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MEMO/09/297

Brussels, 25 June 2009

Q&A: the infringement exercise concerning cross-border energy network access and regulated prices

The Commission launched today new infringement proceedings against 25 Member States (MS) for not complying with the EU legislation on the internal market for electricity and gas, notably the Electricity Regulation (1228/2003), the Gas Regulation (1775/2005), the Electricity Directive (2003/54/EC) and the Gas Directive (2003/55/EC).

If MS do not implement the internal energy market rules, they prevent European consumers and the other market participants from benefiting from the advantages of a competitive and open energy market.

What is at stake?

This major infringement exercise focuses on three broad areas of concern: lack of transparent, simple and inexpensive procedures for dealing with consumer complaints, lack of transparent access to cross-border electricity and gas network infrastructure and market distortions caused by regulated energy prices.

Compliance with the existing regulations in the area of electricity and gas is of key importance for the proper functioning of the internal energy market in the EU and is a pre-condition for effective implementation of the Third Energy Market Liberalisation Package (see IP/09/1035) which will also be adopted today.

How should energy consumer complaints be settled?

It is fundamental that all citizens who enjoy the benefits of the internal market should also be able to enjoy high levels of consumer protection. However, a lack of transparent, simple and inexpensive procedures for dealing with their c omplaints can lead to consumer reluctance in participating in the internal market.

There are clear obligations in the Electricity and Gas Directives to ensure that such procedures are in place and provide real alternative options for consumers. However, the Commission's analysis of MS practices showed that in a number of cases MS do not allow for consumers to settle their disputes with their energy suppliers efficiently.

Why is a transparent access to cross-border electricity and gas network infrastructure important for the internal energy market?

The aim of the internal energy market is to provide customers with secure and sustainable energy at competitive prices across Europe.

Today's energy markets in the EU are mostly national in scope and often dominated by a few large incumbent energy companies. Therefore the historical boundaries of the national markets have to be enlarged to stimulate competition between market participants across Europe. New market entrants have to be in a position to get access to a sizeable customer base.

Why do we need coordinated congestion management methods?

The transport infrastructure for energy which links neighbouring markets plays a central role in providing customers with secure and sustainable energy at competitive prices across Europe. However, cross-border transmission links are often congested and their management does not live up to the standards set by the European Regulations for Electricity and Gas.

The Commission's analysis has shown that despite the efforts made, the coordination between Transmission System Operators (TSOs) is not yet sufficient to offer the maximum available transport capacity to market participants. Capacity allocation methods are often not even bilaterally coordinated between the operators of adjacent transmission systems. This causes procedural inefficiencies and increases market participants' transaction costs, ultimately resulting in higher prices for energy consumers.

Why it is so important that Transmission System Operators (TSOs) offer transparent capacity allocation and calculation mechanisms?

The transparent information on capacity calculation is the corner stone for all energy market participants. Without knowing the capacities available and how they are allocated and calculated, companies cannot participate in the Energy market using all the available capacity. The Electricity and the Gas Regulation require that the TSOs publish their allocation methods for transmission capacities (in case of gas), and their operational, planning and safety standards including the calculation scheme for transmission capacities (in case of electricity) and that the national regulatory authorities (Regulators) approve those methods and standards. Since TSOs are monopoly providers of energy transmission services, their internal procedures and dealings are subject to regulatory scrutiny. In addition to that and in order to increase market participants' trust, their work has to be organised transparently.

However, the Commission's analysis has shown that some TSOs either do not publish this information with the required content or it is not approved by the Regulator.

Why are not all transmission capacities offered to the market?

Concerning the electricity market, some TSOs commonly use the alleged or real tightness of their internal generation and supply balance as an argument to limit cross-border transmission capacities. Also, internal network congestions are sometimes relieved by reducing the available transmission capacity on cross-border transmission lines. Such limitations eventually result in suboptimal generation and consumption patterns between MS and lead to higher costs of providing energy to European consumers.

Gas TSOs which operate systems that are only capable of allowing gas to flow in one direction, often do not offer capacities for so called counter flows. In cases where a pipeline system allows physical gas flows in both directions, capacity - firm and interruptible - can be offered in both directions. However, also in cases where it is technically not possible to physically transport gas in both directions, it is still possible for a TSO to offer capacity as a "counter flow" or "backhaul" in the other direction, on a virtual basis. In that case the gas is not actually moving in the opposite direction, but the gas flow requested in the counter flow direction is subtracted from the gas flowing in the main direction. This is referred to as "netting". Counter flow transport can be offered up to the maximum of the main flow, however generally only on an interruptible basis, as a TSO cannot guarantee the shipment of the counter flow gas under all circumstances.

In the internal market in natural gas the provision of counter flow capacities on an interruptible basis is a precondition for competitive shipper activity. Shipper options would seriously diminish if shippers were limited to exercising their shipping activities according to the physically feasible main flow direction of the pipeline system only.

By not providing such counter flow capacity, TSOs would be obstructing the possibility for suppliers to enter neighbouring markets and therefore limit competition and market integration which in the end leads also to higher costs of providing energy to European consumers.

Why are coordinated intra-day cross-border transmission capacity allocation procedures important?

