Faculty of Law Academic Year 2015-2016 Exam Session 1
Implementation of the EU Third Energy Package in Member States with strong monopolies Cases of Ireland and Greece
LLM Paper By Chrysi Mitka Student number : 01510502
Promoter: Prof. Inge Govaere
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To my promotor, Prof. Govaere for embracing the idea and motivating me,
and my parents for their greatest support.
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TABLE OF CONTENTS
TABLE OF ABBREVIATIONS 5
INTRODUCTION 6
CHAPTER 1: EUROPEAN LEGAL FRAMEWORK 8
SECTION 1.1 CREATION OF EU ENERGY LAW 8 SECTION 1.2 THE FIRST ENERGY PACKAGE 8 SECTION 1.3 THE SECOND ENERGY PACKAGE 10 SECTION 1.4 THE ROAD TO THE THIRD ENERGY PACKAGE 11 SECTION 1.5 IN DEPTH ANALYSIS OF THE UNBUNDLING PROVISIONS 13 SUBSECTION 1.5.1 WHY IT IS NEEDED-RELATIONSHIP WITH TPA 13 SUBSECTION 1.5.2 OWNERSHIP UNBUNDLING IN DIRECTIVES 2009/92 AND 2009/73 14 I) FIRST OPTION-OWNERSHIP UNBUNDLING II) SECOND OPTION-ISO III) THIRD OPTION-ITO SUBSECTION 1.5.3 CONSIDERATIONS RELEVANT TO ARTICLE 345 TFEU 19
CHAPTER 2: EFFECTIVE IMPLEMPLEMENTATION OF THE EU UNBUNDLING PROVISIONS 21
SECTION 2.1 DEFINITION OF EFFECTIVE UNBUNDLING 21 SECTION 2.2 ASSESSING EFFECTIVE IMPLEMENTATION OF UNBUNDLING- FIRST GROUP 23 SUBSECTION 2.2.1 THE UK 23 SUBSECTION 2.2.2 THE NETHERLANDS 24
SECTION 2.3 ASSESSING EFFECTIVE IMPLEMENTATION OF UNBUNDLING- SECOND GROUP 26 SUBSECTION 2.3.1 FRANCE 26 SUBSECTION 2.3.2 GERMANY 28
SECTION 3 CONCLUSIONS 29
CHAPTER 3: THE CASE OF IRELAND 31
SECTION 3.1 HISTORICAL OVERVIEW OF THE IRISH ENERGY MARKET 31
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SECTION 3.2 DEVELOPMENTS PRIOR TO THE THIRD ENERGY PACKAGE 33 SECTION 3.3 TOWARDS THE THIRD ENERGY PACKAGE 37 SECTION 3.4 EFFECTIVENESS OF UNBUNDLING IN IRELAND AND RELEVANT CONSIDERATIONS 43
CHAPTER 4: THE CASE OF GREECE 44
SECTION 4.1 HISTORICAL OVERVIEW OF THE GREEK ENERGY MARKET 44 SECTION 4.2 DEVELOPMENTS PRIOR TO THE THIRD ENERGY PACKAGE 46 SECTION 4.3 TOWARDS THE THIRD ENERGY PACKAGE 49 SECTION 4.4 EFFECTIVE (?) UNBUNDLING, THE CRISIS AND THE EXAMPLE OF IRELAND 51
CONCLUSION 57
BIBLIOGRPAPHY 59
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TABLE OF ABBREVIATIONS
NRA NATIONAL REGULATORY AUTHORITY
TPA THIRD PARTY ACCESS
OU OWNERSHIP UNBUNDLING
ISO INDEPENDENT SYSTEM OPERATOR
ITO INDEPENDENT TRANSMISSION OPERATOR
CER COMMISSION FOR ENERGY REGULATION (IRELAND)
DCENR DEPARTMENT OF ENERGY (IRELAND)
RAE REGULATORY AUTHORITY FOR ENERGY (GREECE)
HRADF HELLENIC REPUBLIC ASSET DEVELOPMENT FUND
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INTRODUCTION
The predominant aim of this paper is to present and critically assess, from a legal point of view, the steps Ireland and Greece followed in order to implement the Third Energy Package Provisions with respect to Ownership Unbundling.1 It should be noted that the two Member States were chosen for this analysis because they present interesting cases for various reasons. Primarily, the geographical position and formulation of the two countries (Ireland is an island, whereas Greece is a peninsula surrounded by two seas and over a hundred inhabited islands) are two crucial factors which have influenced, and will continue to influence, their choices regarding energy policy. In other words, the countries’ location and formulation create special energy needs. The above have been among the reasons both Greece and Ireland had entrusted their electricity and gas operations each to a public company which dominated the market for decades. These companies were (and still are) considered as key national assets. All the more, the energy sector had been functioning as one of the most important public employers in either country, providing for jobs to domestic population. Moreover, the Third Energy Package, found the two countries, each in a severe economic situation, due to the financial crises they were undergoing at the time (at the time of writing, Greece has not yet recovered from the crisis). Being Members States of the Eurozone, both countries concluded financial assistance agreements with the EU and IMF, including provisions regarding the privatization, among others, of a number of national energy-related entities.2 In other words, both Greece and Ireland could be characterized as peculiar cases with respect to energy matters. Precisely, their attempts for a reconstruction of the energy market, in order to meet liberalization and competition objectives, according to the mandate of EU Energy Law, overlapped with the above mentioned geographical, economic and social considerations and all the more, they were sometimes the result of financial agreements falling outside the scope of EU Energy Law (and the Third Energy Package more specifically). It should be noted that the purpose of this paper is to analyze the implementation of the Unbundling Provisions by Greece and Ireland from an EU Energy Law perspective. The legal nature of the relative financial agreements and their respective provisions, as well as the relationship between those and EU Energy Law are issues that exceed the limits of this paper and they will not be addressed in detail. Furthermore, in order to acquire a complete picture of the ‘EU Energy Unbundling Puzzle’, it is crucial to examine not only the scope and purpose of the legal provisions, but also to analyze the reasons behind their choice, as well as their effectiveness. Therefore, after presenting the EU Unbundling Legal Framework in the first chapter, the second is dedicated to assessing the effectiveness of unbundling in Member States which are categorized in two groups: The first
1 European Commission, ‘Market Legislation’ available at http://ec.europa.eu/energy/en/topics/markets-and-consumers/market-legislation accessed 11/5/2016 2 See Website of the European Commission, Financial Assistance in EU Member States http://ec.europa.eu/economy_finance/assistance_eu_ms/ireland/index_en.htm for Ireland and http://ec.europa.eu/economy_finance/assistance_eu_ms/greek_loan_facility/index_en.htm for Greece
6 group consists of the most interesting cases of Member States which implemented the Ownership Unbundling Regime on their own initiative, before it became an obligation under EU law, namely the cases of UK and the Netherlands.3 The second group contains Germany and France, two of the most economically strong Member States, which had been strong opponents to the ownership unbundling idea.4 The case of Ireland is the subject of the third chapter, while Greece is analyzed in the fourth chapter. The methodology followed in the paper is the descriptive one. To summarize, the research questions addressed in the present paper are the following: i) How is “effective unbundling” defined in the EU Third Energy Package? ii) How has it been pursued by Ireland and Greece (MS with strong monopolies and weak economies), has it been successful and, if not, are there remedies under EU energy law? iii) Is the definition of “effective unbundling” broader in reality and is it pursued by the EU as such? iv) What is the relationship between Ownership Unbundling and Privatization under EU law?
