I-3425, paragraph 29.

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been developed. In addition to this, Article 47 CFR guarantees the fundamental right to an effective remedy and to a fair trial for all rights and freedoms guaranteed by EU law.411

6.124

Under paragraphs 60(7) and 37(16), respectively, the decisions taken by regulatory authorities must be fully reasoned and justified so as to allow for judicial review. This requirement expresses another element of effective judicial protection as recognised by the case law of the ECJ.412 In particular, the Court has ruled that “where it is a question of securing the effective protection of a right conferred by European Union law, interested parties must also be able to defend that right under the best possible conditions and have the possibility of deciding, with a full knowledge of the relevant facts, whether there is any point in applying to the courts. Consequently, in such circumstances, the competent national authority is under a duty to inform them of the reasons on which its decision is based, either in the decision itself or in a subsequent communication made at their request”.413 For reasons of transparency, the decisions of national regulatory authorities must also be published, while preserving the confidentiality of commercially sensitive information.

6.125

Under paragraph 60(8) and 37(17), respectively, Member States must ensure that there are suitable mechanisms at national level under which a party affected by a decision of the regulatory authority has a right of appeal to a body independent of the parties involved and of any government. This is in line with the general provision of Article 19(1) TEU requiring Member States to provide remedies sufficient to ensure effective legal protection in the fields covered by Union law. According to the case law of the ECJ, in the absence of EU rules, it is for the Member States to designate courts having jurisdiction and to determine the procedural conditions governing actions at law intended to ensure the protection of the rights derived from EU legislation (principle of procedural autonomy of the Member States). However, under the principles of equivalence and effectiveness, the national mechanisms and conditions may not be less favourable than those governing similar domestic actions and may not render virtually impossible or successively difficult the exercise of these rights conferred by EU law.414

411 412 413 414

See below in this Section on procedural guarantees for legal remedies. Cf. ECJ, Case C-222/86, Heylens [1987] ECR 4097, paragraph 15. ECJ, Case C-182/10, Solvay [2012] EU:C:2012:82, paragraph 59. ECJ, Cases C-33/76, Rewe [1976] ECR 1989, paragraph 5; C-312/93, Peterbroeck [1995] ECR I-4599, paragraph 12; C-431/93 van Schijndel [1995] ECR I-4705, paragraph 17.

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8.

Regulatory regime for cross-border issues

A key objective of the internal electricity and gas market legislation is to create an integrated internal market, not a series of disparate national ones. The provisions in the Directives recognise that issues of cross border relevance can only be dealt with effectively through close cooperation and coordination between the regulators concerned. Cooperation requirements stipulated by the Directives must be seen as complementary to the obligation to cooperate within ACER.415

6.126

Articles 61 of the Electricity Directive and 42 of the Gas Directive, impose a general obligation on regulatory authorities to closely consult and cooperate with each other. Regulatory authorities are also under the obligation to provide each other and the ACER with any information necessary for the fulfilment of their tasks under the Directives. The Directives thus emphasise the importance of sharing information required to enable regulators to cooperate effectively. As regards the protection of confidential data the Directives stipulate that the receiving authority must ensure the same level of confidentiality as that required of the originating authority which, in turn, requires the originating authority to designate information as confidential when sharing it with other regulatory authorities. Furthermore, national regulatory authorities are granted a general right to enter into cooperative arrangements with each other to foster regulatory cooperation.416

6.127

Because of its importance, a specific obligation to cooperate at regional level is created. Article 61(2) of the Electricity Directive and Article 42(2) of the Gas Directive sets out an obligation of at least regional level cooperation to:

6.130

(a) foster the creation of operational arrangements in order to enable an optimal management of the network, promote joint electricity [gas] exchanges and the allocation of cross-border capacity, and to enable an adequate level of interconnection capacity, including through new interconnection, within the region and between regions to allow for development of effective competition and improvement of security of supply, without discriminating between supply undertakings in different Member States;

415 See Chapter 7 of this book. 416 Paragraph 3 of Articles 61 of the Electricity Directive and 42 of the Gas Directive.

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6.129

Chapter 6 National Regulatory Authorities Emmanuel Cabau, revised and updated by Kristóf Kovács (b) coordinate the joint oversight of entities performing functions at regional level [only Electricity Directive]; (c) coordinate, in cooperation with other involved authorities, the joint oversight of national, regional and European resource adequacy assessments [only Electricity Directive]; (d) coordinate the development of all network codes for the relevant transmission system operators and other market actors; and (e) coordinate the development of the rules governing the management of congestion.417

6.131

The Commission is given the right to adopt guidelines on the extent of the duties of the regulatory authorities to cooperate with each other and with ACER.418 As explained above, regulatory cooperation has in general terms been successful and has intensified since the adoption of the Third Package. The Development of framework guidelines preceding network codes and the corresponding scrutiny of the network codes has established a relatively efficient procedure for regulatory cooperation.419

6.132

The Electricity Directive adds to new areas of regulatory cooperation. First this entails the regional coordination centres set up under the Electricity Regulation as well as the newly established obligation for resource adequacy assessment at national, regional and European level. Both areas will necessitate flexibility on the part of the regulatory authorities and will be an important litmus test as to whether such coordination can function as a going concern or whether the general rule that directs cases to ACER for lack of agreement within four months between regulatory authorities will prevail more and more.

6.133

In case the regulatory authorities concerned have not been able to reach an agreement on an issue related to cross border infrastructure within a period of four months from when the case was referred to the last of those regulatory authorities, the Agency becomes competent to decide upon the matter according to Article 6 of the ACER Regulation. Regulatory authorities may also decide to 417 Paragraph 4 clarifies that these actions shall be carried out, as appropriate, in close consultation with other relevant national authorities and without prejudice to their specific competencies. 418 Paragraph 5 of Articles 38 of the Electricity Directive and 42 of the Gas Directive. 419 This regulatory cooperation within the folds of ACER was however tested heavily in the course of the scrutiny of the network code on harmonized transmission tariff structures for gas which the Commission ultimately had to take upon itself to drafting as there was no agreement between the regulatory authorities.

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submit a joint request to the Agency, thereby transferring the issue directly to the Agency.

9.

ACER review

The Third Package introduced a particular feature to cooperation between the national regulatory authorities and ACER which enable the Agency to review decisions taken by national regulatory authorities. This is also taken forward in the Electricity Directive. In fact, it provides for two different procedures allowing for such ‘Agency reviews’, one set out in Article 6 of the ACER Regulation, the other in Article  63 of the Electricity Directive and Article 43 of the Gas Directive. While these provisions differ in terms of scope and procedure, they both enable the ACER to deliver an opinion on whether a regulatory authority s decision complies with legal provisions of the Directives.420 Regulators may solicit a review by the Agency of both the decisions of other regulators and their own decisions.421

6.134

Article 6 of the ACER Regulation essentially empowers the Agency to provide an opinion at the request of a regulatory authority or of the Commission, on whether a decision taken by a regulatory authority complies with the Electricity or Gas Directives or Regulations (including guidelines referred to in these acts). By contrast, under Article 63 of the Electricity Directive and Article 43 of the Gas Directive, ACER may only assess the conformity of a regulator s decision with the guidelines adopted on the basis of the Directives or Regulations

6.135

420 Cf. paragraphs 7.91-7.92 on the differences and the relation between the two procedures. 421 Since this procedure has been put in place ACER has taken a few key decisions already in its role as arbitrator between regulatory authorities. ACER Decision No 11/2018 on the capacity booking platform to be used at the Mallnow interconnection point between Germany and Poland put an end to the long-lasting standoff between the German and the Polish regulatory authority both of which were promoting the respective platforms already in use in their systems. The revised Capacity Allocation Network Code (Commission Regulation 2017/459/EU) specifically introduced the procedure whereby ACER was given the opportunity to decide on the matter in case regulatory authorities did not reach an agreement after a sufficiently long period of time. The matter was however further complicated when the ACER Board of Appeals by decision of 14 February 2019 annulled the ACER decision that gave the Polish platform operator GSA the right to operate the platform at Mallnow. By contrast the ACER decision No 6/2016 on capacity calculation regions was upheld by the Board of Appeals in its decision of 17 March 2017 against which the Austrian regulatory authority and several key players of the Austrian electricity sector appealed. Finally, in another contentious and long-running case between regulators before ACER as regards capacity allocation procedures for gas on the border between Austria and Hungary, the Agency has, in its Decision 05/2019 of 9 April 2019, taken a decision as the two regulatory authorities have not been able to find an amicable solution. However, this case has now been taken further to the European Court of Justice with the Hungarian TSO FGSZ challenging the ACER decision (Case T-704/19).

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mentioned. However, such a review procedure may result in a decision by the Commission requiring the regulatory authority concerned to withdraw its decision on the basis that that the Guidelines have not been complied with. Such a decision is binding upon the regulatory authority.

6.136

The procedure for Agency review under Articles 63 of the Electricity Directive and 43 of the Gas Directive is as follows: 1. Any regulatory authority and the Commission may request the opinion of ACER on the compliance of a decision taken by a regulatory authority with the network codes and guidelines referred to in [the Gas and Electricity] Directive or in [the Gas and Electricity] Regulation. 2. ACER shall provide its opinion to the regulatory authority which has requested it or to the Commission, respectively, and to the regulatory authority which has taken the decision in question within three months of the date of receipt of the request. 3. Where the regulatory authority which has taken the decision does not comply with ACER s opinion within four months of the date of receipt of that opinion, ACER shall inform the Commission accordingly. 4. Any regulatory authority may inform the Commission where it considers that a decision relevant for cross-border trade taken by another regulatory authority does not comply with the network codes and guidelines referred to in [the Gas and Electricity] Directive or in [the Gas and Electricity] Regulation within two months of the date of that decision. 5. Where the Commission, within two months of having been informed by ACER in accordance with paragraph 3, or by a regulatory authority in accordance with paragraph 4, or, on its own initiative, within three months of the date of the decision, finds that the decision of a regulatory authority raises serious doubts as to its compatibility with the network codes and guidelines referred to in this Directive or in [the Gas and Electricity] Regulation the Commission may decide to examine the case further. In such a case, it shall invite the regulatory authority and the parties to the proceedings before the regulatory authority to submit observations. 6. Where the Commission takes a decision to examine the case further, it shall, within four months of the date of such decision, issue a final decision: 316

Chapter 6 National Regulatory Authorities Emmanuel Cabau, revised and updated by Kristóf Kovács (a) not to raise objections against the decision of the regulatory authority; or (b) to require the regulatory authority concerned to withdraw its decision on the basis that network codes and guidelines have not been complied with. 7. Where the Commission has not taken a decision to examine the case further or a final decision within the time-limits set in paragraphs 5 and 6 respectively, it shall be deemed not to have raised objections to the decision of the regulatory authority. 8. The regulatory authority shall comply with the Commission decision requiring it to withdraw its decision within two months and shall inform the Commission accordingly. 9. The Commission is empowered to adopt delegated acts in accordance with Article 67 [gas: Article 51(3)] supplementing [the Gas and Electricity] Directive by establishing guidelines setting out the details of the procedure to be followed for the application of this Article.

Any regulatory authority and the Commission may therefore request an opinion of ACER on the compliance of a decision taken by a regulatory authority with any of the guidelines adopted under the Directives or Regulations.

6.137

The Agency must, within three months from the date of receipt of the request, provide its opinion, either to the regulatory authority which has requested it or to the Commission, as well as to the regulatory authority which has taken the decision in question.

6.138

This opinion of the Agency is not binding on the regulator in question although it is understood that it should have a strong political weight especially in the context of the Board of Regulators of ACER, where all national regulators are represented. In any event, a binding second step procedure is provided for in the event that the regulator does not comply with the Agency s opinion.

6.139

Where the regulatory authority which has taken the decision does not comply with ACER s opinion within four months from the date of receipt of that opinion, the Agency must inform the Commission. In addition, any regulatory authority may inform the Commission where it considers that a decision relevant for cross-border trade taken by another regulatory authority does not comply with the guidelines adopted under the Directives or the Regulations within two months from the date of that decision.

6.140

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6.141

Where the Commission, within two months after having been informed by the Agency or by a regulatory authority, or on its own initiative (then within three months from the date of the decision), finds that a decision of a regulatory authority raises serious doubts as to its compatibility with a guideline, the Commission may decide to examine the case further.

6.142

Where the Commission takes a decision to examine the case further, it must, within four months of the date of such decision, issue a final decision:

6.143 6.144

(a)

not to raise objections against the decision of the regulatory authority, either through an express decision or a tacit decision; or

(b)

to require the regulatory authority concerned to withdraw its decision on the basis that the guidelines have not been complied with.

Before taking the decision, the Commission invites the regulatory authority and the parties to the proceedings to submit observations. The Commission’s decision to require the regulatory authority concerned to withdraw its decision is binding. The regulatory authority must comply with this decision and withdraw its decision within a period of two months. It must inform the Commission accordingly. If the regulatory authority does not comply, the Commission can start an infringement proceeding against the Member State concerned. The Commission may adopt guidelines to set out the details of the procedure to be followed.

10. Conclusion 6.145

In 2009 the Third Package clearly constituted a step change as regards the EU framework for electricity and gas regulatory authorities at EU level. It strengthened their independence and increased their duties and powers but also added enhanced requirements on cooperation and judicial review. The 2019 amendment of the Electricity Directive is a more incremental change in the institutional set-up of regulatory authorities aimed at building on the experiences gained throughout the years of implementation of the Directives. It also aimed at ensuring that regulatory authorities are given the proper tools and duties to function in the internal electricity market of the future which builds on news services and much greater cross-border coordination and cooperation. 318

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As regards their institutional set-up, the Third Package Directives obligated Member States to establish a single regulatory authority and to ensure its independence not only from the energy industry but also from any political influence. Additional requirements on budget and management rotation were designed to enable regulators to exercise their duties in an independent manner with a view to realising the policy objectives of the Third Package.

