The European Commission recently published a staff working document dated 8 May 20131 specifying certain aspects of the rules on the unbundling of transmission system operators (“TSOs”) as laid down in the European Electricity and Gas Directives. The working document illustrates the Commission’s practice in assessing the presence of a conflict of interest in the case of parallel participations in generation, production and/or supply activities.

Although the document is not legally binding, it provides investors with valuable guidance as to which forms of financial investments may be acceptable on a caseby- case basis even if the scope and nature of investment do not meet the formal requirements set out in the Directives. In such cases, the investment will be acceptable if it can be demonstrated that in the specific circumstances of the case there is no conflict of interest.

Background – the European rules on ownership unbundling

The Electricity Directive and the Gas Directive of the Third EU energy package2 set out requirements for the structural separation between TSO activities on the one hand, and generation, production and supply activities on the other hand (“unbundling”). The aim of these provisions is to avoid conflicts of interest and to make sure that TSOs take their decisions independently, ensuring transparency and non-discrimination towards all network users. The European unbundling provisions have been implemented by all European member states and are enforced by the national regulatory authorities, who check for compliance with the unbundling provisions in particular during the TSO’s certification procedure.

Generally speaking, the ownership unbundling provisions under the Electricity and Gas Directives require that the same person cannot control or exercise rights over generation, production and/or supply activities, and at the same time control or exercise rights over a TSO or transmission system. In this context, the concept of “control” is taken from the EC Merger Control Regulation.3 The Electricity and Gas Directives clarify that the exercise of rights includes the exercise of voting rights, the power to appoint members of the supervisory board, the administrative board or bodies legally representing the undertaking, and the holding of a majority share. The unbundling provisions apply across the gas and electricity markets and on a world-wide basis, i.e. are not limited to activities within the European Economic Area.

What the working document says

The working document illustrates how the ownership unbundling rules have been interpreted and applied by the Commission in the context of the first round of TSO certification procedures. Since the aim of the unbundling rules is to prevent a conflict of interest between generators/producers, suppliers and TSOs, the Commission holds that it would not be in line with the objectives of the Electricity and Gas Directives if certification of a TSO were to be refused due to formal non-compliance with the unbundling requirements where, in the circumstances of the individual case, it can be clearly demonstrated that there is no incentive for a shareholder in a TSO to influence the TSO’s decision-making in order to favor his generation, production and/or supply interest to the detriment of other network users. Such situations may arise in particular in the case of participations held by financial investors.

In this context, the Commission explicitly recognizes the need for increased investments in the European energy infrastructure. The involvement of financial investors may help European TSOs to raise the funds needed to realize the investments in their energy infrastructure.

The Commission goes on to illustrate its practice of determining whether a conflict of interest can be excluded by examining how the rules were applied in four legal opinions given by the Commission in the certification procedure of certain TSOs. The Commission’s central points can be summarized as follows:

  • In cases where participation in a TSO does not meet the ownership unbundling requirements set out in Article 9(1) (b), (c) or (d) of the Electricity or Gas Directives, a certification can only be granted if any conflict of interest is clearly excluded. This requires an in-depth analysis on a case-by-case basis.
  • The burden of proof as to the absence of a conflict of interest or an incentive to exploit it lies with the TSO to be certified and its shareholders, and includes an obligation to submit all relevant information.  
  • Several elements may be of relevance for the case-by-case assessment, such as for instance
    • the geographic location of the transmission activities and the generation, production and/or supply activities concerned;  
    • the value and the nature of the participations in these activities;  
    • the size and market share of the generation, production and/or supply activities; and
    • access of the investor to confidential information.  
  • With respect to generation activities covered by regulated frameworks and renewable energy generation in particular, the Commission notes that

“where generation activities have a guaranteed income such as specific feed-in tariffs that do not vary with market prices, they will no longer be sensitive to wholesale price fluctuations, and as a consequence will less easily give rise to a conflict of interest and an incentive to discriminate through transmission activities.”

This means that investments in renewable generation projects will be more likely to pass the Commission’s conflict of interest test where feed-in tariff schemes or similar regulated schemes with pre-established prices have been implemented.

  • In all cases, an overall assessment will be required, taking the various elements into account.
  • Any material changes in the activity of the shareholder concerned may trigger the need for a reassessment of the TSO’s compliance with the unbundling rules and should be notified to the national regulatory authority.

Conclusion

Both TSOs and financial investors can benefit from the new guidelines, which for the first time summarize the European Commission’s approach, thereby providing greater clarity on how to structure participations so as to avoid conflicts of interest under the European unbundling rules.