Select Committee on European Scrutiny Third Report


THIRD REPORT


The European Scrutiny Committee has made further progress in the matter referred to it and has agreed to the following Report:—

COMMON RULES FOR THE INTERNAL MARKET IN ELECTRICITY AND NATURAL GAS



(22385)
7218/01
COM(01) 125

(a)
Commission Communication on completing the internal energy market.

(b)
Draft Council Directive amending Directives 96/92/EC and 98/30/EC concerning common rules for the internal market in electricity and natural gas.

(c)
Draft Council Regulation on conditions for access to the network for cross-border exchanges in electricity.


Legal base: (b) Articles 47(2), 55, 95 and 251 EC; co-decision; qualified majority voting
(c) Articles 96 and 251 EC; co-decision; qualified majority voting
Document originated: 13 March 2001
Forwarded to the Council: 2 May 2001
Deposited in Parliament: 20 June 2001
Department: Trade and Industry
Basis of consideration: EM of 28 June 2001
Previous Committee Report: None
To be discussed in Council: No date set
Committee's assessment: Politically important
Committee's decision: For debate in European Standing Committee C, together with the Commission Green Paper on a strategy for energy supply

Background

1.1  As part of the drive to complete the Single Market, the Council adopted in 1996 Directive 96/92/EC[1] setting out common rules for the internal market in electricity. In addition to laying down general rules for the organisation of the sector, it contained a number of more specific provisions governing generation, transmission and distribution systems, the unbundling[2] and transparency of the accounts of vertically integrated concerns, and access to the system (where Member States were required to ensure at least a significant opening of their markets, corresponding to 30% of domestic consumption in 2000, and 35% in 2003). Two years later, a comparable measure (Council Directive 98/30/EC)[3] was adopted for the internal market in natural gas, though the market access targets were set slightly lower, at 20% in 2000 and 28% in 2003.

1.2  The current documents comprise a Communication from the Commission which analyses the way in which these two measures have operated to date. This is accompanied by proposals for a Directive and Regulation which reflect the findings in the Communication, with the former amending the rules applying nationally to access to the supply networks for both electricity and gas, and the latter laying down further conditions governing the network for cross-border exchanges of electricity.

The current document

(a) Commission Communication

1.3  In its introduction, the Commission observes that, because of industry's heavy reliance on electricity and natural gas, these represent an important share of its production costs, and that an opening of these markets is a major factor in improving Europe's competitiveness generally. However, it adds that the key issue is fair access to the transmission and distribution grids, which it considers to be more likely if those facilities are functionally separated from other commercial interests, in particular generation and supply. The Commission also notes that the existing Directive offers Member States the choice between a third party access system based on published tariffs applicable to all customers ("regulated" access) and one based on negotiations between parties, with published main commercial conditions ("negotiated" access); that integrated companies are required to "unbundle" by separating their accounts; and that an independent transmission system operator must ensure non-discrimination between incumbent and new entrant system users.

1.4  As regards the implementation of the Directives so far, the Commission notes that all Member States have now adopted the necessary national legislation for electricity, and that most have also done so for gas (but that, in the latter case, infraction procedures have been launched against France, Luxembourg and Germany, which have yet to complete the process). It further notes that the average degree of opening for the Community as a whole in 2000 was 66% for electricity and 79% for gas (as compared with the minima of 30% and 20% laid down in the Directives): the UK was one of the few countries with 100% access in each sector, whilst a number of countries — notably France — had achieved little more than the required minima. The Commission also says that a "clear majority" of Member States have chosen structural measures most likely to promote effective competition, particularly for electricity. It therefore concludes that the current state of implementation is "encouraging", but that further improvements are necessary. In particular, it considers that, as things stand, the divergence between the degree of market opening in the various Member States is likely to continue, and that this could significantly distort competition within the Community. Indeed, the Commission goes further, and states that, for real competition to develop, there is a need for effective unbundling and fair and non-discriminatory access conditions.