6.146

Notwithstanding the new differences between the Electricity and Gas Directives elaborated in this chapter, the Directives now provide for a comprehensive set of duties, while at the same time conferring on regulators the necessary powers to fulfil their tasks, including as regards network tariffs, ensuring compliance of market participants and market monitoring. Strong investigatory and enforcement powers are also granted to ensure that those powers are effective. Additional duties and competences are foreseen in case of unbundling solutions for TSOs other than ownership unbundling (ISO, ITO). Further new duties and powers are also vested with regulatory authorities in conjunction with the ENTSO for electricity, the EU DSO entity and the regional coordination centres. Even more tasks and powers are conferred by further legal acts, including network codes and guidelines adopted by the Commission and other acts including Regulation (EU) No 1227/2011 on wholesale energy market integrity and transparency (REMIT), Regulation (EU) No 347/2013 on guidelines for trans-European energy infrastructure and Directive 2012/27/EU on energy efficiency.

6.147

Enhanced independence, duties and powers are accompanied by comprehensive and increasing obligations to coordinate both among regulators and with the Agency on cross border issues. This also includes the possibility for ACER to review decisions taken by national regulators and, in the absence of an agreement or upon a joint request, to take decisions instead of the national regulatory authorities concerned. What is more, regulators must act as dispute settlement bodies in order to resolve conflicts between market participants without (or at least before) an action being brought before a court. The Directives also contain general principles on the handling of complaints and on judicial review, even though the latter aspect is largely determined by the case law of the ECJ; and the basic right to an effective remedy and to a fair trial guaranteed by the Charter of Fundamental Rights of the European Union and the European Convention on Human Rights.

6.148

More recent legislation especially on infrastructure, security of supply, renewable energy and energy efficiency points towards a changing role of national regulatory authorities. While their core duties related to, inter alia, tariffs, unbundling, market monitoring and enforcement appear likely to remain stable in

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the foreseeable future, the overall objectives of energy and climate policy will require an active role of regulators in accompanying and enabling the transformation of energy systems in the long run. These new policy areas and duties are spelled out in the Electricity Directive.

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Chapter 7 The EU Agency for the Cooperation of Energy Regulators (ACER)422

1.

Introduction

The liberalisation of the national energy markets and the creation of an internal market in electricity and gas rests on a regulatory framework in which national regulatory authorities have been playing a key role. Their core competence is to regulate their national markets. However, with electricity and gas markets extending beyond national borders, regulatory action has an impact also on cross-order market activities and needs to address also specific cross-border issues. Obviously, cooperation between the national regulatory authorities and coordinated regulatory action is necessary to develop effectively an integrated European market in electricity and gas.

7.1

In 2003, the European Commission therefore set up an independent advisory group for electricity and gas: the ‘European Regulator Group for Electricity and Gas’ (ERGEG).423 ERGEG was made up of representatives of the national regulatory authorities. It was meant to advise and assist the Commission in consolidating the internal energy market, and to facilitate consultation, coordination and cooperation between the regulatory bodies in Member States, and between those bodies and the Commission, with a view to consolidating the internal market in electricity and natural gas.424

7.2

422 This chapter is based on and updates the one by Ermacora/Tremmel, ‘The Agency for the Cooperation of Energy Regulators (ACER)’, in Jones (ed.), EU Energy Law I, 2016 ed., p. 277 et seq. It focuses on the organisation, tasks and procedure of ACER. The opinions expressed in this chapter are those of the author and do not necessarily represent the position of the EU Agency for the Cooperation of Energy Regulators. 423 Commission Decision 2003/796/EC of 11 November 2003 on establishing the European Regulators Group for Electricity and Gas, OJ L 296/34, 14.11.2003. 424 Article 1(2) of Decision 2003/796/EC.

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7.3

Over time, it became clear that ERGEG was not a suitable structure to establish common solutions and to tackle the cross-border issues of an increasingly complex energy sector. In 2007, especially with regard to the need for harmonising the technical rules for the operation of transmission systems (network codes), the Commission advocated a stronger cooperation structure in its proposals for the Third Energy Package. Having considered various options, such as harmonisation by the Commission itself, by a more powerful network of national regulatory authorities or by a European System of Central Banks-like mechanism, the Commission finally came to the conclusion that an agency should be established which is independent and separate from the Commission, whose structure provides a framework for national regulatory authorities to cooperate as well as to bundle their expertise, whose tasks complement at European level the regulatory activities of the national regulatory authorities, and which can take binding individual decisions.425

7.4

As a consequence, in 2009 the Agency for the Cooperation of Energy Regulators (ACER) was constituted by law with the aim to fill a regulatory gap at Union level and to contribute towards the effective functioning of the internal markets in electricity and natural gas. ACER is fully operational since 3 March 2011 and has its seat in Ljubljana, Slovenia.426

2.

The legal basis

2.1 Overview 7.5

Regulation (EC) No 713/2009 establishing an agency for the cooperation of the energy regulatory authorities427 laid the foundations of ACER. It established ACER as a Community agency with legal personality, specifying its purpose, the acts it could take, its tasks, its organisational set-up and its financial framework. 425 Commission Proposal for a Regulation of the European Parliament and of the Council establishing an Agency for the Cooperation of Energy Regulators, COM(2007)530 final, pp. 10, 11, 41, 42 (p. 41: ‘Regula‑ tory activities require highly technical skills, notably knowledge of the physics of the grid, levels of investment needed in the sector (generation and transmission), a scale of access tariffs and a dispute settlement mecha‑ nism.’). 426 Decision taken by common agreement between the Representatives of the Governments of Member States of 7 December 2009 on the location of the seat of the Agency for the Cooperation of Energy Regulators, OJ L 322/39, 9.12.2009. See also Article 16(4) of Regulation (EU) 2019/942 (ACER Regulation). 427 Regulation (EC) No 713/2009 of the European Parliament and of the Council of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators, OJ L 211/1, 14.8.2009.

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With regard to ACER’s tasks, Regulation (EC) No  713/2009 was complemented by 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 crossborder exchanges in electricity,428 Regulation (EC) No 715/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the natural gas transmission networks (Gas Regulation),429 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,430 and 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 (Gas Directive);431 the provisions of the founding statute largely mirrored the relevant sector-specific rules.

7.6

Later, Regulation (EU) No 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency (REMIT),432 Regulation (EU) No 347/2013 of the European Parliament and of the Council of 17 April 2013 on guidelines for trans-European energy infrastructure (TEN-E Regulation)433 and Regulation (EU) 2017/1938 of the European Parliament and of the Council of 25 October 2017 concerning measures to safeguard the security of gas supply (Security of Gas Supply Regulation),434 as well as several Commission Regulations establishing network codes and guidelines on the basis of Regulation (EC) No 714/2009 and Regulation (EC) No  715/2009 added essentially to the legal basis of ACER by assigning new tasks to ACER. Though those tasks enlarged ACER’s remit significantly, they were not incorporated into Regulation (EC) No 713/2009 and resulted only in marginal textual amendments of Regulation (EC) No 713/2009.435

7.7

With effect of 4 July 2019, Regulation (EC) No 713/2009 was amended and replaced by Regulation (EU) 2019/942 of the European Parliament and of the Council of 5 June 2019 establishing a European Union Agency for the Cooperation of Energy Regulators (ACER Regulation),436 as part of the legislative project ‘Clean energy for all Europeans’ (Clean Energy Package).

7.8

428 429 430 431 432 433 434 435

OJ L 211/15, 14.8.2009. OJ L 211/36, 14.8.2009. OJ L 211/55, 14.8.2009. OJ L 211/94, 14.8.2009. OJ L 326/1, 8.12.2011. OJ L 115/39, 25.4.2013. OJ L 280/1, 28.10.2017. Following Regulation (EU) No 347/2013, Article 22 was amended to cover also fees for ACER decisions on cross border cost allocation according to Article 12 of Regulation (EU) No 347/2013. 436 OJ L 158/22, 14.6.2019.

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7.9

As part of the same legislative package, ACER’s tasks have been redefined also by Regulation (EU) 2019/941 of the European Parliament and of the Council of 5 June 2019 on risk-preparedness in the electricity sector (Risk Preparedness Regulation),437 by Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity (Electricity Regulation),438 amending and repealing Regulation (EC) No 714/2009 as of 1 January 2020, and by Directive (EU) 2019/944 of the European Parliament and of the Council of 5 June 2019 on common rules for the internal market for electricity (Electricity Directive),439 amending and repealing Directive 2009/72/EC as of 1 January 2021.

2.2 The new legal framework of ACER 7.10

Following a public consultation on a new energy market design in 2015, which indicated a support for increasing the legal powers of ACER, e.g. its oversight of the activities of the European Network of Transmission System Operators for Electricity (ENTSO-E) or its decision powers for swifter alignment of national regulatory authorities’ positions, and a need for making ACER’s decisions more independent from national interests,440 the Commission presented by the end of November 2016 a proposal for a recast of Regulation (EC) No 713/2009.441

7.11

The Commission’s proposal was driven by the concern over fragmented regulatory oversight: while market actors cooperated across borders and decided on certain matters concerning grid operation and electricity trading with qualified majority at regional or even Union level, there was no equivalent for these regional decision-making procedures at regulatory level. Instead, national regulatory authorities took all main regulatory decisions even in situations where a common regional or a Union-wide solution was needed.442 To address this discrepancy and the risk of diverging decisions and unnecessary delays, reinforced regulatory oversight beyond borders, with more effective decision-making, was considered necessary. To that end, according to the Commission, strengthening ACER on the basis of the existing legislative framework by enhancing its powers with new tasks and with the authority to directly approve certain terms and conditions or methodologies was the most appropriate solution.443 437 438 439 440

OJ L 158/1, 14.6.2019. OJ L 158/54, 14.6.2019. OJ L 158/125, 14.6.2019. https://ec.europa.eu/energy/sites/ener/files/documents/First%20Results%20of%20Market%20Design%20Consultation.pdf, p. 3. 441 Proposal for a Regulation of the European Parliament and of the Council establishing a European Union Agency for the Cooperation of Energy Regulators (recast), COM(2016) 863 final. 442 Commission Proposal, p. 7 and 8. 443 Commission Proposal, p. 17. In that context, the Commission discarded the ‘ legislative option transforming

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After the Council had reached its general approach on the Commission’s proposal in June 2018, the European Parliament adopted its position on the draft regulation governing ACER at first reading in March 2019, and the Council approved the European Parliament’s position at first reading in May 2019. As a consequence, Regulation (EU) 2019/942 (ACER Regulation) entered into force on 4 July 2019.

7.12

The ACER Regulation consolidates ACER’s role, updates its remit and tasks (including existing duties in the area of wholesale market surveillance under REMIT and cross-border infrastructure under the TEN-E Regulation), adds new responsibilities and refines its functioning. New important elements introduced by the ACER Regulation are:

7.13

–

Competence to request information from regulated entities and regulatory authorities;444

–

Regulatory oversight of EU entities (ENTSO-E, the EU DSO entity and regional coordination centres (RCCs);445

–

More responsibility in elaborating and submitting the final proposal for a network code to the Commission;446

–

Direct competence for the approval of terms and conditions or methodologies for the implementation of network codes and guidelines where those terms and conditions or methodologies apply EU-wide;447

–

Approval of methodologies related to generation adequacy and risk preparedness;448

–

Requirement for rules of procedure for ACER’s decision-making process;449

–

Explicit recognition of working groups;450

444 445 446 447 448 449 450

ACER to something closer to a pan-European regulator’. Article 3(2). Article 4. Article 5(1). Article 5(2). Article 9(1) and (3). Article 14(5). Article 30.

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7.14

–

Readjustment of the interaction between the Director and the Board of Regulators for the adoption of opinions, recommendations and decisions.451

3.

Purpose and objectives

ACER was established to fill the regulatory gap at Union level, to contribute towards the effective functioning of the internal markets for electricity and natural gas, and to enable regulatory authorities to enhance their cooperation at Union level and participate, on a mutual basis, in the exercise of Union-related functions.452 ACER provides a framework for facilitating the uniform application of the internal market legislation for electricity and natural gas throughout the Union.453 The key pillars of ACER’s mission are laid out as follows: Article 1 ACER Regulation “2. The purpose of ACER shall be to assist the regulatory authorities referred to in Article 57 of Directive (EU) 2019/944 and Article 39 of Directive 2009/73/ EC in exercising, at Union level, the regulatory tasks performed in the Member States and, where necessary, to coordinate their action and to mediate and settle disagreements between them in accordance with Article 6(10) of this Regulation. ACER shall also contribute to the establishment of high-quality common regulatory and supervisory practices, thus contributing to the consistent, efficient and effective application of Union law in order to achieve the Union’s climate and energy goals. 3. When carrying out its tasks, ACER shall act independently, objectively, and in the interest of the Union. ACER shall take autonomous decisions, independently of private and corporate interests.”

7.15

Accordingly, ACER pursues three main objectives: –

assisting the regulatory authorities in exercising, at Union level, the regulatory tasks performed in the Member States and, where necessary, coordinating the action of the regulatory authorities;

451 Article 24(2). 452 Recital 10 of the ACER Regulation. 453 Recital 16 of the ACER Regulation.

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–

mediating and settling disagreements between regulatory authorities as regards situations concerning more than one Member States, where regulatory issues having effects on cross-border trade or cross-border system security require a joint decision by at least two regulatory authorities; and

–

contributing to the establishment of high-quality common regulatory and supervisory practices, in or to achieve consistent, efficient and effective application of Union legal acts and the Union’s climate and energy goals.

The guiding principles for realising these objectives are independence, objectivity and the Union’s interests. Those principles are underpinned by specific obligations of and protections for the bodies of ACER, i.e. the Administrative Board, the Board of Regulators, the Director and the Board of Appeal.454

4.

7.16

Types of acts

The acts that ACER can adopt follow in principle from the typology established by Article 288 TFEU. In accordance with that provision, ACER can adopt opinions and recommendations,455 which have no binding force, and decisions, which specify those to whom they are addressed and which are binding upon those addressees.

