Earlier this year, the provisions of the European Union's Third Energy Package ("TEP") came into force across the European Union ("EU"). This relates to the separation ("unbundling") of the operation of transmission networks (i.e. gas pipelines and electricity networks) in the EU from the business of generating electricity or supplying gas or electricity in the EU, and, from 2015, also in the countries of the European Energy Community1. This applies not only to European energy companies but also to companies from "third countries" i.e. countries outside the European Union. It is therefore relevant to Japanese companies investing or holding electricity or gas assets in any part of the energy chain in Europe.  

In this e-bulletin, we provide details of the requirements for third parties to obtain certification when taking a "controlling" stake in a transmission system operator/becoming a transmission system operator ("TSO") and discuss their potential impact on foreign investors in EU TSOs which will apply from 3 March 2013.  

Background to the EU third country certification requirements

Before being approved as a TSO, an undertaking must be certified by the national regulatory authority of the relevant EU Member State ("NRA") pursuant to Article 10 of EU Directives 2009/72/EC (the Third Electricity Directive) and 2009/73/EC (the Third Gas Directive).

The certification of TSOs controlled by non-members of the European Union is governed by Article 11 of the Third Electricity Directive and the Third Gas Directive (together the Third Directives). When making its decision, an NRA must, from 3 March 2013 onwards, refuse to grant certification if the following two criteria (the Certification Criteria) have not been demonstrated:

  • compliance by the entity with the unbundling requirements of Article 9 of the Third Directives; and
  • that granting certification will not put at risk the security of energy supply of the Member State and the European Union.  

In countries of the European Energy Community, the same criteria will apply from 2017 onwards.  

Compliance with the unbundling requirements of the Third Directives

The EU unbundling regime involves the separation of the operation of gas pipelines and electricity networks at transmission level from the business of generating electricity or supplying either gas or electricity. EU Member States have three main unbundling options: (i) full ownership unbundling, (ii) the independent system operator ("ISO") model, or (iii) the independent transmission operator ("ITO") model.  

The full ownership unbundling model set out at Article 9 of the Third Directives is the usual model used. In this case, each undertaking which owns a transmission system must act as a TSO. Further, the same person or persons are not entitled:

  • directly or indirectly to exercise control over an undertaking performing any of the functions of generation or supply, and directly or indirectly to exercise any right over a TSO or over a transmission system;
  • directly or indirectly to exercise control over a TSO or over a transmission system, and directly or indirectly to exercise control or any rights over an undertaking performing any of the functions of generation or supply;
  • appoint members of the supervisory board, the administrative board or bodies legally representing the undertaking of a TSO or a transmission system, and directly or indirectly to exercise any rights over an undertaking performing any of the functions of generation or supply; or
  • 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 TSO or transmission system.  

Under the ISO model, vertically integrated companies may retain ownership of their network assets, provided the network is managed by an ISO. The ISO must be an undertaking or entity which is completely separate from the vertically integrated company, and must perform all functions of a network operator. The ISO entity will need to comply with the same unbundling requirements as other network operators. As such, the ISO may not hold any interest in a supply/generation undertaking.  

The ITO model preserves vertically integrated supply and transmission companies but obliges such companies to comply with strict additional rules to ensure that their supply and generation activities are operated independently from their network activities. The ITO model is only available to entities operating a network activity that was part of a vertically integrated company on 3 September 2009.  

Assessing the risk to security of energy supply

In considering the second criteria, the NRA or other competent authority will take into account:

  • the rights and obligations of the European Community with respect to the relevant third country under international law;
  • other specific facts and circumstances of the case and the third country concerned; and
  • the rights and obligations of the Member State with respect to that third country arising under agreements concluded with it.  

Article 11 of the Third Directives also requires NRAs to request an opinion from the European Commission on whether the two Certification Criteria have been satisfied. The final decision on certification lies with the relevant NRA; its decision may diverge from the opinion provided by the Commission, but the NRA will need to publish its justification for any such divergence.  

The majority of the requirements of the Third Directives were required to take effect as of March 2011, and the unbundling requirements a year later. However in practice, many Member States have yet to transpose these provisions into domestic law. In countries where the directives have not yet been transposed into national law, the directives will apply directly. Specific advice should be sought in those circumstances as issues pertaining to administrative law and energy regulation are likely to arise for affected companies.

Potential impact of the certification requirements on third country investors

Once transposed by a Member State, the certification requirements of the Third Directives are likely to have a significant impact on third country investors in EU TSOs.  

This is because the Third Directives specifically state that, when making their assessments regarding whether the granting of certification will risk the EU's or the relevant Member State's security of energy supply, both the relevant NRA and the Commission must take into account "any agreement concluded with one or more third countries to which the Community is party and which addresses the issue of security of energy supply". This means that any bilateral agreement relating to energy security entered into between the relevant third country and either the EU or the relevant Member State would be considered when the relevant NRA and the Commission make their assessments, and would significantly increase the likelihood of certification being approved for the third country investor.  

An example of such an agreement might be that entered into between the EU and China in May 2012; a Joint Declaration on Energy Security affirming that both sides would establish an open, transparent, efficient and competitive energy market, including transparent and efficient legal and regulatory frameworks. Since the Joint Declaration seeks to facilitate the mutual security of energy supply between the EU and China, it seems likely to constitute the kind of agreement that would make the relevant NRA and the Commission more likely to award certification to prospective Chinese owners of EU TSOs.  

The EU and Japan agreed at the 20th EU-Japan Summit in May 2011 to "strengthen their dialogue" on energy policy. This dialogue aims to include issues such as:

  • exchanging experience and best practices on policy-setting for secure, safe and sustainable energy;
  • deepening information exchange on respective approaches and positions to promote energy security; and
  • exploring possibilities for exchanging views on long-term planning and the energy mix.  

However the outcome of the Summit does not take the form of any binding agreement between the EU and Japan. Therefore whilst the strengthening of their energy dialogue, the outcome appears unlikely to constitute an "agreement" for the purposes of Article 11 of the Directives. It may however be interpreted by Japanese investors as a first stepping stone towards such an agreement.  

The absence of any type of dialogue or agreement between a third country and either the EU or the relevant Member State would make certification for investors in that third country much less likely.  

The full texts of the Third Directives are available here (Third Electricity Directive and Third Gas Directive).