3 P. Lowe, I. Pucinskaite, W. Webster and P. Lindberg ‘Effective unbundling of energy transmission networks: lessons from the Energy Sector Inquiry’ [2007] 1 Competition Policy Newsletter, Spring 2007 ,23, 29 available at http://ec.europa.eu/competition/publications/cpn/2007_1_23.pdf 4 ‘Eight EU Member States oppose Unbundling, table Third Way’ Euractive (1February 2008 last updated 28 September 2012) http://www.euractiv.com/section/energy/news/eight-eu-states-oppose- unbundling-table-third-way/ accessed 12/5/2016
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1. European Legal Framework
1.1. Creation of EU Energy Law
The initial idea for energy market rules emerged from the realization by the European Commission that the monopolistic5 nature of the energy sector in most Member States created obstacles to the effective functioning of the European internal market.6 According to the Internal Energy Market Working Paper of 1988, the instruments in need to address the obstacles in the energy sector should be the ones provided by the then EC Treaty for the free movement of goods and services and also the provisions on commercial monopolies, competition and state aids.7 The importance of the abovementioned instruments lies on the fact that it was acknowledged for the first time by the Commission that the rules on the free movement of goods apply also to the energy sector.8 The categorization of electricity as a good was made by the European Court of Justice in the Almelo case9 of 1992 and therefore, it comes as a natural consequence that the supply of electricity is a service under the Treaty.10 Thus, in the actions taken against 8 Member States in 1991, the Commission argued that according to Article 86 (2) of the EC Treaty, the then existing monopolies on the gas and electricity sector constituted a breach to the free movement of goods.11 The Court confirmed that Article 86 (2) of the EC Treaty provided a legal basis for initiating actions against monopolies in a number of cases.12 Only a year later, in 1992, the Commission issued proposals with the purpose to introduce common rules and thus, to create an internal energy market.13
1.2. The First Package
It took four years for a consensus over the proposed legislation to be reached and when it finally did, in 1996, it included a number of amendments to the initial plan of the Commission.14 It is worth mentioning that the legal basis for the adoption of the Directives
5 C. W. Jones et al EU Energy Law. 1 : The Internal Energy Market : The Third Liberalization Package (3rd edn. Claeys en Casteels, 2010) para 1.3 for the different kinds of state-owned monopolies( = entities that have been granted exclusive rights in law or in reality to operate an economic activity in a specific sector) 6 European Commission, The Internal Energy Market,COM (88) 238, 5 7 ibid 18 8 M. Marquis and W. J. Fulbright ,Introducing Free Markets and Competition to the Electricity Sector In Europe (Wisdom House 2001) 24 9 See Case C-393/92 Gemeente Almelo and Others and Energiebedrijf IJsselmij NV [1994] ECR-I 1508 para 28 10 Jones (ed.)(note 5) 7 11 Jones (ed.)(note 5) 2 12 Ibid 3 13 European Commission, Proposal for a Council Directive concerning common rules for the internal market in electricity [1992] Ο.J. C65/04 and in the gas sector [1992] O.J. C65/13 14 Jones(ed.) (note 5) for the discussion about the adoption of the first directives at 74-76
8 was the then Article 100a EC15 (now Article 114 TFEU) which conferred the Council the power to act with qualified majority in order to adopt measures aimed in the establishment and functioning of the internal market.16 Directive 96/92 on electricity17 stated in the preamble that the establishment of the internal market for electricity should take place progressively and while taking into account the different structures of the electricity markets of the Member States.18 As a first step, the Directive required the opening of 30% of the supply market to eligible customers by 2003.19 Other key features of the Directive, which formed the initial steps to the liberalization of the market, were the provisions introducing competition in the generation sector,20 the designation of a Transmission and Distribution System Operator21 , the unbundling of vertical integrated22 entities with respect to their management and their accounts in order to achieve, inter alia, transparency23and finally the provisions on third party access to the network.24 The Directive also provided for the possibility of the Member States to derogate25 from the provisions aimed at fostering competition, in cases where the implementation would create problems in the performance of public service obligations26 among other reasons. The first Directive for the internal market of gas followed.27 It contained very similar provisions to the ones in the electricity Directive, namely, opening up of 20% of the supply contracts to eligible customers by 1998 and 28% by 2003.28It also included provisions on public service obligations and unbundling of accounts29 -and not of management as it was required by the electricity directive- of vertically integrated companies, as well as provisions allowing third party access to the system.30
15 Which was inserted in the EEC Treaty by the Single European Act of 1986, see N.D. Sabin. ‘Member State Exemptions from Article 100A Harmonizing Measures: A Possible European Court Approach’ [1991] Volume 14 Boston College International and Comparative Law Review 1 http://lawdigitalcommons.bc.edu/cgi/viewcontent.cgi?article=1344&context=iclr accessed 16.2.2016 16 Ibid 17 Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996 concerning common rules for the internal market in electricity [1996] OJ L 027/20 [hereafter Directive 96/92/EC] 18 ibid, Recital 5 19 Article 19, Directive 96/92/EC (note 17) 20 Article 4 of the Directive 96/92/EC (note 17) introduced two procedures that Member States we able to choose to regulate the entering in the generation market, namely the tendering and the authorization procedure 21 Chapters IV and V of the Directive 96/92/EC (note 17) 22 According to Article 2 (18) of Directive 96/92/EC (note 17) vertical integrated entities are the ones performing a network and a production/supply activity in the electricity sector 23Chapter VI of Directive 96/92/EC (note 17) 24 Chapter VII of Directive 96/92/EC (note 17) In order to facilitate third party access to the system, the Directive provided for three options, namely negotiated access (Article 17 par.1), regulated access (17 par. 4) and/or the single buyer system (Article 18) 25 Article 3 par. 3 and Articles 23 and 24 of Directive 96/92/EC (note 17) 26 Member States shall define the concept of public service obligation having due regard to the provisions of the Directive and shall inform the Commission, as provided in Article 3 par. 2 of Directive (note 17) 27 Directive 98/30/EC of the European Parliament and of the Council of 22 June 1998 concerning common rules for the internal market in natural gas [1998] OJ L 204/1 [hereafter Directive 98/30/EC] 28 Article 18, Directive 98/30/EC (note 27) 29 Articles 12, 13 Directive 98/30/EC (note 27) 30 Negotiated or regulated, according to Articles 15 and 16 of Directive 98/30/EC (note 27)
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An important factor calling for a level of disparity between the two Directives was the special characteristics of each commodity. Gas, for example, can be stored and also take more than one forms; therefore, specific provisions were introduced regarding storage of gas31and LNG32 (liquefied natural gas). The Directive provided also for provisions allowing derogations from the liberalization rules in cases of sudden crisis33 or when a situation could lead to unreliability of the gas market,34or in cases financial problems were caused to gas companies due to their take or pay obligations.35 As a general rule, the time limit for the implementation of the two directives was two years.36
1.3. The Second Package
Only a few years after the entering into force of the First Package, the Commission concluded that the progress towards the internal energy market for electricity and gas did not meet its expectations.37The three most important problems, according to the Commission, were the high concentration of the market, discrimination in access to networks and also the different pace of implementation of the first directives by the Member States.38 Therefore, the Commission proposed a second legislative package in order to tackle the existing problems and improve the framework that had been introduced with the first directives. The second electricity and gas directives were adopted in 2003 and came into force in 2004, repealing their predecessors.39They brought many changes in the fields of third party access (TPA), legal unbundling and the role of National Regulatory Authorities (NRA).40 Regarding TPA, the second electricity Directive made obligatory the use of regulated access through published tariffs after their approval by the NRA.41The same regime was introduced by the second gas Directive, whereas, in this case, many exceptions42 were put in place, taking into account the special characteristics of the gas sector.43Moreover, the directives required
31 Chapter III, Directive 98/30/EC (note 27) 32 ibid 33 Article 24, Directive 98/30/EC (note 27) 34 Article 25, Directive 98/30/EC (note 27) 35 Article 26, Directive 98/30/EC (note 27) 36 Article 27 Directive 96/92/EC (note 17) and Article 29 Directive 98/30/EC (note 27) 37 P. D. Cameron, ‘Completing the internal market in energy: an introduction to new legislation’ in Cameron, Legal Aspects of EU Energy Regulation : Implementing the New Directives On Electricity and Gas Across Europe (Oxford University Press 2005) 10 38 Cameron (supra note 37) 9 39 Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity and repealing Directive 96/92/EC [2003] OJ L 176/37 [hereafter Directive 2003/54] and Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in natural gas and repealing Directive 98/30/EC [2003] OJ L 176 /57 [hereafter Directive 2003/55] 40 Cameron (supra note 37) 11 41 Article 20 (1) of Directive 2003/54/EC (note 39) 42 Cameron (note 37) 13, citing Articles 19 (1), 20 and 22of Directive 2003/55/EC concerning the regulated access regime and the respective exceptions 43 Less state intervention required and more discretion allowed to Member States, see Cameron (note 37) 12
10 a high level of scrutiny by the Member States when they applied the provisions on exceptions.44 The second very important feature of the second energy package was the inclusion of provisions relating to legal unbundling of vertically integrated undertakings,45 in addition to the functional and accounting unbundling that had been imposed on them by the first package. Thirdly, the role of NRAs was strengthened, since they became responsible for monitoring the functioning of the market and ensuring a transparent market field for competitors.46 The implementation deadline was set in one year after the adoption of the Directives, namely by July 2004.47
1.4. The Road to the Third Energy Package
By launching an energy sector inquiry in June 2005, the Commission aimed at identifying the malfunctions of the energy sector.48It concluded that effective liberalization of the electricity and gas markets had not yet been achieved.49 More specifically, the Commission stated that the most crucial problems of the concerning markets were the high market concentration, the inadequate level of unbundling, discrimination and difficulty for new players to entry the market, as well as lack of transparency.50 The findings of the sector inquiry came after51 two other communications, namely the “Prospects for the Internal Market”52 and Green Paper.53 The “Energy Policy for Europe”54 communication that followed, in 2007,55 made clear that the intentions of the Commission were to propose a new set of rules targeting the deficiencies that they had not been tackled by the second energy package.56 After the Commission published its proposal,57 dialogues between the Commission, the Council and the European Parliament followed, resulting in the adoption of the Third Energy
44 Cameron (note 37) 13 , citing Article 20 (2) of Directive 2003/54 and Article 22 of Directive 2003/55/EC 45 Article 10 (2) and Article 15 of Directive 2003/54/EC and Article 9 (2) and 13 of Directive 2003/55/EC 46 Article 23 of Directive 2003/54/EC and Article 25 2003/55/EC (note 39) 47 Cameron (note 37) 11 48 European Commission ‘Inquiry pursuant to Article 17 of Regulation (EC) No 1/2003 into the European gas and electricity sectors’ (Final Report) COM(2006) 851 final 49 ibid 2 50 Ibid 3 51 Jones (ed.) (note 5) 4 52 European Commission ‘Prospects for the internal gas and electricity market’ COM(2006) 841 final 53European Commission Green Paper of 8 March 2006 ‘A European strategy for sustainable, competitive and secure energy’ COM(2006) 105 final 54 European Commission ‘An Energy Policy for Europe’ COM(2007) 1 final 55 Jones (ed.) (note 5) 4 56 ‘An Energy Policy for Europe’ (note 54) 7 57European Commission, ’Proposal for a Directive of the European Parliament and the Council, amending Directive 2003/54/EC concerning common rules for the internal market in electricity’ COM(2007) 528 final
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Package in 2009.58 It consists of the new electricity and gas Directives59 as well as the Regulation for the establishment of the Agency for the cooperation of energy regulators (ACER),60 and the Regulations concerning the access to the networks of electricity and gas, respectively.61 Moreover, in 2009, another development took place: the Lisbon Treaty62 came into force. It stipulated, in Article 4 (paragraph 2 i), that energy is an area of shared competence between the EU and the Member States. The Treaty also contains a specific chapter dedicated to energy, consisting of Article 194 TFEU. The Article states that one of the aims of the Union is the establishment and effective functioning of the internal energy market63 and thus, the competent institutions of the Union shall adopt the relevant measures for the achievement of the objectives laid down in the article.64 As pointed out in the official website of the Directorate General for Energy,65the mains goals of the Third Energy Package involve effective unbundling of suppliers from networks, fostering independence of regulators as well as effective cooperation of TSOs on a Europe-wide level, the establishment of ACER and finally, reaching a transparency level so that all consumers are benefited from it.66 The third Directives were to become applicable by 3 March 2011, while the second Directives were applicable until then.67