7.17

Beside those typical administrative acts, the Third Energy Package introduced a special concept of a non-binding act for the electricity and gas sectors, namely framework guidelines. Those guidelines, developed upon a request of the Commission, set out non-binding principles on the basis of which binding technical and market rules are established.

7.18

Article 2 of the ACER Regulation lists types of acts that ACER can adopt.

7.19

454 Articles 18(7), 22(3), 23(1), 26(2) and 27(4) of the ACER Regulation. 455 See Order of 19 October 2016, T-671/15, E-Control v ACER, where the Court, with regard to the previous version of Article 6(5) of the ACER Regulation, i.e. ex-Article 7(4), held that this provision constituted a legal basis for the adoption of non-binding opinions and that the contested opinion, given its wording, content and context, was indeed an opinion, non-binding and not a challengeable act under Article 263 TFEU (ECLI:EU:T:2016:626, esp. paras. 59 and 92).

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Article 2 ACER Regulation “ACER shall: (a) issue opinions and recommendations addressed to transmission system operators, the ENTSO for Electricity, the ENTSO for Gas, the EU DSO Entity, regional coordination centres and nominated electricity market operators; (b) issue opinions and recommendations addressed to regulatory authorities; (c) issue opinions and recommendations addressed to the European Parliament, the Council, or the Commission; (d) issue individual decisions on the provision of information in accordance with Article 3(2), point (b) of Article 7(2) and point (c) of Article 8; on approving the methodologies, terms and conditions in accordance with Article 4(4), Article 5(2), (3) and (4); on bidding zones reviews as referred to in Article 5(7); on technical issues as referred to in Article 6(1); on arbitration between regulators in accordance with Article 6(10); related to regional coordination centres as referred to in point (a) of Article 7(2); on approving and amending methodologies and calculations and technical specifications as referred to in Article 9(1); on approving and amending methodologies as referred to in Article 9(3); on exemptions as referred to in Article 10; on infrastructure as referred to in point (d) of Article 11; and on matters related to wholesale market integrity and transparency pursuant to Article 12. (e) submit non-binding framework guidelines to the Commission in accordance with Article 59 of Regulation (EU) 2019/943 of the European Parliament and of the Council […] and Article 6 of Regulation (EC) No 715/2009 of the European Parliament and of the Council […].”

7.20

Article 2 lists the types of acts by, on the one hand, categorising opinions and recommendations according to their addressees and, on the other hand, detailing individual decisions and framework guidelines with reference to their specific legal basis.

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Its title and structure suggest that Article 2 defines generally which acts ACER can adopt, instead of determining exhaustively when ACER is required or permitted to adopt the listed acts. The authority to issue a certain act ensues within the context of the specific legal provisions assigning a particular task and competence to ACER. Those provisions are in Articles 3 et seq. of the ACER Regulation, as well as in the sector specific legislation, such as the Electricity and Gas Regulations, the Electricity and Gas Directives, and the Risk Preparedness Regulation and the Security of Gas Supply Regulation. Deliverables not explicitly mentioned in Article 2 can be found, for instance, in Article 15 (2) and (4) of the ACER Regulation referring to reports, or Article 37(5) of the Electricity Regulation referring to a decision not listed in Article 2 (and no other provision) of the ACER Regulation.

7.21

As regards decisions, it has been emphasised that they are of individual scope of application and adopted in the defined circumstances.456

7.22

In practice, the vast majority of the acts adopted by ACER in the past were nonbinding, most of which were opinions. The decisions related mainly to two areas: terms and conditions or methodologies for the implementation of network codes and guidelines, and REMIT.457

7.23

5.

Tasks of ACER

The tasks of ACER are set out partly by the legal act establishing ACER, partly by specific legislation for the electricity and natural gas sectors.

7.24

ACER’s founding act distinguished in principle between tasks regarding the (then) Community institutions, the cooperation of transmission system operators (TSOs), the national regulatory authorities, consultations and transparency, and the monitoring of and reporting on the electricity and natural gas markets. It defined those tasks to a large extent by referring to and mirroring provisions of the sector specific rules in the regulations and directives concerning electricity and natural gas. In addition, the latter regulations and directives established tasks for ACER that were not included in Regulation (EC) No 713/2009.

7.25

456 See Recitals 16 and 29 of the ACER Regulation. 457 In particular according to Article 10(1) of REMIT on the access of regulatory authorities to data sharing.

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7.26

Subsequent legislation, such as REMIT, the TEN-E Regulation, and Commission Regulation (EU) No 543/2013 on submission and publication of data in electricity markets (Transparency Regulation)458 added further tasks, without those tasks being incorporated in Regulation (EC) No 713/2009.

7.27

The ACER Regulation consolidates the existing tasks and complements them with new tasks assigned by the Clean Energy Package.459 The vast majority of the tasks are distinguished in part according to the entities concerned and in part according to the subject area governed. The former group comprises the tasks regarding the Union institutions,460 the (TSOs) and distribution system operators (DSOs),461 the regulatory authorities,462 the RCCs,463 and the nominated electricity market operators (NEMOs);464 the latter category includes tasks concerning the development and implementation of network codes and guidelines,465 generation adequacy and risk preparedness,466 exemptions for new interconnectors and new gas infrastructure,467 infrastructure plans and projects of Union-wide relevance,468 wholesale market integrity and transparency,469 and monitoring and reporting on the electricity and natural gas sectors.470 In addition, there are tasks with a procedural context, related to the collection of information471 and to consultations, transparency as well as decision-making procedures.472

7.28

The scope of these tasks is still defined only partially by autonomous rules in the ACER Regulation, the latter relying on numerous cross-references to rules in other legal acts specifying the relevant task. However, the ACER Regulation also omits tasks assigned to ACER under other legal acts.473 458 Commission Regulation (EU) No 543/2013 of 14 June 2013 on submission and publication of data in electricity markets and amending Annex I to Regulation (EC) No 714/2009 of the European Parliament and of the Council, OJ L 163/12, 15.6.2013. 459 Articles 3 to 15. 460 Article 3(1). 461 Article 4. 462 Article 6. 463 Article 7. 464 Article 8. 465 Article 5. 466 Article 9. 467 Article 10. 468 Article 11. 469 Article 12. 470 Article 15. 471 Article 3(2). 472 Article 14. 473 E.g. Article 37(5) of the Electricity Regulation.

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As regards their nature, some of those tasks involve merely advisory and supervisory competences, while others entail decision-making competence.

7.29

Member States were concerned that new competences, in particular for decision-making, could be granted without adequate involvement of the Council. To avoid this risk and to ensure that ACER adopts decisions only in clearly defined circumstances,474 two safeguards have been installed:

7.30

First, Article 5(2), Article 5(3) and Article 6(10) of the ACER Regulation allow conferring decision-making powers for new cross-border issues, including the terms and conditions or methodologies under network codes and guidelines, in principle only through legislation adopted under the ordinary legislative procedure or through implementing acts.

7.31

Second, Article 13 of the ACER Regulation allows entrusting additional tasks for issues related to the purpose for which ACER has been established, in circumstances clearly defined by the Commission in network codes adopted according to Article 59 of the Electricity Regulation and guidelines adopted according to Article 61 of the Electricity Regulation or Article 23 of the Gas Regulation, on the condition that those tasks do not involve decision-making powers.

7.32

5.1 General competences 5.1.1 Advice to the EU institutions Given its coordinating role and its overview of the regulatory authorities as well as of the developments on the markets for electricity and gas, ACER is capable to provide advice, in particular to other Union institutions involved in policy and law making.475

7.33

Article 3(1) of the ACER Regulation recognises this potential and provides that ACER issues opinions and recommendations to the European Parliament, the Council and the Commission on all issues related to its purpose.

7.34

474 See also Recital 29 of the ACER Regulation. 475 Recital 22 of the ACER Regulation.

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Article 3 ACER Regulation “1. ACER may, upon a request of the European Parliament, the Council or the Commission, or on its own initiative, provide an opinion or a recommendation to the European Parliament, the Council and the Commission on any of the issues relating to the purpose for which it has been established.”

7.35

Contrary to its heading (‘general tasks’), Article 3(1) does not establish a task but rather a general competence, as it does not define an activity or piece of work to be done. It empowers ACER to issue an opinion or a recommendation – ACER may issue them –, and does not oblige ACER to do so, even if requested by the European Parliament, the Council or the Commission.

7.36

The scope of this competence is defined by the purpose for which ACER has been established. That purpose follows in the first place from Article 1(2) of the ACER Regulation, i.e. assisting the regulatory authorities in exercising, at Union level, the regulatory tasks and coordinating their action, mediating and settling disagreements between them, and contributing to the establishment of high-quality common regulatory and supervisory practices as well as to the consistent, efficient and effective application of Union law in order to achieve the Union’s climate and energy goals. In addition, the purpose ensues from all specific tasks of ACER, and the requirements how to carry out those tasks, as set out in the specific legal provisions.

5.1.2 Request for information 7.37

To ensure that ACER has access to the information needed to fulfil its tasks, ACER must be able to obtain that information from the relevant bodies.476

7.38

To that end Article 3(2) of the ACER Regulation, contrary to its title which refers to tasks, introduces a general power for ACER to request the relevant information from the regulatory authorities, ENTSO-E, the ENTSO for Gas (ENTSOG), the RCCs, the EU DSO entity, the TSOs and the NEMOs, and complements it with the corresponding obligation of those entities to provide the requested information.

476 Recital 14 of the ACER Regulation.

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Article 3 ACER Regulation “2. At ACER’s request, the regulatory authorities, the ENTSO for Electricity, the ENTSO for Gas, the regional coordination centres, the EU DSO entity, the transmission system operators and the nominated electricity market operators shall provide to ACER the information necessary for the purpose of carrying out ACER’s tasks under this Regulation, unless ACER has already requested and received such information.

For the purpose of information requests as referred to in the first subparagraph, ACER shall have the power to issue decisions. In its decisions, ACER shall specify the purpose of its request, shall make a reference to the legal basis under which the information is requested, and shall state a time limit within which the information is to be provided. That time limit shall be proportionate to the request.



ACER shall use confidential information received pursuant to this Regulation only for the purpose of carrying out the tasks assigned to it in this Regulation. ACER shall ensure the appropriate data protection of the information pursuant to Article 41.”

The first subparagraph defines the scope of a request for information as well as the duty of the entity concerned to provide the requested information. Both, scope and duty, are governed and limited by the purpose of carrying out tasks under the ACER Regulation. In principle, any of those tasks can serve as a relevant subject-matter, covering potentially a very wide range of information. In practice, this will be especially relevant for ACER’s supervisory tasks, for monitoring and reporting on the electricity and natural gas sector. The particular request must be based on necessity: the piece of information should be necessary for the task concerned, and ACER should not have received that information otherwise.

7.39

The second subparagraph clarifies the form of the request for information. It can be a decision, but it can also be a simple request.477 Only the former is legally binding and enforceable with sanctions by the competent national regulatory authorities. Given its legal consequences, a decision is explicitly required to identify the purpose of the request, to indicate the legal basis under which the information is requested, and to set a proportionate time limit within which the

7.40

477 According to Schütz, ‘A reinforced governance of the European electricity market’, in Jones/Ermacora (ed.), EU Energy Law XIII, 2020 ed., para. 7.35, the co-legislators intended requests for information to take only exceptionally the form of a decision.

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information is to be provided. In any event, it should be clear to the addressee which information is required and why ACER requires it. For transparency and legal certainty reasons, it seems appropriate to apply the same specifications to a simple request for information.

7.41

A decision requesting information under Article 3(2) does not require a favourable opinion of the Board of Regulators in accordance with Article 24(2) of the ACER Regulation.

7.42

The third subparagraph obliges ACER to preserve the confidentiality of the information received and, in accordance with Article 41 of the ACER Regulation, protect personal data. While confidentiality and privacy are reasons for a particularly protective treatment of the information concerned, they do not justify withholding information requested by ACER.

7.43

In addition to Article 3(2), the ACER Regulation provides a special legal basis for requesting information from RCCs and NEMOs, in its Article 7(2)(b) and Article 8(c) respectively. Those requests, too, can take the form of a decision, as indicated in Article 2(d) of the ACER Regulation. In such case, however, contrary to a decision under Article 3(2), they do require the Board of Regulators’ favourable opinion according to Article 24(2) of the ACER Regulation.

5.2 Cooperation of transmission system operators and distribution system operators 7.44

One key element of the Third Energy Package was the creation of new and reinforced cooperation bodies between TSOs, i.e. ENTSO-E for electricity and ENTSOG for gas.478 Therefore, from the beginning, ACER was assigned a number of tasks concerning the cooperation of TSOs, relating to the establishment of the ENTSOs as well as to the execution of their tasks.

7.45

The Clean Energy Package enhanced the cooperation of and coordination between system operators by providing for the establishment of an entity of distribution system operators in the Union (the EU DSO entity) and of RCCs. Accordingly, ACER’s tasks have been enlarged to cover also those entities. Moreover, ACER’s tasks have been intensified by supervisory responsibilities in relation to ENTSO-E, the EU DSO entity and the RCCs as well as by approval powers regarding ENTSO-E’s methodology on the use of congestion income according to Article 19(4) of the Electricity Regulation. 478 See Chapter 12, para 12.61, et seq.

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5.2.1 Establishment of the ENTSOs and the EU DSO entity ACER has an advisory role in the formation of the ENTSO-E, the ENTSO-G and the EU DSO entity. The general scope of this task is set out in Article 4(1) of the ACER Regulation as reviewing the draft statutes of those entities, their list of members and their draft rules of procedure and providing an opinion to the Commission.

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Article 4 ACER Regulation “1. ACER shall provide an opinion to the Commission on the draft statutes, list of members and draft rules of procedure of the ENTSO for Electricity in accordance with Article 29(2) of Regulation (EU) 2019/943 and on those of the ENTSO for Gas in accordance with Article 5(2) of Regulation (EC) No 715/2009 and on those of the EU DSO entity in accordance with Article 53(3) of Regulation (EU) 2019/943.”

