Description of domestic sector
Describe the domestic natural gas sector, including the natural gas production, liquefied natural gas (LNG) storage, pipeline transportation, distribution, commodity sales and trading segments and retail sales and usage.
The majority of the gas supplied in the EU is imported from outside the EU (70 per cent in 2016). The remaining gas volumes (30 per cent in 2016) stem from domestic EU gas production. The six largest gas-producing countries within the EU are the UK, the Netherlands, Romania, Germany, Italy and Denmark. The main external sources of gas supply in 2016 (in terms of trade value) were Russia (39.5 per cent), Norway (34.4 per cent), Algeria (15.1 per cent) and Qatar (5 per cent). While 87 per cent of the EU’s net imports were transported by pipeline in 2016, 13 per cent were delivered as LNG from across the world. The EU’s largest LNG providers are Qatar (46 per cent of total LNG supplies), Algeria (22 per cent) and Nigeria (16 per cent), followed by Norway (9 per cent), Peru (4 per cent) and Trinidad and Tobago (3 per cent); LNG imports from the US accounted for 0.6 per cent. The member states with the largest LNG imports are Spain, the UK, France, Italy, Belgium and Portugal. There are currently 27 LNG import terminals located in the EU: seven in Spain, four in France, three in the UK, three in Italy, two in Sweden and one in each of Belgium, Finland, Lithuania, Greece, Malta, the Netherlands, Poland and Portugal. Six additional LNG terminals (three in Finland, two in Spain and one in the UK) are currently under construction and are scheduled to start their operations between 2018 and 2022. Additional LNG terminals are currently in the study and planning phase in Croatia, Estonia, Germany, Greece, Ireland, Italy, Latvia, Malta, Poland, Sweden and the UK.
What percentage of the country’s energy needs is met directly or indirectly with natural gas and LNG? What percentage of the country’s natural gas needs is met through domestic production and imported production?
Natural gas accounted for approximately 22 per cent (ie, 358mtoe (million tonnes of oil equivalent (net calorific value)) of the EU’s total gross inland energy consumption (1,628mtoe) in 2015. The majority of EU-wide gas supplies stem from gas imports from non-EU countries, with the remaining volumes being produced within the EU (see question 1). The EU continues to be gas import-dependent, with some countries less dependent than others. The member states least dependent on gas imports are Romania and Croatia. The Netherlands and Denmark are both net exporters.
Government policy
What is the government’s policy for the domestic natural gas sector and which bodies set it?
EU energy policy aims to establish well-functioning energy markets that ensure secure energy supplies at competitive prices. To achieve this, EU legislation has sought to open up the European gas markets to competition and to create a single European gas market. Key to realising this aim is the breaking up of national monopolies, removal of barriers to cross-border gas supply, ensuring third-party access to transport infrastructure and the establishment of uniform conditions throughout the EU. In February 2015, the European Commission (the Commission) announced the new Energy Union strategy – the Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy – that emphasises the importance of these policy goals (ie, security of gas supply and a fully integrated European gas market), and puts their effective implementation and enforcement as a top priority for the coming years.
The gas sector is principally subject to sector-specific EU legislation (regulations, directives and guidelines) and the enforcement of generally applicable EU competition rules. However, other areas of EU law may also have an impact on the natural gas sector (eg, rules on state aid, public procurement, free movement of goods, services and capital, and EU environmental legislation).
Sector-specific legislation
The key elements of EU sector-specific legislation for natural gas are as follows:
• Directive 94/22/EC of 30 May 1994 on the conditions for granting and using authorisations for the prospection, exploration and production of hydrocarbons (the Hydrocarbon Licensing Directive);
• Directive 2008/92/EC of 22 October 2008 concerning the transparency of gas prices charged to industrial end users; and
• Directive 2009/73/EC of 13 July 2009 concerning common rules for the internal market in gas (the Third Gas Directive), on which the Commission has issued a number of explanatory notes dealing with:
(i) the unbundling regime in general;
(ii) ownership unbundling in particular (including with regard to financial investors);
(iii) third-party access to storage facilities;
(iv) retail markets;
(v) the role of regulatory authorities;
(vi) exemptions from certain provisions of the unbundling and third-party access regime; and
(vii) public service obligations.
Explanatory notes (vi) and (vii) were formally issued before the Third Gas Directive, but still provide useful guidance today.
In addition, the Commission has (as at December 2017) issued 63 opinions on draft certification decisions by national regulators in relation to the certification of gas transmission system operators (TSOs) and 31 opinions on draft exemption decisions by national regulators in relation to new gas infrastructure (pipelines, LNG terminals and storage facilities), which provide supplementary guidance on the Commission’s interpretation of the Third Gas Directive.
