Working Paper Faculty of International Business and Economics Poznan University of Economics WP/01/2014

Michael Berger

Obstacles to the creation of a common energy policy

Poznań, February 03, 2014

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Obstacles to the creation of a common energy policy

Michael Berger

Keywords: energy policy, energy security, European Community, , financial and economic focus, Energy Charter JEL: E02, E12, E13, E30, E61

Abstract In analyzing the notion of European integration it is evident that energy was a key issue right from the outset of post-war Europe, and the creation of the ECSC in 1951 is clear proof of this. When the six founding members took on their economies in order to replace war and antagonism with cooperation and prosperity, they decided to integrate and steel production within a community pool. These two most important sectors were central in the development of a new Europe. They reflected the dominance of possible energy sources at that time; although these sources have changed considerably by now, energy still is on the political and economic agenda of the .

The that followed in 1957 confirmed this notion of European integration but was based around nuclear energy supply and security issues. It is striking that although energy supply and energy security were seen as central for the whole sector throughout the recent history of European integration, there has been limited success in the development of a common energy policy. While the ECSC sought to abolish all barriers to trade between its Member States by controlling subsidies and cartel-like behaviour among producers, this spirit had not been carried

 Paper has been accepted for publication by Tadeusz Kowalski. The author wishes to thank Ida Musiałkowska and Mariusz Szuster for comments. All remaining errors are those of the author.

The author is a PhD candidate at the Faculty of International Business and Economics, Poznan University of Economics.

2 forward with all conscientiousness and consequently, energy issues were left to individual member states which pursued their own policies. Other areas of European policy were within the focus of the Commission; in particular the common agricultural policy (CAP), common trade policy, competition policy or the common monetary policy (CMP) were successfully introduced and prevailed over national law.

The aim of this paper is to examine the reasons as to why energy has not been taken further in order to create a common policy on energy, similar to that of the agricultural sector. The reasons shall be explored that hindered member states or the Commission to take the necessary steps for a common policy on energy; why was a common policy within the energy sector not followed through, was it intentional or was there simply no agreement reachable? Can it be the case of the European Union having neglected the issue for too long or was it rather not practicable, not really desirable? Could it be the case that this issue is economically reasonable but politically not enforceable, or vice versa? Has the Commission or the European Parliament made any suggestions or proposals, and if so, which ones?

This work is based around two sections and its scope is to show the different approaches that have been introduced and suggested by various actors on a common energy policy. The first section of the paper is devoted to an analysis of the steps taken towards a Community policy in general, focusing on the idea of a common energy policy and the common market. The second section focuses on various proposals of the Commission towards a common energy policy and explains obstacles to this idea as well as behaviour of the market actors. The paper closes with conclusions.

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1. First steps towards a common European policy on energy

The analysis of the early developments on European energy policy shows that the ECSC Treaty was not a simple framework treaty, but rather a regulatory framework setting out detailed rules which were supervised directly by a High Authority1. This central authority applied rules directly and had wide ranging supranational powers without the requirements of implementation at a national level. The High Authority had the right to intervene in order to adjust production quotas and prices, to control state subsidies or impose levies on excess production2. Furthermore, it was concerned with the allocation of production in case of shortages, social and employment issues within the ECSC and was even in the position to grant loans to member states.

The six member states were over time concerned with various other issues in the sphere of European cooperation and integration. On March 17, 1948 a Treaty on Economic, Social & Cultural Collaboration and Collective Self-Defense was signed at Brussels by France, Belgium, The Netherlands, Luxembourg and the United Kingdom. The Treaty (Brussels Treaty) represented the first attempt to introduce new European arrangements as a response to the built up of a Soviet controlled Eastern Europe. The commitment to mutual defense as well as military cooperation was initiated by the Treaty and a plan for common defense was adopted and incorporated within a joint command organization. In December 1950, the Brussels Treaty powers decided to merge their military organization into the North Atlantic Treaty Organization (NATO)3, since it needed to back up its commitments with appropriate political and military structures. NATO thus, had steadily become the “central element in the West European security system”4.

In the meantime, the desire to integrate more industrial sectors within a common European context grew and sectors like agriculture, transport and energy became the focus of increased attention. A customs union based on the free movement of goods, persons, services as well as capital and the drawing up of common policies was envisaged by the Commission. Furthermore a European Defense Community (EDC) was proposed by France as a step

1 Declaration of May 9, 1950. The Treaty was signed on April 18, 1951 and entered into force on July 23, 1952. 2 ECSC Treaty, Title One, Article 4. 3 The North Atlantic Treaty was signed on April 4, 1949 as part of a broader effort to deterring Soviet expansionism, forbidding the revival of nationalist militarism in Europe and encouraging European political integration. 4 Origins of WEU at www.weu.int. Accessed on Feb. 02, 2014.

4 forward towards European integration which would have been organized on a supranational basis comparable to the ECSC [Fursdon 1980]. The idea for a common defense policy was developed in the aftermath of the Korean War in June 1950 when the threat of a possible communist attack by the North was still regarded as high and not too remote [Ruane 2000, p. 33].

Jean Monnet who was the leading figure of European integration at that time proposed in his function as General Commissioner of the French National Planning Board to René Pleven, French Premier and former Defense Minister, the creation of a new common defense mechanism. This suggestion was not only Monnet’s own thinking but took into account a wide reaching announcement that U.S. Secretary of State Dean Acheson made in a New York Conference5 when he met British foreign secretary, Ernest Bevin, and the French foreign minister, Robert Schuman. The message was that the United States would be prepared to take a step further and deploy substantial forces to Europe in order to defend Western Europe on the ground, however, this would only happen if the European allies were prepared to accept their part of responsibility as well as certain facts, namely that the whole effort could not successfully succeed without a German military contribution and therefore, the idea of German rearmament had to be accepted [Martin 1963, p. 656].

The French Premier René Pleven submitted Monnet’s initial proposal further to the French National Assembly on October 24, 1950, essentially suggesting the creation of a European army under a single military and political European authority with the involvement of German units in it. French foreign minister, Robert Schuman was not in principle against rearmament of West Germany at some point but the pace of the whole idea was regarded as politically impossible for him to accept the plan publicly, since not many people in France would understand the importance of such a development. Indeed, the proposal sparked fierce discussions in France and the sense was that such a step could appear provocative towards the Soviet Union and her Eastern allies [Ginsberg 2010, p. 49]. The attempt for a purely European military army was eventually defeated on a procedural motion without a debate in the French National Assembly in August 1954, which refused to ratify the Treaty6.