The details of how ACER is to perform this function are specified in Article 29(2) of the Electricity Regulation with regard to ENTSO-E, in Article 5(2) of the Gas Regulation with regard to ENTSO-G, and in Article 53(3) of the Electricity Regulation with regard to the EU DSO entity. Those provisions lay down in almost identical terms a procedure for the delivery of ACER’s opinion. Article 29 Electricity Regulation “2. Within two months of receipt of the draft amendments to the statutes, list of members or rules of procedure, ACER, after consulting the organisations representing all stakeholders, in particular the system users, including customers, shall provide an opinion to the Commission on these draft amendments to the statutes, list of members or rules of procedure. 3. The Commission shall deliver an opinion on the draft amendments to the statutes, list of members or rules of procedures taking into account ACER’s opinion as provided for in paragraph 2 and within three months of receipt of ACER’s opinion. 5. The documents referred to in paragraph 1 shall be submitted to the Commission and to ACER where there are changes thereto or upon the reasoned request of either of them. The Commission and ACER shall deliver an opinion in accordance with paragraphs 2, 3 and 4.” 335

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Under the procedure of Article 29(2) of the Electricity Regulation, Article 5(2) of the Gas Regulation, and Article 53(3) of the Electricity Regulation, the relevant entity has to submit the required document(s) to ACER, then ACER has to consult the organisations representing all stakeholders and issue an opinion on the document(s) to the Commission within two months. As such, ACER’s opinion provides input for the opinion of the Commission, on the basis of which the statutes and the rules of procedure are finally to be adopted.479

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The wording of Article 29(2) of the Electricity Regulation differs slightly from both Article 5(2) of the Gas Regulation and Article 53(3) of the Electricity Regulation in that it refers to ‘draft amendments to the statutes, list of members or rules of procedure’, whilst the latter provisions still concern the original version of these documents. This difference is due to the fact that ENTSO-E has already been established (following the opinions of ACER and the Commission), that the Gas Regulation was not updated to take into account the establishment of ENTSOG, and that the EU DSO entity is still to be established.

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With regard to future amendments of the relevant documents, Article 29(5) and Article 53(6) of the Electricity Regulation require that ‘the documents re‑ ferred to in [Article 29(1), respectively Article 53(2)] shall be submitted to the Commission and to ACER where there are changes thereto or upon the reasoned request of either of them. The Commission and ACER shall deliver an opinion in accordance with paragraphs 2, 3 and 4’. It is clear from this wording that where the entities intend to change a relevant document that was subject to an opinion by ACER and the Commission, such revision has to undergo the same procedure as for the original document, and the proposed amendment has to be submitted to ACER and the Commission for their opinions. By contrast, it is less clear what the referred submission upon reasoned request of the Commission or ACER should imply. If this alternative were to mean that the Commission or ACER can request the documents which ENTSO-E and the EU DSO entity have to submit in any case because of Article 29(2) and Article 53(3) of the Electricity Regulation, the reasoned request would actually be redundant. If, on the other hand, the reasoned request was interpreted, in view of its context, to refer to and enable changes which the Commission and ACER deem necessary and ask for, a submission upon such request would indeed make sense. The purpose of subjecting the founding documents of ENTSO-E and the EU DSO entity to an opinion by ACER and the Commission before their adoption holds true also for changes to these documents which the Commission and ACER deem 479 Article 29(3) of the Electricity Regulation; Article 5(3) of the Gas Regulation; Article 53(4) of the Electricity Regulation.

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necessary. Bearing this in mind, it is consistent to conclude from Article 29(5) and Article 53(6) of the Electricity Regulation that both ACER and the Commission can request ENTSO-E and the EU DSO entity to submit amended documents. As regards ENTSOG, there is no provision similar to Article 29(5) and Article 53(6) of the Electricity Regulation. Read in their textual context, Article 29(2) of the Electricity Regulation, Article 5(2) of the Gas Regulation, and Article 53(3) of the Electricity Regulation determine the scope of the relevant documents and, hence, of the review to be carried out by ACER. The rules of procedure should include the procedure rules for the consultation of stakeholders;480 the EU DSO entity is also explicitly required to submit the financial rules.481 For the EU DSO entity, the draft statutes are further specified: they have to comply with a list of specific requirements and to include a code of conduct.482

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5.2.2 Performance of the ENTSOs and the EU DSO entity ‘To ensure that the cooperation between transmission system operators […] pro‑ ceed in an efficient and transparent way for the benefit of the internal markets for electricity and natural gas’,483 ACER has wide-ranging monitoring duties with regard to the execution of the tasks of ENTSO-E, ENTSOG and the EU DSO entity as well as with regard to regional cooperation between TSOs in the electricity and gas sectors.

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Article 4(2) of the ACER Regulation outlines the monitoring duties with regard to ENTSO-E, ENTSO-G and the EU DSO entity. As far as ENTSO-E and ENTSOG are concerned, it mirrors the first subparagraph of Article 32(1) of the Electricity Regulation and the first subparagraph of Article 9(1) of the Gas Regulation.

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Article 4 ACER Regulation “2. ACER shall monitor the execution of the tasks of the ENTSO for Electricity in accordance with Article 32 of Regulation (EU) 2019/943, of the ENTSO for Gas in accordance with Article 9 of Regulation (EC) No 715/2009 and of the EU DSO entity as set out in Article 55 of Regulation (EU) 2019/943.” 480 For ENTSO-E see also Article 5(1) of Regulation (EC) No 714/2009. 481 Article 29(1) of the Electricity Regulation; Article 5(1) of the Gas Regulation; Article 53(2) of the Electricity Regulation. 482 Article 53(2) and Article 54 of the Electricity Regulation. 483 Recital 12 of the ACER Regulation.

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The specific scope of these monitoring duties results from Article 30 in conjunction with Article 32 of the Electricity Regulation, from Article 8 in conjunction with Article 9 of the Gas Regulation, and from Article 55 of the Electricity Regulation. The relevant tasks of ENTSO-E, ENTSOG and the EU DSO entity are set out in Article 30 of the Electricity Regulation, Article  8 of the Gas Regulation, and Article 55 of the Electricity Regulation, respectively. They include, e.g. for ENTSO-E and ENTSO-G, the development of network codes, and the adoption of common network operation tools, of a non-binding Unionwide 10-year network development plan (TYNDP), of recommendations on the coordination of technical cooperation between Union and third-country TSOs, of an annual work programme, or of an annual report.

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ACER must report on its monitoring to the Commission.484

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Under this umbrella, Article 4(3) and (5) of the ACER Regulation single out specific deliverables of ENTSO-E, ENTSOG and the EU DSO entity to which ACER can respond with an opinion and, under the circumstances of paragraph 5, must issue a reasoned opinion and recommendations: Article 4 ACER Regulation “3. ACER may provide an opinion: (a) to the ENTSO for Electricity in accordance with point (a) of Article 30(1) of Regulation (EU) 2019/943 and to the ENTSO for Gas in accordance with Article 8(2) of Regulation (EC) No 715/2009 on the network codes; (b) to the ENTSO for Electricity in accordance with the first subparagraph of Article 32(2) of Regulation (EU) 2019/943, and to the ENTSO for Gas in accordance with the first subparagraph of Article 9(2) of Regulation (EC) No 715/2009 on the draft annual work programme, on the draft Unionwide network development plan and other relevant documents referred to in Article 30(1) of Regulation (EU) 2019/943 and Article 8(3) of Regulation (EC) No 715/2009, taking into account the objectives of non-discrimination, effective competition and the efficient and secure functioning of the internal markets for electricity and natural gas; (c) to the EU DSO entity on the draft annual work programme and other relevant documents referred to in Article 55(2) of Regulation (EU) 2019/943, 484 See also Article 32(1) of the Electricity Regulation and Article 9(1) of the Gas Regulation.

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Point (a) of Article 4(3) concerns the development of non-binding network codes by the ENTSOs. Here, ACER may issue an opinion to the relevant ENTSO.485

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Point (b) and (c) of Article 4(3) cover essentially all relevant mandatory deliverables of ENTSO-E, ENTSOG and the EU DSO entity, point (b) of Article 4(3) mirroring the first subparagraph of Article 32(2) of the Electricity Regulation as well as the first subparagraph of Article 9(2) of the Gas Regulation. Here, again, ACER may issue an opinion to the entity whose deliverable is at stake.

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By contrast, Article 4(5) addresses a special case of draft annual work programmes and draft Union-wide network development plans of ENTSO-E and ENTSOG, mirroring the second subparagraph of Article 32(2) of the Electricity Regulation and the second subparagraph of Article 9(2) of the Gas Regulation. Where, in ACER’s view, the proposed annual work programmes or the prosed Union-wide TYNDPs do not contribute to non-discrimination, effective competition and the efficient functioning of the market or a sufficient level of cross-border interconnection open to third-party access, or do not comply with the relevant provisions of the Electricity Regulation and the Electricity Directive or the Gas Regulation and the Gas Directive, ACER must react on such shortcomings and failures. It must issue an opinion and also recommendations, and bring them also to the attention of the European Parliament, the Council and the Commission. ACER must do so within only two months, according to

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485 See below section 5.6.3.

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the second subparagraph of Article 32(2) of the Electricity Regulation and the second subparagraph of Article 9(2) of the Gas Regulation.

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Finally, to ensure that the cooperation between TSOs in the electricity and gas sectors proceed in an efficient and transparent way for the benefit of the internal markets for electricity and natural gas, ACER has been explicitly tasked to monitor also the regional cooperation between TSOs.486 Article 5 ACER Regulation “8. ACER shall monitor the regional cooperation of transmission system operators referred to in Article 34 of Regulation (EU) 2019/943 and Article 12 of Regulation (EC) No 715/2009, and shall take into account the outcome of that cooperation when formulating its opinions, recommendations and decisions.”

5.2.3 Regulatory oversight of European and regional entities 7.61

With the expansion of the operational responsibilities of ENTSO-E, the EU DSO entity and the RCCs, it was considered necessary to strengthen and enhance the regulatory oversight of those bodies operating at Union-wide or regional level.487 While the Third Energy Package did not consider the imposition of effective sanctions for ENTSO-E’s or ENTSOG’s failure to comply with their obligations, the Clean Energy Package introduced a legal basis for sanctions regarding ENTSO-E, the EU DSO entity and the RCCs. Remarkably, ENTSOG was not included in this regulatory framework.

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The enforcement of EU legislation and ACER decisions against national entities is a task of the national regulatory authorities. This principle has been applied to ENTSO-E, the EU DSO entity and the RCCs accordingly. The primary responsibility for the oversight of those EU and regional entities rests with the national regulatory authorities, which have to coordinate for that purpose.488 According to Article  59(1)(c) and Article  62(1)(f ) of the Electricity Directive, the relevant regulatory authorities should, in close coordination with each other, ensure compliance with the entity’s obligations under the regulatory framework of the internal energy market and with ACER’s decisions and jointly identify any non-compliance with the respective obligations. If non-compliance has been identified, then, according to Article 59(4) and Article 62(3) of the 486 Recital 12 of the ACER Regulation. 487 Recital 13 of the ACER Regulation. 488 Recital 13 of the ACER Regulation.

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Electricity Directive, the regulatory authority located in the Member State in which the entity has its seat is mandated to impose effective, proportionate and dissuasive penalties.

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In addition to the national regulatory authorities, ACER is also overseeing ENTSO-E, the EU DSO entity and the RCCs. Article 4(6) to (8) of the ACER Regulation establishes a framework for this concurrent oversight and ACER’s participation in identifying non-compliance and remedying it.

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Article 4 ACER Regulation “6. The relevant regulatory authorities shall coordinate in order to jointly identify whether there is non-compliance of the EU-DSO entity, the ENTSO for Electricity or regional coordination centres with their obligations under Union law, and shall take appropriate action in accordance with point (c) of Article 59(1) and point (f ) of Article 62(1) of Directive (EU) 2019/944.

At the request of one or more regulatory authorities or at its own initiative, ACER shall issue a reasoned opinion as well as a recommendation to the ENTSO for Electricity, the EU DSO entity or the regional coordination centres with regard to compliance with their obligations.

7. Where a reasoned opinion of ACER identifies a case of potential non-compliance of the ENTSO for Electricity, the EU DSO entity or a regional coordination centre with their respective obligations, the regulatory authorities concerned shall unanimously take coordinated decisions establishing whether there is non-compliance with the relevant obligations and, where applicable, determining the measures to be taken by the ENTSO for Electricity, the EU DSO entity or the regional coordination centre to remedy that non-compliance. Where the regulatory authorities fail to take such coordinated decisions unanimously within four months of the date of receipt of ACER’s reasoned opinion, the matter shall be referred to ACER for a decision pursuant to Article 6(10). 8. Where the non-compliance by the ENTSO for Electricity, the EU DSO entity or a regional coordination centre that was identified pursuant to paragraph 6 or 7 of this Article has not been remedied within three months, or where the regulatory authority in the Member State in which the entity has its seat has not taken action to ensure compliance, ACER shall issue a recommendation to the regulatory authority to take action in accordance with point (c) of Article 59(1) and point (f ) of Article 62(1) of Directive (EU) 2019/944, in order to ensure 341

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For identifying non-compliance, paragraphs 6 and 7 envisage a two-stage involvement of ACER:

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In a first stage, according to paragraph 6, ACER can get active on its own initiative or upon request of at least one regulatory authority. It issues a reasoned opinion as well as a recommendation to ENTSO-E, the EU DSO entity or the RCCs with regard to potential non-compliance. The reasoned opinion addresses the question whether the relevant entity is in breach of its obligations, and the recommendation deals with the question which measures that entity should take to remedy the breach. Given that ACER’s findings are non-binding and that it is the regulatory authorities’ prerogative to decide, the non-compliance detected by ACER is only a potential one and the remedial measures envisaged by ACER are only a proposal to ENTSO-E, the EU DSO entity or the RCCs.

