The Acquis in the Electricity Sector

The world-wide liberalization developments in the 1980s and 1990s also sparked reforms in the electricity sector. The objectives were similar to those in telecommunications: to increase efficiency and stimulate competition by separating the physical infrastructure, i.e. transmission and distribution networks, from the generation and supply of electricity. However, in electricity developments were extremely slow as regards European-wide liberalization, although the Commission set up a responsible Directorate (DG XVII) as early as 1968. This was mainly due to the fact that electricity had for a long time been considered as an exclusive national matter (Matláry 1997: 12). Thus, until reform the landscape of national electricity systems in the EU was quite heterogeneous (Eberlein 2001: 35).¹³⁰

A common European energy policy first had to overcome the problems resulting from these different national backgrounds and policy goals. One important development for both the telecommunications and the electricity market was the strategic reorientation of DG IV, the Commission’s Directorate General for Competition, in the early 1980s (McGowan and Wilks 1995: 150-153). A moderate initiative towards energy liberalization at the supranational level was the Commission’s report on the ‘Internal Market for Energy’

(European Commission 1988b). It declared the opening of the electricity and gas sector a major goal in the creation of an internal energy market but failed to generate sufficient support. The first concrete advance was undertaken in 1990 by a Directive calling for transparency of electricity and gas prices for industrial consumers. The goal was to reveal price information in order to strengthen the bargaining power of industrial users vis-à-vis the suppliers. Also in 1990, the Transit Directive manifested the obligation of network operators to grant access to their grids. However, it only targeted electricity transport between two member countries without a common border (Midttun 1997: 266-270).

130 There were mainly two system types: first, a vertically-integrated monopoly which existed, for example, in France or the United Kingdom. And second, a decentralized and fragmented system in form of regional monopolies based on a complex combination of public and private ownership on different territorial levels.

The latter could for example be found in Germany (Eberlein 2001: 42-43).

These initial reform attempts already caused severe opposition from the industry as well as member state governments. The draft proposal for a Directive liberalizing the energy market in 1992 met with fierce opposition in the Council and the EP, mainly because of concerns related to issues of general interest services (European Commission 1992). This was due to the proposed ‘common-carrier model’ and issues regarding third-party access, which supposedly threatened existing and future investments. However, modifications of the proposal by the Commission did not get a majority in the Council, mainly because the French and the German government held opposing views on the issue.

But, instead of threatening to legislate Directives based on Article 86 ECT, the Commission opted for a cooperative way and engaged in consensual decision-making (Schmidt 1998).

The agreement that was finally reached unanimously in the Council in 1996 included a complicated formula for market-opening.¹³¹ Directive 96/92/EC brought major changes to the organization of the electricity market. Its objectives were transparency and non-discrimination of market participants and consumers. The Directive basically abolished integrated monopolies by forcing the member states to unbundle network operations from generation and supply. It further demanded from the member states the incremental and moderate opening of their electricity markets (European Parliament 1996). Since the Directive’s entry into force, the Commission has constantly been monitoring the development in the national markets with the goal to identify obstacles to competition.¹³²

Directive 96/92/EC foresaw three alternative models for achieving non-discriminatory access to electricity grids: regulated party access, negotiated third-party access and the single-buyer model. All three models required member states to ensure that their transmission systems are unbundled. Since the beginning of the liberalization process most EU member countries opted for regulated third-party access.

Under the latter, a NRA sets and controls access conditions and transmission rates.

131 The agreement was the result of a compromise between the opposing German and French positions. While the French government favoured the ‘single-buyer model’, the German government supported a ‘negotiated third-party access model’ based on associative self-regulation (Midttun 1997: 270).

132 The Directive had to be implemented by the member states by February 1999.

Germany, however, opted for negotiated third-party, a system that quite rapidly came under heavy fire and whose failure to ensure sector competition has resulted in the establishment of a regulatory authority according to new EU law.¹³³

According to the provisions of the Directive, liberalization proceeded in three consecutive steps: since February 1999 suppliers have been able to compete for large users with an annual consumption of more than 40 GWh, corresponding to approximately 26 per cent of the national electricity demand. The threshold was lowered to an annual consumption of more than 20 GWh, or 28 per cent of national demand, in February 2000 and to an annual consumption of more than 9 GWh per year in 2003, corresponding to 33 per cent of the national demand of electricity (Eberlein 2001: 36).

Actual market development, preference change by member state governments and criticism raised by the Commission in its benchmarking reports have led to a revision of this legislation. The new Directive 2003/53/EC fully opened the electricity market for all business customers by 1 July 2004 and demands the same for households by 1 July 2007 (European Parliament 2003).¹³⁴ The Directive also required legal and operational unbundling of network activities from generation and supply and the publication of network tariffs. It further strengthened public service obligations especially towards vulnerable customers. Most characteristically, however, the Directive demanded the establishment of a NRA in all member states by 1 July 2004. The major responsibility of the NRAs is to monitor the development of competition, the levels of investment and, in some cases, the level of prices in order to create more transparency and predictability in the sector.¹³⁵ The latter provision was mainly targeted at the situation in Germany, the only

133 Directive 96/92/EC also contained a public service clause which demanded from the member states the imposition of public interest obligations on energy companies. In order to safeguard security of supply as well as affordable prices, member state governments could individually define these obligations (Eberlein 2001: 40).

134 Directive 2003/53/EC was further accompanied by a Regulation which established common rules for the cross-border trade in electricity. A regulatory committee decides on guidelines on compensation of transit flows, harmonization of national transmission tariffs and allocation of cross-border interconnection capacity.

135 For example, through market monitoring and the inclusion of specific conditions in the licences of suppliers, NRAs can seek to ensure that several types of contracts are available to the consumer, including long-term supply contracts. In addition, NRAs can exercise significant influence over the market for

country among the EU-15 in which a NRA had not been created by the date the Directive entered into force.¹³⁶

The new Directive also emphasizes public service obligations for generators and suppliers by recognizing that continued availability of electricity at a reasonable price is crucial for both the economy and for society. Thus, Directive 2003/54/EC does not call for total deregulation of energy supply or a laissez-fair approach. In contrast, the new legislation requires close monitoring of the market and the possibility of introducing a number of key obligations on energy companies relating to public service. As outlined above, such provisions are especially important during the transformation from a state monopoly to a competitive market as regards prices and investment decisions. The major public service obligations in the sector refer to universal service provision, protection of vulnerable and final consumers (European Commission 2004c: 4-5).

Over all, the extent of liberalization in the electricity sector has not been as big as in telecommunications. Nevertheless, the new and amended legislation “introduces competition into the sector and thereby fundamentally alters the established sectoral regimes” (Eising 2002: 95). And indeed, first results of market opening in electricity seem to be positive. By the end of 2003 electricity prices for industrial consumers have dropped by 15 per cent in real terms compared to 1995 (European Commission 2004c: 1). By 2005, even countries that had for a long time been rather sceptical of liberalization, i.e. Belgium, Denmark, or Spain, have almost fully opened their markets. However, Community legislation provides only the framework for reform. The emergence of effective and competitive energy markets can only be realized by corresponding measures in the member states.

electricity generation due to the fact that new generators have to be authorized before they can start operation (European Commission 2004c: 4).

136 By July 2005, the German government finally managed to establish a department for the regulation of the electricity and gas market within RegTP, the national regulator for the telecommunications and post sector.