58 Jones(ed.) (note 5) 10 59Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC [2009] OJ L 211/55 and Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC [2009] OJ L 211/94 [hereafter Directive 2009/72 and Directive 2009/73, or third Directives] 60Regulation (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 [2009] OJ L 211/1 61Regulation (EC) No 714/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity and repealing Regulation (EC) No 1228/2003 [2009] OJ L 211/15 and Regulation (EC) No 715/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the natural gas transmission networks and repealing Regulation (EC) No 1775/2005 [2009] OJ L 211/36 62Consolidated Version of the Treaty on the Functioning of the European Union [2008] O.J. C 115/47, most recent version [2012] OJ C 326/47 [hereinafter TFEU]. 63 Paragraph 1 (a) of Article 194 TFEU 64 Paragraph 2 and 3 of Article 194 TFEU; however, the Third Energy Package has been adopted on the basis of the then Article 95 TEC, now Article 114 TFEU, providing for the harmonization of legislation regarding internal market, see Preamble of Directive 2009/72 (note 59) 65European Commission, Energy, Topics, Markets and Consumers, Market Legislation
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1.5. In depth analysis of the Unbundling Provisions of the Third Energy Package
1.5.1 Why it is needed-Relationship with TPA
In order for a competitive energy market to be established, one of the most important conditions is the facilitation of Third Party Access (TPA) in the network systems.68Since the networks for transmission69 and distribution70 of electricity and gas are considered natural monopolies,71 the same network has to facilitate the abovementioned activities, regardless of who injects to, or withdraws energy from the system. In other words, generators and suppliers of energy (electricity and gas) must be able to access the networks on the same conditions, so as to be able to participate in the market and compete for selling their product, meaning to compete about who is going to supply a customer with electricity and/or gas.72 As it has been mentioned above in the Chapter, the first73 and second74 electricity and gas Directives had imposed accounting, managerial and legal unbundling requirements to electricity and gas undertakings. The first two types of unbundling aim at safeguarding the keeping of separate accounts and separate management of the network activities from the competitive ones.75 The latter type requires that the network undertaking is established under a separate legal personality than the vertically integrated company.76In all cases, the vertically integrated undertaking remains also the owner of the network.77 According to the Commission proposal of 2007 regarding the energy sector, a great deal of obstacles to the competitive functioning of the energy market was to be blamed on the inefficiency of the then existing unbundling rules with the most important ones being the incentive of the network operator to favor the position of the vertically integrated company it was part of, both in terms of access to the system and information providing, as well as the lack of willingness of the operator to pursue network investments based on network-related factors, but rather based on the economic benefit of the integrated company.78
68 W. Fritz, ‘Network Access and Transmission and Distribution Pricing’ in D. Geradin (ed.), The Liberalization of Electricity and Natural Gas in the European Union (Kluwer Law International 2009) 37 69 High voltage level networks that transport electricity and gas in long distances, see Ibid 39 70 Lower voltage level networks that facilitate the supply of electricity (coming from transmission networks) to customers in a local or regional area, see ibid 71 Fritz (note 68) 37 72 Free supplier choice by customers leads also to trading of energy as a commodity in wholesale markets, that it also is dependent on TPA see S. Schulte-Beckhasen, ‘Energy Trading in the EU’ in in D. Geradin (ed.), The Liberalization of Electricity and Natural Gas in the European Union (Kluwer Law International 2009) 50,57 73 See supra note 17 for electricity and note 27 for gas 74 Supra note 39 75 Jones (ed.) (note 5) 11 76 Ibid 77 Article 10 par. 1 of Directive 2003/54/EC and Article 10 par. 1 of Directive 2003/55 (note 39) 78 European Commission ‘Explanatory Memorandum accompanying the Proposal for a Directive of the European Parliament and the Council, amending Directive 2003/54/EC concerning common rules for the internal market in electricity’ COM(2007) 528 final, 4 [hereafter Explanatory Memorandum]
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Taking into account the abovementioned facts and also the inability of NRAs to effectively monitor the unbundling requirements of network operators,79 the Commission came to the conclusion that the legal, managerial and accounting unbundling were inefficient to promote the effective functioning of the internal market of energy and thus, a stronger level of unbundling should be introduced, that of ownership unbundling.80
1.5.2 Ownership Unbundling in Directives 2009/72 and 2009/73
i) First Option-Ownership Unbundling (OU)
According to Article 9 paragraph 1 (a) of the Directives 2009/72 and 2009/73, from 3 March 2012, transmission system owners shall function as transmission system operators. Regarding the tasks of a TSO, the Commission stated in the Interpretative Note for the Unbundling Regime,81 that they consist of the facilitation of non-discriminatory TPA to the system, the collection of system related charges and payments, as well as of ensuring the well-functioning of the system in terms of technical and managerial aspects and also of planning the appropriate investments in need.82 Concerning the unbundling rules, Article 9 paragraph 1 (b) imposes the obligation for TSOs not to be controlled directly or indirectly from persons controlling, or having any rights in any production and/or supply undertaking of electricity and gas sector.83 The same unbundling rules apply, vice versa, for production and/or supply undertakings.84 Moreover, according to section (c), the person controlling or having rights in any production and/or supply entity shall not be able to appoint members in any of the managerial and legally representative bodies of the TSO. Lastly, section (d) prohibits persons from participating as members in any of the abovementioned bodies of the TSO, while simultaneously holding a position or an interest in a production and/or supply entity. Recital 13 and 10 of the third Electricity and Gas Directives respectively state that the term “control” is taken from the Mergers Regulation.85 According to the definition provided in the Regulation,86 any rights or contracts or any other kind of arrangements that are capable of conferring the ability to exercise decisive influence on an entity, in law or in fact, shall be
79 ibid 80 Explanatory Memorandum (note 78) 5 81 European Commission, ‘Interpretative Note on Directive 2009/72 /EC concerning common rules for the internal market in electricity and Directive 2009/73/EC concerning common rules for the internal market in natural gas: The Unbundling Regime’ (Staff Working Paper) Brussels,22 January 2010 [hereafter Interpretative Note] 82 ibid 8 83 Paragraph 3 of Article 9 of both third Directives (note 59) state that this obligation applies equally to situations where a gas and electricity undertakings are jointly involved in controlling of both the network and the generation/supply. 84 Paragraph 1 (b) (i) of Article 9 of the Third Directives (note 59) 85 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation) [2004]OJ L 24/1 86 The provisions of the Mergers Regulation as cited by the Commission iν the Interpretative Note, supra (note 81)
14 deemed as conferring control of that entity to the person in their possession.87 The Commission makes clear that due regard shall be paid to the term “decisive influence”, since this is the crucial factor for determining whether control has been conferred or not.88 Moreover, control can be direct or indirect, through an intermediary body; in both cases the term control falls within the scope of the Mergers Regulation.89 Regarding the concept of “persons”, the Commission again refers to the provisions of the Merger Regulation which clarifies that the definition includes natural and legal persons;90 the latter can be of public or private legal nature.91 It also gives an example, stating that, in practice, the persons having control in both entities will be either the holding company of both the supply and network activity, or the parent company having branches in the supply or network sector.92 For the concept of “rights”, there is a specific section of Article 9 providing the definition. Paragraph 2 of the Article states that the rights mentioned in paragraph 1 include the voting rights, the right of appointment of persons in the administrative, supervisory or legally representing bodies of the entity and lastly, the right to a majority shareholding. By inserting the phrase ‘the rights….shall include in particular’ (emphasis added) in the first sentence of paragraph 2, the drafters make clear that the list of rights is non-exhaustive. In the Interpretative Note, a specific clarification is given with regards to the right in a majority shareholding. More precisely, it is stated that “the shareholding can only provide financial rights, i.e. the right to receive dividends”.93 In other words, if the parent company, or a supply (or production) company wishes to keep a financial right in a TSO after the unbundling, this right can only be of financial nature and additionally, it shall not lead to the attainment of any of the rights drawn in paragraphs 1, cases (b), (c) and (d). That means that the company maintaining the financial right shall not be able to hold a majority share (the financial right shall be of a minority), or exercise any voting rights, or any other kind of control, or appoint members in the boards of the TSO. Regarding the latter, the Commission justifies the choice to insert a specific limitation concerning the appointment of members in the boards of a TSO, by the reason that, this way it is ensured that the company that has been the subject of unbundling and maintains a non-majority right in the TSO is precluded from interfering with the decisions of the TSO by any means.94 The same rules apply in the opposite situation, where a TSO wishes to maintain a financial right in a supply or production undertaking.95 Paragraph 4 of Article 9 grants additional time (3 March 2013) for the implementation of paragraph 1 (b) and (c) because they involve major changes in the corporate structure and
87 According to the Interpretative Note (note 81) 8, citing the Merger Regulation provisions, such rights can be the ownership of assets and the ability to form the board, exercise voting rights ect. 88 Interpretative Note (note 81) 8 89 ibid 90 Article 3 (3) of the Merger Regulation as cited by the Commission in the Interpretative Note (note 81) 91 Interpretative Note (note 81) 9 92 ibid 93 ibid 94 Interpretative Note (note 81) 10 95 ibid
15 governance of the formally vertically integrated undertaking, and thus more time is required.96 Finally, Paragraph 6 of Article 9 complements Recitals 23 and 20 of the electricity and gas directives respectively. In the recitals it is stated that the unbundling provisions shall not interfere with the Member States’ choice of the public or private legal form for undertakings when applying the unbundling requirements. Accordingly, Article 9 (6) states that when two separate public bodies are in control of the network and of the production or supply undertakings, they shall not be considered as the same person. This issue will be analyzed in detail in the following sections.
ii) Second Option-Independent System Operator (ISO)
This sub-section (as well as the following) refers to the differences between the main form of ownership unbundling as provided in Article 9 of Directives 2009/72 and 2009/73 and the alternative, that of ISO (and ITO). As stated in Article 13 (1) of the Electricity and 14 (1) of the Gas Directive, in Member States where, by 3/9/2009, the transmission system was part of a vertically integrated company, full ownership unbundling could be avoided and instead, an ISO was allowed to be appointed, after a proposal of the network owner and the subsequent approval by the Commission. This way, the TSO still remains part of the integrated company. In order to safeguard the independence97 of the ISO from the vertically integrated company it is part of, paragraph 2 of both Articles imposes a set of obligations that must be ensured by the NRA prior the authorization of the ISO as TSO.98 These obligations include the complete independence of ISO from generation and supply activities of the company, in other words to comply99 with the unbundling rules of Article 9 paragraph 1 (b) (c) (d); the ability of the operator to function properly and adequately by having all the necessary means and resources to fulfill its purpose and also to be in a position to finance its activities according to the NRA planning; to cooperate effectively with other European and regional operators. Serving the same purpose, of ensuring independence, Articles 14 and 15 of the two Directives provide rules for the legal and functional unbundling of the ISO from the vertically integrated company. Obligations with regards to the ISO are also imposed on the transmission system owner. According to Articles 13 and 14 (5) of the Electricity and Gas Directives respectively, the owner of the system shall provide all the necessary information and shall cooperative effectively with the ISO; it shall provide liability safeguards with regards to network assets; it shall finance the investments determined by the ISO, or allow third parties to finance them.100
96 E.Cabau ‘Unbundling of TSOs’ in Jones (ed.) (note 5) para 4.167 97 Cabau, (note 96) para 4.173 98 Paragraph 3 of Article 13 of electricity and 14 of gas directives 99 Cabau (note 96) para 4.174 100In cases where the owner has agreed for a third party to finance investments on the system and these concern expansions of the system, the owner will not be also the owner of these new expansions, according to the Interpretative note, supra (note 81) 13
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As stated in paragraph 6, the NRA shall ensure compliance of the owner with the abovementioned obligations, as well as compliance of both the ISO and the owner with the provisions of the Directive.101 The tasks of an ISO (and ITO) are the same as in the case of a fully unbundled TSO, according to paragraph 4 of Articles 13 and 14 of Electricity and Gas Directives.