In order to enable electricity producers to optimize their short term generation assets across borders, TSOs are obliged to put in place coordinated intra-day cross-border transmission capacity allocation procedures. Such procedures have increasingly gained importance with the large scale deployment of wind generation units. The abruptly changing output of wind farms needs to be efficiently absorbed by consumption units which can only be ensured if properly designed and implemented intra-day TSO procedures are in place.

However, the Commission's examination has revealed that up until now only very few TSOs have fully complied with this requirement and implemented such procedures on all their interconnectors. This reluctance has the potential to hinder the rapid development of renewable energy sources throughout Europe and their integration into a regional generation market.

Why do transmission capacities have to be allocated for different timeframes?

TSOs have to define an appropriate structure for the allocation of capacities between different timeframes . This means that TSOs have to define which proportion of their transmission capacities will be allocated on short term basis (e.g. day-ahead) and which proportion will be made available for longer periods (e.g. for whole calendar years) Ideally, the proper structure would reflect the characteristics of traded electricity markets, which means that the capacity allocation periods would have to correspond to the relevant time horizons for which cross-border wholesale transactions are concluded. E.g. in Continental European traded electricity markets the price of the year-ahead forward contract is deemed to be a benchmark. However, some TSOs do not offer any transmission capacities for the calendar year at their interconnectors. This does not allow for market participants to buy this contract in one MS along with the corresponding cross-border transmission right and resell it in another MS. This clearly hinders the development of deep and liquid cross-border wholesale electricity markets.

Are there enough key fundamental and infrastructure related data available?

For their trading decision, market participants rely heavily on accurate, complete and timely information on both, the availability of the transmission infrastructure and market fundamentals (information on supply and demand). TSOs are therefore obliged to publish a wealth of data for different timeframes in prescribed time periods.

As for the gas and electricity transmission infrastructure, these data include: available and reserved transmission capacities, information on the actual usage of the infrastructure, long-term forecast of available capacities and information on maintenance periods. Regarding the market fundamentals, the relevant information encompasses: forecasts on aggregated demand, planned and unplanned generation outages and the realised values for all forecasted data.

The Commission has found that almost all TSOs put out some infrastructure related information, but almost none of them do it with the required granularity and/or regularity. The level of compliance is even lower for the provision of fundamental market data with electricity generation related information being routinely missing items among published data.

Why should balancing regimes be transparent?

Suppliers who provide gas to their customers have to match the demand of these customers with adequate supplies (e.g. import or local production) at all times. Since this matching procedure happens in advance of actual supply (real time) and the realised demand of customers cannot be predicted with full accuracy, suppliers will always be out of balance for a given balancing period.

Therefore, TSOs have to provide for a balancing regime which allows for suppliers to cover their imbalances real time. This regime has to be transparent and carefully designed giving appropriate incentives to market participants to stay in balance but it has also to avoid being punitive at the same time.

The Commission's research has shown that, in particular in the case of gas transmission, the calculation methodology and the final tariffs of the imbalance charges applied are often not published by the TSOs. This missing transparency of balancing rules and charges exposes suppliers to a risk which ultimately leads to higher gas prices paid by final customers and discourages new suppliers from entering the market.

How to make Transmission System Operators (TSOs) obey the rules?

Even if the provisions of the Electricity and Gas Regulations are properly transposed into national law, it has to be ensured that they are in fact applied. Therefore it is foreseen that MS lay down rules on penalties. A system of penalties which gives Regulators the possibility of combating violations is necessary to ensure TSOs compliance with congestion management and transparency requirements. Furthermore, the penalties provided for at national level must be effective, proportionate and dissuasive.

However, the Commission has found that the majority of MS have not laid down and notified an adequate system of penalties threatening the effective enforceability and the correct application of the rules.

Why does the Commission tackle regulated prices?

The internal energy market legislation builds on the concept of competitive energy markets encompassing production, trading and supply to final customers. The market mechanism is there to ensure that energy is provided to customers reliably and at the lowest possible cost.

The notion of price is central to the functioning of competitive markets. E.g. in case of electricity, it indicates which of the existing generation units should be employed and suggests to investors whether there is any room for profitable investments in new generation assets. It also gives valuable information to customers as to how to best adjust their consumption in both, short and long term.

Therefore, in general, regulated prices are not compatible with the ideal of the competitive internal energy market. However, the Electricity and Gas Directives allow MS to implement regulated price schemes, provided that they are clearly defined, transparent, non discriminatory, verifiable, guarantee EU energy companies equal access to national consumers and do not impede the opening of the market.

The Commission's investigations have revealed that regulated price regimes of certain MS do not fulfill these criteria and therefore distort the functioning of the internal energy market.

Which MS are affected?

Belgium, the Czech Republic, Germany, Poland, Romania and Slovenia have received letters of formal notice for not putting in place adequate proced ures for dealing with consumer complaints as required by the Electricity and Gas Directives.

As for not complying with certain provisions of the Gas Regulation, all MS have received letters of formal notice, except f or Estonia, Latvia, Lithuania and Finland in view of specific derogations which apply to them. Also Malta and Cyprus are not subject to this infringement exercise as they do not have a gas transmission network in place and do not use gas.

Regarding the infringement of certain provisions of the Electricity Regulation, all MS have received letters of formal notice, except for Malta and Cyprus, since they do not have an electricity interconnection to any other MS.

Finally, t he Commission has sent letters of formal notice to Greece, Poland, Portugal, Romania and Lithuania concerning regulated prices.


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