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If ACER identified a case of potential non-compliance in a reasoned opinion, it has to inform the concerned regulatory authorities so that they are in a position, according to paragraph 7, to take coordinated decisions to confirm noncompliance and, if so, determine the appropriate remedial actions. The competent regulatory authorities are not bound by the reasoned opinion and the recommendation that ACER addresses to the relevant entity. If the regulatory authorities do not endorse ACER’s finding of non-compliance, ACER has no means legally to enforce such non-compliance.

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In the second stage, according to paragraph 7, ACER becomes competent to decide instead of the regulatory authorities where the regulatory authorities failed to take ‘coordinated decisions unanimously within four months’. Given that the regulatory authorities’ decisions cover both the question whether or not there is non-compliance and, in case of non-compliance, the question which measures are to be taken by the relevant entity to remedy that non-compliance, it would be conclusive for ACER to also address these two issues. ACER’s decision will be in accordance with Article 6(10) of the ACER Regulation. This means that here, deviating from the usual arbitration procedure under Article 6(10) of the ACER Regulation, an extension of the period within which the regulatory authorities have to reach an agreement is excluded, according to third subparagraph of Article 6(10), and consequently ACER has to decide within four months (instead of usually six), according to Article 6(12)(a) of the ACER Regulation. 342

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Paragraph 7 seems to suggest that ACER can assume decision-making competence only in a matter for which it had issued already a reasoned opinion. However, regulatory authorities are not required to obtain such opinion from ACER before finding non-compliance. For that reason, Article 59(1)(c) and Article 62(1)(f ) of the Electricity Directive call on ACER to decide in accordance with Article 6(10) of the ACER Regulation where the regulatory authorities have not been able to reach an agreement within a four months period that does not refer to a reasoned opinion of ACER, but to the start of consultations for jointly identifying non-compliance. Such consultations can indeed commence and take place without a reasoned opinion of ACER.

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The fact that ACER’s decision-making competence derives from the responsibilities of more than one regulatory authorities entails a significant limitation. Even where the relevant entity does not comply with an obligation vis-a-vis ACER only, ACER would not be entitled to ascertain such non-compliance by means of a decision.

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Regarding the remedial of non-compliance, it falls to the regulatory authority of the Member State in which the relevant entity has its seat to enforce compliance. Paragraph 8 expects ACER to become active in two instances: first, when the identified non-compliance has not been remedied within three months; and second, when the regulatory authority competent to impose sanctions has not taken action to redress the identified non-compliance. In those cases, ACER should support the competent authority with recommendations for the actions to take in accordance with Article 59(1)(c) and Article 62(1)(f ) of the Electricity Directive and inform the Commission. Interestingly, the latter provisions do not refer to an action other than ensuring compliance and identifying non-compliance.

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5.2.4 Methodology for the use of congestion income The amount to be paid for cross-border access to the system varies depending on the transmission system operator involved and the tarification system applicable, and can result in distortions of trade. To avoid negative effects, harmonized rules are necessary.489 To that end, Article 19 of the Electricity Regulation lays down rules on the use of revenues from congestion management procedures.

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Article 19(2) of the Electricity Regulation defines two priority purposes for which the revenues resulting from the allocation of cross-zonal capacity should be used: (a) for ‘guaranteeing the actual availability of the allocated capacity

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489 Recitals 37 and 38 of the Electricity Regulation.

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including firmness compensation’, and (b) for ‘maintaining or increasing crosszonal capacities through optimisation of the usage of existing interconnectors by means of coordinated remedial actions, where applicable, or covering costs result‑ ing from network investments that are relevant to reduce interconnector conges‑ tion’. Where those priority purposes have been adequately fulfilled, according to Article 19(3) of the Electricity Regulation, the revenues may be used as income to be taken into account by the regulatory authorities when approving the methodology for calculating network tariffs or fixing network tariffs, and the remainder should be placed on a separate internal account line for future use for the priority purposes.

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Article 19(4) of the Electricity Regulation requires a methodology which governs the use of revenues from the allocation of cross-zonal capacity. According to third subparagraph of this provision, this methodology ‘shall set out at least the conditions under which the revenues can be used for the [priority] purposes re‑ ferred to in paragraph 2, the conditions under which those revenues may be placed on a separate internal account line for future use for those purposes, and for how long those revenues may be placed on such an account line’.

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The role of ACER in this context is to approve the congestion income methodology which the TSOs have to propose. Article 4(4) of the ACER Regulation outlines ACER’s competences, which Article 19(4) of the Electricity Regulation details within the procedural framework. Article 4 ACER Regulation “4. ACER, where appropriate, after requesting updates to the drafts submitted by transmission system operators, shall approve the methodology regarding the use of revenues from congestion income pursuant to Article 19(4) of Regulation (EU) 2019/943.

Article 19 Electricity Regulation 4. The use of revenues in accordance with point (a) or (b) of paragraph 2 shall be subject to a methodology proposed by the transmission system operators after consulting regulatory authorities and relevant stakeholders and after approval by ACER. The transmission system operators shall submit the proposed methodology to ACER by 5 July 2020 and ACER shall decide on the proposed methodology within six months of receiving it.

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ACER may request transmission system operators to amend or update the methodology referred to in the first subparagraph. ACER shall decide on the amended or updated methodology not later than six months after its submission.”

The first subparagraph of Article 19(4) of the Electricity Regulation defines when the TSOs have to submit their initial proposal for the congestion income methodology and within which period ACER has to decide on that proposal.

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Unlike for other proposals,490 ACER has not been entrusted with the power to revise or amend itself the proposed methodology in order to approve it. In case of concerns, ACER can only ask the TSOs to reconsider their proposal and amend it in accordance with ACER’s views, or otherwise reject it.

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The second subparagraph of Article 19(4) of the Electricity Regulation appears to take account of such scenario by explicitly recognising ACER’s right to request from the TSOs amendments or updates of the methodology. From the wording, it is not fully clear whether those amendments or updates aim at the proposed methodology submitted by the TSOs, or rather at the methodology already approved by ACER, or even at both the proposed methodology and the approved methodology. By contrast, the corresponding provision of Article 4(4) of the ACER Regulation aims at changes to pending proposals for the methodology when it refers to ‘requesting updates to the drafts’.

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One might argue that even in the absence of an explicit permissive provision, ACER would not be prevented by law to request amendments or updates. The critical factor is the enforcement of such request. In that regard, the second subparagraph of Article 19(4) of the Electricity Regulation and Article 4(4) of the ACER Regulation give rise to uncertainty as they do not lay the ground for a clear time frame within which the TSOs have to resubmit an amended or updated methodology.

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5.2.5 Certification of transmission system operators Under the Electricity and Gas Directives, the TSOs need a certification by national regulatory authorities that they comply with the unbundling requirements. Article 51 of the Electricity Regulation and Article 3 of the Gas Regulation provide for a review of those certification decisions by the Commission and sets out the procedure for this review. In the review process, ACER may play a role. 490 See Article 5(2) and (6) of the ACER Regulation.

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Article 51 Electricity Regulation491 “1. The Commission shall examine any notification of a decision on the certification of a transmission system operator as laid down in Article 52(6) of Directive (EU) 2019/944 as soon as it is received. Within two months of receipt of such notification, the Commission shall deliver its opinion to the relevant regulatory authority as to its compatibility with Article 43 and either Article 52(2) or Article 53 of Directive (EU) 2019/944.

When preparing the opinion referred to in the first subparagraph, the Commission may request ACER to provide its opinion on the regulatory authority’s decision. In such a case, the two-month period referred to in the first subparagraph shall be extended by two further months.”

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While Article 9(2) of Regulation (EC) No 713/2009 included a reference to ACER’s role in the specific review process for national decisions on the certification of TSOs according to the Electricity and Gas Regulations, the ACER Regulation is silent in that regard. Accordingly, now ACER’s competence to participate in the specific review process derives solely from Article 51 of the Electricity Regulation and Article 3 of the Gas Regulation.

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ACER’s competence is twofold limited: ACER can act only upon request of the Commission, and it can act only through an opinion.

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The Commission is not obliged to involve ACER or, when it has done so, to follow ACER’s opinion.492 Conversely, if requested by the Commission, ACER must issue an opinion on the national certification decision.

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Article 51 of the Electricity Regulation and Article 3 of the Gas Regulation do not set an explicit time period for ACER to issue its opinion. Considering however that according to those provisions the Commission’s two-month period to deliver its opinion shall be extended by two further months in the event of an ACER opinion, ACER will have to provide its opinion within less than two months so the Commission can take into account ACER’s opinion and still deliver on time. 491 Article 3(1) of the Gas Regulation mirrors Article 51(1) of the Electricity Regulation. According to Article 53(6) of the Electricity Directive and Article 11(6) of the Gas Directive the Commission may request the views of ACER also in the context of examining certifications of transmission system operators in relation to third countries. See Chapter 4, para. 4.108 et seq., for details on the certification procedure. 492 See Ermacora, ‘The Agency for the Cooperation of Energy Regulators (ACER)’, in Jones (ed.), EU Energy Law I, The Internal Energy Market, 2010 ed., para. 7.62.

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5.3 Regulatory authorities 5.3.1 Frame for the cooperation and coordination of regulatory authorities In accordance with its designation as a cooperation body and its statutory objectives, ACER’s core functions in relation to the national regulatory authorities are assisting them in exercising regulatory tasks at Union level and in coordinating their actions.493 Article 6(2) and Article 6(4) of the ACER Regulation provide for the fundamentals of ACER’s mission.

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Article 6 ACER Regulation “2. ACER may, in accordance with its work programme, at the request of the Commission or on its own initiative, make recommendations to assist regulatory authorities and market participants in sharing good practices. 4. ACER shall provide a framework within which the regulatory authorities can cooperate in order to ensure efficient decision-making on issues with cross-border relevance. It shall promote cooperation between the regulatory authorities and between regulatory authorities at regional and Union level and shall take into account the outcome of such cooperation when formulating its opinions, recommendations and decisions. Where ACER considers that binding rules on such cooperation are required, it shall make the appropriate recommendations to the Commission.”

Article 6(2) exemplifies how ACER can assist national regulatory authorities, but also market participants, with regard to the sharing of good practices. To this end, ACER may issue recommendations on its own initiative, or upon the Commission’s request, provided the activity is in line with ACER’s work programme.

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Since the practices which can be relevant in this context are not limited to a specific type, ACER’s recommendations may cover in principle the full range of practices pertinent to the regulatory tasks of national regulatory authorities. An example of such practice are the incentives and the risk assessment concerning projects of common interest according to Article 13(5) of the TEN-E Regulation.494 In this context also technical rules concerning the connection to the system according to Article 8 of the Gas Directive could be relevant.

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493 Article 1(2) of the ACER Regulation. 494 See Section 5.9.5 below.

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Article 6(4) outlines the central function for which ACER has been established: providing an ‘ integrated framework which enables the regulatory authorities to participate and cooperate’ and which ‘ facilitates the uniform application of the legislation on the internal markets for electricity and natural gas throughout the Union’.495 The tasks associated with this function have been described rather programmatically: ACER has to enable cooperation among national regulatory authorities, foster it and take into account the outcome for its own opinions, recommendations and decisions. This leaves in practice considerable room of how to implement those tasks. A significant factor to effect cooperation is ACER’s Board of Regulators, given its composition and role.496 Similarly relevant are ACER’s working groups which bring together experts of the national regulators and ACER staff to prepare ACER’s deliverables.

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ACER’s cooperation function is not considered as unilateral and supporting only. The Electricity497 and Gas Directives498 as well as the Gas Regulation499 oblige also the national regulatory authorities to cooperate with ACER.

5.3.2 Review of decisions of national regulatory authorities 7.90

Article 6(5) of the ACER Regulation gives ACER the competence to review the compliance of a national regulatory authority’s decision with sector specific Union legislation. It is complemented by Article 63 of the Electricity Directive and Article 43 of the Gas Directive, which provide for a similar review procedure. Article 6 ACER Regulation “5. ACER shall provide a factual opinion at the request of one or more regulatory authorities or of the Commission, on whether a decision taken by a regulatory authority complies with the network codes and guidelines referred to in Regulation (EU) 2019/943, Regulation (EC) No 715/2009, Directive (EU) 2019/944 or Directive 2009/73/EC or with other relevant provisions of those directives or regulations.

495 Recital 16 of the ACER Regulation. 496 See also Ermacora, ‘The Agency for the Cooperation of Energy Regulators (ACER)’, in Jones (ed.), EU Energy Law I, The Internal Energy Market, 2010 ed., para. 7.56. 497 Article 59(1)(f ). 498 Article 41(1)(c). 499 Article 24.

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Article 63 Electricity Directive500 “1. Any regulatory authority and the Commission may request the opinion of ACER on the compliance of a decision taken by a regulatory authority with the network codes and guidelines referred to in this Directive or in Chapter VII of Regulation (EU) 2019/943. 2. ACER shall provide its opinion to the regulatory authority which has requested it or to the Commission, respectively, and to the regulatory authority which has taken the decision in question within three months of the date of receipt of the request. 3. Where the regulatory authority which has taken the decision does not comply with ACER’s opinion within four months of the date of receipt of that opinion, ACER shall inform the Commission accordingly.”

The scope of ACER’s opinion covers the question whether a decision taken by a national regulatory authority complies with the network codes and guidelines referred to in the Electricity and Gas Directives and the Electricity and Gas Regulations or with other relevant provisions of those Directives or Regulations.

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The basis for ACER’s review are, on the hand, the relevant legal provisions in the Directives and Regulations referred to, as well the network codes and guidelines adopted thereunder, and, on the other hand, the facts of the decision at issue. Though one would assume that a decision of a national regulatory authority will naturally rest on facts and therefore cannot be reasonably assessed without considering the facts which led to the decision, Article 6(5) reinforces the importance of the factual context. In practice, ACER’s assessment will bear on the specific facts and the relevant legal provisions.

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ACER can enter into a formal review of a regulatory authority’s decision only if requested by a national regulatory authority or by the Commission. It is not in the position to undertake a compliance review upon request of other parties or on its own initiative.

