European Commission’s energy legislation faces opposition

Oct. 1, 2007
With its third legislative package on energy revealed Sept. 19, the European Commission is tackling head-on the nine countries opposed to ownership unbundling-the crux of its policy to open up energy markets to greater competition.

With its third legislative package on energy revealed Sept. 19, the European Commission is tackling head-on the nine countries opposed to ownership unbundling-the crux of its policy to open up energy markets to greater competition.

Nine countries oppose the proposed legislation that would separate the network operation of electricity and gas from supply and generation activities.

Aware that this will require “long and arduous negotiations” with countries expressing strong opposition to the measure, the commission has offered an alternative option. It is “the independent system operator” (ISO) system whereby integrated companies are given the option of retaining network ownership, provided their assets are operated by a fully independent company.

Implementation of ISO, however, is so complex and requires such close monitoring by energy regulators that unbundling opponents do not see it as a satisfactory alternative.

Energy Commissioner Andris Pielbalgs insisted that both unbundling options would boost investment in new infrastructure, interconnection, and generation capacity, an argument refuted by large integrated companies such as Gaz de France, Electricite de France, E.On, which are generally backed by their governments.

As soon as ISO was announced, French, German, and Austrian governments opened fire against the measure, which would dismantle their energy champions. In France, Finance Minister Christine Lagarde said the government would retain a blocking 35% minority interest in the recently merged Gaz de France-Suez group and a golden share to “be able to counter the sale of any of Gaz de France’s assets in France,” including gas infrastructure.

Opponents to unbundling argue that competition and transparency in energy markets can be achieved through greater regulatory control and the increased clout and independence of National Energy Regulators, measures that are already in the energy package.

However, the commission’s proposal to go further and set up an Agency for the Cooperation of National Energy Regulators that would have binding decision and controlling powers, is not meeting with enthusiastic acceptance. Intended to facilitate cross-border trade, the agency would oversee the application of community regulations but would also act as watchdog over network operators, namely the ISOs, and would be able to apply sanctions.

The countries do welcome the energy package’s safeguards against the influence of non-EU countries that would try to assume control over an EU network. With an obvious eye on Gazprom and security of gas supplies, the commission has provided that companies from non-EU countries will “have to demonstrably and unequivocally comply with the same unbundling requirements as EU companies” to ensure a level playing field.

Subject to international obligations, the commission would be able to block any purchaser “which cannot demonstrate both its direct and indirect independence from supply and generation activities.” This measure is in answer to growing concerns in the EU that if ownership unbundling of transport networks is pushed too far in the EU, it could harm supply security should these networks be acquired by non-EU buyers. It provides a sticky frame for Gazprom and Sonatrach, which are aiming to be operators on downstream gas distribution in some EU countries.

With the proposed energy package covering unbundling, regulatory oversight and cooperation, network cooperation, transparency, and record keeping, it is no wonder it has been met with comments both for and against it and has received no overall approval.

Ian Colin Lyle, chairman of the European Federation of Energy Traders’ gas committee, was critical of the Agency for the Cooperation of National Energy regulators. He said he was unconvinced that the way “to deal with the inconsistencies in the operation of the EU gas grid” was to create a 27-member state gas Transmission System Operators, with the expectation that they would spontaneously produce market-friendly reforms and harmonization measures.

Jean-Louis Schilansky, president of the oil companies trade group Union Française des Industries Petrolieres and who also presides over the Energy Committee of France’s Corporate Leaders Association (Mouvement des Entreprises Francaises), admitted that “the commission is right to aim for intensified competition on the energy market.” But, he said, it should not be carried out to the detriment of the EU’s being able to remain competitive and attractive as a market. “Our ambition is to direct the European energy markets towards sustainable development,” he said.