5 Conference of the Foreign Ministers of the U.S., the UK and France with regard to Germany on September 19, 1950 in New York City. See FRUS 1950: III, 1286. 6 In May 1952 the attempt for a purely European military army led to the signature of the European Defense Community (EDC), setting up a treaty in which Belgium, France, Italy, Luxembourg, the Netherlands and the Federal Republic of Germany were due to participate.

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The proposal of a European army plan must be approached from a broader global perspective; according to Aimaq, the French proposal was positioned within a context involving the major postwar processes of the emergence of a transatlantic partnership, European integration and decolonization. In this context, the thesis is that it was not merely the fact of German rearmament that prompted Paris to pursue a European army option but in addition French colonial ambitions, “specifically against the background of the Indochina War, coupled with the nature of Franco-American relations” [Aimaq 1996].

The refusal to ratify the EDC-Treaty by France affected furthermore another proposal of European integration, the European Political Community (EPC) which was proposed in 1952 as a combination of the existing ECSC and the planned European Defense Community (EDC). A draft EPC-Treaty was drawn up by the ECSC assembly with a supranational executive accountable to the Parliament. The European Political Community project was abandoned in 1954 when the French National Assembly indicated that the EDC would not be ratified.

The failure to create a common political and defense policy was regarded as a big setback but some leaders7 within the ECSC regarded a Community plan as necessary in order to provide solutions to the specific problems of economic integration [Griffiths 1997, p. 395]. In May 1955, the Foreign Ministers of the three Benelux countries Belgium, the Netherlands and Luxemburg adopted a joint memorandum8, essentially suggesting the extension of the responsibilities of the ECSC in the areas of transport, energy and nuclear energy as well as in the social, economic and financial fields. The idea of an atomic energy community was regarded as an important and promising step towards a European integration, since such a community would have the advantage of covering the increasing need for energy by lower- priced means rather than relying on costly oil imports which, in addition, would lead to a long term dependency9.

7 So, for instance, Dutch Foreign Minister Johan Willem Beyen who in May 1953 set out a framework within the ECSC Membership for the establishment of general economic integration with the aim of progressively developing a common market in Europe. Similar approaches were made by his Luxembourg counterpart, Joseph Bech. For further reading see: ”The Beven-plan”, European Commission. 8 The of May 18, 1955 proposing the establishment of an Economic Community based on a general common market and a sectoral approach for transport and energy, especially nuclear energy. 9 Report by the Committee of Three Wise Men.

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1.1. Steps towards a common policy on energy

Initial efforts were also made for a coordinated energy policy to be considered at the conference of Messina, where the Foreign Ministers of the ECSC met in June 1955. In addition to the agenda of nominating a member of the High Authority and appointing a new President and Vice-Presidents for the forthcoming period, the Conference also included action plans for a new European integration, with different Committees und specialized subcommittees being responsible for different topics. The different committees examined the proposed issues such as the common market, investments and social issues, transportation, energy, customs and nuclear matters10

At the which was attended by the Foreign Ministers of the ECSC and chaired by Joseph Bech of Luxemburg, the ministers elaborated on a possible way of extending European integration to other sectors of the economy and focused mainly around the memorandum submitted by the Benelux countries. The Conference further created an Intergovernmental Committee which was under the chairmanship of the Belgian Foreign Minister Paul-Henri Spaak and held its constituent meeting in Brussels11. The committee composed of delegates from the six governments of the ECSC and was tasked with the outline and drawing up of a report focusing on of two main topics12 :

- the establishment of a common market and common institutions, as well as

- the establishment of a European Community for the peaceful use of atomic energy.

The Committee debated almost a year on this task and finally published the Spaak Report on April 21, 1956 concluding that the gradual elimination of trade barriers by creating a customs union would be the proper way to follow. It was particularly in the Dutch interest to get freer trade in Europe since the concept of a common market promised social and economic development for an import-dependent country like the Netherlands. Similarly, Belgium’s and Luxemburg’s export-dependence on the steel market led the respective governments and interest groups to press for low common tariffs within a customs union [Griffiths 2000, p. 98]. The Spaak report identified ways of attaining the objectives set by the

10 Centre Virtuel de la Connaissance sur l‟Europe (CVCE), The Intergovernmental Committee created the Messina Conference. 11 Constituent meeting on July 9, 1955 at the offices of the Belgian Foreign ministry in Brussels. 12 Centre Virtuel de la Connaissance sur l’Europe (CVCE), The Intergovernmental Committee created the Messina Conference.

7 initial memorandum13 of the ministers and set out the broad lines for a general common market. Taking the experience of the ECSC as an example, the report went beyond supporting a simple liberalisation of trade and recommended instead a general customs union with a common external tariff. In the theoretical context, liberal intergovernmentalism reflects a baseline theory in the study of regional integration. According to this theory, national governments are viewed as being fully rational having close to perfect information about their own preferences across the multitude of issues under discussion and possess the necessary analytical knowledge to agree upon the Pareto frontier outcome of efficient agreements [Moravcsik 1998, p. 23], Moravcsic’s analysis on the evolution of EU integration concludes with the issue-specific preferences of states, deriving from the equilibrium between concrete economic interests and geopolitical concerns [Moravcsik 1998, p. 38]. Alter and Steinberg argue on this line of argument that the political implications of the ECSC were much more important than the economic effect; the whole integration process would need to be seen in the rapprochement between France and Germany [K. Alter and D. Steinberg 2007, p. 103]. A similar argument is being brought forward by John Gillingham in arguing that the economic impact of the ECSC was rather slight, with the overall increase in the coal and steel trade during the early years of operation stemming from the general growth of the European economy [Gillingham 1991, p. 300].