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500 For the gas sector, see the equivalent provision in Article 43 of the Gas Directive.

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Article 6(5) does not prescribe any consultation requirements. However, in accordance with Article 14 of the ACER Regulation and the principle of good administration, ACER will generally have to give due consideration to the interests of the applicant and the regulatory authority whose decision is under scrutiny, and consult them. Formally, such consultation is different from hearing the parties to a decision-making procedure, as the latter results in a legally binding act, whereas the opinion is non-binding.

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Article 6(5) does not specify any time limit for issuing the opinion, nor any addressees. By contrast, Article 63(2) of the Electricity Directive and Article 43(2) of the Gas Directive do provide clarity on those aspects. They require the opinion to be issued within three months, and to be sent to the requester as well as to the regulatory authority whose decision was under review.

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Given the absence of legally binding effects,501 the opinion cannot be challenged before the Board of Appeal or the Court of Justice, nor can it be directly enforced vis-a-vis the national regulatory authority concerned. Nevertheless, Article 6(6) aims to ensure that it does not remain unnoticed if the regulatory authority concerned would ignore ACER’s finding of non-compliance. It points to a followup process in which the Commission would take the lead role in enforcing potential non-compliance. To that end, ACER has to inform the Commission and the respective Member State if the regulatory authority does not comply with its opinion within four months. It is then up to the Commission and the Member State to take any further measures. For instance, the Commission may launch infringement proceedings under Article 258 TFEU if it considers the action or inaction of the national regulatory authority as against Union law.

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In that regard, Article 63(5) to (8) of the Electricity Directive and Article 43(5) to (8) of the Gas Directive set out a more specific process of how the Commission has to proceed if, following a non-compliance notice by ACER, the Commission finds that the decision raises serious doubts as to its compatibility and decides to examine the case further.

501 See case T-671/15, E-Control v ACER, where the Court, with regard to the previous version of Article 6(5) of the ACER Regulation, i.e. Article 7(4) of Regulation (EC) No 713/2009, held that this provision constitutes a legal basis for the adoption of non-binding opinions and that the contested opinion, given its wording, content and context, is indeed an opinion, non-binding and not a challengeable act under Article 263 TFEU (ECLI:EU:T:2016:626, esp. paras. 59 and 92).

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5.3.3 Advice on the application of Guidelines Article 6(7) of the ACER Regulation assigns an advisory role to ACER in cases where national regulatory authorities have difficulties with the application of network codes and guidelines adopted according to the Electricity and Gas Directives or the Electricity and Gas Regulations.

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Article 6 ACER Regulation “7. Where, in a specific case, a regulatory authority encounters difficulties with the application of the network codes and guidelines referred to in Regulation (EU) 2019/943, Regulation (EC) No 715/2009, Directive (EU) 2019/944 or Directive 2009/73/EC it may request ACER to provide an opinion. ACER shall deliver its opinion, after consulting the Commission, within three months of the date of receipt of such a request.”

The reference to ‘difficulties with the application of network codes and guidelines’ suggests that ACER can be asked for an interpretation of provisions of the Guidelines. Unlike under Article 6(5) of the ACER Regulation, the other provisions of the Electricity and Gas Directives, and of the Electricity and Gas Regulations, are not mentioned as the subject-matter of such interpretation. Nevertheless, this should not prevent considering also these provisions where they are relevant for the network codes and guidelines as the latter need to be interpreted in consistency with the legal framework on which they are based.

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ACER can issue an opinion only upon request of a national regulatory authority, and only with regard to a specific case. As a consequence, ACER cannot adopt an interpretative opinion at the request of market participants (even if they are parties to proceedings before a national regulatory authority), or on its own initiative. Nor can ACER provide an opinion when the regulatory authority’s request was on an abstract basis and unrelated to a concrete case.

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Before issuing its opinion, ACER must consult the Commission. ACER is not obliged to follow the view expressed by the Commission, though. In addition, it may be appropriate and necessary to consult also on the specificities of the case, in particular the facts to which the relevant legal provision is to apply.

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The opinion needs to be delivered within three months after receipt of the national regulatory authority’s request. ACER’s opinion is not binding.

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5.3.4 Operational assistance in REMIT investigations 7.103

Regulatory authorities are responsible for ensuring that the rules prohibiting abusive practices affecting wholesale energy markets under REMIT are enforced. To do so, they must be in a position to effectively investigate potential abusive practices. Therefore, and since market abuse on wholesale energy markets often affects more than one Member State, ACER has been assigned a role in ensuring that investigations of potential REMIT breaches are carried out in an efficient and coherent way, and has been enabled to request cooperation and to coordinate investigation.

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It is this context, to which Article 6(8) of the ACER Regulation refers: Article 6 ACER Regulation “8. Upon the request of a regulatory authority, ACER may provide operational assistance to that regulatory authority regarding investigations pursuant to Regulation (EU) No 1227/2011.”

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More specifically, the second subparagraph of Article 16(2) of REMIT provides that a national regulatory authority may request ACER to take certain actions if that authority suspects that acts affecting wholesale energy markets or the price of wholesale energy products in that Member State are being carried out in another Member State.

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To that end, in accordance with Article 16(4) of REMIT, ACER can request national regulatory authorities to supply any information related to the suspected breach, to commence an investigation of the suspected breach, and to take appropriate action to remedy any breach found, and it can establish and coordinate an investigatory group consisting of representatives of the concerned national regulatory authorities (and possibly also of other relevant authorities) to investigate a potential breach.

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Where ACER has reasonable grounds to suspect that the suspected acts constitute market abuse within the meaning of Directive 2003/6/EC and affect financial instruments subject to Article 9 of that Directive, ACER has to inform the European Securities and Markets Authority (ESMA) and the competent financial authority according to Article 16(3) of REMIT.

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5.3.5 Reduction of cross-zonal capacities or deviation from ­coordinated actions Cross-zonal capacities are calculated by RCCs in a coordinated way on the basis of data provided by the TSOs.502 Where the calculation does not result in capacity equal to or above the minimum capacities required by the Electricity Regulation,503 RCCs should consider all available remedial actions to further increase capacity up to the minimum capacities.504 Allocating reduced capacity or curtailing allocated capacity should only occur as last resort measures.505 Accordingly, it should be for reasons of operational security when RCCs reduce cross-zonal capacities or when TSOs deviate from the coordinated capacity calculation during the validation of the latter’s outcome.506

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To prevent abuse of last resort measures and to ensure that cross-zonal capacities are not limited to solve congestion inside a bidding zone,507 Article 16(3) of the Electricity Regulation requires the RCCs’ ‘coordinated actions reducing the cross-zonal capacities’ and the TSOs’ ‘[deviations] from coordinated actions in respect of coordinated capacity calculation and coordinated security analysis’ to be monitored. Unjustified reductions or deviations are enforced by the national regulatory authorities.

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To support the national regulatory authorities, ACER participates in the monitoring, as laid down in Article 6(9) of the ACER Regulation and, more specifically, in the third subparagraph of Article 16(3) of the Electricity Regulation:

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Article 6 ACER Regulation “9. ACER shall submit opinions to the relevant regulatory authority and to the Commission pursuant to Article 16(3) of Regulation (EU) 2019/943.”

Article 16 Electricity Regulation “3. […] By  3 months after the entry into operation of the regional coordination centres pursuant to Article  35(2) of this Regulation and every three months 502 503 504 505 506

See Article 16(3) and Article 37(1)(a) of the Electricity Regulation. See Article 15(2) and Article 16(8) of the Electricity Regulation. Recital 20 and Article 16(3) of the Electricity Regulation. Article 16(2) and (3) of the Electricity Regulation. Recital 21 and Article 16(3) of the Electricity Regulation; Article 26(3) of Commission Regulation (EU) 2015/1222. 507 Recital 21 of the Electricity Regulation.

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According to the legal text, the RCCs report on ‘any reduction of capacity or deviation from coordinated actions to the second subparagraph’ and recommend ‘ how to avoid such deviations in the future’, and ACER assesses whether ‘the prerequisites for a deviation pursuant to this paragraph are […] fulfilled or are of a structural nature’. Thus, the reporting obligation of RCCs refers to both kind of incidences under the second subparagraph of Article 16(3) of the Electricity Regulation, namely capacity reductions by the RCCs and deviations by TSOs, while ACER’s assessment concerns ‘deviations’. Comparing the wording of those obligations, one could wonder whether the term ‘deviations’ was meant to exclude capacity reductions by RCCs from ACER’s assessment. In fact, the last sentence of the third subparagraph of Article 16(3) of the Electricity Regulation, which holds RCCs liable for breach of the prerequisites of a deviation, confirms that the term ‘deviation’ can indeed be meant in a generic sense, as a departure from the capacity calculation and allocation standard. In addition, the purpose of the monitoring, to ensure cross-zonal capacities be not reduced excessively or because of internal congestions, is relevant also for reductions of capacity by RCCs. This context suggests that ACER’s assessment covers reductions of cross-zonal capacities by RCCs as well as deviations from coordinated actions in respect of coordinated capacity calculation and coordinated security analysis by TSOs.

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ACER has to submit its opinion only where it finds that the prerequisites for the deviations were not fulfilled or that structural congestions were the cause of the deviations. A specific time limit for submitting the opinion to the regulatory authorities and the Commission has not been set.

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5.3.6 Decisions on technical issues Article 6 ACER Regulation “1. ACER shall adopt individual decisions on technical issues where those decisions are provided for in Regulation (EU) 2019/943, Regulation (EC) No 715/2009, Directive (EU) 2019/944 or Directive 2009/73/EC.”

Article 6(1) of the ACER Regulation tasks ACER with decision-making on technical issues referred to in the Electricity and Gas Directives and the Electricity and Gas Regulations. As such, it does not itself establish any decision-making competence, instead this competence originates from the relevant provisions in the Electricity and Gas Directives and the Electricity and Gas Regulations.

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The Electricity and Gas Directives and the Electricity and Gas Regulations specify several cases in which ACER has the power to adopt decisions. Among those cases, however, only two are not listed in the ACER Regulation and do not refer to the general mediation and settlement competence under Article 6(10) of the ACER Regulation. This is, first, the approval of new tasks for RCCs according to Article 37(5) of the Electricity Regulation and, second, the approval of compliance programmes for joint undertakings through which vertically integrated TSOs cooperate at regional level according to Article 7(4) of the Gas Directive. Even for these two instances, one may wonder to which extent they can qualify as ‘technical issues’.

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Against that background, Article 6(1) is currently of little relevance in practice.

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5.3.7 Decisions on regulatory issues of cross-border trade or cross-border system security From the outset, ACER had a decision-making role in cross-border issues involving more than one regulatory authority, substituting the regulatory authorities in case they could not agree on the decision to be adopted by them or in case they jointly requested ACER to decide.508

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This concept of subsidiary decision-making has been preserved also under the ACER Regulation. In fact, the subsidiary decision making role has been recognised as a core function of ACER, Article 1(2) of the ACER Regulation referring to mediation and settlement of disagreements between regulatory authori-

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508 Article 8(1) of Regulation (EC) No 713/2009.

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ties and Article 2(d) of the ACER Regulation pointing to arbitration between regulators, even though such terminology puts emphasis on the controversial issues and neglects the voluntarily referred ones. The central rules are in Article 6(10) to (13) of the ACER Regulation, establishing the general framework for the operation of the subsidiary decision-making mechanism. Article 6 ACER Regulation “10. ACER shall be competent to adopt individual decisions on regulatory issues having effects on cross-border trade or cross-border system security which require a joint decision by at least two regulatory authorities, where such competences have been conferred on the regulatory authorities under one of the following legal acts: (a) a legislative act of the Union adopted under the ordinary legislative procedure; (b) network codes and guidelines adopted before 4 July 2019 and subsequent revisions of those network codes and guidelines; or (c) network codes and guidelines adopted as implementing acts pursuant to Article 5 of Regulation (EU) No 182/2011.

ACER shall be competent to adopt individual decisions as specified in the first subparagraph in the following situations: (a) where the competent regulatory authorities have not been able to reach an agreement within six months of referral of the case to the last of those regulatory authorities, or within four months in cases under Article 4(7) of this Regulation or under point (c) of Article (59)(1) or point (f ) of Article 62(1) of Directive (EU) 2019/944; or (b) on the basis of a joint request from the competent regulatory authorities.



The competent regulatory authorities may jointly request that the period referred to in point (a) of the second subparagraph of this paragraph be extended by a period of up to six months, except in cases under Article 4(7) of this Regulation or under point (c) of Article 59(1) or point (f ) of Article 62(1) of Directive (EU) 2019/944.

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Where the competences to decide on cross-border issues referred to in the first subparagraph have been conferred on the regulatory authorities in new network codes or guidelines adopted as delegated acts after 4 July 2019, ACER shall only be competent on a voluntary basis pursuant to point (b) of the second subparagraph of this paragraph, upon a request from at least 60 % of the competent regulatory authorities. Where only two regulatory authorities are involved, either one may refer the case to ACER.



By 31 October 2023, and every three years thereafter, the Commission shall submit a report to the European Parliament and to the Council on the possible need to further enhance ACER’s involvement in solving cases of disagreement between regulatory authorities concerning joint decisions on matters for which the competences were conferred on those regulatory authorities by a delegated act after 4 July 2019. Where appropriate, the report shall be accompanied by a legislative proposal to modify such powers or to transfer the necessary powers to ACER.

11. When preparing its decision pursuant to paragraph 10, ACER shall consult the regulatory authorities and transmission system operators concerned and shall be informed of the proposals and observations of all the transmission system operators concerned. 12. Where a case has been referred to ACER under paragraph 10, ACER: (a) shall issue a decision within six months of the date of referral, or within four months thereof in cases pursuant to Article 4(7) of this Regulation or point (c) of Article (59)(1) or point (f ) of Article 62(1) of Directive (EU) 2019/944; and (b) may, if necessary, provide an interim decision to ensure that security of supply or operational security is protected. 13. Where the regulatory issues referred to in paragraph 10 include exemptions within the meaning of Article 63 of Regulation (EU) 2019/943, or Article 36 of Directive 2009/73/EC, the deadlines provided for in this Regulation shall not be cumulative with the deadlines provided for in those provisions.”

