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Council Adopts Common Position on Amendments to Electricity Directive - International Law Office

International Law Office

Energy & Natural Resources - European Union

Council Adopts Common Position on Amendments to Electricity Directive

March 31 2003

Background
Key Amendments
Market Opening
Unbundling
Public Service Obligations
Third-Party Access
Independent Regulatory Authorities
New Generation Capacity
Implementation and Derogations
Reporting
Legal Unbundling of Distribution System Operators
Cross-Border Electricity Exchanges


Background

On February 3 2003 the European Council adopted its Common Position on proposed amendments to the Internal Market in Electricity Directive (96/92/EC). The adoption of the Common Position follows the political agreement reached, after considerable debate, by the council on November 25 2002.

The adoption of the Common Position represents real progress in the liberalization of EU energy markets, and all that remains is for the text to be agreed by the European Parliament at second reading. The deadline for the European Parliament's opinion at second reading is May 13 2003.

During the course of the European Parliament's first reading, it was decided to separate the amendment proposal for the gas and electricity directives into two parts - one for gas and one for electricity. This update comments on the proposed amendments to the Internal Market in Electricity Directive.

The key elements of the commission's initial proposal are retained in the Common Position. The most important differences are the delay in the date for full market opening until July 2007 (rather than 2005, as initially proposed by the commission and supported by the European Parliament), and the delay in legal unbundling for distribution system operators until July 2007 (rather than July 2004, as initially proposed by the commission and supported by the European Parliament).

Despite the delay in full market opening, the Common Position, subject to European Parliament approval, is an important step in the progress of creating an integrated electricity and gas market, and will give rise to a number of issues in member states. It has also achieved a timeline which is more ambitious than may have been thought possible, given the recently expressed views of France and Germany. The commission's achievement is thus considerable.

Key Amendments

The most significant amendments to the IME Directive are:

  • freedom of choice of supplier for all European non-household consumers by July 2004 and all customers by no later than July 2007;

  • legal separation of transmission activities from those of generation and supply by July 2004; and

  • legal separation of distribution activities from those of generation and supply by July 2007.

Market Opening

The European Commission has stated that it can accept the delay in full market opening, in the spirit of general compromise. The most important achievement is that an unconditional date for market opening to all customers has been set in the proposed amendments to the directive, and that all customers will be able to benefit from the internal market in the medium term. However, these dates may not be taken for granted, since the proposed amendments for both the gas and electricity directives contain provisions for the commission to compile a report on the state of the market by January 2006, which may lead to the delay of full market opening.

Unbundling

The Common Position has clarified that legal unbundling does not mean a transfer of ownership of assets to the legally unbundled system operator. The revised text also clarifies that a degree of coordination between the owner of the assets and the system operator should exist, in order to safeguard a return on the assets for the owner. The commission has stated that it can accept this clarification, although there is the possibility of a delay for the introduction of legal unbundling of distribution system operators until July 2007.

To meet unbundling concerns voiced by France and Germany, which were concerned at the possible bureaucratic complexity, the European Council has agreed that the European Commission should submit a report to the European Council and the European Parliament in 2006, giving an account of the experience acquired in implementing the directive as well as the independence of network operators in integrated companies. Alternative measures may then be considered on unbundling.

Public Service Obligations

In addition to these requirements for unbundling and market access, the European Council also approved the following amendments relating to the strengthening of public service obligations:

  • Member states must ensure that all household customers and, where deemed appropriate, small enterprises,(1) enjoy universal service. This means that these customers shall have the right to be supplied with electricity of a specified quality, within their territory, at reasonable prices.

  • Although the proposed amendments for both the gas and electricity directives refer to a need for consumer protection, only the proposed electricity amendments give consumers the right to receive supplies at reasonable prices.

  • There are provisions relating to the protection of final customers including ensuring adequate safeguards to protect vulnerable customers from disconnection, as well as ensuring that eligible customers are effectively able to switch to a new supplier. Member states must monitor security of supply in the electricity and gas sectors, and may establish suppliers of last resort (a separate directive is being discussed on security of supply in gas).

  • There are energy labelling requirements which ensure that final customers' energy bills show the contribution of each energy source to the overall fuel mix of the supplier over the preceding year, as well as the environmental impact, at least in terms of carbon dioxide emissions and radioactive waste.