Moravcsik’s Pareto frontier analysis has however been challenged in the academic theory: due to the complex nature of international negotiating situations, with sometimes highly complex and technical issues, individual delegations often lack the analytical skills and substantive knowledge to find the Pareto frontier of mutually acceptable agreements. Furthermore, they are often unclear about their own preferences and even more uncertain of the preferences of other actors [Hampson 1995]. In such complex, multilateral negotiations, even if the parties have adequate skills and knowledge to find the frontier, there is still the question of the distribution of gains along the frontier, with a proposed solution from one party often being perceived to be biased by other actors, “thereby decreasing the probability of its acceptance” [Dupont & Faure 2002, p. 51]. Third party intervention can thus be necessary in order to achieve a mutually acceptable agreement, by providing informational resources, analytical skills, or substantive expertise [Hopmann 1996, Young 1999, Elgström 2001].

13 The BeNeLux memorandum of May 18, 1955.

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The Spaak report led to ongoing discussions at the Brussels Conference in July 1956, leading to the adoption of the Treaty establishing the European Economic Community (TEEC) and the European Atomic Energy Community (Euratom) on March 25, 1957. Although considerable interest had been devoted to energy resource issues in general only nuclear energy was regarded as vital enough in order to be treated separately within the European integration process. In particular France was very interested in the advantages of a large community market, since it viewed “research” as the most important “department” of the nuclear industry [Faure 1956]. A common approach would increase productivity within the sector and dissuade a country from going along, an avenue that has already been explored in the past. France’s experience and existing technology in this matter would enable her to complete the full cycle of atomic process, in a combined scientific effort and a common budget of around 20% of total expenditure on nuclear research by the Member States. According to Maurice Faure, French State Secretary for Foreign Affairs, there was a real danger that Germany would catch up very soon on nuclear technology, if Euratom was not created within the Community14.

The Intergovernmental Committee regarded nuclear energy “as the main primary energy source” and was therefore only concerned with conventional energy issues within the context of coordinated investment planning in the period of transition to nuclear energy [Daintith 1987]. Furthermore, nuclear energy enjoyed widespread support at that time, it was regarded as a key factor in strategic and economic terms and Euratom’s mission was to contribute to the rapid development of an industry that would improve the production of large amounts of low-cost nuclear-powered energy for a better standard of living within Europe’s Member States15. It was in essence research-driven and technical in nature, it sought to promote research and disseminate knowledge. Nevertheless, the Euratom Treaty also contained certain commercial provisions [Berger 2012] such as the possibility for the Community to license patents, to advise on investment projects, to promote industrial cooperation and joint ventures as well as to provide a common policy for the supply of nuclear products and fissile materials16.

14 Maurice Faure, Junior Minister in the French Foreign Ministry and Head of the French Delegation to the Intergovernmental Conference on the Common Market and Euratom, in an interview given on July 4, 1956 to the French daily newspaper Le Monde. 15 Euratom Treaty, Title 1, Article 1. 16 Euratom Treaty, Title II, Chapter 6, Article 52.

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1.2. Creating a common market policy

The common market aimed at merging national markets, removing obstacles to free competition and creating a common economic policy within a specified geographic area in Europe. It also defined the general objectives of a common agricultural policy17 which were set out at the Conference of Stresa in July 1958. Here, issues of how agricultural productivity could be increased, markets stabilized and availability of supplies could be assured were discussed; in addition, price support was identified as the main policy instrument [Fennell 1997]. France’s role was very significant since she had the largest agricultural sector of all the Member States with nearly 27 per cent of the population being employed in agriculture in the year 1955 (see table 1). This in fact meant a considerable influence for the French farmers association to make policy. As a result, France has remained the largest recipient of CAP funds throughout the whole existence of the Policy. For France, agriculture played a major role in her economy and the fluctuations of food prices were seen as significantly influenced by agricultural markets; agricultural policy was therefore an essential cost factor in the non- agricultural sector and it was in France’s interests to ensure that the German market was open to her agricultural products [Grant 1997, p. 63]. According to Tracy, agriculture was historically so important to France, that its decline could have meant the decline of the whole nation [Tracy 1976, p. 3].

The main objectives of a common agricultural policy were related to food supply and food prices as well as farmers’ income problems. As a matter of fact, agriculture was only one issue out of many, but the Spark Report clearly made it obvious that the establishment of a common market without agriculture would be unthinkable [Fearne 1997, p. 14]. According to Manshold, agriculture was included in the integration process for changes and adjustments within the sector were essential with general economic growth [Mansholt 1963, pp. 83-89]. Particularly in France, severe food shortages caused by destruction of land during the war and low profits due to intercepted food supplies led to extreme unemployment and civil unrest among farmers. In addition, foreign currency resources were scarce in order to rely on food imports on a long term [Hoffmeyer 1958].

The pace which ensured the conclusion of the , allowed agriculture to be included only on broad terms without discussion on complicated agricultural policy issues. The real discussion of the design of the CAP began after the establishment of the EEC in

17 Treaty of Rome 1957, Title II, article 38.

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195818. Nevertheless, the Treaty was uttering the principles of an ambitious European policy, inviting the Community members to give up a narrow sector-based and nationalist vision and encompass the interest of European society as a whole.

Essentially, agriculture was given such great attention for it played a major role in the economy of the six founding countries of the EEC in relation to overall production, employment, and trade. Table 1 shows net foreign trade balance in agricultural products of the founding six countries, in addition to the UK.

Table 1: Main agricultural indicators in 1995-1960

a) In the three columns, the trade data for Luxemburg are included in the data for Belgium. Source: OECD (1969)

It can be noted from table 1 that Holland was the only member state which had a positive net foreign trade balance in agricultural products within the envisaged period. An interesting aspect is the minor role of agriculture in the overall economy of the United Kingdom and the fact that this country was a considerable net importer of agricultural products. In Germany, the effects of the war were still visible in terms of agriculture and this is also reflected in table 1, despite the greater importance of the agriculture industry in comparison to the UK. Thus, the importance of this industry sector within Europe was easily understandable. France’s share of total employment in agriculture was very high, and it was essential to raise productivity in this sector, Furthermore, the issue of farmer incomes was of

18 The Common Agricultural Policy came into being on January 1, 1958 after the establishment of the EEC.

11 great importance since they were legging behind considerably from incomes in other sector [OECD 1961]. Italy, which had an even higher share of total employment in agriculture, had in addition a rural small-scale infrastructure which had been damaged by the war being in great need of structural policy measures.

