London calling the shots on network rules

There are similarities and striking differences in how member states are responding to the parallel efforts to revamp energy and telecoms regulation, writes Simon Taylor.

While some members of the European Parliament worry that the Barroso Commission’s commitment to better legislation means fewer legislative proposals to get their teeth into, it is not a complaint one hears from MEPs working on energy and telecoms. The Commission has presented two major legislative packages on energy and telecoms, which will keep decision-makers busy until the end of next year and possibly into the start of 2009.

The third energy package and the telecoms reform have a common aim - bringing more competition into the two sectors and ensuring a level playing- field in the single market. The two packages have some similar features including a proposal to boost regulatory powers at EU level with the creation of new bodies with enhanced powers. They also involve measures to weaken incumbent operators’ dominance over their respective industry through greater separation of activities.

For energy, the Commission is calling for ownership unbundling, which would oblige energy producers to sell off their shares in transmission system operators. For telecoms it wants regulators to have the power to impose functional separation where the business activities of running the network and offering services via the network are separated. But telecoms companies which own the networks could still own the services companies.

While the two packages have similarities in objectives and approach, the response from member states to the two reform proposals has been markedly different. As Monday’s (3 December) Energy Council showed, several countries led by France and Germany are rejecting ownership unbundling and the alternative of an independent system operator. But the Commission’s proposal for an Agency for the Co-ordination for Energy Regulators (ACER) has met widespread support with only a few questions over some details.

The vast majority of member states accept the need for the powers and independence of national energy regulators to be enhanced and for an EU-level body to decide on cross-border issues such as interconnectors.

In the telecoms sector, the proposal for a European Telecoms Market Authority (ETMA) has been received more negatively by member states. Whereas on energy the UK has been strongly supportive of ACER, it is "not convinced" of the need for a new EU telecoms agency, believing that the current co-ordinating body for electronic communications networks and services, the European Regulators’ Group (ERG), should continue its work. The UK’s position is partly motivated by reluctance to set up a new EU body which could need 130-150 staff and would absorb the responsibilities for network security currently being handled by ENISA, a bespoke agency in Crete. But Britain is in favour of functional separation as a remedy for competition problems, provided it is done in co-operation with companies, and has applied this approach to BT, the former state telecoms monopoly, now privatised.

However, the Commission’s telecoms reform proposal faces opposition from other large member states. Germany is against regulators having the option of requiring functional separation and is opposed to the new agency. Spain is against functional separation, as is France, although the French government, which will have to deal with the package when it has the EU presidency in the second half of 2008, is said to be considering giving the regulator the option of functional separation. Poland and Italy support separation.

The difference in member state reactions to the proposed energy and telecoms agencies can be explained by the different levels of competition in the two sectors and the precise set-up and powers of the new central regulatory bodies. The telecoms market has been opened to competition to a far greater degree than the energy sector, which is still dominated by large national champions, combining generation and transmission businesses, like Germany’s E.ON and RWE and France’s EdF.

Earlier EU directives required a degree of legal separation of generation and transmission businesses, but an inquiry into the functioning of the market found lingering competition problems. These are down, in part, to certain ‘integrated’ companies exploiting their control over and knowledge about transmission systems to the detriment of their rivals.

In addition, competition in the energy sector depends far more on key capital-intensive infrastructure projects such as cross-border interconnectors. In the telecoms sector it is cheaper to get access to networks, making it easier for new entrants to gain a foothold in the market.

The proposal for the new energy regulator would allow the current energy regulators’ co-ordinating group ERGEG, which has next to no formal powers at EU level, to catch up with its current telecoms counterpart. It would gain powers over cross-border issues but national regulators would retain their role and see their competences extended under the Commission proposal.

For telecoms the new set-up involving ETMA would give the Commission powers to address cases where national regulators were failing to remedy competition problems effectively or too slowly. At present the Commission can only intervene on national regulators’ decisions as to whether there is dominant behaviour in a national market or market segment. Its views on whether measures recommended by national regulators are sufficient are not legally binding. The Commission points out that with the current set-up, remedies are applied very unevenly across the EU depending on the national authority’s approach.

The UK argues that ERG should be allowed to continue its work to improve best practice among national regulators to achieve a more even approach.

But there may be another element at play. Some believe that the UK’s opposition to a new telecoms agency is linked to fears over a central EU regulator for financial services. Given the current financial market turmoil, questions are being asked about whether the existing set-up for financial products provides an effective way to regulate cross-border activities. The UK may be trying to avoid precedent-setting and spill-over from telecoms to financial services.

There are similarities and striking differences in how member states are responding to the parallel efforts to revamp energy and telecoms regulation, writes Simon Taylor.