Article 6(10) establishes a competence for ACER to decide on regulatory issues having effects on cross-border trade or cross-border system security. It bases this competence on joint competences of at least two regulatory authorities, which are primarily competent, and it defines under which conditions the competence to decide must accrue to ACER and under which it can be delegated. 357

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The relevant regulatory issues, which have effects on cross-border trade or crossborder system security and on which regulatory authorities have to decide jointly, follow essentially from other legal provisions than Article 6 of the ACER Regulation. In that regard, the first and fourth subparagraph of Article 6(10) distinguish four categories of relevant legal acts: legislative acts of the Union adopted under the ordinary legislative procedure, network codes and guidelines adopted before 4 July 2019 and subsequent revisions of those network codes and guidelines, and network codes and guidelines adopted after 4 July 2019 either as implementing acts according to Article 5 of Regulation (EU) No 182/2011 or as delegated acts. Thus, the regulatory authorities’ competence for a particular case needs to derive from Union law, ACER cannot be assigned purely national competencies.

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Explicit examples for regulatory issues in Union legislation adopted under the ordinary legislative procedure are the identification of non-compliance of PanEuropean and regional entities under Article 4(7) of the ACER Regulation or Article (59)(1)(c) and Article 62(1)(f ) of the Electricity Directive, and the derogation from the minimum interconnection capacity to be made available under Article 16(9) of the Electricity Regulation; those provisions expressly refer to Article 6(10) and the decision-making procedure defined therein.

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Furthermore, Article 5(3) and (4) of the ACER Regulation provides for joint competences of regulatory authorities and subsidiary competences of ACER with regard to the approval of terms and conditions or methodologies for implementing network codes or guidelines and in that regard refers also to Article 6(10). Those approval competences are, however, framed in abstract terms, referring to situations where corresponding competences have been granted by a specific legal act of the four categories distinguished in Article 6(10). Given this structure, the approval competences addressed by Article 5(3) and (4) of the ACER Regulation do not genuinely originate from the ordinary legislative procedure.

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Provisions in Union law adopted under the ordinary legislative procedure which do not refer to Article 6(10) but do follow the concept of subsidiary competence concern the exemption of new interconnectors and new infrastructure under, respectively, Article 63(5) of the Electricity Regulation and Article 36(4) of the Gas Directive, the cross-border allocation of investment cost for projects of common interest under Article 12(6) of the TEN-E Regulation, and the approval of methodologies and assumptions for the bidding zone review and alternative bidding zone configurations under Article 14(5) of the Electricity Regulation. 358

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Those provisions do also specify the conditions under which ACER becomes competent and has to decide, thereby partly deviating from Article 6(10). To the extent they conflict with Article 6(10), they prevail as the more specific rules. The deviations leave in fact hardly room for a genuine application of Article 6(10).

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Typical examples of regulatory issues in network codes and guidelines are the approval of terms and conditions or methodologies implementing requirements of those network codes and guidelines and applying supra-nationally. For those Pan-European and regional terms and conditions or methodologies, Article 5(2), (3) and (4) of the ACER Regulation provides for a special competence regime, partly referring to Article 6(10).509 To the extent covered by this special competence regime, the Pan-European or regional terms and conditions or methodologies are to be approved under this specific framework and not directly under Article 6(10). This context suggests that the regulatory issues under network codes or guidelines to which Article 6(10) applies directly will in principle concern other matters than terms and conditions or methodologies.

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The conferral of the decision-making competence from the regulatory authorities to ACER can be mandatory or voluntary, depending on the nature of the legal act from which the regulatory issue and the regulatory authorities’ competences arise.

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The distinction regarding the relevant legal acts is the result of concerns regarding Member States’ involvement in the adoption of new legal acts defining new decision-making issues for which ACER is or might be responsible.510 The concerns targeted in particular the assignment of new issues and competences through network codes and guidelines adopted as delegated acts. To that end, delegated acts have been treated differently: if they concern revisions of network codes or guidelines existing on 4 July 2019 and introduce only ‘amendments which are necessary to take into account the evolution of the market without substantially changing those network codes and guidelines or creating new com‑ petences of ACER’, 511 they are caught by point (b) of the first subparagraph of Article 6(10);512 if they establish new network codes and guidelines after that date, they fall under the special rule of the fourth subparagraph of Article 6(10).

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509 See below section 5.6.6. 510 See Schütz, ‘A reinforced governance of the European electricity market’, in Jones/Ermacora (ed.), EU En‑ ergy Law XIII, 2020 ed., paras. 7.67 et seq. 511 Recital 17 of the ACER Regulation. 512 See Schütz, ‘A reinforced governance of the European electricity market’, in Jones/Ermacora (ed.), EU En‑ ergy Law XIII, 2020 ed., para. 7.68.

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Thus, where Union legislation adopted under the ordinary legislative procedure, network codes and guidelines adopted before 4 July 2019 and their subsequent revisions, or network codes and guidelines adopted as implementing acts according to Article 5 of Regulation (EU) No 182/2011 are at stake, both a mandatory and a voluntary conferral can apply. Where network codes and guidelines adopted as delegated acts after 4 July 2019 are at issue, only a voluntary conferral, which differs from the one for the other categories of legal acts, is available.

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The mandatory conferral of competence is governed by point (a) of the second subparagraph of Article 6(10). The regulatory authorities lose the decisionmaking competence to ACER if they could not reach an agreement within a certain period of time on how to decide the case brought before them. This period is usually six months with the possibility of an extension by up to additional six months upon a joint request of the regulatory authorities; in a case of noncompliance according to Article 4(7) of the ACER Regulation as well as Article (59)(1)(c) and Article 62(1)(f ) of the Electricity Directive, this period is only four months, without an extension being possible. The six-month period begins once the last of the relevant regulatory authorities received the case; the fourmonth period starts either once the last relevant regulatory authority received a reasoned opinion of ACER according to Article 4(7) of the ACER Regulation or, in the absence thereof, once the relevant regulatory authorities started their consultations for identifying non-compliance according to Article (59)(1)(c) or Article 62(1)(f ) of the Electricity Directive.

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The voluntary conferral of competence is addressed by point (b) of the second subparagraph and by the fourth subparagraph of Article 6(10). Regardless of any disagreement, the regulatory authorities may renounce their decision-making competence and refer the case to ACER for a decision. In principle, this requires, according to point (b) of the second subparagraph of Article 6(10), a joint request of the competent regulatory authorities, i.e. all of them have to agree to refer the case to ACER and to ask ACER for a decision. As an exemption to this rule, unanimity is not required for regulatory issues under new network codes or guidelines adopted as delegated acts after 4 July 2019. For those issues, it is sufficient, according to the fourth subparagraph of Article 6(10), that the request is supported by at least 60 % of the competent regulatory authorities, or, where only two regulatory authorities are competent, by one of them.

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hibit a decision by ACER.513 Moreover, the mandatory conferral prevents that the regulatory authorities’ decision-making process reaches a deadlock. Conversely, the voluntarily conferral does not address this risk, which could be particularly critical for regulatory issues under new network codes and guidelines adopted as delegated acts after 4 July 2019: in case of disagreement there might not be the required majority, or the will, to refer the case to ACER in accordance with the fourth subparagraph of Article 6(10). Article 6(11) sets out the key principles for ACER’s process. Typically, the underlying proceedings before the regulatory authorities are initiated by TSOs, so that the TSOs’ observations should be made available to ACER and ACER should consult the relevant TSOs and the concerned regulatory authorities before taking its decision. The same principles should apply per analogy if other parties are involved, e.g. NEMOs submitting a proposal for approval, given that the rationale of Article 6(11) applies equally to those parties. In any case, Article 14(5) and (6) of the ACER Regulation establishes a more detailed procedural framework and requires to follow specific rules of procedure, ensuring in particular that any party concerned is heard.

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In accordance with Article 6(12)(a), ACER has to take its decision in general within six months, i.e. within the same amount of time initially available to the regulatory authorities for reaching an agreement. A shorter period, namely four months, applies for decisions in matters of non-compliance of Pan-European and regional entities according to Article 4(7) of the ACER Regulation and Article (59)(1)(c) or Article 62(1)(f ) of the Electricity Directive.514 The decisionmaking period starts with the referral of the case to ACER under Article 6(10), i.e. when the regulatory authorities referred the case to ACER because of their disagreement or with their joint request. An extension of ACER’s decision-­ making period has not been provided for.515

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To ensure protection of security of supply or of operational security, ACER may provide an interim decision according to Article 6(12)(b).

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513 See Schütz, ‘A reinforced governance of the European electricity market’, in Jones/Ermacora (ed.), EU En‑ ergy Law XIII, 2020 ed., para. 7.72. 514 While not expressly related to Article 6(10) of the ACER Regulation, but conceptually framed as a subsidiary competence, ACER has to decide on an investment request according to Article 12(6) of the TEN-E Regulation and on the methodology and assumptions for a bidding zone review as well as the alternative bidding zone configurations according to Article 14(5) of the Electricity Regulation within only three months. 515 Remarkably, according to the third subparagraph of Article 12(6) of the TEN-E Regulation the threemonth decision making period can be extended in case ACER seeks further information by an additional period of two months, which begins on the day following receipt of the complete information.

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5.4 Regional coordination centres 7.134

Commission Regulation (EU) 2017/1485 of 2 August 2017 establishing a guideline on electricity transmission system operation (System Operation Guideline)516 furthered the regional coordination and integration of system operation by formalising the coordination between TSOs. It required them to participate in regional security coordinators, established upon a proposal of the TSOs of a capacity calculation region and with the approval of the national regulatory authorities in those regions, however without imposing a specific regulatory oversight.517

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To further enhance this coordination, the Electricity Regulation established a framework under which the regional security coordinators are replaced by RCCs and under which this coordination is put under direct regulatory oversight. In this oversight ACER is involved given that the RCCs cover several Member States and such coverage calls for supra-national monitoring.518

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In addition to Article 4(6) to (8) of the ACER Regulation, which defines ACER’s part in overseeing the RCCs’ compliance with their obligations under Union law, Article 7 of the ACER Regulation summarises ACER’s responsibilities with regard to RCCs, based on the specific tasks set out in the Electricity Regulation. Article 7 ACER Regulation “1. ACER, in close cooperation with the regulatory authorities and the ENTSO for Electricity, shall monitor and analyse the performance of regional coordination centres, taking into account the reports provided for in Article 46(3) of Regulation (EU) 2019/943. 2. To carry out the tasks referred to in paragraph 1 in an efficient and expeditious manner, ACER shall in particular: (a) decide on the configuration of system operation regions pursuant to Article 36(3) and (4) and issue approvals pursuant to Article 37(2) of Regulation (EU) 2019/943;

516 OJ L 220/1, 25.8.2017. 517 Articles 76 and 77 of the System Operation Guideline. 518 Recital 8 of the ACER Regulation.

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Article 7 distinguishes between the principal task of monitoring and analysing the RCCs’ performance (para. 1) and the tasks of deciding on the configuration of system operations regions as well as on new assignments to the RCCs, of requesting information from them, and of issuing opinions and recommendations (para. 2). From a systematic point of view, it is the geographical scope of the RCCs that first needs to be defined, by determining the configuration of system operation regions, before those centres can be established according to Article 35 of the Electricity Regulation; following their establishment, ACER can monitor and analyse the RCCs and in that context request information and issue opinions or recommendations.

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5.4.1 Decision on the geographical scope of regional coordination ­centres RCCs cover geographically system operation regions and are established upon a proposal of all TSOs of a system operation region and with the approval of the regulatory authorities of the system operation region, in accordance with Article 35(1) and (2) of the Electricity Regulation. To that end, ENTSO-E makes a proposal for the configuration of the system operation regions, and ACER decides on it. Article 36(1) and (2) of the Electricity Regulation prescribes the requirements for this proposal and the configuration of the system operation regions, Article 36(3) and (4) of the Electricity Regulation frames the decisionmaking procedure of ACER.

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According to Article 36(1) of the Electricity Regulation, ENTSO-E had to develop a proposal specifying which TSOs, bidding zones, bidding zone borders, capacity calculation regions and outage coordination regions are covered by each of the system operation regions and submit it for approval to ACER by 5 January 2020.

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For ACER’s decision on proposed system operation regions, Article 36(3) and (4) specifies the procedure as follows:

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Article 36 Electricity Regulation “3. Within three months of receipt of the proposal in paragraph 1, ACER shall either approve the proposal defining the system operation regions or propose amendments. In the latter case, ACER shall consult the ENTSO for Electricity before adopting the amendments. The adopted proposal shall be published on ACER’s website. 4. The relevant transmission system operators may submit a proposal to ACER for the amendment of system operation regions defined pursuant to paragraph 1. The process set out in paragraph 3 shall apply.”

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Article 36(3) defines a procedure which applies not only to the first decision on the configuration of system operations regions, but according to Article 36(4) also to any subsequent decision amending the initial configuration. In either case, ACER is not forced to adhere to the proposal, but can amend the proposal in order to approve it (or all the more ask for the submission of amendments of the pending proposal). It has to adopt its decision within three months.

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In that regard it is to note that the decision-making procedures under Article 36(3) and (4) are the same, though they are initiated by different parties: the initial configuration is proposed by ENTSO-E, amendments thereto are suggested by the relevant system operators.

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Remarkably, ACER has not been empowered to prompt changes of the approved configuration of system operation regions. Instead, Article 36(4) assigns such initiative only to the relevant TSOs.

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Article 37(1) in conjunction with Annex I of the Electricity Regulation defines the minimum tasks of regional relevance which each RCC should carry out in the entire system operation region where it is established. Where those tasks are not already covered by network codes or guidelines, their execution is conditional upon an approval procedure involving ACER, specified in Article 37(5) of the Electricity Regulation. Similarly, the assignment of additional advisory tasks is subject to a procedure requiring the approval by ACER in accordance with Article 37(2) of the Electricity Regulation.