The CAP has been the touchtone of European integration so far and despite its criticism in various areas19, it has been this policy that introduced a new intercourse between the community and its economic actors. Various structural policy reforms have taken place since then adjusting certain structural problems and implementing new measures, but the CAP introduced the existence of the most supranationally integrated policy.

2. Commission proposals towards a common energy policy

Following the establishment of the three Communities (the ECSC, the EEC and the Euratom) the Commission affirmed repeatedly the need for a coordinated energy policy. The High Authority set up an Inter-Executive Committee (IEC) in order to develop a policy focusing on the creation of a common energy market [El-Agraa 2011, p. 258]. The creation of the High Authority corresponds, according to Pollack, to a functionalist logic for delegation and ensures the credibility of policy commitments, in addition to monitoring compliance, credibility and impartiality [Pollack 2003, p. 77-78]. By delegating portions of their own sovereignty, Member States like France could minimize their concerns that Germany would use her economic power unchallenged. The IEC which was formed in 1959 and chaired by Pierre-Olivier Lapie of the ECSC’s High Authority, released a memorandum with joint proposals of the three Executives of the for a common energy policy in June 25, 1962. According to this memorandum the development of the common market needed the “gradual harmonization of member countries' economic policies in various fields” with energy policy being of particular importance for the following reasons20:

- “energy playing a part in all economic activities, and any failure of supply to keep up with demand would have very serious consequences;

19 So, for instance, the income problem which is well described in the economic literature, based on the diagnosis by Schultz [1945]. Further, price support as one of the backbones of agricultural policy has been criticized widely. 20 „Energy Policy in the European Community”, Memorandum of the Inter-Executive Energy Committee published on June 25, 1962 in Strasbourg.

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- the cost of energy being one of the major factors determining a country's international competitive position and the location of its industries;

- the coal industry employing more workers than most other Community industries, and a number of densely-populated industrial areas would be dependent on it for their wellbeing”..

Although the proposals specified long-term objectives for the reduction of costs, security of supply, long-term stability of supply and freedom of choice for the consumer, fundamental differences among Member States’ interests reduced any possibility of formulating any common energy policy in the near future. Coal-consuming countries like the Netherlands, Italy and Luxembourg were interested in cheap supplies while coal producers like West- Germany or Belgium favoured some sort of protection from coal and oil imports. France had considerable oil interests at stake and insisted on refined oil tariffs to be agreed [Chick 2007, p. 48]. Thus, the Community’s attempts for a common community energy policy did not develop any further.

Meanwhile, European integration did not stop there and the European was signed in Brussels on April 8, 1965 and came into force on July 1, 1967. The Treaty essentially established a Single Council and a Single Commission of the European Communities replacing thus the Commission and Council of Euratom and the High Authority and the Council of the ECSC21. The issue of a common energy policy had been revived after the Suez Crisis when the Council of the European Communities adopted a Directive obliging member states to maintain emergency stocks of oil and petroleum products in order to provide the Community with supplies of energy22. The Commission on the other hand also took action and presented guidelines for a common cooperation framework on security of supply issues and released its First Guidelines for a Community Energy Policy in December 196823. The paper took into account the proposals of the Inter-Executive Working Party on Energy and identified that there were still serious obstacles to trade within the Community as regards to energy products. Within this framework, the Commission released another paper

21 Treaty establishing a Single Council and a Single Commission of the European Communities (April 8, 1965). 22 Council Directive of December 20, 1968 imposing an obligation on Member States of the EEC to maintain minimum stocks of crude oil and/or petroleum products (68/414/EEC). 23 „First guidelines for a Community energy policy”, Memorandum presented by the Commission to the Council on December 18, 1968, COM (68) 1040.

13 called “Necessary Progress in Community Energy Policy”24 in 1972, confirming in principle the basic arguments of the First Guidelines Memorandum and suggesting further initiatives, forecasts and proposals for the individual energy sectors in order to “secure maximum cooperation with all States and regions which have an interest in it”25.

The Council adopted two Directives in accordance with these proposals26, Regulation 1055/72 on imports of crude oil and natural gas, effectively requiring member states to inform the Commission about their importations27, and Regulation 1056/72, imposing the requirement to notify the Commission on investment projects of interest to the Community in the petroleum, natural gas and electricity sectors28. These initiatives were introduced in the aftermath of crude oil price developments and supply shocks caused by the 1967 Arab-Israel conflict when Israel launched a preemptive strike against Egyptian forces in response to Egypt's closing of the Straits of Tiran.

In reaction to the institutional limitations of the community institutions in the area of energy policy, the Commission did not stop suggesting and urging new measures for the introduction of a new strategic energy policy within the EEC; it introduced a memorandum "Towards a new energy policy strategy for the Community" in June 197429. In order to guarantee "safe and lasting supplies under satisfactory economic conditions", the Council adopted the following guidelines30:

- “the political will to draw up and implement a Community energy policy is affirmed. This means preparing joint target figures constituting guidelines for national policies and, at the same time, major indicators for Community energy producers and consumers;

24 „Necessary Progress in Community Energy Policy”, Communication from the Commission to the Council forwarded on October 13, 1972, COM (72) 1200. 25 Ibid., p. 6. 26 The proposals in essence recommended: an immediate solution to the environmental problems posed by energy use; sustained effort to achieve a more rational use of energy; the adoption of a programme of research & development and improvement in the general conditions of production, refining, transport, stockage and use of energy; the development of renewable energy sources and new uses of traditional energy forms; cooperation with other consumer and producing countries. 27 Regulation (EEC) No 1055/72 of the Council of May 18, 1972 on notifying the Commission of imports of crude oil and natural gas. 28 Regulation (EEC) No 1056/72 of the Council of May 18, 1972 on notifying the Commission of investment projects of interest to the Community in the petroleum, natural gas and electricity sectors. 29 Council Resolution of September 17, 1974 concerning a new energy policy strategy for the Community, R/1472/74 (ENER 28). 30 Official Journal of the European Communities, Council Resolution C 153/1, Points 3, 4, 5 & 6.