Iii) Third Option (Independent Transmission Operator)
The Independent Transmission Operator (ITO) forms another alternative to ownership unbundling. As in the case of ISO, this option could be applied on the condition that a TSO of the Member State concerned was part of a vertically integrated company by 3 September 2009.102It is worth mentioning that the ITO system was added in the third Directives by the Energy Council of June 2008,103 after the Commission had issued its proposal and it has been characterized “a compromise”.104 The main features of the ITO model are drawn in Articles 17-23 of both Directives. In this option, the TSO remains part of the vertically integrated company, but detailed rules105 are established in order to safeguard the autonomy and independence of the ITO. According to the abovementioned provisions, the ITO shall have in its disposal all the necessary resources, such as financing, personnel, assets and rights to carry on its tasks as a TSO effectively and on its own responsibility. The provisions also require that a Chinese wall regarding information between the ITO and the vertical integrated undertaking is put in place; moreover, a complete prohibition has been introduced with regards to any direct or indirect shareholding rights of the vertical company in the TSO;106The relationship between the two entities shall be the same that it would be under normal market conditions.107 Article 19 aims to ensure that members of the staff and management are independent from the vertically integrating company. The article requires the NRA to monitor whether the independence conditions have been fulfilled and also imposes a requirement for minimum “neutral” years between ITO board members’ engagement in the board, or termination of their term and the commencement of a new relationship with the vertically integrated company. A Supervisory body, which is also subject to the same independence conditions, is in charge of appointing the members of the respective management organs of the ITO.108 Moreover,
101 Article 37 and 41 paragraph 3 of the Electricity and Gas Directives respectively, providing for a detailed list of the tasks of the NRAs regarding the ISO option, in addition to the obligations conferred to the with regards to TSOs in general. See Cabau (note 96) para 4.189 102 Article 9 (8) (b) of Electricity and Gas Directives (note 59) 103 J.G. Westerhof ‘The Third Internal Energy Market Package’ in M. M. Roggenkamp and U Hammer European Energy Law Report VI (Intersentia 2009) 30 104 ibid 105 Aricles 17 and 18 of Electricity and Gas Directives (note 59) 106 Article 18 para 3 of third Electricity and Gas Directives (note 59) 107 Article 18 para 6 of third Electricity and Gas Directives (note 59) 108 Article 19 para 1 of third Electricity and Gas Directives (note 59)
17 this body has been conferred the power by Article 20 to make decisions regarding matters of shareholding and financial governance. The overall compliance of the ITO with non-discrimination behavior is ensured by a compliance program which is run by a compliance officer according to the specifications of Article 21, while the NRA is able to enforce ITO to make a decision regarding an investment, in case the integrated company opposes, as stated in Article 22. In general, it is the task of the NRA to monitor and have the general regulatory oversight of the functioning of the ITO and for that reason, paragraph 5 of Article 37 provides for a minimum (“…at least the following..”) set of powers to be conferred to it.
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1.5.3. Considerations relevant to Article 345 TFEU109
Article 345 TFEU binds the EU to remain objective with regards to Member States’ choices of property model; in other words, the EU shall not impose unilaterally any nationalization, expropriation, or privatization on Member States.110 Thus, the choice to Member States to implement a certain property model shall be in the hands of Member States.111 Nevertheless, it has been argued that, given the overall liberal-driven character of the Treaties, the provision is not entirely objective and, in fact, it favors the liberal functioning of undertakings.112 The CJEU itself has followed an approach consistent with the free movement provisions, narrowing the scope of 345 TFEU in cases where the four freedoms and the main aims of the Union are not unjustifiably hampered.113
More specifically, in the 2012 joined cases114 concerning the prohibition of privatization of the Dutch distribution electricity and gas networks, the Court, citing its case-law, stated that: “However, Article 345 TFEU does not mean that rules governing the system of property ownership current in the Member States are not subject to the fundamental rules of the FEU Treaty, which rules include, inter alia, the prohibition of discrimination, freedom of establishment and the free movement of capital.” 115
In the same case, the Court confirmed that the reasons behind the choice of Member States with regards to the property system, shall be taken into account, in order to assess whether a restriction on a freedom is justified or not.116In that regard, the Dutch law rules were introduced with the aim to achieve the objectives of the second and third energy package of proper and competitive functioning of the networks and thus, the Court stated that these aims form a higher public objective and they can, in principle, justify a freedom restriction.117
With regards to Ownership Unbundling and Article 345 TFEU, it has been stated that the unbundling regime is solely concerned with the party losing property and not with the one acquiring it and thus, it is not in breach with the Article.118
109 For TFEU, supra (note 62) 110 M.D. Diathesopoulos, ‘Ownership Unbundling in EU & Legal Problems’ (December 29, 2010) 1, 18 available at SSRN: http://ssrn.com/abstract=1732212 or http://dx.doi.org/10.2139/ssrn.1732212 111 E.M. Ehlers ‘Electricity and gas supply network unbundling in Germany, Great Britain and the Netherlands and the law of the EU: A comparison (Insertia 2009) 417 112 A. McHarg “Social Obligations of Ownership and Regulation of Energy Utilities” in A. McHarg, Property and the Law In Energy and Natural Resources (Oxford University Press, 2010) 379 113 I. Guayo, G. Kuhne and M. Roggenkamp, ‘Ownership Unbundling and Property Rights in the EU Energy Sector’ in A. McHarg, Property and the Law In Energy and Natural Resources (Oxford University Press, 2010) 338 114 Joined Cases C-105/12 to C-107/12 Staat der Nederlanden v Essent NV,Essent Nederland BV,Eneco Holding N ,Delta NV [2013] ECR I-677 115 Ibid, paragraph 36 116 Joined Cases C-105/12 to C-107/12 (note 114) para 55 117 Joined Cases C-105/12 to C-107/12 (note 114) para 64-66 118 I. Guayo, G. Kuhne and M. Roggenkamp ( note 113) 338
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Additionally, it has been stated that since the Commission was unable to enforce ownership unbundling through (partial) privatization of State-owned energy companies, it compromised by introducing the notion of different State bodies owning and being responsible for different activities119 (eg. generation/transmission). The above solution has been criticized for not respecting the principle of equality, with the public sector being treated more favorably, since, only private undertakings have to give up one or another of the required activities, while the public sector is able to use its many “faces” in order to diffuse the parallel ownership of multiple entities.120
However, meeting the independence criteria governing all three unbundling options for entities remaining inside the public spectrum seems an ambitious plan, since public entities are connected one way or another to the government, no matter how closely or loosely. The assumption that conflicting interests and any kind of corruption are avoided seems a utopia, at least in some cases.
The above considerations have completed the European Union legislation relevant to Unbundling. In the following chapter due regard is paid to the notion “effective unbundling”.
119 E.M. Ehlers (note 111) 418 120 E.M Ehlers ( note 111) 420
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2. Effective Implementation of the Third Package Unbundling Provisions
2.1. Definition of Effective Unbundling Recitals 11 and 12 of the Third Electricity Directive, as well as recitals 8 and 9 of the Third Gas Directive, contain the definition of effective ownership unbundling according to the provisions of the Directives. More precisely, the Recitals provide for a ‘checklist’ in order to determine the effectiveness of the measures concerned. It consists of the following requirements: Primarily, according to the abovementioned Recitals of the electricity and gas Directives respectively, the unbundling measure implemented (namely, either the option of full ownership unbundling, or ISO, or ITO) shall ensure that any overlapping of interests between network operation and supply and/or production activities is eliminated. The abovementioned requirement is further defined in the Recitals as embodying three aspects: Firstly, the obligation of the Member States to ensure through one of the unbundling options that the network operator does not discriminate against generation or supply competitors with regards to access to the network (TPA); Secondly, transparent access of all market participants to necessary information shall be facilitated by the network operator; Thirdly, the operator shall be obliged to foster network investments. With regards to the latter, any decisions regarding network investments shall take into account solely the development and better functioning of the network; in other words, the network operator shall adopt its position regarding investments in infrastructure while keeping a completely neutral view to the position of market participants on the matter. Lastly, the abovementioned results shall be effected under the umbrella of an efficient and transparent regulatory regime. These obligations are cumulative. This is confirmed by the Commission’s Interpretative Note on the Unbundling Regime, where the Commission refers to all of the abovementioned elements as consisting aspects of requirement for effective (emphasis added) unbundling, that should guide Member States when implementing one of the three models.121 Therefore, one could refer to the ‘checklist for the effectiveness of unbundling’ by applying the Recitals’ conditions to the way Member States have implemented the unbundling regime, in order to verify whether the purpose in question has been achieved. Nevertheless, along with the necessity of the effectiveness checklist to be in place, the whole contribution of Unbundling to the competitive functioning of the market needs to be part of the assessment. This approach is in line with the overall purpose of primary EU law to establish and promote a competitive energy market,122 as well as with the aim of the Third Energy Package to eliminate problems in competition123 and establish “a well-functioning energy market.”124 Thus, it could be argued that a broader definition of effectiveness should apply. Indeed, according to Joscow,125 a fully ownership unbundled TSO (he refers to the electricity sector) performs in the most efficient way compared to other models of ownership which lead to a
121 supra (note 81) 4-5 122 Article 194 TFEU 123 European Commission ‘Explanatory Memorandum’ (note 78) 3 124 Recital 6 of Directive 2009/72 (note 59) 125 P. L. Joscow, “Lessons Learned From Electricity Market Liberalization” (The Energy Journal, Special Issue. The Future of Electricity: Papers in Honor of David Newbery 2008, 9) http://economics.mit.edu/files/2093 accessed 13/5/2016
21 partial involvement of both entities in the transmission activities.126Even though at his “textbook” he includes the option of less intrusive unbundling models127 (such as the ISO and ITO), in his opinion, day-to-day operations as well as investments on the network should lie with a single entity, that being the independent TSO.128 Notwithstanding, examining the issue from another legal angle, that of the general principles of EU law,129 and more specifically from the perspective of proportionality, as referred to in Article 5 paragraph 4 of the TFEU, according to case law of the Court130the measure must serve the aim pursued, at least at a minimum level.131 Hence, one can observe that, in principle, providing for three unbundling models of gradual severity, so that Member States are free to choose the model it suits them most, is in line with proportionality’s requirement not to employ measures going beyond what is necessary to achieve a result.132 The above conclusion is valid when the ‘effectiveness check list’ of the Directives, as described above, is met. It could also be argued that for a measure to be appropriate, it should add to the whole development of the internal energy market, according to the objective of Article 194 TFEU as analyzed above. In this respect, the experiences of Member States having implemented either the OU model or the ITO model could be proven of great value.