Further key elements of EU sector-specific legislation for natural gas are as follows:
• Regulation 715/2009/EC of 13 July 2009 on conditions for access to the natural gas transmission networks (the Gas Regulation). The Gas Regulation is supplemented by Regulation 312/2014 of 26 March 2014 establishing a Network Code on Gas Balancing of Transmission Networks (the Network Code on Gas Balancing); Regulation 2017/459 of 16 March 2017 establishing a Network Code on Capacity Allocation Mechanisms in Gas Transmission Systems (the Network Code on CAM); Commission Decision of 30 April 2015 and Commission Decision of 24 August 2012 on conditions and procedures to reduce congestion in European gas transmission pipelines; Regulation 2015/703 of 30 April 2015 establishing a Network Code on Interoperability and Data Exchange Rules (the Network Code on Interoperability); and Regulation 2017/460 of 16 March 2017 establishing a Network Code on Harmonised Transmission Tariff Structures for Gas (the Network Code on Rules regarding Harmonised Transmission Tariff Structures for Gas). In addition, non-binding Commission guidance on congestion management procedures in natural gas transmission networks was published in July 2014. The EU Agency for the Cooperation of Energy Regulators (ACER) has also issued non-binding framework guidelines on capacity allocation mechanisms, balancing rules, interoperability and data exchange, and harmonised gas transmission tariff structures; and a number of opinions and recommendations on draft network codes;
• Regulation 713/2009 of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators (ACER Regulation), regarding which the Commission has issued an explanatory note on the possibility of non-EU neighbouring countries and their TSOs to participate in the ACER and the European Network of Transmission System Operators for Gas (ENTSOG) (a recast ACER Regulation was proposed by the Commission in November 2016 reflecting the changed and enhanced tasks that have been conferred to ACER since its establishment);
• Regulation 1227/2011 of 25 October 2011 on wholesale energy market integrity and transparency (REMIT) prohibiting the use of inside information or other market manipulation in energy wholesale markets (Commission Implementing Regulation 1348/2014 of 17 December 2014 (the REMIT Implementing Regulation) further sets out the details of wholesale energy products and fundamental data that must be reported to ACER and establishes appropriate channels for data reporting); and
• Regulation (EU) 2017/1938 of 25 October 2017 concerning measures to safeguard the security of gas supply (the Security of Supply Regulation) (repealing Regulation (EU) No. 994/2010 of 20 October 2010).
The single most important piece of sector-specific legislation has been the Third Gas Directive and its predecessors, the Second Gas Directive (Directive 2003/55/EC of 26 June 2003) and the First Gas Directive (Directive 98/30/EC of 22 June 1998). The Third Gas Directive, complemented by the Gas Regulation and the ACER Regulation, was adopted as part of the EU’s Third Energy Package with the original aim of completing the single European gas market by 2014. More specifically, it provides for the following:
• effective separation of production and supply activities from transmission networks (unbundling) through one of three unbundling models: the ownership unbundling (OU), the independent system operator (ISO) and the independent transmission operator (ITO) models. All TSOs established after 3 September 2009 must comply with the OU model;
• measures to strengthen the powers and to guarantee the independence of national energy regulators to improve regulatory supervision;
• increased transparency of retail markets and strengthened consumer protection rules;
• establishment of ACER to ensure effective cooperation between national regulatory authorities and to take decisions on cross-border issues;
• better cross-border collaboration and investments through the ENTSOG, which brings together EU gas network operators to cooperate and develop common commercial and technical codes and security standards, as well as to plan and coordinate the necessary infrastructure investments needed at EU level; and
• new tools to harmonise market and network operation rules at the pan-European level, including rules relating to tariff setting (or methodologies for their calculation) for access to the network, the establishment of third-party access services and harmonised principles for capacity allocation, congestion management, determination of transparency requirements, balancing rules and imbalance charges, and the facilitation of capacity trading.
On 8 November 2017, the Commission proposed to extend the applicability of the Third Gas Directive to gas pipelines to and from third countries for which there is currently no comprehensive EU regulatory framework in place (the proposed changes will need to be agreed by the European Parliament and Council before they become law).
Competition law rules
The natural gas sector has been one of the priority areas for the Commission in the enforcement of the EU competition rules (articles 101, 102 and 106 of the Treaty on the Functioning of the European Union (TFEU)). The Commission’s 2007 Report on the Energy Sector Inquiry and several competition cases since then highlight the importance of competition law enforcement as a complement to sector-specific legislation (see question 28).
Enforcement bodies
EU policy is set by the Commission, the Council of the European Union (composed of the heads of the 28 member states) and the European Parliament. The Commission has the power to initiate EU legislation, which must be approved and adopted by the Council and the Parliament. In addition, the Commission is responsible for the enforcement of EU law. It can take EU member states to court for not complying with EU law and adopt binding decisions against companies that violate EU competition law rules. Competition law enforcement is an important tool for the Commission in shaping its gas policy. Within the Commission, the Commissioner for Climate Action and Energy (Miguel Arias Cañete), supported by the Vice President for the Energy Union (Maroš Šefčovič), and the Commissioner for Competition (Margrethe Vestager) have the primary responsibility of achieving the objectives set by the EU policies for the gas sector and the energy markets in general. The term of the current Commission will end in 2019.
The Commission acts in close cooperation with national regulatory authorities. This cooperation takes place through ACER, the Citizens’ Energy Forum, the European Gas Regulatory Forum (the Madrid Forum) and the Gas Coordination Group. ACER was established in 2011, and complements and coordinates the work of the national regulatory bodies at EU level. ACER is responsible for developing EU-wide network and market rules (framework guidelines, network codes), coordinating regional and cross-regional market integration initiatives, monitoring the work of the ENTSOG (in particular, the TSOs’ EU-wide network development plans), and the monitoring of the functioning of gas markets in general and of wholesale gas trading in particular. The Citizens’ Energy Forum is a platform for national consumer organisations, industry representatives and government authorities that convenes once a year in London to foster competitive, energy-efficient and fair retail markets for consumers. The Madrid Forum is an informal forum in which national regulatory authorities, member states, the Commission, TSOs, gas suppliers and traders, consumers, network users and gas exchanges convene once or twice a year in Madrid to address issues related to the cross-border trade of gas, in particular the tarification of cross-border gas exchanges, the allocation and management of scarce interconnection capacity, and other technical and commercial barriers to the creation of a well-functioning single European gas market. The Gas Coordination Group coordinates security of supply measures among EU countries and exchanges information on security of supply with supplier, consumer and transit countries. Members of the Gas Coordination Group include national authorities, ACER, ENTSOG, the Energy Community and representatives of industry and consumer associations.