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- emphasized that this Community energy policy implies close coordination of the positions of the Member States of the Community which would enable it progressively to express a common viewpoint on energy problems vis-à-vis the outside world;

- confirmed that the world-wide aspects of energy problems necessitate cooperation among the consumer countries and between them and producer countries, in which the Community as such and the Member States intend to participate;

- adopted the following guidelines: (a) as regards energy demand : reduction of the rate of growth of internal consumption by measures for using energy rationally and economically without jeopardizing social and economic growth objectives;

(b) as regards energy supply : improving security, under the most satisfactory economic conditions possible, by means of the following: - development of production o the hydrocarbon and solid fuel resources in the Community o diversified and reliable external supplies o a research and technological development effort ensuring the required development of the various energy sources

(c) consideration should be given to problems of environmental protection, in particular by respecting the guidelines laid down in the relevant national or Community programs, in the spheres of both production and consumption of energy”.

The adoption of these commitments expressed a certain degree of consensus among the Member States, albeit based on general guidelines and priorities. In essence, the Council confirmed the Commission’s suggestions on a common energy policy and included new milestones on environmental protection and energy saving issues. These suggestions were to be taken into account in the formulation of national policies. Already in December 1974, a further Resolution concerning energy policy objectives for 1985 was released by the Council31, announcing the intention to reduce the dependency of the Community on energy

31 The initiative was taken by the French Government at the Conference of Heads of Government in Paris on December 9 and 10, 1974 with the intention to call upon the Community institutions to work out and implement a common energy policy as quickly as possible. See at http://aei.pitt.edu/1459/1/Paris_1974.pdf.

15 imports from countries outside the union to less than 50 percent, and if possible to 40 percent, in comparison to the existing 65 percent of the year 197332. Energy saving measures should be introduced for the reduction of the growth rate of energy consumption within the Community as a whole in order to achieve by 1985 a level 15 percent below the January 1973 estimates.

Essentially, the objectives were to be reached by rather nonbinding recommendations based on voluntary cooperation of the economic actors and the various financial support programs. The Commission gave, in the meantime, further initiatives and suggestions on the rational use of energy such as the “Guidelines and priority actions under the Community energy policy” in April 1973, adopting principles of cooperation and non-discrimination, providing for rules governing the regulation of the Community market as well as calling for action on environmental protection33.

Parallel to the EEC actions, within the framework of international cooperation, the Organization for Economic Cooperation & Development (OECD) adopted further measures in order to tackle oil supply emergency issues through the creation of a new organization, namely the International Energy Agency (IEA) which was founded in November 1974. The Agency was established in Paris in the aftermath of the oil crisis of 1973 and was intended to act as an adviser to its member states; it was dedicated to respond to physical disruptions in the supply of oil, as well as serving as an information source on statistics about the international oil market and other energy sectors34. An automatic oil-sharing mechanism was provided for, “the Oil Sharing Safety Net” in case shortages in one of the member states would constitute a reduction in supplies of seven percent or more. The decision to utilize the framework of the OECD was taken because it already had legal status and experience in dealing with crude oil and other energy questions, had expertise in economic analysis and statistics, physical facilities and established staff, and was the principal organization of the industrial countries35. The policy requires that the trigger decision must be an objective one

32 Council Resolution of December 17, 1974 concerning Community energy policy objectives for 1985, Official Journal C 153, 09/07/1975, P. 0002-0004. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31975Y0709(02):EN:NOT. 33 „Guidelines and priority actions under the Community energy policy”, Communication from the Commission to the Council presented on April 27, 1973, SEC (73) 1481. 34 http://www.iea.org/Textbase/nppdf/free/2-ieahistory.pdf. 35 The IEA Oil Emergency Sharing System is reinforced through a set of tools to manage short-term oil supply disruptions such as the coordinated use of stockdraw, demand restraint measures, fuel switching and surge oil production.

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“without being conditioned by prior political agreement among the Members”36. Interestingly, the trigger decisions are not designed to be technical ones made by individual Members but rather administrative and made by the Secretariat of the IEA37. As a matter of fact, the formal sharing system has not yet been deployed by the IEA but it can be regarded as a strategic safety net for a future crisis scenario.

2.1. Obstacles to the creation of a common energy policy

During the following years a clear swift in interests took place and it became clear that from now on the issue of energy security with ongoing access to supply was more imminent than that of low prices for oil imports. Evidence of this was Council Resolution No. 1729/76 which was adopted in June 1976 in order to “supply the Commission with the information needed to assess the energy supply situation in each Member State”38 or the Resolution on measures to be taken on an actual or imminent shortfall in the supply of crude oil39. Despite the fact that the Community was very keen to solve the forthcoming issues, it was not able to overcome the problem of shortage of affordable petroleum products which was in contrast to a great surplus of coal and coke. A great deal of it could be used for the fulfillment of obligations arising from the newly introduced Directive obliging the member states to “maintain minimum stocks of fossil fuel at thermal power stations”40. In order to contain the problem in a controllable manner, measures were taken to enhance the surveillance of imports of hard coal originating in third countries41.

Despite the divergent interests of the member states and the continuing barriers to trade in energy, the Commission brought forward new initiatives during the course of time, releasing a communication entitled “The Development of an Energy Strategy for the Community” in October 198142. The document on the one hand underlines the need for continued action both on the energy demand side (energy saving and rational use of energy) and on the supply side (diversification)43, accepts however the possibility of maintaining a

36 The History of the International Energy Agency, Volume Four, Bamberger 2004. 37 International Energy Agency, Volume Two, Major Policies & Actions, Richard Scott, p. 35ff. 38 Regulation (EEC) No 1729/76 (1) at http://aei.pitt.edu/8519/1/31735055261295_1.pdf 39 Council Decision 77/186/EEC. 40 Council Directive 75/339/EEC. 41 Council Decision 77/707/ECSC, Official Journal L 292 , 16/11/1977 P. 0011 – 0011 at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:41977D0707:EN:HTML. 42 COM(81) 540 final. 43 The Development of an Energy Strategy for the Community, October 2, 1981 at paragraph 3.

17 diversified and decentralized energy policy, since “equivalence of effort does not require any substantial centralization of energy policy instruments nor the pursuit of uniformity in the diversification of supply, which must vary according to national circumstances”44.

