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Brussels, 12 December 2006
Introduction: Commission's action
The European Commission has issued today (10-12-2006) a warning to bring EU Member States on line with energy policy agreed in 2003.
In particular the Commission has addressed 26 "reasoned opinions" to 16 Member States: Austria, Belgium, the Czech Republic, Germany, Estonia, Spain, France, Greece, Ireland, Italy, Lithuania, Latvia, Poland, Sweden, Slovakia and the United Kingdom (see table attached).
This package of infringement procedures is the 2nd step of the procedure already started on 4 April 2006 with the sending 27 "letters of formal notice" to 17 Member States. The Member States have all replied to these letters of formal notice.
After throughout examination of these responses, the Commission regrets that insufficient progress has been made by Member States in implementing in letter and in spirit EU 2003 directives setting up an internal market in gas and electricity.
Obstacles to competition - Current situation damages EU citizens (i.e. Black-out 4th November)
Although some progress has been achieved, the EU needs to complete the internal gas and electricity markets. Incumbent electricity and gas companies largely maintain their dominant positions on "their" national markets. Insufficient interconnection between national markets prevents the creation of single EU truly physical electricity and gas markets. Electricity and gas prices do not reflect costs leading therefore to underinvestment and future supply crunches. Vested interests impede real competition to be developed and new suppliers to come into the market. Lack of coordination and insufficient powers to regulators impede the development of a stable and transparent regulatory framework.
In particular, the Commission sector inquiry and the country reviews conducted by the Commission during 2006 have unearthed a variety of specific examples which demonstrate the shortcomings of the existing energy regulatory framework, in particular:
An overall strategy to make electricity and gas market a reality
The Commission has noted these ongoing problems with the electricity and gas market in its report issued at the end of 2005.
The Commission has committed itself to a number of actions. In particular, in relation to the firm implementation of existing Directives, the Commission launches today this series of infringement procedures in 2006 against 20 Member States.
For certain key issues, no action has been taken since 2003. This is certainly damaging the credibility of the internal market. The Commission has acted and pleads Member States to act quickly and adopt their national legislation to the 2003 internal market directives. Compliance with existing legislation and adoption of further requirements are fundamental to ensure the realisation of a truly internal
The launching of these procedures to ensure completion of existing legislation needs to be also completed with further action to address the remaining issues. The Commission, in its package dated 10th January 2007, will aim at:
This two-fold policy strategic approach which aims at, on one hand, ensuring compliance with existing legislation and, on the other, proposes specific actions to address the remaining bottlenecks should make electricity and gas liberalisation a reality for its citizens and business. Everyone must be able to buy their energy from a choice of suppliers from across the EU that have to compete intensively for their business. By January 2009, a European Gas and Electricity Grid and a truly competitive European-wide energy market should be created.
Details of the infringments
During its examination of the conformity of the national legislations, the Commission focused in particular on those aspects which form the principal elements of modern market regulation and guarantee competition. These are:
The main deficiencies observed in transposition of the 2003 internal market directives are the following.
Existence of regulated prices preventing entry from new market players
In several Member States, the regulated tariffs are of general application, and set at a level so low compared with market prices, that they fully prevent market opening in complete violation of the Directives. Regulated prices are also a strong disincentive for investment. They also prevent energy demand to adapt to price increases. Energy efficiency is subsequently prevented. The Commission is suing these Member States (Spain, France, Estonia and Latvia).
In other countries, the infringement relates more to the fact that the right to supply at regulated price is granted on a discriminatory basis (Italy and Ireland).
In a number of Member States, the Commission is aware of the existence of regulated tariffs but does not have sufficient evidence that they prevent market opening to start proceedings on this basis. The Commission is requesting these Member States, in compliance with the rules of the directives on information relating to public service obligations, to provide information as to these systems of price controls and their impact on competition (the Czech Republic, Germany, Poland, Italy (for gas), Slovakia and Lithuania). Further infringement cases on the negative impact of these regulated tariffs on market opening may follow.
In the end, only prices freely determined by the market can ensure the best price for the customers and give the right signal for the huge investments needed to ensure our security of supply. Bread is more essential than electricity, its price is, however, not, or not any more, under the control of governments in - I believe – all Member States.
Insufficient unbundling of transmission and distribution system operators which cannot guarantee their independence
Because most of the companies operating the transmission and distribution grids (TSO and DSOs) are still owned by gas and electricity suppliers (no ownership unbundling, which is not a requirement of the directives), there is a potential risk of lack of independence by these operators. Managing a natural monopoly (the grids or networks throughout which gas or electricity circulate) in a discriminatory manner in the benefit of their affiliate companies – normally, the historical incumbent in a dominant position - both in terms of access to the networks, diffusion of information and new investments prevents the development of a truly competitive market.