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Article 37 Electricity Regulation “2. On the basis of a proposal by the Commission or a Member State, the Committee established by Article 68 of Directive (EU) 2019/944 shall issue an opinion on the assignment of new advisory tasks to regional coordination centres. Where that Committee issues a favourable opinion on the assignment of new advisory tasks, the regional coordination centres shall carry out those tasks on the basis of a proposal developed by the ENTSO for Electricity and approved by ACER in accordance with the procedure set out in Article 27. 5. For the tasks set out in this Article and not already covered by the relevant network codes or guidelines, the ENTSO for Electricity shall develop a proposal in accordance with the procedure set out in Article 27. Regional coordination centres shall carry out those tasks on the basis of the proposal following its approval by ACER.”

In both approval proceedings, ENTSO-E has to make a proposal and ACER has to decide on it in accordance with Article 27 of the Electricity Regulation. It follows from of Article 27 of the Electricity Regulation that ACER has to take its decision within three months, and that it is not bound by ENTSO-E’s proposal but can amend it before approving it.519

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5.4.3 Monitoring The performance of RCCs is subject to a multiple monitoring mechanism. First, according to Article 46(1), (3) and (4) of the Electricity Regulation, RCCs themselves have to monitor their operational performance, the implementation and outcome of the coordinated actions and recommendations issued by them and the effectiveness and efficiency of the tasks for which they are responsible, and they have to report on the outcome of this monitoring and the shortcomings found to, inter alia, ENTSO-E, the regulatory authorities in the system operation region and ACER. Second, according to Article 30(2) of the Electricity Regulation, ENTSO-E should identify any shortcomings regarding the performance of RCCs and report them to ACER. Third, according to Article 62(1)(g) of the Electricity Directive, the regulatory authorities of the relevant system operation region should, in close coordination with each other, monitor the performance of system coordination and report annually to ACER in accordance with Article 46 of the Electricity Regulation. Fourth, according to Article 7(1) of the ACER Regulation, ACER has to monitor and analyse the performance of RCCs. 519 See also below section 5.7.1.

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The performance to be monitored and analysed by ACER has not been predefined and, thus, needs to be viewed in the context of the RCCs’ legal tasks as well as of their purpose of coordinating TSOs and ensuring the efficient, secure and reliable operation of the interconnected transmission system. Relevant parameters will be effectiveness and efficiency. Relevant information will be provided in the first place directly by the RCCs, through their monitoring reports and replies to specific requests for information.

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Neither the ACER Regulation nor the Electricity Regulation set a specific time and format for ACER to carry out and complete its monitoring and analysis. The fact that the RCCs and the relevant regulatory authorities should report the findings of their monitoring activities annually, according to Article 46(3) of the Electricity Regulation and Article 62(1)(g) of the Electricity Directive respectively, suggests that ACER’s monitoring cycle should be at least also annual.

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Point (b) of Article 7(2) establishes the legal basis for ACER to obtain from the RCCs the information needed to effectively monitor and analyse their performance.

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If the request takes the form of a decision in accordance with Article 2(d) of the ACER Regulation, it requires a favourable opinion of the Board of Regulators according to Article 24(2) of the ACER Regulation.

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Points (c) and (d) of Article 7(2) provide a specific legal basis for ACER to issue opinions and recommendations concerning the activities of RCCs.

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On the one hand, opinions and recommendations can be addressed to the European Parliament, the Council and the Commission, which allows to bring forward policy issues and proposals for legislative improvements. On the other hand, they can be directed to the RCCs, thereby targeting implementation and regulatory issues immediately. A case for a recommendation specifically considered in the Electricity Regulation concerns incidents where the threshold has been surpassed above which the impact of actions of one or more TSOs in the emergency, blackout or restoration states is deemed significant for other interconnected transmission system: according to point 6.2 of Annex I of the Electricity Regulation ACER may issue recommendations aiming to prevent similar incidents in future. 366

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5.5 Nominated electricity market operators Commission Regulation (EU) 2015/1222 establishing a guideline on capacity allocation and congestion management (CACM Regulation) created an institutional and governance framework for power exchanges by requiring the designation of market operators (NEMOs) carrying out tasks related to single day-ahead or single intraday coupling and by subjecting them to regulatory oversight. Given the Union-wide dimension of the NEMOs’ functions, the CACM Regulation integrated ACER into the regulatory framework with monitoring the NEMOs’ progress in establishing and performing the market coupling operator functions, in particular their effectiveness and efficiency, and with approving their proposals for terms and conditions or methodologies where national regulatory authorities could not agree or wanted ACER to decide.520

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Given the Union-wide dimension of the NEMOs’ functions,521 updated by requirements under the Electricity Regulation,522 Article 8 of the ACER Regulation consolidates ACER’s regulatory oversight of NEMOs.

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Article 8 ACER Regulation “In order to ensure that nominated electricity market operators carry out their functions under the Regulation (EU) 2019/943 and Commission Regulation (EU) 2015/1222 (21), ACER shall: (a) monitor the nominated electricity market operators’ progress in establishing the functions under Regulation (EU) 2015/1222; (b) issue recommendations to the Commission in accordance with Article 7(5) of Regulation (EU) 2015/1222; (c) request information from nominated electricity market operators where appropriate.”

Article 8 identifies three types of ACER activities vis-à-vis the NEMOs, namely monitoring, recommending, and requesting information, which are partly predefined by Article 7(5) of the CACM Regulation.

520 Articles 7(5) and 9(11) of the CACM Regulation. 521 Recital 12 of the ACER Regulation. 522 Articles 7 et seq. of the Electricity Regulation.

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Article 7 Regulation 2015/1222 “5. The Agency shall monitor NEMOs’ progress in establishing and performing the MCO functions, in particular regarding the contractual and regulatory framework and regarding technical preparedness to fulfil the MCO functions. By 12 months after entry into force of this Regulation, the Agency shall report to the Commission whether progress in establishing and performing single day-ahead or intraday coupling is satisfactory.

The Agency may assess the effectiveness and efficiency of establishment and performance of the MCO function at any time. If that assessment demonstrates that the requirements are not fulfilled, the Agency may recommend to the Commission any further measures needed for timely effective and efficient delivery of single day-ahead and intraday coupling.”

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The monitoring under point (a) of Article 8 of the ACER Regulation covers all functions of NEMOs under the CACM Regulation. Those functions follow notably from Article 7 of that Regulation, which defines the NEMOs’ tasks. Most notably, the NEMOs have to implement the market coupling operator (MCO) functions523 which, according to Article 7(2) of the CACM Regulation, should include the following: (i) developing and maintaining the algorithms, systems and procedures for single day-ahead and intraday coupling, (ii) processing input data on cross-zonal capacity and allocation constraints provided by coordinated capacity calculators, (iii)operating the price coupling and continuous trading matching algorithms, and (iv) validating and sending single day-ahead and intraday coupling results to the NEMOs. In accordance with Article 7(5) of the CACM Regulation, ACER should monitor the MCO functions in particular with regard to the contractual and regulatory framework, the technical preparedness, and the effectiveness and efficiency of their establishment and performance.

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Point (c) of Article 8 of the ACER Regulation enables ACER to obtain information directly from the NEMOs where appropriate. Under which circumstances such request can be considered as appropriate seems not obvious from 523 According to Article 2(30) of the CACM Regulation, ‘market coupling operator function’ means the task of matching orders from the day-ahead and intraday markets for different bidding zones and simultaneously allocating cross-zonal capacities.

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the legal text. The wording of the first sentence of Article 8 seems to suggest that the request and the requested information are necessary to ensure that the NEMOs carry out their functions under the Electricity Regulation and the CACM Regulation. Yet, neither the request nor the requested information can achieve this objective on their own. It is rather through its monitoring and its recommendations that ACER can contribute to ensuring NEMOs’ compliance with their duties. Accordingly, where ACER needs information from NEMOs to effectively monitor them under point (b) or issue recommendations under point (c), a request for such information is certainly appropriate. If such request for information takes the form of a decision in accordance with Article 2(d) of the ACER Regulation, it requires the Board of Regulators’ favourable opinion according to Article 24(2) of the ACER Regulation. By contrast, a decision requesting information from NEMOs under Article 3(2) of the ACER Regulation is not subject to such favourable opinion of the Board of Regulators.

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5.5.3 Recommendations The recommendations that ACER can issue to the Commission under point (b) are determined by Article 7(5) of the CACM Regulation, setting their prerequisites and subject-matter. According to that provision, if ACER’s assessment shows that the effectiveness and efficiency of the establishment and performance of the MCO function is not fulfilled, ACER can recommend measures for the timely effective and efficient delivery of the single day-ahead and intraday coupling.

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5.6 Development and implementation of network codes and ­guidelines A critical tool for the integration of the markets in electricity and natural gas are network codes and guidelines. They provide for ‘the stepwise implementation and further refinement of common regional and Union-wide rules’.524 Those instruments are typically intended to establish binding, generally applicable rules. Given this nature, ACER was not granted any binding decision-making power for those rules. Still, ACER participates in the development of network codes and guidelines.

524 Recital 19 of the Electricity Regulation.

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Article 5 ACER Regulation “1. ACER shall participate in the development of network codes in accordance with Article 59 of Regulation (EU) 2019/943 and Article 6 of Regulation (EC) No 715/2009 and of guidelines in accordance with Article 61(6) of Regulation (EU) 2019/943[.]”

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With regard to network codes, ACER is responsible mainly for drafting framework guidelines, which form the basis for network codes envisaged for adoption as Union law acts, for reviewing the proposals for such network codes prepared by the ENTSOs on the basis of the framework guidelines, and for submitting the proposals to the Commission for adoption.525 ACER also reviews those network rules proposed by the ENTSOs which are not meant to be adopted as Union law acts.526 Further, ACER deals with proposals for modifications of binding network codes527 and monitors the implementation of network codes and non-binding network rules.528

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For guidelines, ACER plays a less prominent role, being one of the parties which the Commission needs to consult before adopting or amending guidelines and which can provide its views on the Commission’s intentions.529

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ACER’s first important contribution to the development of network codes is to develop the underlying non-binding framework guidelines in an area identified by the Commission as a priority matter.530 Article 5 ACER Regulation “1. ACER […] shall in particular: (a) submit non-binding framework guidelines to the Commission where it is requested to do so under Article 59(4) of Regulation (EU) 2019/943 or Ar525 526 527 528 529 530

Article 59 of the Electricity Regulation and Articles 6 and 8(1) of the Gas Regulation. Article 59(15) of the Electricity Regulation and Article 8(2) of the Gas Regulation. Article 60 of the Electricity Regulation and Article 7 of the Gas Regulation. Article 32(1) of the Electricity Regulation and Article 9(1) of the Gas Regulation. Article 61(6) of the Electricity Regulation and Articles 6(12) and 23(1) of the Gas Regulation. According to Article 59(3) of the Electricity Regulation, the Commission establishes every three years a list of priority areas in which network codes are to be established, according to Article 6(1) of the Gas Regulation it does so each year. Before establishing this priority list the Commission has to consult ACER, the ENTSOs and the relevant stakeholders.

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Chapter 7 The EU Agency for the Cooperation of Energy Regulators (ACER) Ernst Tremmel ticle 6(2) of Regulation (EC) No 715/2009. ACER shall review the framework guidelines and re-submit them to the Commission where requested to do so under Article 59(7) of Regulation (EU) 2019/943 or Article 6(4) of Regulation (EC) No 715/2009;”

The process for developing framework guidelines is set out in Article 59(4) to (8) of the Electricity Regulation, and similarly in Article 6(2) to (5) of the Gas Regulation. Article 59 Electricity Regulation531 “4. The Commission shall request ACER to submit to it within a reasonable period not exceeding six months of receipt of the Commission’s request non-binding framework guidelines setting out clear and objective principles for the development of network codes relating to the areas identified in the priority list (framework guideline). The request of the Commission may include conditions which the framework guideline shall address. Each framework guideline shall contribute to market integration, non-discrimination, effective competition, and the efficient functioning of the market. Upon a reasoned request from ACER, the Commission may extend the period for submitting the guidelines. 5. ACER shall consult the ENTSO for Electricity, the EU DSO entity, and the other relevant stakeholders in regard to the framework guideline, during a period of no less than two months, in an open and transparent manner. 6. ACER shall submit a non-binding framework guideline to the Commission where requested to do so under paragraph 4. 7. If the Commission considers that the framework guideline does not contribute to market integration, non-discrimination, effective competition and the efficient functioning of the market, it may request ACER to review the framework guideline within a reasonable period and resubmit it to the Commission. 8. If ACER fails to submit or resubmit a framework guideline within the period set by the Commission under paragraph 4 or 7, the Commission shall develop the framework guideline in question.”

531 See also the mirror provisions for gas in Article 6(2) to (5) of the Gas Regulation.

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As exemplified by Article 59 of the Electricity Regulation, ACER’s competence for drafting framework guidelines hinges on the Commission, namely its request to prepare a specific framework guideline (para. 4).

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Following such request, ACER has to prepare a framework guideline setting out clear and objective principles for the development of a network code in the relevant area and contributing to market integration532, non-discrimination, effective competition and the efficient functioning of the market (para. 4). For this purpose, ACER must consult the concerned ENTSO and other relevant stakeholders, which includes for the electricity sector in any event the EU DSO entity, during a period of no less than two months, in an open and transparent manner (para. 5), and it must adopt the framework guideline and submit it to the Commission within a reasonable period of time not exceeding six months, which the Commission may extend upon ACER’s reasoned request (para. 4).

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If the Commission considers the framework guideline submitted by ACER as not contributing to market integration,533 non-discrimination, effective competition and the efficient functioning of the market, it can request ACER to review it within a reasonable period of time and re-submit it (para. 7).

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If ACER fails to submit or re-submit the framework guideline on time, the Commission is obliged to elaborate itself the framework guideline (para. 8). In such case, the framework guideline will be adopted by the Commission, and not by ACE