This shift in emphasis reflects a new approach by the Commission, suggesting in fact a framework of general principles rather than enforcing a rigid policy an energy issues which could possibly mean widening divergences between Member States in the security of energy supply as well as “adversely affect the level of economic activity in the Community as a whole”45. Thus, according to the paper, collective discipline that goes beyond “mere expressions of a common agreement” would be necessary in addition to a reflection of willingness within the policies of each member state to pursue common goals. The Commission would draw attention to progress made within the framework of common goals but also show constraints and weaknesses in order to ensure consistency. Further action in five main operational priorities on all energy sources was identified within this paper46:

- “ensuring an adequate level of investment both in alternatives to oil and in the more rational use of energy; - the development of a common approach to energy pricing and taxation; - the establishment of measures of Community solidarity to avoid instability on the markets; - the reinforcement of common policies in the fields of research, development and technological demonstration; - the further development of common approaches and initiatives in external energy relations”.

In conclusion, the Commission’s new approach could be regarded as the mere acceptance of facts, the aforementioned divergences cannot be regarded as new and neither were they peculiar to the energy sector. However, it came with a new dimension which will be show in the next section.

44 Ibid., paragraph 6. 45 Ibid. 46 Ibid., paragraph 10.

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2.2. Changing the focus on a common policy on energy

The new dimension in this way of thinking was the idea that the essence of these divergences was accepted as fact with a solution sought around them. A successful energy policy would have to manage the diversity of attitudes, experiences and policies of the different member states. According to El-Agraa, the goal of a common energy market was demoted, overall, “policy was concerned with changing the structure of energy balances rather than the structure of energy markets” [El-Agraa 2011, p. 259]. Another aspect is de Gruyter’s approach were he rightly points out that “the large Member States and their problems carry the greatest weight in the Community policy making process or obstructing it” [De Gruyter 1986, p. 10]. Thus, it has been argued that the Community would in essence work for the benefit of the bigger and economically stronger member states rather that for the benefit of all, something that has been stronger communicated throughout the recent crisis within Europe.

In 1986 the adoption of the (SEA) was completed,47 and it was in effect the first major revision of the 1957 Treaty of Rome in 1957, setting the objective of establishing a single community market by the end of 199248. In order to make this objective possible the legislative process was reformed by introducing the Cooperation procedure and the qualified majority vote within the Council49. The idea of a common energy policy played however no significant role in the emergence of the SEA and the Commission acknowledged in its subsequent Working Document in May 198850 that there were still “considerable barriers to trade in energy products within the Community”. The report proposed measures to eliminate these obstacles and recommended transparency of prices under the principles of free energy flows. Nevertheless, the SEA concept had some important stimuli towards the transformation of a common market, in particular by the adoption of qualified majority in cooperation with the European Parliament [Roggenkamp 2007, p. 227]. First directives on transparency of gas and electricity prices51 were adopted, and likewise on transit of electricity

47 The Act was signed at Luxembourg on February 17, 1986 by the nine Member States and at The Hague on February 28, 1986 by Denmark, Italy and Greece. It came into effect on July 1, 1987. 48 The Commission‟s programme to establish the internal market was mainly based on the Commission‟s White Paper on „Completing the Internal Market‟ from June 1985, COM (85) 301 (final), and the report of British Commissioner Arthur Cockfield in 1985, which produced 300 recommendations on how the single market could be brought into being. 49 Single European Act (1986), Title II, Chapter II, Section II, Article 16., OJ L 169 of 29.6.1987. 50 Commission Working Document „The Internal Energy Market‟, May 2, 1988 at COM (88) 238 final. 51 Council Directive 90/377/EEC of June 29, 1990, OJ L 185, 17.07.1990, p. 16-24.

19 and gas through the main transmission grids with the EU52. However, these directives were rather narrow in their scope and Member States did not feel obliged to move closer towards real energy sector liberalisation. Liberalisation was seen as the most efficient way to curb on high public expenditure and interference with the market, thus providing for productivity and engaging the private sector in order to bring about international competition. From a macroeconomic perspective, there was significant theoretical and empirical evidence suggesting that liberalisation would bring positive effects to network industries in terms of lower prices and better service levels53. Likewise, liberalisation and competition were also in microeconomic terms seen as a desirable objective, since opening the electricity and gas market was thought to enhance internal production and external market efficiency towards a better allocation of costs [Jamasb and Pollitt 2005, p. 12].

The Commission’s willingness to promote competition and elaborate towards energy liberalisation was demonstrated further by the issuance of draft directives for the completion of the internal market of electricity and natural gas54. However, macroeconomic aspects of Member States coupled with the introduction of the monetary union led the Commission to suggest measures for the balancing of energy-sector operating accounts and the release of the energy burdens from national government budgets [Green 2006, p. 259]. In order to promote competition and facilitate a more balanced business behavior within the industry, measures such as the generation of electricity, free access to transmission and distribution facilities and third-party access to the network were proposed [CEC 1988].

In 1995, an Action Plan was introduced following the release of a Green Paper55 and a White Paper56 in the same year. The Commission recognized that energy was a key sector within the Community which was becoming increasingly integrated both politically and economically and whose geopolitical responsibilities would be widening. The Action Plan thus defined objectives such as overall competitiveness, security of energy supply and environmental protection and introduced an “Indicative Work Program” over a five year period, in order to achieve the operation of the internal market and the convergence of

52 Council Directives 90/547/EEC of October 29,1990 and 91/296/EEC of May 31, 1991. 53 Directorate General for Enterprise & Industry, Observatory of Small and Medium Enterprises, SMEs and the Liberalisation of the Network Industries: Telecommunications and Electricity Markets, No.3, 2003, p.9. 54Council Directive 90/377/EEC of June, 29 1990 concerning a Community procedure to improve the transparency of gas and electricity prices charged to industrial end-users. Also, Council Directive 90/547/EEC of October, 29 1990 on the transit of electricity through transmission grids. Further, Council Directive 91/296/EEC of 31 May 1991 on the transit of natural gas through grids. 55 Green Paper „For a European Union Energy Policy‟, from January 11, 1995, COM (94) 659 final. 56 White Paper „An Energy Policy For the European Union‟, from December 13, 1995, COM (95) 682 final.