Regulation of natural gas production
What is the ownership and organisational structure for production of natural gas (other than LNG)? How does the government derive value from natural gas production?
The ownership and organisational structure for the production of natural gas is largely regulated at national level and varies significantly between member states. At EU level, the Hydrocarbon Licensing Directive prevents member states from maintaining hydrocarbon production monopolies through the grant of perpetual and exclusive rights for the exploration and production of hydrocarbon. In addition, EU court jurisprudence has clarified that national import and export monopolies for natural gas would violate the EU rules on the free movement of goods (C-159/94, Commission v French Republic).
The extent to which member states derive value from natural gas production is not a matter specifically regulated at EU level. The Hydrocarbon Licensing Directive expressly recognises that member states may subject natural gas production to conditions and requirements to ensure ‘secure tax revenues’.
Describe the statutory and regulatory framework and any relevant authorisations applicable to natural gas exploration and production.
Authorisations for natural gas exploration and production (both conventional and unconventional) are granted at national level subject to the transparency and non-discrimination requirements of the Hydrocarbon Licensing Directive. Rules relating to the lease of mineral rights and the permitted timing, location and quantities of natural gas production are also set at national level.
Are participants required to provide security or any guarantees to be issued with a licence to explore for or to store gas?
Authorisations for natural gas exploration and storage are granted at national level, subject to the transparency and non-discrimination requirements of the Hydrocarbon Licensing Directive (for exploration, see question 5) and the minimum requirements of the Third Gas Directive (for storage, see question 8).
Regulation of natural gas pipeline transportation and storage
Describe in general the ownership of natural gas pipeline transportation, and storage infrastructure.
The ownership and organisational structure of pipeline transportation and storage of natural gas is largely laid down at national level subject to the minimum requirements of the Third Gas Directive.
The Third Gas Directive requires the structural separation of gas transmission systems (except upstream pipeline networks or high-pressure pipelines primarily used for local distribution) from production or supply activities. For TSOs that were part of a vertically integrated corporate group (a group holding interests in both transmission and production and supply), as at 3 September 2009, member states can choose one of three unbundling models (all TSOs established after that date must comply with the OU model):
• under the OU model, the ownership of the transmission system must be fully separated from any production and supply operation. The rules further include limitations for companies that directly or indirectly control or have any other rights (eg, majority shareholding, power to appoint board members or voting rights) over a production or supply company to appoint board members in the TSO. In addition, a board member may not be a member of the boards of both a TSO and a production or supply company at the same time. Ownership unbundling generally applies across gas and electricity markets (ie, not only within the gas or electricity markets);
• under the ISO model, a production or supply company may remain the owner of the transmission system provided it appoints an independent system operator company to operate the transmission system; and
• under the ITO model, a production or supply company may remain the owner of a transmission system, and may even own or otherwise control the system operator company, provided that it complies with detailed rules to ensure the autonomy of the ITO – essentially, through legal, accounting and functional separation.
Exceptionally, member states may deviate from these unbundling requirements where – as at 3 September 2009 – TSOs belonged to a vertically integrated undertaking, and the structure of the TSO and the regulatory framework guarantee a more effective independence than under the ITO model.
The Third Gas Directive obliges undertakings to be certified by the competent regulatory authorities of the member states before they are approved and designated as a TSO. Member states notify their draft certification decisions to the Commission, which issues an opinion on their compliance with the unbundling rules that national regulators are required to take into account in their final certification decisions. In the exceptional case of a deviation from one of the three unbundling models, the national regulator must comply with the Commission decision.
If certification is requested by a TSO that is controlled by a company from a non-EU country, or a non-EU entity acquires control over an EU TSO (third-country clause), certification shall be refused not only in cases of non-compliance with the unbundling rules, but also if a certification would put at risk the security of energy supply of the EU or the member state concerned.
The Third Gas Directive further requires gas companies that own storage facilities to establish at least a separate business unit responsible for storage (storage system operator) and to keep separate accounts for it. In addition, storage operators that are part of vertically integrated undertakings with transmission activities must be legally and organisationally unbundled from supply activities.
Exemptions from the unbundling rules can be granted for a defined period of time in the case of major new gas infrastructure (ie, interconnectors, LNG and storage facilities), or significant increases of capacity in or modifications to existing infrastructure. Such exemptions are subject to review by the Commission.
Cyprus, Luxembourg and Malta are exempted from the above TSO unbundling rules. Exceptions were originally also foreseen for Estonia, Finland and Latvia until any of their systems are interconnected to the systems of any member state other than Estonia, Finland, Latvia and Lithuania. However, these derogations have become, or are in the process of becoming, obsolete. In 2012, Estonian legislation was amended to derogate from the exemption and to select the ownership unbundling model and unbundling was achieved in 2015. Similarly, new Latvian legislation was passed in 2016 that opened up the market for foreign gas suppliers as of 3 April 2017 introducing ownership unbundling as of 31 December 2017. In Finland, the Finnish government proposed legislation in May 2017 that provides, among other things, for ownership unbundling of the transmission gas network from the sale of natural gas by 1 January 2020.
