Why Barroso could be tempted to take the third way

European Commission President José Manuel Barroso faces a tough choice over the coming days and weeks. He will have to decide whether a rival to the Commission’s own proposals for bringing more competition to EU energy markets should be treated as a serious option.

Well-informed sources inside the Commission and the European Parliament say that, in order to get a quick deal on the energy package, Barroso could be tempted to go for the option presented last week (29 January) by France, Germany and six other countries.

Falling in line with the two biggest member states would avoid the drawn out negotiations that would result from insisting on full ownership unbundling, so that energy supply companies do not own the network or grid, or a "deep" separation between supply of energy and control of the grid, ie, a tough independent system operator (ISO). Those two options, proposed by the Commission last September, face a substantial blocking minority within the Council of Ministers.

If Barroso gives in, he might also keep the support of German Chancellor Angela Merkel and French President Nicolas Sarkozy when he comes up for re-appointment as Commission president next year.

Energy Commissioner Andris Piebalgs told a hearing of MEPs last Thursday (31 January): "I remain convinced [that] ownership unbundling or a very strong ISO is the best way to ensure full structural independence of decision-making of the TSO [transmission system operator] and the best way of removing inherent conflict of interest in an integrated company." Referring to the Franco-German ‘third way’, he said: "If the third option can’t guarantee the independence of the TSO, I don’t think it can be a credible alternative".

The third-way proposal, which its authors have named "effective and efficient unbundling", aims to ensure independence of the TSO through separate management, staffing and premises from the parent company. The national regulator would oversee its independence from the parent. Crucially, the TSO subsidiary would have to present a ten-year plan including the investment in new infrastructure needed to end bottlenecks, partly across national borders, and ensure fair access to the grid for new suppliers. This is important because the expected massive increase in capacity from renewable energy sources such as wind and wave generation and photovoltaic cells will require smaller producers to have access to the grid.

Whether a TSO which is still ultimately owned by a supplier can make truly independent investment decisions will be the crucial test of the third way proposal. Under the Franco-German plan, the parent would still be able to limit the total financial resources of the subsidiary and set the maximum level of indebtedness. This raises doubts as to whether the subsidiary would really be free to invest in new capacity to remove bottlenecks, or indeed have any incentive to do so. The ‘pinch points’ generate healthy congestion revenue income for incumbents.

The Commission’s analysis into the effects of the third energy market package on the sector says that the best approach to the issue of the conflict of interest is structural, ie, where vertically integrated companies sell off their shares in the transmission network business so that the new entity can concentrate on developing its network business without worrying about the effects on the parent company.

Piebalgs wrote to German centre-right MEP Angelika Niebler, who chairs the Parliament’s industry, energy and research committee, saying: "Other forms of unbundling have been tried and found wanting. Legal and functional unbundling have not been able to overcome the incentive and opportunity for vertically integrated companies to use their networks strategically to exclude competition and keep markets tight. Only a structural solution whereby the networks are run by fully independent entities can achieve this."

The reaction to the third-way proposal from a number of energy market experts is that it does not go far enough to tackle the inherent problems in the sector. Jorge Vasconcelos of renewables energy company New Energy Solutions, a former head of the European regulators group CEER, told MEPs last week: "The new proposals are just translating into effective measures what should have been implemented in 2003." He was referring to the EU’s second energy market liberalisation package which required legal and functional unbundling.

But Matthias Kurth, chairman of the German energy regulator, the Bundesnetzagentur (BNA), denied that the proposal was what was already on the table. He added: "In German conditions it’s more feasible and could be done in a quicker time [than the Commission’s call for ownership unbundling]."

The fact that the third way could be agreed and implemented quickly is what may tempt Barroso to go for an early and politically less costly deal.

But pursuing the third way would delay moving to a fully integrated and competitive energy market for probably another ten years, undermining the EU’s chances of meeting its ambitious cuts in carbon dioxide emissions while improving energy security. The path of least resistance is tempting, but it will not deliver Barroso’s declared climate change aims.

European Commission President José Manuel Barroso faces a tough choice over the coming days and weeks. He will have to decide whether a rival to the Commission’s own proposals for bringing more competition to EU energy markets should be treated as a serious option.