20 economic policies57. 1996 saw the introduction of the first Directive on the liberalisation of the electricity58 market, followed by the Directive on the liberalisation of the gas59 market in 1998. The Directives in principle required the progressive liberalisation of the respective national electricity and gas markets to competition. This set of legislation prescribed, for the first time, common rules for the organization of the electricity and gas sector. It introduced measures towards achieving a separation between competitive and non-competitive sectors. However, the Commission followed a rather pragmatic approach by setting out a very broad framework with large discretion margins for member states in order to avoid sovereignty issues [Jamasb and Pollitt 2005, p. 17]. Furthermore, as Cameron points out, neither technical or regulatory issues arising from the very idea of cross-border trade in an integrated European market nor exclusive rights granted to state energy monopolies were addressed within the directives of 1996 [Cameron 2002, p. 64]. As a result, due to lack of coordination from a supra level authority, the various national governments pursued different liberalisation and regulatory strategies, creating thus many individual liberalised markets instead of a single common market [Ibid].

Since the timeframe for implementation was not specified, the process of liberalisation of each individual member state took place in different speeds within the more liberal options available, limited to particular segments of the market. Some member states like Finland, the UK, Germany, Spain, Sweden or the Netherlands indicated at an early stage that they would fully open their markets to outside competition by way of third party access (TPA). France proposed a self-styled liberalisation form, the single buyer concept, whereby the role of monopoly utilities as the sole operator of the technical networks for electricity would be kept alive [Jabko 2005, p. 14]. The Commission, which needed to address the regulatory limitations created by the First Directive tried to engage in coalitions and delegate policymaking responsibilities to public and private actors [Eberlein 2008, p. 77]. In the attempt to provide a platform for cooperation between national ministries, Community organs, network operators, network users, industrial consumers and technical experts, the Electricity Regulatory Forum in Florence was established in 199860. Since the technical and regulatory integration of national electricity systems in a common market was an entirely new experience it was felt that broad participation including actors beyond member states and

57 Ibid. 58 Directive 96/92/EC, OJ L 27, 30.01.1997. 59 Directive 98/30/EC, OJ L 204, 21.07.2008. 60 See further: Electricity Regulatory Forum (Florence), European Commission, Single Market for gas & electricity, available at: ec.europa.eu/energy/gas_electricity/electricity/forum_electricity_florence_en_htm.

21

Community representatives was needed [Cameron 2002, p. 67]. The consensus of the Florence Forum was that effective competitions towards a European energy market was to be achieved by unbundling the electricity industry; to put it in the words of Hunt, “efficiency was the goal, competition the means, open access, restructuring and deregulation the tools to achieve it” [Hunt 2002, p. 5]. Although agreements reached at the Forum were not binding on negotiating parties, it provided the Commission well in data-gathering, elaboration of regulatory proposals and expertise from industry and national regulators, strengthening thus the position of the Commission as a “professionalized institution” [Cameron 2002, p. 76].

The uneven implementation among member states as well as the existing use of discriminatory methods to manage interconnectors to networks led the European Council to stress the need to accelerate this process by adopting the second Electricity and Gas Directives in 2003, thus requiring national markets to be liberalized by July 2004 for large non-household consumers and by July 2007 for all customers61. The new Directives established rules in four areas:

- Unbundling requirement for integrated companies

- Free entry to electricity and gas generation

- Free access to retail suppliers by customers

- Regulated transmission and distribution

The directives further introduced stronger regulation in comparison to the previous ones62 with member states being required to designate a sector regulator with minimum set of competences on the setting of network charges. They further committed the Commission to set up a European Regulators Group for Electricity and Gas, which would encourage cooperation between regulatory bodies63. Furthermore, the directives contained stronger requirements for the security of supply, acknowledging a certain risk by relying solely on market signals to ensure sufficient generating capacity64. Nevertheless, the directives were

61 Directives 2003/55/EC and 2003/54/EC, OJ L 176, 15.05.176. 62 Previous Directions contained little reference on security of supply issues containing only requirements on transmission system operators (TSO) to safeguard the transmission system. In principle, all other aspects were to be decided by national governments under „public service obligations‟  Preamble 13. 63 Article 23 (12). 64 Paragraph 23 of the preamble of both Directives.

22 not duly implemented and energy consumers experienced both higher tariff levels than before as well as discrimination in access to grids [Eikeland 2011, p. 21].

As far as the Commission tried to push ahead, the response of the member states in transforming the directives into national law was lackluster leading to a considerable amount of infringement procedures by the Commission65 as well as a sector inquiry into competition in June 2005, responding to concerns voiced by consumers and new entrants in the sector66. The final report of the inquiry, published in January 2007, identified serious shortcomings in the electricity and gas markets67:

- high market concentration in most national markets;

- a lack of liquidity, preventing successful new entry;

- too little integration between Member States’ markets;

- an absence of transparently available market information, leading to distrust in

the pricing mechanisms

- an inadequate current level of unbundling between network and supply

interests which has negative repercussions on market functioning and

investment incentives;

- customers being tied to suppliers through long-term downstream contracts;

The inquiry in essence seemed to confirm the existence of limited competition and a weak functioning of the market with the need for greater efficiency and reduced costs. The general conclusion of the Final Report was that stronger remedies in competition and regulation issues were required, in order to address the malfunctioning of the markets

[Haghighi 2008, p. 177]. Commission proposals for energy integration dated back to 1992, however its realization was still not as effective as hoped for, thus, a new approach was taken by the release of a Commission Communication in 2007, calling for integrated,

65 With 28 letters of formal notice sent to 17 Member States, IP/06/430 of April 4, 2006 „The Commission takes action against Member States which have not opened up their energy markets properly”. 66 IP/05/716 of June 13, 2005 „Commission opens sector inquiry into gas and electricity”. 67 Directorate General on Competition, Report on Energy Sector Inquiry, Brussels, January 10, 2007 (SEC 2006) 1724. Also, COMP/B-1/39172 (electricity sector inquiry) and COMP/B-1/39173 (gas sector inquiry).