Describe the statutory and regulatory framework and any relevant authorisations applicable to the construction, ownership, operation and interconnection of natural gas transportation pipelines, and storage.
Authorisations for the construction, ownership, operation and interconnection of natural gas transportation pipelines and storage are granted at national level subject to the minimum requirements of the Third Gas Directive. Further to the unbundling requirements (see question 7), the Third Gas Directive requires transmission system and storage operators to operate in a secure and reliable, transparent and non-discriminatory manner. This includes the obligation to build sufficient cross-border capacity to integrate European transmission infrastructure. Under the Security of Supply Regulation (with limited exceptions for Luxembourg, Slovenia and Sweden), member states are obliged to implement minimum standards to ensure that transportation pipelines and storage facilities (and other gas infrastructure) are able to satisfy total gas demand during periods of exceptional gas demand in the event of a disruption of the single largest infrastructure. It also requires that gas companies are obliged to officially notify national authorities about major long-term supply contracts that may be relevant for security of supply.
The Third Gas Directive also requires that refusals to grant an authorisation must be reasoned and subject to appeal before an independent judicial body. In addition, undertakings must be certified before they are approved and designated as TSOs.
How does a company obtain the land rights to construct a natural gas transportation or storage facility? Is the method for obtaining land rights to construct natural gas distribution network infrastructure broadly similar?
EU law does not regulate national systems of land ownership. The transfer of land rights is subject to national law only.
How is access to the natural gas transportation system and storage facilities arranged? How are tolls and tariffs established?
The Third Gas Directive separately regulates third-party access to transmission (and distribution) systems and third-party access to storage facilities.
Third-party access to transmission (and distribution) systems must be granted to all eligible customers on the basis of objective, non-discriminatory criteria and approved published tariffs (regulated access). The Gas Regulation stipulates additional detailed requirements governing third-party access to transmission networks. To facilitate the shippers’ effective access to multiple transmission networks, the Gas Regulation sets out minimum requirements for:
• access tariffs, which must be subject to approval by national regulators, transparent and reflect actual costs (but may provide for an appropriate return on investment);
• services to be provided by TSOs, including long-term and short-term contracts, and interruptible transmission;
• relocation of unused capacity and physical congestion;
• transparent, non-discriminatory and effective balancing systems (as set out in the Commission’s EU-wide Network Code on Gas Balancing);
• secondary trading markets for capacity in transmission systems; and
• auctions for the allocation of capacity at relevant interconnection points and cross-border (bundled) products to be offered (as set out in the Commission’s EU-wide Network Code on CAM).
Additional requirements are set out in the non-binding framework guidelines of the ACER. They provide a minimum set of rules regarding:
• capacity allocation at interconnection points;
• gas balancing (including network-related rules on nomination procedures, rules for imbalance charges and rules for operational balancing between TSOs’ systems);
• interoperability and data exchange for European gas networks (including minimum requirements for interconnection agreements between adjacent TSOs, the use of units such as energy, volume, pressure and gross calorific value, gas quality and odourisation); and
• harmonised transmission tariff structures.
Third-party access to storage facilities (including linepack) must be granted either on the basis of regulated or negotiated access. Regulated access allows eligible customers to storage or linepack on the basis of published tariffs. Negotiated access involves free negotiations on access terms with the storage system operator (however, storage operators must annually publish their main commercial conditions for the use of storage).
The Third Gas Directive permits the refusal of third-party access to gas transmission and storage services where there is lack of capacity, where access would prevent the undertaking from carrying out public service obligations, and where serious economic and financial difficulties with take-or-pay contracts would arise.
In the case of upstream transportation systems, third-party access may be refused on grounds of:
• technical incompatibility;
• difficulties that cannot reasonably be overcome, and that could prejudice current and planned production of hydrocarbons;
• the need to respect reasonable needs of the network owner or operator; and
• the interests of other users.
Exemptions from the third-party access rules can be granted for a defined period of time in the case of major new gas infrastructure or significant increases of capacity in or modification to existing infrastructure (subject to review by the Commission). Exceptions can also be granted to member states (except for storage) as long as they are considered emergent markets (subject to review by the Commission).
Can customers, other natural gas suppliers or an authority require a pipeline or storage facilities owner or operator to expand its facilities to accommodate new customers? If so, who bears the costs of interconnection or expansion?
The Third Gas Directive provides that, in the event that third-party access is refused based on lack of capacity or a lack of connection, the relevant member state may require that the system operator makes the necessary investments in capacity if it is economic to do so or if a customer is willing to pay for them. It further provides that, in circumstances where no further authorisations to build and operate distribution pipelines are granted, member states must require the system operators to invest in incremental capacity if requested. The terms under which such expansions may be required are set out in national legislation.