126 Ibid 26 127 Joscow (note 125) 12 128 ibid 129 See M. Horspool and M. Humpreys, European Union Law ( 8th edition, Oxford University Press 2014) 113 130 ECJ Case C-331/88 Fedesa [1990] ECR I -4023 para 14 131 “not manifestly inappropriate”, ibid 132 See ECJ Case C-58/08 Vodafone and others [2010] ECR I- 5026 para 51
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2.2. Assessing Effective Implementation of Unbundling-First Group
2.2.1 The UK (England and Wales)
The UK could be characterized as the leader of unbundling, since, not only it was the first EU Member State to liberalize its electricity market, but it did it on its own initiative, a decade before the first European Directives were adopted.133 The liberalization program of the UK provided for the creation of three electricity generation companies and one transmission company, by splitting up the CEGB.134The generation companies were privatized some years later,135 whereas the transmission company became the sole network operator; access to the gird for market participants was possible under the acquiring of a license and payment of a regulated fee.136 The same conditions applied for the functioning of the distribution networks which were operated by regional operators.137 The outcome of the liberalization program was that by the time of the adoption of the first EU energy Directives, the UK had introduced free choice of suppliers for all customers of electricity.138 With regards to the gas sector, as stated by former officials of the Directorate-General for Competition in a 2007 opinion,139 the reason behind the urge of the UK to adopt the ownership unbundling regime in the 1990s as a means for liberalization, was the inability of the former vertically integrated company to meet the expectations of the market and its subsequent inability to comply effectively and cost efficiently with the then existing regulatory framework.140 Applying the effectiveness check list to the information provided in the abovementioned article, one could reach to the conclusion that the UK’s unbundling program was stemmed with success: In years after ownership unbundling and privatization took place, TPA discrimination by the TSOs was tackled, investments reached a higher level than before, transmission costs as well as market concentration were substantially reduced and new infrastructure investments were planned (information about years 2000-2006).141
133 M. Marquis and W. J. Fulbright (note 8) 40 134 ibid 135 ibid 136 M. Marquis and W. J. Fulbright (note 8) 41 137 M. Marquis and W. J. Fulbright (note 8)51 138 M. Marquis and W. J. Fulbright (note 8) 55 139 P. Lowe, I. Pucinskaite, W. Webster and P. Lindberg (note 3) 140 ibid 30 141ibid; For the information regarding market concentration N. Kroes ‘Improving Competition in European Energy Markets Through Effective Unbundling’ [2007] Volume 31 Fordham International Law Journal 1387, 1431
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Taking into account more recent data, according to the Commission’s assessment of the UK’s electricity and gas market of 2014142 and 2015143, no reference was made with regards to the (in)effectiveness of ownership unbundling. On the contrary, concerns about liquidity and price transparency of the market have been raised, due to the prevalence of a number of vertically integrated undertakings in the electricity generation and supply activities.144 Investments also seem to be following a rising trend, since infrastructure projects have been authorized by the NRA for the period 2013-2021.145 To conclude, any problems146 Commission has identified with regards to the UK energy market do not seem to be related to the ownership unbundling regime and thus, the implementation of the unbundling provisions can be considered effective.
2.2.2. The Netherlands
The Dutch Electricity and gas downstream sector underwent a series of structural transformations that begun in the 1980s and aimed at the full liberalization of the energy market.147 In the following years, the Netherlands, similar to the UK, followed a proactive approach with respect to unbundling and implemented a legal unbundling for electricity transmission operators, going a step further from the requirement of functional unbundling of the First Electricity Directive that was then in force.148 Gas legal unbundling took place along with the implementation of the Second Gas Directive149and by 2004, both the high and low voltage networks were operated by legally unbundled companies.150 With regards to the process of ownership unbundling of the transmission operators, although the Dutch approach had initially favored the idea of concluding the unbundling along with the privatization of the transmission companies, this approach was not followed at last.151 Instead, the shares of the Electricity TSO Tennet, which were held by production companies, were bought by the Dutch State in 2001.152 Moving on to the gas sector, transmission Company GasUnie was unbundled in 2005 with the State buying the shares private companies (Shell and Exxon) were holding.153GasUnie had already performed legal unbundling in 2004 by creating
142 European Commission ‘Single market progress report 2014, country report: the UK’ https://ec.europa.eu/energy/sites/ener/files/documents/2014_countryreports_unitedkingdom.pdf accessed 18/3/2016 [hereafter 2014 UK Report] 143 European Commission, ‘Country Fact Sheet United Kingdom’ (Staff Working Paper) accompanying Communication od the Commission to the European Parliament, the Council, the Economic and Social Committee, the Committee of Regions and the European Investment Bank ‘State of the Energy Union’ SWD(2015) 242 final [hereafter 2015 UK Factsheet] 144 2014 UK Report (note 142) 233; 2015 UK Factsheet (note 143) 4 145 2014 UK Report (note 142) 237 146 2014 UK Report (note 142) 230 147 M.M.Roggenkamp ‘ Full Transparency through Ownership Unbundling’ in M. M. Roggenkamp and U .Hammer European Energy Law Report VI (Intersentia 2009) 62-63 148 M.M.Roggenkamp ( note 147) 64 149 ibid 150 M.M.Roggenkamp ( note 147) 66 151 M.M.Roggenkamp ( note 147) 66-67 152 M.M.Roggenkamp ( note 147) 67 153 M.M.Roggenkamp (note 147) 68-69
24 another company to function as a TSO, that of Gas Transport Services.154Thus, the Dutch State became the owner of both the electricity and gas transmission companies. Regarding the results of the ownership unbundling option in the Netherlands, they have been characterized very positive as far as investments are concerned.155 Precisely, in years after ownership unbundling was implemented (2005), several investment projects were initiated, such as the construction of a new LNG Terminal and a new gas storage facility.156 The above developments have been connected with the market oriented character acquired by the unbundled TSOs.157 Monitoring long term developments, the Commission’s reports of 2014158 and 2015159 for the performance of the energy sector in the Netherlands revealed that concentration of the electricity production market is not high and although, in the gas sector a higher level of concentration is present, wholesale market liquidity and competition in retail markets remain strong.160Moreover, in electricity retail markets, competition is improving year by year as the supplier choices show.161 Furthermore, the problems of concentration in the Dutch gas sector are not related to the ownership unbundling option. The fact that the Netherlands is a producer of gas leads to the small number of undertakings carrying out production activities, since only one takes advantage of the gas field in the region of Groningen.162 Overall, the abovementioned market facts are strong indicators that the pro-ownership unbundling approach by the Netherlands has served the purpose of giving a boost to investments and creating a competitive and well-functioning energy market.
154 M.M.Roggenkamp ( note 147 )66 155 M.M.Roggenkamp (supra note 147) 74 156 P. Lowe, I. Pucinskaite, W. Webster and P. Lindberg (supra note 3) 31 157 ibid 158European Commission ‘Single market progress report 2014 country report: the Netherlands’ http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52015SC0241&from=EN > accessed 19/3/2016 [hereafter 2014 Report: the Netherlands] 159 European Commission, ‘Country Fact Sheet the Netherlands’ (Staff Working Paper) accompanying Communication of the Commission to the European Parliament, the Council, the Economic and Social Committee, the Committee of Regions and the European Investment Bank ‘State of the Energy Union’ SWD(2015) 241 final [hereafter 2015 Report: the Netherlands] 160 2015 Report: the Netherlands (supra note 159) 4 161 2014 Report: the Netherlands (supra note 158) 226 162 2015 Report: the Netherlands (supra note 159) 4
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2.3. Assessing Effective Implementation of Unbundling-Second Group
2.3.1. France
France provides for a very good example of a Member State that embraced the public character of its utility entities from their early stages of development. The actual shift towards the abovementioned approach took place after World War II, when France nationalized its electricity upstream and downstream industry in order to prevent the repetition of the power inefficiencies that occurred during the War;163 since then, small private companies were active in the generation and supply of electricity.164 The law of 1946, introducing also partial nationalization of the gas sector, provided for the establishment of a two national energy entities, named Electricite de France (EDF) and Gas de France (GdF) respectively;165 each would retain the ownership of the generation units as well as the sole operation and ownership of the electricity and gas networks accordingly.166 When France was called upon to implement the First Electricity and Gas Directives, it was not without any opposition from its part. The main idea of French officials and the public was that the energy sector was benefited from the public model in a way that questioned the necessity of effecting competition in the energy markets.167Nevertheless, the first Directives were adopted for both electricity and gas.168 By the time of the transposition of the Second Directives in 2004, a major change had occurred in the France energy sector: Both EDF and GdF had been transformed into limited liability companies whose majority of shares was held by the State.169 Furthermore, the legal and functional unbundling of the network activities were implemented, since a new, legally independent unit of EDF, that of RTE, was appointed network operator.170 It is very important to mention that the status of “national public services” (emphasis added) in France, such as telecommunications, energy and post services is granted a special protection under the Constitution.171 This approach has been followed by the French courts whenever they were called upon to rule on matters such as a partial privatization of a utility.172A swift occurred in 2004, when the Constitutional Court ruled in favor of the partial privatization of GdF, which subsequently made possible the merger of GdF with Suez (now GdF-Suez), in which the State holds 40% of the shares.173
163 M.M. Roggenkamp, Energy Law In Europe : National, EU and International Regulation (2nd ed. Oxford university press 2007) para 8.100 164 M.M. Roggenkamp, Energy Law In Europe (note 163) 8.98 165 M.M. Roggenkamp, Energy Law In Europe (note 163) 8.100 166 ibid 167 M.M. Roggenkamp, Energy Law In Europe (note 163) para 8.117 168 M.M. Roggenkamp, Energy Law In Europe (note 163) para 8.231, 8.243 169 M.M. Roggenkamp, Energy Law In Europe (note 163) para 8.120, 8.233 170 M.M. Roggenkamp, Energy Law In Europe (note 163) para 8.249 171 J-C. Pielow and E. Ehlers, ‘Ownership unbundling and constitutional conflict: a typical German debate?’ [2008] Volume 2, Issue 3 European Review of Energy Markets 1, 29 172 J-C. Pielow and E. Ehlers ( note 171) 29-30 173 J-C. Pielow and E. Ehlers ( note 171) 30-31
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The combination of these factors along with the willingness of France to apply the legal unbundling provisions of the Second Directives to its energy players provides an overview of France’s position with regards to ownership unbundling: it does not support a full privatized ownership unbundling, since a strong public participation in the energy networks is an inherent feature of the French energy sector.174 Indeed, France raised its objections with regards to the Commission’s Third Package proposal for full ownership unbundling and it subsequently favored the inclusion of the ITO model in the Directives,175 which it actually implemented, since in 2014 two out of three operators in France had been unbundled according to the abovementioned model.176 Moving on to assess whether the implementation of the ITO model has been effective in France, the situation seems complicated. According to the 2015 Commissions’ report for France,177 market concentration (in favor of the incumbents) in electricity production, wholesale and retail market is rather high and this reflects on the fact that suppliers have rarely used their option to switch suppliers.178In the gas sector, switching supplier rates are higher and thus the market is less concentrated.179However, it is astonishing that French energy prices are among the lowest in the EU and also that the consumers rate the performance of the national energy market as very satisfactory.180 However, none of the above deficiencies in competition have been related to the effectiveness of the ITO model by the Commission in country reports, or by the French NRA (CRE). The latter stated in a report of 2014 that France has already achieved actual( emphasis added) separation of the networks from competitive activities, by implemented the Third Package provisions, which has been a major step for the opening of the market.181Nevertheless, there is a consistency between CRE and European Commission reports that further improvement of the energy regulation in France is required to fostering competition.182 Especially with regards to infrastructure investments, European Commission has stressed out that the absence of a strong electricity interconnector with Spain creates problems to competition and regional cooperation.183
174 This is proven by the fact that the State has retained a level of participation in all French TSOs see: European Commission, ‘Single market progress report 2014 country report: France’
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Concluding, it is difficult to assess whether the ‘effectiveness checklist’ has been met in France. One the hand, due regard should be given to the fact that the French energy sector has been dominated from a successful monopoly for a very long time and therefore transition to a highly liquid and competitive market could not be but anything but challenging. One the other hand, implementation of the ITO model does not seem to have contributed substantially to the development of the French market.
