On 19 September 2007, the European Commission published its Third Package of Energy Liberalisation Proposals. The proposals are aimed at strengthening regulatory controls, encouraging infrastructure investment and ensuring a competitive, transparent and secure internal market in electricity and gas.

The proposals identify six key objectives:

  • Legal and functional ownership ‘unbundling’ of electricity and gas transmission from supply and generation activities or, alternatively, transfer of transmission operations to an independent system operator;
  • Greater power and independence for National Regulatory Authorities (NRAs);
  • Creation of a European Agency for the Co-operation of Energy Regulatory Authorities;
  • Reinforced co-operation between Transmission System Operators (TSOs);
  • Improved internal market functioning; and
  • Greater co-operation to ensure security of supply.

We address each of these key objectives in more detail below.

TSO unbundling

Existing legislation requires transmission operations to be legally and functionally separated from supply and generation activities. Member States have complied with this obligation by implementing alternative organisational structures, e.g. by creating a totally separate company for transmission operation, or by creating a separate legal entity within a vertically integrated company.

However, with regard to the latter, the European Commission considers that a vertically integrated TSO may favour its affiliates and not act fairly towards competitors. In particular, it highlights issues regarding the disclosure of market sensitive information, increased barriers to entry and the distortion of investment incentives.

Complete ownership unbundling between transmission operations and supply and generation activities is therefore proposed. For vertically integrated energy companies, this would require divestment of the company (or companies) which operate on, or own the transmission system. It also requires that no person who exercises control over a supply or generation undertaking or a transmission owner/operator holds any interest in the other (although non-controlling minority interests in both would not be precluded).

The proposals do, however, allow for a derogation from this obligation, under which a vertically integrated energy company may retain ownership of transmission assets provided an independent TSO is designated by the relevant member state and approved by the European Commission.

In addition, there will be scope for a temporary derogation from the TSO unbundling rules for the construction of new infrastructure. This will be applied on a case by case basis, having regard to the economies of the new investment, and the internal market and security of supply objectives.

The UK is already compliant with the TSO unbundling aspect of the proposals in respect of Great Britain. Separation and divestment of the TSO is currently being implemented in Northern Ireland.

More powerful and independent NRAs

The European Commission proposes to make NRAs stronger by means of a clear mandate to co-operate at European level. This cooperation would take place through the European Commission itself and through the agency (see below).

It also seeks to strengthen NRAs’ ability to monitor regulatory compliance and investigate and impose sanctions where necessary. It is further proposed that greater NRA independence be achieved through complete legal and functional independence from any other public or private entity.

Creation of the agency

At present, the European Regulators Group for Electricity and Gas (ERGEG) facilitates consultation, co-ordination and co-operation between NRAs, and liaises with the European Commission. However, the ERGEG is slow to reach agreement due to the structure of its decision making, as its actions require the agreement of all 27 NRAs and more than 30 TSOs, and its codes are not legally binding.

The European Commission therefore proposes the creation of the agency. This would be an independent body comprised of NRAs, providing a framework for co-operation, information exchange and case allocation. It is anticipated that it would therefore improve the handling of cross-border situations. It would also have individual decision powers in respect of certain European level matters.

In addition, the agency would be involved in monitoring and reviewing the work of the European Networks of TSOs for Electricity and Gas (see below). In particular, it would be involved in setting priorities, reviewing ten year investment plans and preparing technical and market codes. With regard to the latter, the agency would be empowered to ask TSOs to modify their drafts, tackle certain areas of the drafts in more detail, recommend to the European Commission that certain provisions be added or that codes bemade legally binding if its implementation by the TSOs is insufficient.

The agency would also have a general role in advising the European Commission on market regulation issues and be empowered to issue non-binding good practice guidelines.

Reinforced co-operation between TSOs

The European Commission recognises the limits of voluntary co-operation between TSOs and therefore proposes that TSOs be required to co-operate formally within the European Networks of TSOs for Electricity and Gas.

Specifically, it is proposed that TSOs work together with the agency, to develop market and technical codes, research activities of common interest, co-ordinate grid operation, and prepare and publish ten year investment plans. The European Commission considers this will safeguard network operation and ensure true market integration.

Improved market functioning

The European Commission proposes to make the Guidelines for Good Third Party Access Practice for Storage System Operators legally binding, as implementation has been poor so far. It also proposes that storage operators be legally and functionally unbundled from supply activities, NRA powers be enhanced to oversee access to storage and that the applicable regulatory regime be clarified. In addition, transparent rules on third party access to Liquefied Natural Gas terminals are proposed.

As regards the retail market, the European Commission is concerned that many energy consumers remain tied to their historic supplier. It therefore proposes to establish a retail forum to promote the European retail market and to establish clear rules on competition. It also intends to tackle consumers’ lack of awareness of their energy consumption and costs by ensuring that suppliers provide more information to their customers and give consumers the right to switch supplier at any time.

Security of supply

With regard to security of supply, the proposals would require the European Networks of TSOs for Electricity and Gas to make system adequacy forecasts every summer and winter as well as long term forecasts. This is in addition to the obligations already imposed on NRAs and Member States to report annually to the European Commission on security of supply.

The proposals state that this European outlook is necessary to take into account the possibilities to export and import electricity and gas in peak demand conditions.