There have also been attempts both at EU and national level to characterise refusal to expand transmission infrastructure (strategic underinvestment) as abusive behaviour violating article 102 TFEU. In the ENI case (2010), the Commission took the view that ENI’s decision to limit investments in its international transmission pipelines, Trans Austria Gas, Trans Europa Naturgas and Transitgas, potentially constituted an abuse. Similarly, the Commission looked into GDF’s refusal to invest in additional import capacity at the Montoir de Bretagne LNG terminal in France (2009). The Commission did not formally conclude that these practices constituted an infringement, as the cases were settled by way of commitment decisions; ENI, for instance, was required to divest its shares in the international transport pipelines to Italy. At national level, the Italian competition authority went further in 2006 and found that ENI had abused its market position by discontinuing works on the expansion of a main import pipeline into Italy. In this case, ENI was fined and ordered to provide third-party access to expanded capacity in the pipeline.
Describe any statutory and regulatory requirements applicable to the processing of natural gas to extract liquids and to prepare it for pipeline transportation.
The extraction and processing of natural gas liquids is not regulated at EU level.
Describe the contractual regime for transportation and storage.
The content of transportation and storage agreements is not specifically regulated at EU level, subject to the constraints of the Third Gas Directive (see question 10) and generally applicable EU competition rules.
Regulation of natural gas distribution
Describe in general the ownership of natural gas distribution networks.
The ownership and organisational structure of the natural gas distribution networks is largely regulated at national level, subject to the minimum requirements of the Third Gas Directive.
Pursuant to the Third Gas Directive, vertically integrated distribution system operators (DSOs) must be established as legally separate companies from their production and supply activities (legal unbundling); be independent in terms of their organisation and decision-making (functional unbundling); and keep separate accounts for their distribution activities (accounting unbundling).
Small DSOs serving less than 100,000 customers are exempted from legal and functional unbundling. In contrast to TSOs (see question 7), the Third Gas Directive does not require ownership unbundling for DSOs.
Describe the statutory and regulatory structure and authorisations required to operate a distribution network. To what extent are gas distribution utilities subject to public service obligations?
Authorisations for the operation of a distribution network are granted at national level subject to the minimum transparency and non-discrimination requirements of the Third Gas Directive. The Third Gas Directive also requires refusals to grant an authorisation to be reasoned and subject to appeal before an independent judicial body.
The Third Gas Directive provides a set of public service obligations that member states may implement at national level. Public service obligations can be imposed in relation to security of supply, regularity, quality and price of supply and environmental protection (including energy efficiency, energy from renewable sources and climate protection). Additional guidance is provided in the explanatory note on public service obligations. Member states must also impose supply obligations in favour of certain categories of customers, customers located in a particular area and a broad set of other customer protection minimum obligations. The latter will allow consumers to switch suppliers more easily (within three weeks), to obtain detailed consumer information from the supplier (eg, consumption data, billing information) and to benefit from complaint handling procedures.
In addition, the Security of Supply Regulation requires member states to implement minimum standards to ensure security of supply for certain protected customers (in particular, household customers) in the event of a seven-day temperature peak and for at least 30 days of high demand, as well as in the case of an infrastructure disruption under normal winter conditions.
How is access to the natural gas distribution grid organised? Describe any regulation of the prices for distribution services. In which circumstances can a rate or term of service be changed?
The Third Gas Directive regulates access to distribution networks in the same way as access to transmission networks (see question 10). However, member states may exempt closed distribution systems from the requirement that network tariffs (or the methodologies underlying their calculation) be approved by the national regulator before entering into force. The Third Gas Directive further provides a framework for the national regulation of third-party access terms to distribution, including balancing, mainly to ensure that they are proportionate and non-discriminatory (see question 10).
May the regulator require a distributor to expand its system to accommodate new customers? May the regulator require the distributor to limit service to existing customers so that new customers can be served?
Similar considerations apply as outlined in question 11. There is no requirement under EU law for distributors to limit services to existing customers so that new customers can be served.
Describe the contractual regime in relation to natural gas distribution.
The content of natural gas distribution agreements is not specifically regulated at EU level, subject to the constraints of the Third Gas Directive (see questions 15 and 16) and generally applicable EU competition rules.
Regulation of natural gas sales and trading
What is the ownership and organisational structure for the supply and trading of natural gas?
The ownership and organisational structure for the supply and trading of natural gas is largely regulated at national level, subject to the unbundling requirements of the Third Gas Directive (see questions 7 and 14).
To what extent are natural gas supply and trading activities subject to government oversight? What authorisations are required to engage in wholesale trading of gas?
Supply and trading of gas are not regulated at EU level, other than through the Gas Regulation, which requires transmission, storage and LNG system operators to provide for the trading of capacity rights, REMIT and the constraints of generally applicable competition rules.
In contrast to the obligations under the Gas Regulation, which primarily concern network operators, REMIT applies to all players on the wholesale gas market, and prohibits insider trading and market manipulation in relation to wholesale energy products. To make the detection of potential abusive conduct easier, REMIT requires market participants to provide ACER with detailed information on trade orders, capacity, use and availability of their facilities. Persons who professionally arrange transactions must further report suspected infringements and operate compliance programmes. The prohibitions under REMIT are enforced by the national regulators, which have the power to impose fines for violations. ACER is responsible for publishing the information collected from market participants (unless it is commercially sensitive) and non-binding guidance on the application of REMIT. The REMIT Implementing Regulation further sets out the details of wholesale energy products and fundamental data that must be reported to ACER and establishes appropriate channels for data reporting.
How are physical and financial trades of natural gas typically completed?