1.5  The Communication then examines a number of detailed aspects arising in the internal markets, as follows.

— Public service objectives

1.6  The Commission notes that, in the past, these objectives have in almost all Member States been pursued through public ownership of all generation and supply functions, but that, as privatisation and market opening have taken place, governments have adopted regulatory systems to lay down the minimum standards of public service which must be provided. These include respecting environmental standards, guaranteed connection to the grid for all under reasonable conditions, minimum service criteria for repairs and connections, uniform tariffs for equivalent customers (but with special tariffs for low income users), and protection for vulnerable customers from disconnection. The Commission adds that the highest possible standard of public service is a primary objective of Community energy policy, and that the Directives contain provisions ensuring that Member States retain the necessary tools to achieve this. However, it also says that experience to date suggests that universal service and consumer protection have not only been maintained by market opening, but have increased.

1.7  Notwithstanding this, the Commission believes that further measures are needed to require Member States to ensure that public service commitments are met. These include the protection of vulnerable customers, and connection at appropriate prices to those in peripheral areas, transparency of information for all customers, obligation to promote generation from renewable resources, and suitable levels of infrastructure maintenance and interconnections. This would be coupled with an obligation on Member States to notify all the measures taken to the Commission, which would then produce a bi-annual report.

— Security of supply

1.8  The Commission recalls that its Green Paper "Towards a European strategy for the security of energy supply" recognises the contribution made to security of supply by the integration of energy markets, and also stresses the importance of security of supply being recognised as an essential public service obligation. It points out that Directives 96/92 and 98/30 seek to ensure that Member States' safeguards guaranteeing energy supplies remain unchanged by the introduction of competition, but it believes that the importance of the issue makes it necessary to reinforce these safeguards. In particular, it says that Member States should be required to monitor the existing supply/demand balance in their domestic electricity market, the level of expected future demand, envisaged additional capacity planned or in construction, and the level of competition. Member States would be required to provide progress reports, enabling the Commission to publish from time to time a similar Communication covering the Community as a whole.

— Environmental consequences

1.9  The Commission suggests that the creation of the internal market has in many respects had a positive environmental impact, due to improvements in generating plants, increased operational efficiency, and a switch to cleaner fuels, though it also notes that lower energy prices might make the development of energy efficiency and the use of renewables less attractive in future. It points out that Directives 96/92 and 98/30 allow Member States to address these issues through public service obligations, and that many have chosen to do so: in addition, it identifies a number of initiatives which have been taken at Community level, notably in the promotion of renewable energy sources, controls over emission levels from large combustion plants, the promotion of energy efficiency and energy saving. However, it also stresses that a fully opened market requires an internalisation of external costs to ensure a level playing field, and it says that it intends to promote initiatives to support this, notably a Community-wide energy tax, strict rules on state aid, and demand-side management measures.

— Effects of competition on employment

1.10  The Commission says that, although the increased efficiency and lower energy prices arising from the creation of the internal market will in the longer term boost employment in European industry as a whole, there is likely in the short term to be a reduction in the workforce in the energy sector itself, and that, within this overall trend, there is also likely to be a shift in the employment balance from the more traditional technical areas to new business activities, such as marketing and customer services. It adds that, so far, this has been handled in a responsible manner, but that the situation needs to be closely monitored, and additional measures taken, if necessary, to minimise any social consequences.

— Trade with third countries

1.11  The Commission says that, although there have in the past been exchanges with third countries, the quantities involved were relatively limited, due to the low interconnection capacity between national systems and different operating standards. It considers that, in a liberalised internal market, trade with third countries is likely to become more attractive, and is to be welcomed in principle as increasing competition, provided there is a level playing field for all economic operators. It therefore believes that clear legal rules need to be agreed and compliance ensured, through agreements with third countries (including the Association Agreements with the candidate countries), covering in particular such areas as environmental and nuclear safeguards; and it intends to identify potential partners.