2.3.2. Germany
Germany’s energy structure shows similarities with the French one, since prior to liberalization, production and transmission energy activities were performed by vertically integrated companies184while distribution was performed by numerous local companies related to or owned by the respective municipalities.185The difference lies on the fact that in Germany, four major energy vertically integrated companies were established,186 in contrast with France were EdF has been the sole major player. Experiences with liberalization of the energy sector have been the result of the implementation of the respective EU Directives.187 Germany transposed the First and Second Package efficiently and on time, although not with a proactive approach: it only enforced the minimum requirements of the Directives.188 Moreover, it is worth mentioning that according to the 2007 Sector Inquiry findings, a case of apparent discrimination had been detected by one of the German vertical integrated energy companies.189 The same approach was followed by Germany with regards to the Third Package when, along with France, backed the less strict model of ownership unbundling, the ITO.190Germany’s strong objection to the Commission’s proposal of ownership unbundling191 was based, inter alia, on the argument that the first option could be deemed contrary to certain constitutional provisions, namely the ones concerning the protection of the fundamental right of property.192 When it comes to implementation of the Third Package Unbundling requirements, the situation seems rather complicated. First of all, Germany has officially chosen the ITO model.193 In electricity, two of the major vertically integrated companies followed the path of ITO,194 meaning, appointing a separate TSO, while abiding by the detailed rules of the Directives, whereas the other two opted for the complete ownership unbundling by selling
184 M.M. Roggenkamp, Energy Law In Europe (note 163) para 9.14 185 M.M. Roggenkamp, Energy Law In Europe (note 163) para 9.11, 9.14 186 That being E.ON AG, Vattenfall Europe AG, EnBW AG, RWE AG, see M.M. Roggenkamp, Energy Law In Europe (note 163) para 9.15 footnote 29 187 M.M. Roggenkamp, Energy Law In Europe (note 163) para 9.88; G. Brunekreeft, G. Goto, M. Meyer, R. Maruyama, T. Hattori, ‘Unbundling of Electricity transmission system operators in Germany-An experience report’ (2014) Bremen Energy Working Papers No. 16,Jacobs University Bremen 1, 5 188 G. Brunekreeft, G. Goto, M. Meyer, R. Maruyama, T. Hattori (note 187) 5,6 189 P. Lowe,I. Pucinskaite, W. Webster and P. Lindberg (note 3) 25 190 G. Brunekreeft, G. Goto, M. Meyer, R. Maruyama, T. Hattori (note 187) 6 191 Shepherd and Wedderburn LLP (note 175) 192 J-C. Pielow and E. Ehlers (note 171) 22-23 193 G. Brunekreeft, G. Goto, M. Meyer, R. Maruyama, T. Hattori (note 187) 40 194 G. Brunekreeft, G. Goto, M. Meyer, R. Maruyama, T. Hattori (note 187) Figure 4 page 14
28 their TSO shares.195Therefore, two models of unbundling have been implemented in Germany. The reasons behind the choices of the companies vary, stemming from different needs,196 traditions,197 prior ownership,198 and market considerations.199 In gas, 15 TSOs have been certified by the competent NRA.200 Has unbundling been effective? According to the information deriving from the Commission’s assessment in the Reports of 2014201 and 2015,202 the German energy market performs well in general, since competition in the gas supply sector is very satisfactory, while in electricity the four largest companies remain the strongest market participants.203 However, by 2012, the largest electricity generation companies in Germany retained the substantial wholesale market share.204 Moreover, electricity retail market is considered highly competitive with a shortcoming being its high prices, which have been a result of additional levies.205 As far as investments are concerned, situation in Germany looks problematic. The country has delayed in completing the relevant electricity infrastructure projects, which are considered crucial for assisting Germany in solving its congestion problems.206 Gas infrastructure investment levels need also to rise up, if Germany wishes to meet its planned targets.207 To sum up, in applying the Directives’ ‘checklist’, there is no obvious information about a malfunctioning of the unbundling system in Germany when it comes to non- discrimination by TSOs with regards to providing information and TPA. However, a number of problems with regards to investments are identifiable.
2.4. Conclusions
It is rather obvious that the different paths the abovementioned Member States followed with regards to unbundling led their energy sectors to different levels of competition and regulation. Even though there is no information about any discriminative behavior of the TSOs, or any other major flaw of the system, one should keep in mind that the purpose of the unbundling provisions is to eliminate the problems more plausible to arise under the vertical
195 ibid 196 G. Brunekreeft, G. Goto, M. Meyer, R. Maruyama, T. Hattori (note 187)15 197 G. Brunekreeft, G. Goto, M. Meyer, R. Maruyama, T. Hattori (note 187)16 198 G. Brunekreeft, G. Goto, M. Meyer, R. Maruyama, T. Hattori (note 187)17 199 ibid 200 European Commission,’ Single market progress report 2014 country report: Germany ‘ https://ec.europa.eu/energy/sites/ener/files/documents/2014_countryreports_germany.pdf > [hereafter 2014 Report: Germany] 90 201 2014 Report: Germany (note 200) 202 European Commission, ‘Country Fact Sheet Germany’ (Staff Working Paper) accompanying Communication of the Commission to the European Parliament, the Council, the Economic and Social Committee, the Committee of Regions and the European Investment Bank ‘State of the Energy Union’ SWD(2015) 225 final [hereafter 2015 Report: Germany] 203 2014 Report: Germany (supra note 200) 91 204 ibid 205 2015 Report: Germany (supra note 202) 4 206 ibid 207 ibid
29 integration structure. In that regard, the ITO model seems to have failed with respect to its biggest supporters. One can easily observe that France’s and Germany’s choice to lobby and implement the ITO model, served their purpose of keeping things almost as they were before introducing the unbundling provisions to their energy markets. Neither EdF, nor the four major German companies lost substantially their high market share. The latter undermines the improvement of competition in the production sector. If market concentration remains high, then non-discriminatory TPA and effective functioning of the network operator adds little value to the aim of a competitive and “well-functioning internal market”.208 Moreover, investments in both countries did not follow a rising trend, which is one of the predominant aims of ownership unbundling. As a Jacobs University Working Paper of 2014209 points out, the ITO model, in its substance, is a stronger form of legal unbundling and it does not result in solving the lack of investment incentive problem. All the more, it creates a new one, which is the difficulty in coordination between the parent company-owner of the system and the ITO, regarding investment decisions and their execution.210 Does the European Commission share the same view? In its 2014 Report on the ITO model,211 the Commission appeared satisfied, especially with regards to the independence requirements.212Moreover, the Report states that ITOs provide all guarantees for adequate investments and there is no concrete proof that investments are being promoted better under the Ownership Unbundling model.213 Nonetheless, the Commission stressed out that 2014 was too early to assess the results delivered by the ITOs’ 10 year investment plans.214 Applying again the proportionality principle, as it was stated at the beginning of the Chapter, assessing whether both the OU and the ITO models are in line with it, heavily depends on the position one takes towards the objective pursued: On the one hand, it seems that the Commission ITO Report was strictly concerned with the implementation by ITOs of the “effectiveness checklist” as prescribed in the Directives and therefore, the ITO is an appropriate model for the objective pursued. On the other hand, we have seen that economic theory for market liberalization sees Ownership Unbundling as the best solution.215 Is it possible that the Commission is not consistent with its interpretation on the results required by unbundling arrangements or, that it employs other mechanisms in order to reach the results prescribed in economic theory but are not being met under the ITO model, or even under the Ownership Unbundling model? With respect to the Member States we examined in this Chapter, the answer to the above question is a negative one. Would one answer the same for the cases of Ireland and Greece? The next chapters will provide the answer.