Physical and financial trades have not been harmonised by EU law and may vary across member states. The European Federation of Energy Traders publishes standardised general agreements for delivery and acceptance of gas and LNG.
Must wholesale and retail buyers of natural gas purchase a bundled product from a single provider? If not, describe the range of services and products that customers can procure from competing providers.
The unbundling rules of the Third Gas Directive provide for the separation of the operation of gas transmission and distribution systems from production and supply activities. However, apart from these restrictions laid down in the unbundling rules, it does not prohibit a company from acting as a single provider (eg, reseller) of transmission and distribution or supply and trading services. On the other hand, there is no legal obligation under the Third Gas Directive to purchase bundled products.
Regulation of LNG
What is the ownership and organisational structure for LNG, including liquefaction and export facilities, and receiving and regasification facilities?
The ownership and organisational structure for companies engaged in LNG activities is largely regulated at national level, subject to constraints under the Third Gas Directive. In particular, the Third Gas Directive requires gas companies owning LNG facilities to establish at least a separate business unit responsible for their LNG activities (LNG system operator) and to keep separate accounts.
Describe the regulatory framework and any relevant authorisations required to build and operate LNG facilities.
Authorisations for the construction and operation of LNG facilities are granted at national level, subject to the minimum transparency, non-discrimination and judicial review requirements of the Third Gas Directive.
Describe any regulation of the prices and terms of service in the LNG sector.
Third-party access to LNG facilities must be available to all eligible customers on the basis of objective, non-discriminatory criteria and approved published tariffs (regulated access, similar to the requirements for third-party access to pipelines – see question 10). Exemptions from the third-party access requirements can be granted for a defined period of time in the case of major new LNG infrastructure, or significant increases of capacity in, or modifications to, existing LNG infrastructure. Such exemption is subject to review by the Commission.
Mergers and competition
Which government body may prevent or punish anticompetitive or manipulative practices in the natural gas sector?
The Commission is responsible for the application and enforcement of EU competition law, including in the national gas sector. In addition, national competition authorities of all 28 EU member states are competent to apply both EU and national competition law rules. The Commission plays a central role in the enforcement of competition law rules in the EU, since it must be consulted about, and has the power to intervene in, all national competition proceedings with cross-border effects. The Commission and the national competition authorities cooperate closely with each other through the European Competition Network to ensure the coherent application of EU competition rules across the EU.
What substantive standards does that government body apply to determine whether conduct is anticompetitive or manipulative?
The key EU competition law provisions are articles 101, 102 and 106 TFEU:
• article 101 TFEU prohibits all agreements and concerted practices between undertakings that appreciably restrict competition and trade within the EU, subject to an exemption possibility. This covers both horizontal agreements between competitors (such as price-fixing, customer or market sharing, bid rigging and collective boycotts) and vertical restrictions between companies active at different levels of trade (such as export and import restrictions, tying and other exclusionary arrangements). The Commission has adopted a number of block exemptions and guidelines that clarify the scope of the EU competition law rules and the Commission’s enforcement policy;
• article 102 TFEU prohibits the abuse of a dominant position within the EU. This may, for instance, cover refusals to grant access to essential facilities without objective justification, applying excessive or discriminatory prices or other trading conditions, tying and other exclusionary arrangements. The Commission has issued specific guidance setting out its enforcement policy in relation to exclusionary conduct within the field of article 102; and
• article 106 TFEU obliges member states and public undertakings to also be in line with EU competition rules. Companies entrusted with services of a general economic interest may be exempt from competition law to the extent necessary for the proper performance of the tasks assigned to them.
What authority does the government body have to preclude or remedy anticompetitive or manipulative practices?
Where the Commission finds a violation of EU competition rules, it can order companies to terminate the infringement and take measures necessary to restore competition. Contractual provisions that do not comply with article 101 TFEU are automatically void and unenforceable. The Commission can fine companies up to 10 per cent of their annual worldwide group turnover for infringements of competition law.
Competition law enforcement has historically been intense in the gas sector, resulting mostly in informal settlements, and in one case (E.ON/GDF) in high fines. Since its final report on the Energy Sector Inquiry in January 2007, the Commission brought the following cases against gas incumbents under article 102 TFEU for allegedly abusing their market power by:
• refusing to grant access to capacity available in the network (capacity hoarding) by granting access in a less attractive manner (capacity degradation) and by strategically limiting investment in international transmission pipelines (strategic underinvestment) in Italy (ENI, 2010);
• refusing access to the gas network by way of long-term bookings of a large proportion of the network entry capacities in Germany (E.ON, 2010);
• preventing access to the network through long-term reservations for most of France’s gas import capacity, exclusionary capacity management practices and strategic limitation of investments in additional import capacity (GDF Suez, 2010);
• limiting network access by exclusionary capacity management practices and setting network tariffs at an artificially high level to squeeze the margins of downstream competitors (margin squeeze) (RWE, 2009); and
• foreclosing the Belgian gas market by way of entering into a long-term gas supply agreement covering large volumes of gas (Distrigas, 2007).
All these cases were settled by way of commitment decisions involving significant reductions of capacity bookings by the companies, unbundling of pipeline infrastructure or limiting duration of and gas volumes covered by gas supply agreements. They highlight the power of the Commission to use EU competition rules to pursue broader regulatory policy goals. Interestingly, in one case (E.ON), the Commission recently (July 2016) released German utility E.ON from its 2010 commitments to reduce long-term bookings on the German gas grid almost five years ahead of schedule after it had reassessed the market situation and concluded that, owing to the material change in the structure of the German gas market (eg, evidence of significant market entries; general market preference of short-term over long-term bookings), the original commitments were no longer necessary.