23 interconnected and competitive energy markets68. In July 2009, the third Energy Internal

Market Package was adopted aiming at putting a well-functioning regulatory framework in place. The core elements of the package would be ownership unbundling, independent system operator (ISO) and independent transmission operators (ITO), stipulating thus the separation of generation and sale operations from the transmission networks69.

A new legal body, the Agency for the Cooperation of Energy Regulators (ACER) was established by the Energy Package to further progress on the completion of the internal energy market, both for electricity and for natural gas70. ACER needs to be seen as an answer for the lack of a supranational body within the previous two directives, it has a separate board of regulators and is solely responsible for regulatory matters. In addition, another Association was mandated by the Energy Package legislation, the European Network of Transmission System Operators for Electricity (ENTSO-E), representing 41 transmission system operators (TSOs) from 34 European countries. It is supposed to draft network codes ranging from network security and reliability, congestion-management, transparency and capacity- allocation, through to energy efficiency71.

Essentially, the establishment of ACER in collaboration with the ENTSO-E increases the development of common technical codes and security standards within the European Community and increases cross border coordination and interaction of energy regulators. Investments plans of the TSO’s will be monitored72 and the combined efforts shall been pooled in order to create a common agreement. In November 2010, the Commission initiated the European Energy Infrastructure Package in order to complete the Internal Energy Market, relying on interconnected national grids with the goal of an increased share on renewable energy sources. It introduced the Energy 2020 strategy for competitive, sustainable and secure energy through the promotion of renewables as a vital contribution towards the

68 COM (2007) 1 final, Communication from the Commission to the European Council and the European Parliament from January 10, 2007 „An Energy Policy for Europe‟. 69 Directives 2009/73/EC and 2009/72/EC, Regulations (EC) No 715/2009 and (EC) No 714/2009 and (EU) No 1227/2011, all of July 13, 2009. Regulation (EC) No 714/2009 also establishes the European Network of Transmission System Operators for Electricity (ENTSO-E). 70 Regulation (EC) No 713/2009 of the European Parliament and of the Council of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators ACER was officially launched in March 2011 and is seated in Ljubljana, Slovenia. 71 Regulation (EC) No 714/2009 of the European Parliament and of the Council of July 13, 2009 on conditions for access to the network for cross-border exchanges in electricity. 72 Interinstitutional Agreement from February 25, 2005 on the operating framework for the European regulatory agencies, COM (2005) 59 final.

24 reduction of greenhouse gas emissions and pollution, as well as the reduction of conventional energy sources in order to tackle climate change. The Commission further noted that there is an increasing problem with energy poverty in all member states, something that can be ascribed to the impact of liberalisation on the price of electricity [European Commission 2010, p. 10]. Due to the leeway contained in the Electricity Directives, retail electricity prices for households differ considerably from one country to another. Barton makes the argument that liberalisation in fact can be a fiasco when not implemented thoroughly and brings in the example of the California electricity crisis of 2000 [Barton 2005, p. 456]. The collapse of California’s electricity restructuring and competition programme led to wholesale electricity price increases of 500 per cent, leading to utility credit problems and bankruptcies of large utilities [Joskow 2001, p. 364].

The Fukushima Daiichi nuclear disaster in March 2011 altered the focus within the energy sector slightly and led the European Commission to reassess the level of nuclear safety in all nuclear power plants within the EU. For this, a common methodology was development with all EU nuclear power plants being assessed at the same time by multinational teams. The Commission communicated the results of the nuclear stress tests revealing that while no nuclear power plant had to shut down for safety reasons, there was a need for significant and tangible improvements at almost all power plants within the Community. All 14 member states with nuclear power plants were asked to prepare national action plans including timetables for implementation. The Commission, in collaboration with the ENSREG, the group of national safety authorities of all Member States, will review the status of the implementation by June 2014. An indicative timeframe for implementation of the Commission’s recommendations has been given until the end of 201573.

Conclusion

In conclusion, this paper has outlined the first approaches to a European Energy Policy (EEP) and has shown that there was a high degree of interest on behalf of the Commission to establish a common vision on energy policy. However, energy has naturally been of too strategic importance to individual national interest in order to leave it being regulated by supranational Treaty provisions. Indeed, one could argue that energy is probably

73 European Commission – MEMO/13/182, Brussels 07/03/2013.

25 the only sector within the Community where existing integration has led to a lower level of cooperation during the course of time. The Commission tried to solve this problem by focusing on market-orientated access to energy by each member state, with the Community Council only acting as a guiding framework. The basic principle for the realization of a common market for energy through competition and market integration was confirmed by the objectives of the Single European Market (SEA).

The establishment of the European Union which led to the introduction of the EMU brought nothing new with respect to a common energy policy and although energy appeared in the for the first time, the inclusion was brought to the same level of importance as action measures in the spheres of civil protection and tourism. Further Treaties like the Amsterdam Treaty or the Nice Treaty did not contain any enabling provisions on energy and even the new energy Title in the Lisbon Treaty (TFEU) did not fundamentally make this picture any different.

The expiration of the ECSC Treaty in 2002 has left Euratom essentially as the sole legal basis for a common energy policy, albeit limited to the nuclear sector. Since then, a common strategy was rather difficult to pursue, partly due to changing energy uses and partly due to national approaches and responses to external factors. The change of energy uses is a very important aspect within this analysis, since natural gas only recently became an important source of primary energy and oil was considered sufficiently covered by free market rules. Thus, when the Treaty of Rome was concluded, coal was the most important primary energy source and this sector was sufficiently covered by the ECSC. Another factor is the reluctance of Member States to subdue to a new kind of High Authority interfering in areas of national sovereignty. Instead, as this paper has shown, they prefer to work within mechanisms of international cooperation and multilateral collaboration. The Commission has been gradually accepting this fact trying to carefully find a balance between national sovereignty over natural resources and Community competences. This however means that the EU cannot set out rules for direct appliance on all areas in order to address the specific requirements of the energy sector.

By accepting the possibility of maintaining a diversified and decentralized energy policy the Commission could see the divergences between member states widening and the reliance on laws of supply and demand might not be sufficient to create a transparent and barrier free energy sector. As a matter of fact, the liberalisation of the gas and electricity

26 market did not bring the desired convergence of economic policies within the energy sector and the various infringement procedures against member states are clear evidence of this.

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