Third way is not right way, says energy regulator

EU energy market regulators have criticised a proposal from France, Germany and six other member states to prevent their energy giants being forced to sell off their shares in transmission networks.

On Tuesday (29 January), ministers responsible for energy from France, Germany, Austria, Greece, Bulgaria, Latvia, Slovakia and Luxembourg sent the European Commission an alternative approach to bringing more competition to EU gas and electricity markets that would allow energy firms with generating capacity to keep shareholdings in transmission networks. The proposal, which will be discussed by energy ministers at their next meeting on 28 February, is known as the "third way" because it is an alternative to the two options favoured by the Commission: ownership unbundling (where firms are forced to sell off transmission assets) or an independent systems operator (ISO).

Under the rival proposal, which its advocates have called "effective and efficient unbundling", the independence of the transmission system operator (TSO) would be ensured by having a separate management board, premises and staff from the parent company although the parent company would keep its shares in the new entity. The TSO would have to draw up a compliance programme to set out safeguards to ensure operational independence and appoint a compliance officer to ensure that the programme was respected. The unbundled entity would have to draw up a ten-year investment plan, which would be examined by the national energy market regulator, to ensure that sufficient new transmission capacity was built. TSOs could be forced by the regulator to make certain investments or open projects to tender to outside investors.

But the plan has run into immediate criticism from senior EU energy market regulators. Walter Boltz, vice-president of the Council of European Energy Regulators and head of Austria’s national regulator E-Control, told a press conference in Brussels yesterday (30 January): "The third way looks like proper implementation of the second energy package," referring to EU legislation on liberalisation agreed in 2003 which required unbundling between generating companies and transmission networks. This package was deemed insufficient and was poorly applied by member states, prompting the Commission to propose a new liberalisation package last autumn.

Boltz questioned whether an unbundled TSO would be able to raise the necessary capital to make new investments. "Day-to-day operations could manage to be independent. But on the investment side would an unbundled TSO be able to draw on enough funds?"

Under the third way proposal, the parent company of an unbundled TSO would be able to "approve the annual financial plan" of the TSO and "set global limits on the level of indebtedness of its subsidiary".

The vice-president of Germany’s energy market regulator the Bundsnetzagentur (BNA) Johannes Kindler disputed Boltz’s view. "The management [of the TSO] would have the maximum liberty in investment decisions. They have to present ten-year plans to the BNA. We will check if the investment plan is an adequate response to the challenge of security of supply," he said.

Boltz also expressed concern that the third way proposal did not contain adequate sanctions to ensure that energy companies complied with their obligations. "There is nothing about sanctions. We have rules which are not being complied with. There are administrative fines of €10-15,000. That’s not a proper sanction. It has to be like in competition law, a percentage of revenue," he said, citing the example of the US regulator which could fine gas transmission companies up to $1 million a day. Boltz also said that regulators should have much stronger inspection rights to examine if companies were respecting EU rules. "We have no possibility for unannounced inspections," he said.

BNA’s Kindler also disputed this point. "The TSO cannot escape compliance," he said.

Steve Smith from UK energy market regulator OFGEM said that the third way looked like an approach which had been tried in the UK. British Gas had set up a separate management board to run the transmission company within an integrated group.

But, Smith said, shareholders had ultimately decided to sell off the business altogether because of the cost of a separate board.

EU energy market regulators have criticised a proposal from France, Germany and six other member states to prevent their energy giants being forced to sell off their shares in transmission networks.