In one case, the Commission imposed fines (€1.1 billion in total) against E.ON and GDF Suez. Both gas companies had agreed on a market sharing agreement in 1975 on the occasion of the construction of the MEGAL pipeline, which transports gas from Russia to Germany and France, and continued to apply this agreement even after market liberalisation. The General Court later upheld the Commission’s findings of an infringement, but reduced the fines to €640 million.
Prior to 2007, the Commission investigated a number of cases against gas companies in relation to:
• joint gas sales agreements in Denmark, Ireland and Norway;
• the refusal to grant access to Dutch, French and German pipeline networks;
• export bans;
• destination clauses;
• profit-sharing mechanisms, and other LNG and natural gas resale restrictions; and
• long-term supply agreements in Spain.
At present, there are three Commission investigations open against the Bulgarian gas incumbent BEH, the Russian producer Gazprom and the Romanian TSO Transgaz for alleged violations of article 102 TFEU. In the case against BEH, the Commission alleges that BEH may have refused access to the Bulgarian transmission network to competitors by either refusal and delay of capacity reservations or by its own excessive capacity reservations on Bulgaria’s main gas import pipeline (similar allegations were raised in the ENI, E.ON and GDF Suez cases; see above). The proceedings against Gazprom are based on allegations that Gazprom divided gas markets by hindering the free flow of gas between member states, hindered third parties from supplying gas to markets in central and eastern Europe, and imposed unfair prices by way of linking the price of gas to oil prices. In March 2017, Gazprom proposed commitments to the Commission, which were subsequently market tested by the Commission and found by stakeholders to be insufficient in addressing all competition concerns raised. Since then, Gazprom and the Commission have been in discussions with a view to improve the commitments previously proposed. In the case concerning the Romanian gas sector, the Commission alleges that Transgaz has abused a dominant position by restricting gas exports from Romania to other EU member states through, for instance, the use of interconnector transmission fees, underinvestments or delays in the building of relevant infrastructure, and unfounded technical arguments as a pretext to prevent or justify delays in exports (there appears to be a parallel investigation ongoing against companies active in the Romanian wholesale market related to the hindering of exports, but neither the allegations nor the status of the case have yet been made public.).
Does any government body have authority to approve or disapprove mergers or other changes in control over businesses in the sector or acquisition of production, transportation or distribution assets?
All mergers, acquisitions of control and ‘full-function’ joint ventures (ie, joint ventures that ‘perform on a lasting basis all the functions of an autonomous entity’) must be approved by the Commission before completion if the parties meet certain turnover thresholds. Transactions that do not meet the EU turnover thresholds may be subject to notification under national merger control laws. There is also a system of referrals of all or part of the transaction between the Commission and national authorities. Formal merger review proceedings before the Commission typically range from 25 working days in easy cases up to eight months for a full in-depth investigation (although pre-notification discussions can considerably lengthen this period). The Commission has the power to block transactions or to approve them only subject to the implementation of remedies (typically, the divestiture of part of the business).
The substantive test under EU merger control rules is whether the transaction creates a ‘significant impediment to effective competition’ within the EU. This standard is largely similar to that applied at national level in the EU, and focuses on unilateral effects (ie, will the merged entity have the ability and incentive unilaterally to increase prices) and coordinated effects (ie, will the merged entity have the ability and incentive to increase prices through tacit coordination with its principal competitors).
In the purchase of a regulated gas utility, are there any restrictions on the inclusion of the purchase cost in the price of services?
There is no express restriction on the inclusion of the purchase cost of a utility in the price of services, and the Gas Regulation expressly recognises that access charges may include ‘an appropriate return on investment’. The extent to which a proportion of the purchase cost could be recovered in this way is unclear, although excessive pricing could constitute an abuse of dominance violating article 102 TFEU (see question 27).
Are there any restrictions on the acquisition of shares in gas utilities? Do any corporate governance regulations or rules regarding the transfer of assets apply to gas utilities?
The main restrictions are those imposed by the ownership unbundling and certification requirements under the Third Gas Directive (see question 7). In addition, EU merger control provides member states with the possibility to prevent takeovers of domestic companies in exceptional circumstances. Other than this, there are no restrictions on the acquisition of shares in gas utilities under EU law. Any member state seeking to introduce such a restriction would have to comply with EU rules relating to the free movement of capital. See question 32 for more details regarding acquisitions by foreign companies.
International
Are there any special requirements or limitations on foreign companies acquiring interests in any part of the natural gas sector?
EU law guarantees the free movement of capital and the freedom of establishment within the EU. Restrictions on the ability of EU companies to acquire interests in the EU gas sector are generally not permitted. In a number of cases, for example, the Court of Justice of the EU has held that golden share arrangements, through which member states seek to protect domestic companies from takeover, are in breach of EU free movement rules. Unlawful golden share arrangements can take many forms, including a cap on the shareholdings that can be kept by nationals of other member states, restrictions on the sale or use of strategic assets or special voting, or veto rights attached to the state’s (minority) shareholding.
