Commission seeks to break up energy giants

European energy giants such as Germany’s E.ON and France’s Electricité de France (EdF) would have to sell off their transmission networks or create fully independent network operators, under plans to be presented by the European Commission on 19 September.

According to draft proposals to bring greater competition to European energy markets obtained by European Voice, the Commission wants member states to choose between two options to create a level playing-field on the Union’s energy market. Either there should be full ownership unbundling, where generating firms would have to sell off their transmission network assets, or independent system operators (ISOs) will run the network. Under the second option, ISOs’ management and investment decisions could not be influenced by generating companies even if they were still the ultimate owners.

If member states chose the ISO approach, they would be subject to tougher regulation and the Commission would ultimately "certify" that such operators were truly independent.

The Commission’s approach, which is currently being discussed by all directorates-general before it is formally approved, reflects strong opposition from Germany, France and seven other member states to ownership unbundling. Ministers from the nine countries wrote in July to Andris Piebalgs, the European commissioner for energy, saying that "full ownership unbundling would not be able to deliver the necessary positive effects on competitivity, security and sustainability of energy supply".

France and Germany are opposed to any moves to break up their successful energy giants, but full unbundling is supported by seven countries including the UK, Sweden and the Netherlands. In order to address German complaints that compulsory ownership unbundling could fall foul of a constitutional ban on enforced sale of assets, the Commission is proposing that shares in companies which own both generating and transmission assets could be split into shares for two separate entities, the generating and transmission companies, although the new shares would be attributed to shareholders of the original company.

An impact assessment which accompanies the proposals says that ownership unbundling "offers the best guarantees from a competitive point of view" and "stimulates investments, reduces market concentration and brings down prices". The ISO option is an "alternative solution" provided it is coupled with "more stringent regulation", the report says.

In return for offering member states the possibility of creating ISOs rather than accepting ownership unbundling, the Commission is insisting on a range of measures to strengthen regulation. These include greater powers and better guarantees of independence for national regulators and new powers for a central "agency for the co-operation of energy regulators". The Commission is proposing that this new body would have decision-making powers over exemptions from unbundling rules or third party access to new infrastructure projects like interconnectors or liquefied natural gas (LNG) terminals. It would also be empowered to resolve disputes between national regulators and review their decisions.

The Commission seeks greater transparency on the energy market by requiring companies to release data on gas stocks, forecasts of supply and demand and the costs for balancing energy networks.

It also wants to extend current rules on legal and functional unbundling to storage system operators and to define rules on how storage operators offer third party access, how they allocate capacity and manage network congestion.

Reports of the Commission’s likely approach received a cautious welcome from John Mogg, chairman of the European Energy Regulators’ Group (ERGEG). "The European regulators welcome in principle an EU regulatory agency. But such a body can only be effective if its powers and independence are assured," said Mogg.

But Luxembourg Green MEP Claude Turmes doubted whether a new agency would be able to stand up to a strong national regulator like Germany’s. "Would ERGEG plus [the new agency] have the power to interfere if a German ISO starts playing games?" asked Turmes.

Two-pronged approach seeks stronger powers for regulators

The European Commission’s strategy of a two-pronged approach on the energy sector, offering member states the option of ownership unbundling or setting up truly independent transmission system operators, reflects the political reality that two of the Union’s most powerful member states, Germany and France, are doggedly opposed to attempts to break up their national energy giants.

The Commission’s draft proposals make it quite clear that it still favours full unbundling, stating: "Existing unbundling provisions are not sufficient to ensure a well-functioning market." Although the 2003 legislation on the EU’s gas and electricity markets contained requirements for network operations to be "legally and functionally separated" from supply or generation activities, the Commission says that problems persist, especially where the transmission system operator is a legal entity within an integrated company.

These include integrated companies shutting new entrants out of the market by denying them access to the network, privileged access to sensitive information from the system operator to the generating business and a distortion of investments as suppliers have no incentive to build new transmission or connection capacity.

Whether the independent system operator (ISO) approach will be effective will depend on giving energy regulators significantly strengthened powers at both national and EU level. The Commission is calling for greater guarantees of political and operational independence of national regulators.

While some regulators, such as France’s, have wide-ranging powers, they are not independent from the government as they make recommendations to line ministries. At the same time, the Commission wants to create a new agency for co-operation among energy regulators which would gain new decision-making powers at EU level, going beyond the advisory role of the existing organisation, the European Regulators Group for Electricity and Gas (ERGEG). The agency would have the power to review decisions taken by a national regulator and would decide on disputes between national regulators.

Reports of the Commission’s approach have been given an initial welcome by John Mogg, chairman of Ergeg and the Council of European Energy Regulators. Ergeg’s position is that ownership unbundling is the best option to ensure a competitive energy sector. But he told European Voice: "If an alternative approach of an ISO surfaces, it must at minimum be a deep ISO model and effectively regulated by independent regulators with appropriate powers."

Mogg said that national regulators should be independent both from commercial interests and direct political influence. In particular, they should have the power to request information, to carry out investigations and to apply effective sanctions, he added.

While EU energy regulators would welcome an EU regulatory agency, such as the Commission is suggesting, Mogg said that it could only be effective if its powers and independence were assured. "If it only has an advisory role, it will have no real teeth," he said. If this were the case, the opportunity for putting in place strong and effective regulations, which was essential for much-needed investment, would be lost, he warned.

Mogg said that proposals to improve access to gas infrastructures such as storage and liquefied natural gas would be welcome. He added that ERGEG’s monitoring of the compliance of storage operators with the voluntary guidelines had "shown repeatedly disappointing results".

Luxembourg Green MEP Claude Turmes expressed concern that the Commission’s approach appeared to leave "too much scope for subsidiarity", referring to the principle under which decisions should be taken at the lowest level possible, privileging the national arena over the EU. Turmes said that even if a new body in Brussels had additional powers, referred to as ‘Ergeg plus’ as a reference to boosting the existing organisation’s remit, he did not see "how Ergeg plus would interfere with the functional operations of an ISO in Germany".

As France and Germany are opposed to ownership unbundling and do not have ISOs which would meet the Commission’s criteria, he predicted that the French and German Commissioners Jacques Barrot and Günter Verheugen would lobby for a third option, the status quo, to be added to the Commission’s approach.

European energy giants such as Germany’s E.ON and France’s Electricité de France (EdF) would have to sell off their transmission networks or create fully independent network operators, under plans to be presented by the European Commission on 19 September.