The 3rd Energy Package. Benefits and deficits of the Ownership Unbundling

TABLE OF CONTENTS

INTRODUCTION

I. BRIEF INFORMATION ABOUT THE THIRD ENERGY PACKAGE

II. OWNERSHIP UNBUNDLING

III. BENEFITS OF OWNERSHIP UNBUNDLING

IV. DEFICITS OF OWNERSHIP UNBUNDLING

CONCLUSION

BIBLIOGRAPHY

INTRODUCTION

Achieving a genuine internal energy market is a priority goal for the European Union. The internal energy market is made up of the European gas and electricity markets. It has been the subject of several successive sets of directives and regulations, grouped into “legislative packages”. There have been three such packages up to now, put together by the European Parliament and the European Union Council, which establish common rules for the internal energy market for all Member States.

In 2007, the European Commission drew up an assessment report on the internal market based on a sector-specific survey of the gas and electricity markets. It concluded that there were still numerous deficiencies preventing both consumers and the industry from fully reaping the benefits of open national markets:

- The provisions of the directive were not properly applied in certain Member States;
- There was insufficient legal and functional separation between network operators and supply and production companies in vertically integrated relations;
- National regulators did not have the powers or independence required to carry out their role effectively.
The Commission then announced that a 3rd legislative package would be introduced to reinforce the rules so far adopted.^[1]

The aim of 3rd Energy Package which was adopted in 2009 was to make the energy market fully effective and to create a single EU gas and electricity market. This would help to keep prices as low as possible and increase standards of service and security of supply.

The most important proposal of the "3rd Energy Package" is "ownership unbundling" - separating the operation of gas pipelines and electricity networks from the business of providing gas or generating power. The purpose of ownership unbundling is to promote an open and transparent market, non-discriminatory access to networks and a level playing field. The idea is to combat cross-subsidization between generation/supply and networks, including exchange of strategic information, to ensure both undistorted competition in electricity and gas markets (i.e. competitive prices for consumers) and sufficient investment in networks.

Therefore, in order to value the importance of the Third energy package for ensuring effective competition the principles of ownership unbundling should be precisely discussed. Thus in the first part of this paper general information about Third Energy Package will be given and brief description of principles, benefits and deficits of the ownership unbundling will be discussed in the following parts respectively. The conclusion part answers the question whether existence of the ownership unbundling, as a main part of the 3rd Energy Package is sufficient to ensure effective competition or not.

I. BRIEF INFORMATION ABOUT THE THIRD ENERGY PACKAGE

The 3rd Energy Package was adopted on July 13, 2009. It consists of 5 components, 2 of them directives:

- Regulation (EC) No. 713/2009 establishing an Agency for the Cooperation of Energy Regulators,
- Regulation (EC) No. 714/2009 on conditions of access to the network for cross-border exchanges in electricity,
- Regulation (EC) No. 715/2009 on conditions for access to the natural gas transmission networks, repealing the previous regulation,
- The 3rd Electricity Directive (2009/72/EC),
- The 3rd Gas Directive (2009/73/EC).

The proposals of the 3rd legislative package were consistent with information on prospects for the internal gas and electricity market, and covered:

- the separation of production and supply activities fromtransmission networkoperation activities:
- either through Ownership Unbundling: in this case the same company can no longer both own thetransmission networkand conduct energy production or supply activities
- or through an Independent System Operator (ISO): vertically integrated companies, i.e. companies working across the entire energy chain (production, transmission, distribution and supply) can retain ownership of the transmission system provided that operation activities are carried out by an entirely independent company or body
- or through a 3rd model proposed by 8 Member States, including France and Germany, the Independent Transport Operator (ITO): integrated companies can retain ownership of their gas and electricity networks. However, they have to hand over day-to-day operation of those networks to independent transmission operators.
- increased powers and independence for national regulators, and cooperation between them through the creation of an agency for the cooperation of energy regulators with the authority to take binding decisions and inflict penalties;
- formalization of groupings of European transmission system operators for better coordination and, in particular, the establishment of common commercial and technical codes (ENTSOG for natural gas, and ENTSOE for electricity);
- an improvement in the operation of the market, in particular greater transparency and genuine access to storage facilities and LNG terminals.^[2]

The aim of these reforms is to break down national barriers to gas and power trade, improving security of supply and forcing traditional incumbent national monopolies to face cross-border competition, thus improving choice and services for consumers.

The ultimate goal is to have harmonized EU rules governing electricity and gas markets, creating a level playing field and allowing energy flows to be determined by supply and demand rather than local rules.

Effective and properly regulated competition will offer the best deal for consumers. The Third energy package introduced new deadlines so that consumers can actually switch supplier within three weeks. In order to have effective competition the operators of transmission networks must allow any electricity or gas supplier non-discriminatory access to the transmission network to supply customers; this is the third party access (TPA) principle. The conditions of access to the networks are regulated by national regulatory authorities. Transmission networks must furthermore apply regulated tariffs so as to avoid any abuse of dominance, and they must comply with specific rules on unbundling.

The rules on unbundling aim at preventing companies which are involved both in transmission of energy and in production and/or supply of energy from using their privileged position as operators of a transmission network to prevent or obstruct access of their competitors to this network. Unbundling requires the effective separation of activities of energy transmission from production and supply interests.

As mentioned the third energy package provides for three basic models for unbundling: Ownership Unbundling (OU), the Independent System Operator (ISO) and the Independent Transmission Operator (ITO). When implementing the unbundling rules of the third energy package Member States have to decide whether to implement exclusively the Ownership Unbundling model, or leave to the TSO a choice between the different models.

One of the core provisions of the Third Package is ensuring that Transmission System Operators (TSOs) are unbundled (or independent) from generation, production and supply interests and are required to be certified as being so.^[3]

Transmission system operators (TSOs) are the companies who operate the networks through which gas and electricity are transported. For electricity these are typically the high voltage lines connected to other Member States. In the gas sector, these are big pipelines. As transmission networks are natural monopolies, they must be subject to regulation. Over the years of working towards creating a well-functioning EU internal market it has become clear that national energy regulators alone and the existing advisory group – the European Regulator Group for Electricity and Gas (ERGEG) – are insufficient to cope with the tasks of regulation at the EU level. Thus it was decided to create an independent body with special expertise on technical issues. This new body ACER is independent from the Commission, national governments and energy companies.^[4]

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^[1]The third energy package, GRTgas and Sia partners, Source: http://www.gasinfocus.com/en/focus/the-3rd-energy-package/ Visited: 22.06.2014

^[2]The third energy package, GRTgas and Sia partners, Source: http://www.gasinfocus.com/en/focus/the-3rd-energy-package/ Visited: 22.06.2014

^[3]EU legislation-Third Package, Ofgem group, https://www.ofgem.gov.uk/gas/wholesale-market/european-market/eu-legislation Visited: 22.06.2014

^[4]Questions and Answers on the third legislative package for an internal EU gas and electricity market, European Commission - MEMO/11/125 02/03/2011 http://europa.eu/rapid/press-release_MEMO-11-125_en.htm?locale=en Visited: 22.06.2014