Fair competition is prevented:
The independence of the TSO /DSO in the decision making process for new investments is vital for the markets. EU 2003 energy legislation provided for specific rules on ensuring such operational independence, without leading to ask for ownership separation between the network operator and the supplier.
This lack of compliance with EU 2003 energy rules on unbundling concerns: the Czech Republic, Italy, Poland, Sweden, Slovakia, Lithuania Estonia, and Spain.
In Belgium, Poland and Ireland, the issue is more one of proper designation of the system operator.
Discriminatory third party access to the network
Under EU 2003 directives, all gas and electricity suppliers should supply their gas and electricity through the grids in a non discriminatory way.
Because of the historical reservation of capacities on interconnectors, and the fact that these interconnectors are often congested, there is often no capacity left for new entrants.
In a judgment of 7 June 2005, the European Court of Justice in Luxembourg made it clear that the non discrimination rules of the directive prohibits the grant of preferential transmission capacities at interconnectors, even for historical long term electricity supply contracts.
In several Member States, preferential access is however still granted to incumbents especially for these long term historical contracts (Austria, the Czech Republic, Germany, Italy, Poland, Slovakia, the United Kingdom and Lithuania).
Insufficient competences of the regulators
In these types of markets which are characterised by the existence of single grids through which gas and electricity circulate, independent regulators must play a key role in the functioning of the markets and third party access to the grid. They must ensure an equal treatment to all market participants. Vested interests should not be protected. Independence is needed particularly when it is necessary e.g. to approve access tariffs to the networks, or to put in place a dispute settlement mechanisms between TSO/DSO and the suppliers in order to protect them against discrimination in access to the grid. They should also ensure equal treatment when it comes to manage insufficient space for access to the grid (congestion).
The existence of strong and independent regulators is therefore absolutely needed to put in place a functioning gas and electricity market and prevent discrimination to network access.
The infringement concerns in particular powers for access to the networks and fixing the tariffs for access (Belgium, Sweden, and Estonia).
No information given to the Commission on public service obligations
Under the directives, Member States are obliged to inform the Commission about obligations to suppliers for public objective reasons (the so-called, public service obligations (PSOs)) that they put into place. This information is especially important for the Commission to ensure that these PSOs do not unduly prevent market opening contrary to the directives (in particular as regards the existence of regulated tariffs, see above 1.).
A big number of them have not notified these PSOs and informed the Commission about their impact on competition (the Czech Republic, Germany, Estonia, Spain, France, Greece, Ireland, Italy, Lithuania, Poland, and Slovakia).
Insufficient indication of the origin of electricity
In two Member States, Italy and Poland, the origin of generation of electricity is still not indicated as required by the directives.
Proper indication of the source of generation is essential for the promotion of renewable energy towards customers.
Rationale for further legislative proposals
The persistent nature of these infringements, almost two years and a half after the obligation to transpose the directives on 1st July 2004, clearly demonstrates the insufficiencies and shortcomings of the current EC legal framework arising from the directives. Action is needed both to ensure complete implementation of existing rules and further adoption of rules further allowing the internal market to be completed in letter and in spirit.
First, energy regulators are not granted the necessary powers and independence enabling them to insure that open markets that function in an efficient and non discriminatory manner are put into place.
They are not granted, in particular, powers enabling them to guarantee, in compliance with the directives:
Secondly, the existing legal framework does not allow for a proper and efficient regulation of the cross border issues relating to gas and electricity network access. The preferential access that is granted in a persisting manner to cross border interconnectors clearly demonstrates the shortcoming of the current rules.
Member States are also currently opening up their markets in such different ways that this is hampering the development of a genuinely competitive European market. This strongly calls for a strengthening of the possibilities for national regulators to act in a coordinated way at EU level.
In addition, a controlling power at European level is needed to insure that national decisions do not play against the creation of a true unified European market, for instance as regards regulated tariffs.
Thirdly, the legal and functional unbundling of network operators that are vertically integrated with production and supply activities, which is provided for under the current directives, does not succeed in ensuring equal access to the networks for all suppliers. This is shown by the persisting infringements on discriminatory and preferential access in favour of dominant vertically integrated incumbents.
In addition, the numerous infringements relating to functional unbundling clearly demonstrate the inability of Member States to transpose in an effective way these unbundling measures of a complex nature.
This dual failure necessarily leads to the question of the reinforcement of the independence of the network operators.
Faced with these shortcomings, the Commission has carried-out a detailed country-by-country review of the effectiveness in practice of the legislative and regulatory measures in connection with market opening. This will lead to a report that will be presented at the beginning of next year with proposals to redress any remaining weaknesses of the current EC legislation. In parallel, the Commission will also unveil the outcome of its competition sector enquiry.