208 See Recital 7 Directive 2009/72 (note 59) 209 G. Brunekreeft, G. Goto, M. Meyer, R. Maruyama, T. Hattori (note 187) 9 210 Ibid 20 211 European Commission, ‘Report on the ITO model’ (Staff Working Document) SWD (2014) 312 final [hereafter Report on ITO model] 212 Ibid 3 213 Report on ITO model (note 211) 6 214 ibid 215 See, supra P.L. Joscow (note 125) and G. Brunekreeft, G. Goto, M. Meyer, R. Maruyama, T. Hattori (note 187)
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3. Implementation of the Unbundling Provisions in Member States with weak economies and strong monopolies
The case of Ireland
3.1 Historical Overview of the Energy Market in Ireland Since the 1920s, following the founding of the Irish State, the Irish policy makers embraced the idea of entrusting the electricity sector to the State.216 Even though there had been a debate over the choice of the private or public model, the main factor which pointed towards the state option was that the lack of safeguards that private investors would serve the countryside as efficiently as the more profit-making populated areas.217 Thus, the Electricity Supply Board (ESB) came to life, as a result of the 1927 Electricity Supply Act.218 The aim was for ESB to act as a public service, entrusted with the task to facilitate the production and supply of electricity to the whole country.219 Even though there was not a clear provision in the Act that a monopoly was formally established, the excessive powers of ESB to acquire power businesses, as well as to authorize and alter the scope of supply areas, as provided by the Act, had the effect of creating a de facto monopoly in the whole electricity chain.220 Moreover, since Ireland’s electricity production was based partly on peat production, another State authority, named, the “Turf Development Board”, was established with a statutory Act in 1936 with the purpose to facilitate and promote peat production for energy uses;221 it was later renamed “Bord da Mona” in 1946.222 This State-Sponsored body was closely connected to the ESB, since, according to the governmental policy, half of the former’s peat production was being bought by ESB, in order to be used in the peat-fired electricity factories.223 In the 1950s, a Governmental Development Program imposed ESB to build and operate four new peat stations that they contributed largely in the extensive peat usage during the 1970s, whereas the usage of peat decreased in the 1990s and thus, by the early 2000s all the peat stations had stopped operating.224However, by 2005, the construction of three new peat stations had been planned.225 Peat production was more than another source of energy for Ireland. The production takes place in rural areas and it has been a major source of employment for the Irish communities.226Therefore, for employment reasons, the government introduced the
216E. D. Cross, Electric Utility in the EU, Electric Utility Regulation In the European Union : a Country by Country Guide (Chichester: Wiley, 1996) 69-70 217 E.D. Cross (note 216) 69 218 E.D. Cross (note 216) 70 219 ibid 220 ibid 221 D. Clack, Brief History of the Peat Industry in Ireland, available at
31 abovementioned peat-promoting policies and obliged ESB to pay high prices for a large portion of the peat Board’s (Bord da Mona) production.227 Thus, the role ESB played in the society was proved to be more than just an electricity company: apart from promoting employment policies, was also responsible for facilitating electricity in rural and remote areas of the country;228 Furthermore, the monopoly powers of ESB were so extensive that there was no provision in the 1927 Act or in another statute to, at least, foresee for the potential introduction of TPA to the network229 or the licensing of new producers.230 The above regime lasted until the 1990s, when the first considerations regarding market reconstruction and liberalization started to commence, mostly driven from the initiation of the European Commission’s efforts to introduce a more liberal regulatory market environment for energy in the EU.231 With regards to gas, the same formulation as in the energy regulation was followed. According to the Gas Act of 1976232, the powers of Bord Gáis Éireann (Irish Gas Board) covered all gas related activities, namely, inter alia, the purchase or import of gas, transmission and distribution through pipelines, maintenance and development of the pipelines, export of gas and construction of new pipelines subject to a Ministerial approval, supply of gas to customers and issuance of bills and acceptance of payments, as well as fixing price rates.233 At this point, a short analysis of the legal nature of the abovementioned State authorities should be provided. The respective Boards for electricity, peat and gas were established under the legal form of Statutory Corporations.234 According to Irish legislation, statutory corporations derive their powers235 from their founding Act,236 which describes in detail the functions of the establishing Board, the relationship with the respective Minister (who is responsible for appointing the Board Members), the monitoring of its accounts, the terms according to which it can borrow or raise capital, the supervisory role of the parliament with regards to its activities and others.237In other words, all the crucial aspects for the functioning of the Statutory Corporation are provided by the Statutory Act. As a result, any amendment
227 E.D. Cross (note 216) 72 228 E.D. Cross (note 216) 72 229 Production licances were given only after ESB’s approval, see E.D. Cross (note 216) 79-80 230 E.D. Cross (note 216) 70-71 and 77-78 231 See E.D. Cross (supra note 216) 78 and first chapter for the evolution of EU energy law 232 Gas Act (Number 30, 1976), available at < http://www.irishstatutebook.ie/eli/1976/act/30/enacted/en/html > accessed 30/3/2016 233 Gas Act (Number 30, 1976) (note 232), Part II, Section 8 234 M. MacCarthaigh ‘The Corporate Governance of Commercial State-owned Enterprises in Ireland’ (2009)Institute of Public Administration CPMR Research Report 9, 9 ,where it is also mentioned that Apart from statutory corporations, State sponsored bodies can also take the legal form of public or private companies, established under the Companies Act, available at http://www.ipa.ie/pdf/cpmr/reports/CPMR_RR9_Corporate_Governance_of_Stateowned_Enterprise s_Ireland.pdf > accessed 30/3/2016 235 ibid 236 In this case the 1927 Electricity Supply Act, Turf Development Act 1946 , Gas Act 1976, Website of the Department of Communications, Energy and Natural Resources, Home, Energy Topics, State Energy Bodies < http://www.dcenr.gov.ie/energy/en-ie/State-Energy-Bodies/Pages/home.aspx > accessed 30/3/2016 237 M. MacCarthaigh 8 (note 234)
32 of the abovementioned elements shall take place along with the amendment of the respective Act.238 Having provided a brief history and explanation of the main aspects of the energy market organization in Ireland, the steps towards liberalization of the market will be covered in the next section.
3.2 Developments prior to Third Energy Package
In early 1990s, discussions around the restructuring of the (electricity) market and reorganization of the ESB had begun.239 The new government showed a positive attitude towards the EU Energy Law developments pursued by the European Commission and thus, it committed to introduce some changes that would bring ESB closer to the then proposed European rules for an internal competitive market.240 Still, the objective was for ESB to continue operations as a single entity.241 At the beginning of 2000s, Ireland gave force to the First Electricity Directive with the 2000 European Communities Regulations (SI. 445/2000).242 The Regulations aimed in transposing the Directives to Irish legislation and to introduce the relevant amendments to the then existing legislation.243By that time, the relevant electricity law was the Electricity Regulation Act of 1999 (No. 23 of 1999) as amended by the Gas Act of 2000.244 For gas, the transposition of Directive 98/30/EC took place with the entry into force of the Gas (Interim Regulation) Act of 2002.245 The transposition of the First Directives has been characterized as “advanced”, at least when it comes to the implementation of the respective EU rules.246 In the following paragraphs the focus will lay on the TSO unbundling and TPA provisions, as well as their effect on competition and investments. Regulations 445/2000247 provided for a series of amendments in order to bring the Irish electricity legislation in line with the First Directive; among others, these included the following: any upstream or downstream electricity activity to be covered by a respective license;248Regulations 5(1) and 34 (1) required the establishment of a public liability company (according to company law-Company Act 1963 and following amendments) which would be
238 ibid 239 E.D. Cross (note 216) 70 240 ibid 70-71 241 ibid 242 P. Mc Govern,’Ireland’ in P. Cameron Legal Aspects of EU Energy Regulation: Implementing the New Directives On Electricity and Gas across Europe (Oxford university press, 2005) 200 243 See ‘Explanatory Note’ in the S.I. 445/2000 Regulation, European Communities (Internal Market in Electricity) Regulations, [2000], available at < http://www.irishstatutebook.ie/eli/2000/si/445/made/en/print#article1 >accessed 1/4/2016 [hereafter 445/2000 IME Regulation] 244 Article 2 (1), 445/2000 IME Regulation (supra note 243) 245 P. Mc Govern (note 242) 200 246 See P. Mc Govern (note 242) 199 247 445/2000 IME Regulations (note 243); the regulations referred below form parts of the 445 IME Regulations. 248 Regulation 4 of 445/2000 IME Regulation(note 243)
33 granted the sole license in order to operate as a TSO; According to Regulations 5 and 6, ESB remained the sole owner of the Transmission System, as well as the operator of the distribution system; the TSO was burdened with all obligations of a TSO under the First Directive, which include, among others, facilitation of TPA in a non-discriminatory way249 and effective operation and development of the system;250the functions of the TSO and the Board (as the owner) shall be entirely separate and even indirect influence is not allowed, as stated in Regulation 9; according to regulation 10,the newly established TSO shall be provided with all necessary resources in order to fully operate (obligation that was further implemented by Regulation S.I. 145/2002); the same applied to personnel;251the internal relationship between the TSO and the Board (including matters, such as payments ESB is entitled to, as the owner) was required to be governed by a special agreement, named “Infrastructure Agreement”, which was subject to the approval and monitoring by CER, according to Regulation 18; unbundling of accounts was required for all undertakings active in the electricity sector according to Regulation 27. With regards to gas, on the same pace with the First Gas Directive, Gas (Interim Regulation) Act of 2002 provided for the licensing of gas activities ( including construction and operation of pipelines according to section 12), according to section 16; the appointment of BGE as responsible for the gas transportation system is provided in section 11; BGE remained the owner of the transmission and distribution systems, although having its accounts separated with regards to all of its activities (including supplying gas) as stated in Section 17 (3); the Act introduced competition in gas transportation and supply activities,252 since, according to Section 12 (1) persons were allowed to construct pipelines, provided that they obtain a permission of CER (for downstream pipelines) or the Minister (for upstream pipelines); Section 14 granted eligible customers the right to apply for TPA access to the TSO, according to published tariffs approved by CER. The section also included detailed rules with regards to TPA obligations of TSO and the supervisory role of CER. One can easily observe that there is an important difference between the Irish electricity and gas regulations: Regulation 445/2000 introduces legal unbundling on top of accounting unbundling with regards to ESB, since it provides for the establishment of a subsidiary, EirGrid, to function as a TSO, obligation that was not yet due under the First Directive; On the contrary, the 2002 Gas Act provides only for the accounting unbundling of BGE. Regardless of the big step towards legal unbundling of ESB, things did not run smoothly, since EirGrid did not begin to operate immediately as a TSO under the new legal unbundled form of a subsidiary, as provided by the Internal Market Regulations.253Instead, the respective transmission unit of ESB within the auspices of the Board continued to function as a provisional TSO, even though the unit’s independence was called into question.254Therefore, full separation of entities with respect to their legal form had not yet taken place.255
249 Regulation 11 of 445/2000 IME Regulations(note 243); also, ESB, as the owner, is obliged to operate in a non-discriminatory way, according to Regulation 20 250 Regulation 8 (1 a-i) of 445/2000 IME Regulation(note 243) 251 Regulation 14 of 445/2000 (note 243) 252 See P. Mc Govern (note 242) 203 253 P. Mc Govern (note 242) 203 (para 10.17) 254 ibid 255 ibid
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Regulation 328/2003 was the piece of legislation making the way for the actual operation of EirGrid as a TSO, providing for the appointment of the first CEO of the company by its Directors.256As a result, EirGrid took over transmission operation activities on 1 July 2006.257 By that time, the Second Electricity Directive had come into force. Ireland passed Regulations 60/2005258, in order to amend the previous regulations and bring them in line with the new Directive. Among others, Regulations 60/2005 introduced TPA for all customers in Regulation 6 (d); also Regulation 11 (1) required non-discriminatory behavior in favor of the incumbent with respect to TPA and for that to be ensured, it introduced a compliance program to be put in place according to section 11 (2). Moreover, Regulations 60/2005, at point 7, amended Regulation 9 of S.I. 445/2000 concerning independence of the TSO, by specifying the mandates the owner of the network (ESB) shall comply with: these could be minimum maintenance and development of the interconnection and the network. However, the list was not exhaustive, since, Regulation 7 of Regulations 60/2005 stated that other requirements “may” be considered necessary by the TSO. The Second Gas Directive was implemented with regulations 325/2005 amending the relevant TPA access rules, Regulations 426/2004, 452/2004 and 60/2005.259The latter concerned the legal unbundling of gas TSO from BGE.260 In more detail, Regulation 5 stated that a new company responsible for transmission operation shall be established, under Company Law legislation, in which BGE shall have at least 50 percent of the shares. Again, an infrastructure agreement was deemed as the tool to determine the relationship between the TSO and the Board as the owner of the system.261As far as ownership of the system was concerned, Regulation 9 followed the minimum requirement of legal unbundling as envisaged by the Second Gas Directive and did not mandate BGE to transfer the ownership of the network in the new established subsidiary.262With regards to independence of the new company from BGE, Regulation 12 required the primary to be fully independent from the latter with respect to its organization and day to day operation, as well as with respect to the development of the system. However, BGE, acting as owner of the system was entitled to review and approve the annual development plan drafted by the TSO.263Also, BGE was granted the right to appoint Board Members provided that they were not in charge of day-to-day operations.264 Overall, one can observe that the TSO’s status of independence, after legal unbundling took place, was the minimum, as required by the Second Directive. The latter is reaffirmed by the subtitle of the relevant regulation 12 of Regulations 60/2005: ‘Independence in “certain” respects’ (emphasis added).