Article 21(4) of the EU Merger Regulation further circumscribes the ability of member states to prevent takeovers of domestic companies. In 2006, the Commission acted against Spain for imposing a number of regulatory conditions on E.ON’s failed bid for Endesa that, in the Commission’s view, were designed to discourage a takeover of Endesa and were incompatible with EU merger control law. One year later, the Commission took the same position on regulatory conditions in Spain in the context of the acquisition of Endesa by Enel and Acciona.
Acquisitions of interests by foreign companies in the gas sector are subject to the ownership unbundling and certification requirements under the Third Gas Directive. The Third Gas Directive expressly provides that a supply company from the EU may not control or exercise any right over ownership unbundled TSOs in other EU member states. The Third Gas Directive further allows member states to adopt measures to ensure a level playing field, provided that these are transparent, non-discriminatory, proportionate and comply with general EU law (subject to notification to and approval by the Commission) (level playing field clause). In addition, for non-EU companies acquiring control over a TSO in the EU, the third-country clause of the Third Gas Directive provides that certification shall not only be refused by the national regulator in cases of non-compliance with unbundling rules, but also if a certification would put at risk the security of supply of the EU or the member state concerned.
In September 2017, the Commission proposed a new legal framework for screening foreign direct investments (FDI) into the EU by member states with a view to make FDI by, for instance, foreign, state-owned companies in strategic (energy infrastructure) assets more transparent.
The proposed Regulation:
• sets minimum requirements for screening mechanisms on grounds of security or public policy (including judicial review of decisions, non-discrimination, and transparency);
• establishes a cooperation mechanism between member states and the Commission for situations when an FDI in one or more member states may affect security or public policy of another; and
• provides for a Commission screening on grounds of security or public policy in cases in which FDI may affect projects or programmes of Union interest (eg, including gas infrastructure).
Importantly, the proposed framework does not affect member states’ ability to adopt any new review mechanism (currently, there are review mechanisms in place in 12 member states) or to remain without such national mechanism, and the member states would keep the final say in any investment screening. The proposal has triggered strong objections from stakeholders, and it can currently not be foreseen if, when and in what final form, the proposal will be approved by the European Parliament and the Council.
To what extent is regulatory policy affected by treaties or other multinational agreements?
The EU is party to trade agreements with non-EU countries that also include gas. These agreements usually contain a prohibition against customs duties or restrictions having an equivalent effect, and member states are bound by such agreements. In addition, the EU is party to the Energy Charter Treaty, a multilateral treaty exclusively applicable to the energy sector. It includes provisions regarding investment protection, trade, transit of energy, energy efficiency, environmental protection and dispute resolution.
International discussions and bilateral agreements between the EU and third countries may be influenced by EU energy policies, such as those regarding the importance of security of supply. This particularly concerns relations with current and future gas-producing countries (eg, Algeria, Azerbaijan, Norway and Russia), gas transit countries (Turkey and Ukraine) and neighbouring countries in the context of the Energy Community. In June 2017, the Commission requested from the Council a mandate to negotiate with the Russian Federation on the key principles for the operation of the new Nord Stream 2 gas pipeline project in the Baltic Sea, but this has not been granted to date.
In order to coordinate and optimise energy-related trading relations between member states and third countries and to ensure compatibility with EU law, the European Parliament and the Council established an information exchange mechanism with regard to intergovernmental agreements (IGAs) between member states and third countries in the field of energy in 2012 (Decision on IGAs). In April 2017, the European Parliament and the Council adopted a revised Decision on IGAs (Decision (EU) 2017/684), which provides that IGAs are checked for compliance with EU law before they are negotiated and concluded (the previous rules only required notification after conclusion of the IGAs).
What rules apply to cross-border sales or deliveries of natural gas?
The Third Gas Directive allows member state A to prevent gas imports from member state B in circumstances where the relevant customers in member state A cannot be freely supplied in member state B (reciprocity rule). This is an exception to articles 34 and 35 TFEU, which prohibit quantitative restrictions on cross-border trade between member states. As a general rule, national measures restricting imports and exports are prohibited unless they can be justified on the basis of article 36 TFEU or imperative requirements.
With the exception of the reciprocity rule, the Third Gas Directive does not set out a particular legal framework for the cross-border supply of gas. That said, the Gas Regulation and the Network Codes on Gas Balancing, CAM, Interoperability and Rules regarding Harmonised Transmission Tariff Structures for Gas, which supplement it, address many aspects of cross-border supplies of gas. The Network Code on CAM, for instance, provides for minimum requirements for auctions for the allocation of capacity at relevant interconnection points and cross-border (bundled) products to be offered. Additional non-binding guidance is contained in the framework guidelines adopted by ACER addressing a variety of issues (see question 10).
Transactions between affiliates
What restrictions exist on transactions between a natural gas utility and its affiliates?
The Third Gas Directive provides for unbundling, non-discrimination and transparency requirements to ensure that transactions between gas utilities and their affiliates are on arm’s-length terms. Depending on the unbundling model chosen for TSOs, stricter rules may apply.
For instance, under the ITO model, TSOs may not contract services from other parts of the vertically integrated undertaking other than in exceptional circumstances. In addition, discrimination in favour of affiliates may also infringe EU competition rules.
Who enforces the affiliate restrictions and what are the sanctions for non-compliance?
The enforcement of affiliate restrictions is primarily up to member states, and, in particular, the national energy regulators. However, the Commission, national competition authorities and courts can all act against discrimination in favour of affiliates where this behaviour violates competition rules.