1.12  The Commission also deals at some length in its Communication with the development of cross-border trade within the internal market, which it notes accounts for around 8% of total electricity production, and is increasing, even though most consumers tend to opt for a national supplier. However, it considers that, in this respect, the market is far from being completed, and that, particularly in countries whose market is dominated by one or two generators, a true market — and hence effective utilisation of the Community's generating capacity — can be established only if a high level of imports is possible. In view of this, the Commission wishes to see action in three main areas — the adoption of appropriate rules on the pricing of cross-border trade, rules for the allocation and management of inter-connection capacity, and an increase in such capacity, where this is economically justified.

1.13  The Commission also describes the work of two new bodies — the Florence and Madrid Fora — set up to deal with these issues in the electricity and gas sectors respectively, and which meet twice a year to consider them. In the case of electricity, a major problem has been the adoption by each Member State of tariffication of cross-border trade on the basis of their individual national systems, leading to considerable differences in tariff structures across the Community. The Florence Forum has therefore sought to address this on the basis of a simple, transparent, cost-reflective and non-discriminatory approach, and it agreed in principle in March 2000 that a tariffication system should be based on physical flows of electricity, with countries receiving electricity being compensated by the exporting countries for any costs caused to their networks. It also agreed that such an approach would be introduced for a provisional test phase of one year, but with the basis on which any compensation was paid and received being reflected in national tariff systems, so long as this did not lead to unreasonable distortion of competition. However, the Commission says that it does not consider this last condition can be met on the basis agreed by the Forum, that it believes a number of important issues (such as the precise methodology for calculating costs, and the harmonisation of financing methodologies, and of certain aspects of national tariffication systems) remain to be resolved, and that it has not therefore been prepared to endorse this approach. It also says that there is a need to ensure that the necessary interconnection capacity is in place.

1.14  The Commission has therefore concluded that, although the Florence Forum has been useful, it has a number of disadvantages, such as its inability to carry out in-depth discussion, its informality and reliance on the full consensus of all parties, and a lack of procedures to ensure implementation. It therefore considers it necessary to propose a Regulation providing for a clear decision-making process on the issues surrounding cross-border exchanges.

1.15  As regards the Madrid Forum for gas, the Commission says that this is less advanced, due to the fact that the relevant Directive was implemented 18 months later than that on electricity, but that the main issues and key principles have now been identified and a clear agenda for future work set out. It highlights the higher degree of correlation which exists between the physical and contract path for gas than for electricity, particularly as regards international transits, where more than 50% of all gas consumed within the Community crosses at least one border, and cross-border tariffs, based on physical flow through the system, already exist. That said, the Commission warns that this correlation will be eroded as a result of competition, and that it is vital to ensure that tariffication systems take account of this fact and that third party access tariffs reflect costs. It also stresses the likelihood of congestion becoming a potential barrier to trade.

1.16  The remainder of this part of the Communication is devoted to infrastructure and the revision of the guidelines for Trans European Networks (TENs). In the case of electricity, it points to the tendency in the past for the vertically integrated public companies to concentrate on the improvement of their own systems, and hence to the need for remove interconnection bottlenecks (where it sees the problem being, not so much financial, as political). The Commission adds that, to overcome these problems, efforts must be made to upgrade capacity on existing lines, followed by the construction, where necessary, of new lines through a European interconnection plan (for which it intends to review existing capacities and operating standards, as well as the possibilities for technical improvements, and the minimum need for new connections between networks).

1.17  In the case of gas, the Commission says that the sharp increase in demand for natural gas within the Community over the last ten years has highlighted the need for a well integrated network, and that generally speaking this is developing well, with a large number of major new pipeline systems having been brought into operation. Despite this, it suggests that increased demand and cross-border trade as a result of market opening may lead to congestion similar to those already emerging for electricity, and that consequently, it may be necessary to adopt a similar approach in identifying new interconnections and establishing appropriate tariffication and capacity allocation mechanisms.

1.18  The Communication notes that the extension in 1995 of the TENs programme to cover electricity and gas has led to the identification of 44 projects in the electricity sector covering links between Member States and with third countries, and 46 relating to gas pipelines, thereby contributing to the achievement of the internal market (and to the reliability and security of supply). The Commission says that, because the development of interconnectors between Member States is one of the priorities of energy transeuropean network policy, it intends to propose a revision of the relevant guidelines, to stress the goal of the optimal functioning of such networks in the context of the internal market for energy.

