Sparks fly over electricity

Date: 09/11/1995

By Fiona McHugh

AS Spain's turn at the helm of the EU draws to a close, its dream of opening up Europe's 136 billion ecu-a-year electricity market to competition seems unlikely to come true.

Both the Spanish presidency and the European Commission have wagered their political reputations on the successful conclusion by Christmas of talks aimed at dismantling the bloc's powerful electricity monopolies.

But with just over a month to go, member states are continuing to resist liberalisation plans and the credibility of both looks likely to be damaged.

While most of the EU's 15 member states still hope for agreement, none seem in the mood for a compromise and few expect a last-minute flurry of meetings to yield positive results.

Discussions currently underway in the Council of Ministers centre on how two rival liberalisation systems supported by two opposing member state camps might be reconciled.

The first, known as Third Party Access (TPA), would force energy companies to allow certain competitors to use their networks for an 'appropriate' charge. Thus privatised German generators could supply electricity to French industrial companies through the French national grid.

The second, invented and touted by France, is known as the Single Buyer Model (SBM). It would introduce competition to the production, but not the distribution, of electricity.

Under SBM, deals between electricity users and foreign suppliers would have to be reached through the host country's network operator, which would be the sole purchaser of electricity supplies within that country.

Unable to pick one model, energy ministers decided last year to draw up a co-habitation plan which would allow the two to co-exist, thus giving member states the right to choose different routes to a common destination - a free and open energy market.

While that seemed like a perfect solution to a tricky problem, the reality of squeezing identical economic effects out of contrasting systems has proved exceedingly difficult to achieve.

“I think it is unworkable,” said one diplomat close to the talks. “On some issues such as the unbundling of accounts, progress has been made but on the key issues such as the equivalency of conditions, we are stuck.”

One of the main sticking points concerns the definition of 'eligible' customers, or customers entitled to shop around for cheap power. France, Italy, Greece and Ireland want that right to be limited to large industrial companies and not extended to distribution companies. The UK, Netherlands, Germany and the Nordic countries, on the other hand, want the latter included.

“If the benefits of liberalisation are to be passed on to regular consumers, then distribution companies must be included,” says Kees Weening of EnergieNed, an association of Dutch distribution companies.

Spain suggested that member states should be obliged to allow large industrial users to negotiate their own deals, but said they should be allowed to decide whether or not to extend that privilege to distributors.

But that idea won few supporters at a high-level Council meeting held last week, with most countries agreeing it would do little more than create an unlevel playing field.

Another related stumbling block is the definition of large industrial users. At the moment, they are described as consumers who use more than 100 GigaWatt hours of electricity per year. Northern member states maintain that this threshold, which is almost seven times higher than the UK's when it started liberalising, is far too high.

“It accounts for no more than 5&percent; of the EU electricity market, which is simply not enough. We will continue to insist on a substantial opening of the market,” says one British negotiator.

The extent to which Independent Power Producers (IPPs) are to be allowed to produce electricity is also causing problems.

Under the revised presidency text, IPPs would be granted licences to operate. But member states would be allowed to limit their production in order to protect public service obligations or until a transitional period of 15 years has expired.

Unsurprisingly, those restrictions are unacceptable for the EU's liberalisers.

So far, marathon talks in the Council seem to have gone nowhere. “Spain left the last meeting with a flea in its ear. It knows the presidency's plans are in serious trouble,” said one negotiator.

“Nobody was impressed by the Spanish compromise. France thought it went too far and we thought it did not go far enough,” said another.

Spain is expected to come up with a new proposal within a fortnight, but few expect it to break the deadlock. “It will be extremely difficult for Spain to find a middle ground,” warned one French diplomat.

Liberalisation of the energy sector, unlike that of the telecoms sector, has been limping along for almost half a decade.

Energy Commissioner Christos Papoutsis expressed high hopes of a breakthrough earlier this year, hopes which have so far been dashed.

Papoutsis warned then that “if no progress is made, the Commission will have to reconsider the whole approach taken during the past four years and evaluate which other strategies and instruments might be applied to realise the internal market in electricity and natural gas”.

He did not say what those instruments might be, but many interpreted his remarks as a veiled threat to use powerful monopoly-busting powers, granted under Article 90 of the Treaty of Rome, if member states did not shape up.

Competition Commissioner Karel Van Miert has long been waiting on the sidelines of the debate and has left no doubt as to his readiness to move into action. “One thing must be clear. Within the logic of the internal market, this will not be delayed for ever. I am determined,” he said last year.

So far, the Article 90 option has been eschewed because of ardent opposition from member states, but the Commission's patience is wearing thin.

Van Miert is known to be frustrated by the lack of progress in this area and has tried to prod private electricity firms into lodging complaints with DGIV, the Directorate-General for competition.

Court cases currently hang over six member states accused by the executive of maintaining illegal state monopolies. Should energy ministers fail to agree on a liberalisation plan, those member states are likely to find themselves in the dock before the end of next year. “If we do not come to heel by next year, I am sure it will press ahead with court action,” said an Irish diplomat.

The Commission's original proposal, which was tabled in 1992, introduced mandatory third party access to electricity grids and gas pipelines but that was later changed to negotiated third party access in the face of stiff French opposition. Last year, France proposed the single buyer system as an alternative to a negotiated TPA.

Should energy ministers agree - against the odds - on a common position in December, a revised text will then go to the European Parliament for a second reading, where it is likely to face an equally rough ride.

Finland and the UK have already opened up their electricity markets to competition and Sweden is expected to follow suit next January. According to the Centre for the study of Regulated Industries (CRI) in London, the average domestic electricity bill in the UK has fallen by 5.46 ecu in the past year.