Third-Party Access

The proposed amendments delete the provision for negotiated access to onshore networks in favour of a third-party access regime based on prior publication of access tariffs, or of the methodology for calculating them.

The Gas Directive retains the choice between negotiated and regulated access for storage facilities, and extends the requirement for negotiated access into upstream facilities. The commission report to be prepared for January 2006 will report on the measures taken by member states to guarantee effective access to gas storage installations.

Independent Regulatory Authorities

The opening of electricity markets will also be assisted by a requirement to establish independent regulatory authorities, which are to be wholly independent of the interests of the electricity industry. They shall be responsible at least for ensuring "non-discrimination, effective competition and the efficient functioning of the internal electricity market".

New Generation Capacity

The European Council approved proposed amendments which provide, primarily, for an authorization process rather than a competitive tendering procedure for the construction of new generation capacity. Previously, for the construction of new generating capacity, member states could choose between an authorization and/or a tendering procedure.

The authorization approach is a free market entry scheme for new generation, subject only to the obtaining of consent or an 'authorization' process. It does not involve any central planning for generation capacity. The criteria and procedures used for authorization are set out in the directive and include safety, security and environmental standards. The criteria and procedures must be made public.

The tendering approach was based on central planning, but without a generation monopoly for the incumbent utility. All requirements for new generation capacity were intended to be put out to competitive tender.

Under the proposed amendments to the directive, the authorization procedure is preferred, with the tendering procedure only available if, on the basis of the authorization procedure, the total generating capacity is not sufficient to ensure security of supply. To a large extent, the use of the tendering procedure has been limited in order to reflect the fact that the tendering procedure is generally accepted to be less likely to lead to the development of competitive markets than those already implemented. The commission considers this to be an important issue in order to ensure a continued level playing field for generation development, particularly in light of the potential accession countries.

Implementation and Derogations

The current date for implementation of this proposed amending directive is no later than July 1 2004 (except for certain obligations in respect of distribution system operators, in which case implementation may be delayed until July 1 2007).

Possibilities for derogation from the obligation to have non-discriminatory authorization procedures in place for new generation capacity is introduced for micro-isolated systems, which are defined as non-interconnected systems with an annual consumption not exceeding 500 gigawatt hours. This derogation only applies to the extension and upgrading of existing plants, and not to the construction of new generation plants, for which an authorization procedure will continue to be required.

Reporting

The reporting provisions have been significantly extended and oblige the commission to publish more detailed reports on security of supply, the impact of market opening on public service levels and the labelling provision.

In addition, the commission will publish a special report by January 1 2006, at the latest, which takes stock of the overall progress on the internal electricity and gas markets, regarding price developments, service levels, independence of system operators, network access, regulation and the way in which effective competition develops. In particular, this report will focus on the experience gained in the application of the directive as far as the effective independence of system operators in vertically integrated undertakings is concerned, and whether other measures, in addition to functional independence and separation of accounts, have been developed which have effects equivalent to legal unbundling. On the basis of the report, the commission can, when appropriate, forward proposals to the European Parliament and Council, in particular with the aim of reviewing public service obligations and the obligation to separate legally the distribution system operator from the vertically integrated company.

Legal Unbundling of Distribution System Operators

Member states have the possibility of delaying the introduction of legal unbundling of the distribution system operators until July 1 2007, the proposed date of full market opening. The commission has stated that while it considers legal unbundling an important element in ensuring the non-discriminatory behaviour of system operators, it can accept this delay. The reason for this is that the proposed amendments contain other measures of functional unbundling which will be effective from the date of implementation regardless of whether legal unbundling is delayed until July 2007.

Cross-Border Electricity Exchanges

The European Council also reached agreement on a draft regulation on cross-border electricity exchanges, crucial to the creation of a single market. The proposal is mainly geared to adopting rules on cross-border transmission tariffs and congestion management for electricity. Germany has waived its reservations, because it has secured agreement that the regulation will enter into force on the date of entry into force of the amended Internal Market in Electricity Directive (July 2004).


For further information on this topic contact Robert Lane at CMS Cameron McKenna by telephone (+44 20 7367 3656) or by fax (+44 20 7367 2000) or by email (robert.lane@cmck.com).


Endnotes

(1) Small enterprises are defined, in accordance with the draft Commission Amendment Recommendation 96/280/EG, as enterprises with fewer than 50 occupied persons and an annual turnover or balance sheet not exceeding €10 million.



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