(b) Proposed Directive

1.19  The key features of the proposed Directive would be:

    —  to set dates of 1 January 2005 for all electricity and gas consumers to have a choice of suppliers, with intermediate dates of 1 January 2003 for industrial and commercial consumers of electricity and 1 January 2004 for industrial and commercial consumers of gas;

    —  to require the legal separation of transmission and distribution systems from the production and supply businesses in vertically integrated companies;

    —  to require all Member States to have independent regulatory authorities for both electricity and gas markets, with responsibility for the approval of national tariffs and the terms of access to national networks;

    —  to require third party access to electricity and gas transmission and distribution systems, on the basis of published tariffs approved in advance by the regulatory authority (with access to gas storage being either regulated or negotiated);

    —  to require Member States to ensure a high level of consumer protection, dispute settlement mechanisms, and transparency of contractual terms: this would include a new universal service obligation for the supply of electricity, with an obligation on Member States to report to the Commission every two years on the measures taken; and

    —  Member States would also have to ensure that public service obligations in such areas as environmental protection were met.

(c) Proposed Regulation

1.20  The proposed Regulation would lay down the principles to underpin cross-border trading in electricity, covering charges for access to national transmission networks, the management of congestion, and the allocation of interconnector capacity. In essence, the approaches adopted, particularly to charging, would need to be transparent, non-discriminatory, and to reflect the actual costs incurred. The Regulation would also set up a regulatory committee chaired by the Commission and made up of representatives of the Member States, and one if its tasks would be to approve, by means of qualified majority voting, binding Commission guidelines on the detailed procedures for access to cross-border electricity transmission capacity. The committee would also advise the Commission in decisions on the amounts of compensation to be received by transmission system operators for transit flows of electricity across their system.

The Government's view

1.21  In his Explanatory Memorandum of 28 June 2001, the Minister for Energy and Industry at the Department of Trade and Industry (Mr Brian Wilson) says that the Government supports full market-opening in the Community electricity and gas sectors and is happy with the broad thrust of the proposed Directive. It regards the provisions on regulated third party access, independent regulation, and legal separation of transmission and distribution as particularly important in meeting the aim of effective competition. He says that the Government agrees that there is a need for a mechanism to agree cross-border trading arrangements and to enforce the arrangements agreed, and that it therefore supports the objectives of the proposed Regulation. However, he adds that the scope of the Commission's proposal and its remit in making proposals will need to be considered carefully, and that it is important that these should be limited to those issues necessary to facilitate cross-border trading, with national regulatory systems being left to national regulators to determine.

1.22  The Minister says that, for Great Britain, the proposals would require minimal adjustment of the existing regime without imposing additional costs or savings, and will have a negligible effect of the operation of businesses. In Northern Ireland, the means and costs of moving to a fully liberalised market are the subject of a current consultation by the Regulator, and the position there is as yet unclear.

Conclusion

1.23  Although we note the Government's view that there would need (at least in Great Britain) to be only minimal adjustments to the existing arrangements as a result of these proposals being adopted, this does nevertheless strike us as being an important document, not least as an indicator of the willingness of certain other Member States to embrace a high degree of market openness in these sectors. For that reason, we consider that the document should be debated, if not in isolation, then at least alongside the Commission's Green Paper on a strategy for energy supply, which has already recommended for debate in European Standing Committee C.[4] However, in view of the importance here of the views of the other Member States, we think it would be helpful if, before the debate takes place, the Minister could set out in a Supplementary Explanatory Memorandum their reactions to the proposal and the likelihood of it being adopted in its present form.


1   OJ No. L 27, 30.1.97, p.20. Back

2   The separation of the various elements within integrated businesses. Back

3   OJ No. L 204, 21.7.98, p.1. Back

4  (22096) 5619/01: HC 28-xi (2000-01), paragraph 2 (4 April 2001); HC 152-i (2001-02), paragraph 1 (18 July 2001). Back


 
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