256 SI No 328 of 2003 - European Communities (Internal Market in Electricity)(Amendment) Regulations [2003] ‘Explanatory Note’ 257 The Competition Authority, Towards a Sustainable Energy Future for Ireland (submission to the DCMNR, 1 December 2006, Submission S/06/009) 25 258 European Communities (Internal Market in Electricity) Regulations [2005] [hereafter S.I. 60/2005] 259 See Department of Communications, Energy and Natural Resources, Home, Energy, Legislation http://www.dcenr.gov.ie/en-ie accessed 7/4/2016 260 Regulation 5 section (1) of S.I. 60/2005 (note 258) 261 Regulation 8, S.I. 60/2005 (note 258) 262 Regulation 9 (4), S.I. 60/2005 (note258) 263 Regulation 12 (3 b), S.I. 60/2005 (note 258) 264 Regulation 12 (6 d), S.I. 60/2005 (note 258)
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In 2007, after the publication of the Energy Green Paper,265 the White Paper followed.266 According to the view of the Competition Authority in its submission to the Green Paper, the Irish Electricity market was in need of fundamental structural reforms to meet its targets for a sustainable and competitive market.267The Authority’s opinion was that the three most crucial reforms should be: to split up the generation unit and take some units away from ESB, to implement a full ownership unbundling to the network entities (and not rely on the then existing legal unbundling) and lastly, to put in place an arrangement in order to facilitate wholesale market activity throughout the island of Ireland.268 With regards to unbundling, the Competition Authority was of the opinion that the legal unbundling arrangements, as they were depicted in Regulations 60/2005 were inadequate in serving the purpose of an effective separation of the network from the competitive activities of ESB.269More specifically, the sharing of responsibilities between the owner, ESB and the TSO, EirGrid, had the result that no effective decision making lied with the TSO with respect to crucial matters such as network construction and timely and effective (emphasis added) development of the system.270Moreover, the fact that the owner of the network has been the strongest player in the generation market did not serve the purpose of inviting new players in the generation sector, since the abovementioned TSO arrangement entailed a risk of network discrimination in favor of the strongest player.271 Lastly, the Authority pointed out that legal unbundling creates a need for a special regulatory and monitoring framework that burdens both the administration and the consumers and thus, it is deemed to be a less efficient option than full ownership unbundling.272 As a conclusion, the position of the Competition Authority with respect to unbundling was that it should go beyond the requirements of the Second Directive and all the more, it should go all the way to a full ownership unbundling.273Adding to the above, the Authority saw the provisions of the EU Second Directive as a strong mandate for Member States to enforce the above proposed structural reforms;274 however, the Irish approach, stuck on black letter law, failed to take the necessary steps in order to create a real and beneficial network separation that would facilitate competition in a market such as the Irish one which, due to its distant location and limited size, has not been a top destination for foreign market entrants.275 The White Paper, published in 2007, set out the key priorities of the Irish Government with regards to energy issues, for a time period until 2020.276More precisely, these included: a secure and sustainable energy supply in Ireland while enforcing competition along with
265 The Competition Authority (note 257) 2 266 DCENR, Delivering a Sustainable Energy Future for Ireland (Government White Paper, The Energy Policy Framework 2007-2020) [hereafter White Paper 2007] 267 The Competition Authority (supra note 257) 2 268 ibid 269 The Competition Authority (supra note 257) 25-26 270 ibid 271 ibid 272 The Competition Authority (supra note 257) 27 273 ibid 274 The Competition Authority (supra note 257) 26 275 The Competition Authority (supra note 257) 27 276 White Paper 2007 (supra note 266) 5
36 transparency and cooperation of the two Governments involved in the island’s energy market.277 With respect to unbundling, the White Paper referred to the insistence of many participants in the Green Paper consultation procedure, for a stronger level of unbundling, which would transfer the ownership of the network to EirGrid.278 Firstly, in achieving the specific goal of “efficient reliable and secure networks”279 the approach followed in the White Paper was the one supporting State-ownership of the networks, while promoting the investment programs of State-owned companies’ active in energy networks.280The above view was also followed with respect to the goal of promoting competition in the energy sector: the actions the Government committed to take, involved, among others, maintenance of State ownership of the networks, while implementing sector reforms, such as, opening up the gas market, enforce actual legal unbundling for BGE by 2007, monitoring the functions of BGE, implement legal unbundling for electricity distribution networks, grant EirGrid ownership of the network, reduce ESB’s market share in generation, while enforcing the role of BGE and Bord da Mona in generation and supply of electricity, enforce the role of CER in reducing market power of ESB and find alternative buyers for an amount of production of an ESB power plant.281 The Government justified its proposal for maintenance of State-ownership of networks by stating that due to Ireland’s small size and isolated location, a certain number of powerful, big energy players were in need in order to keep up with the other major European and international players.282 Lastly, the White Paper went on to emphasize the importance of ESB, BGE, Bord da Mona and EirGrid in strategic, economic and social aspects of Ireland and it confirmed that their operation, as Semi-State entities, has been successful over the years.283
3.3 Towards the Third Energy Package
As discussed in the previous section, in the 2007 White Paper, the Irish Government decided to adopt a full ownership unbundling model in the electricity transmission sector, by granting EirGird ownership of the network assets. What followed that decision was an analysis ordered by the Ministry of Energy, in order to assess the possible results of the ownership options.284 Along with that, the Employee Share Ownership Plan of ESB ordered an independent research on the ownership options of the networks to be carried out by LECG.285
277 See ‘Executive Summary’, White Paper 2007 (supra note 66) 5-7 278 White Paper 2007 (supra note 266) para 2.5.3. 279 White Paper 2007 (supra note 266) para 3.5. (emphasis added) 280 White Paper 2007 (supra note 266) para 3.5.2. 281White Paper 2007 (supra note 266) para 3.16.11. 282 White Paper 2007 (supra note 266) para 3.16.2. 283 White Paper 2007 (supra note 266) para 3.19.1. 284LECG, ‘Implementing the Third Energy Directive in Ireland: Options for the transmission network’, (Final, 23 April 2010) para 2.11 [hereafter LECG Report] 285 LECG Report, para 1.3 (note 284)
37
At this point, it should be noted that by the time the LECG report was published (23 April 2010), the EU Third Electricity and Gas Directives had come into force; therefore, the discussion about the status of EirGrid inevitably was tied to the ownership unbundling arrangements envisaged in the new Directives. According to the findings of the report, the then existing arrangements of network ownership and operation were highly equivalent to the ISO model, as drawn in the Third Directives.286More specifically, EirGrid was characterized as a “deep ISO” in contrast to a “shallow ISO”, with the difference lying on the fact that the previous is also responsible for network planning including investment decisions, whereas the latter carries out only day to day operations.287The Report concluded that EirGrid was functioning sufficiently enough as an ISO,288 indicating the following: EirGrid, as a deep ISO was already in control of investment decisions and therefore, adopting the ownership unbundling model would not add any value to that;289market opening and introduction of competition in generation was evolving, since implementing the Asset Strategy Agreement between CER and ESB290 , in 2009, the Spanish Company Endesa and ESB made a deal so that the previous acquired four power plants and a power station291 and thus, it became a strong market player in the generation sector, mitigating ESB’s market power;292promoting interconnections with neighborhood markets was also in a good track under the ISO regime293and any change in the ownership status would result in unavoidable delays in implementation of these plans,294as well as in high costs.295 With regards to the Irish ISO’s conformity with the EU Directive’s provisions, LECG Report pointed two provisions that might be proven problematic, the most important being the involvement of ESB in a few aspects of the investment planning of network, through its position as responsible for financing the construction of the plan, whereas the Directive obliges the ISO to be the sole involved in the above.296 Concerning the gas sector, as discussed in the previous section, Regulation 760/2005 mandated the legal unbundling of BGE, which was actually implemented with the establishment of the independent company Gaslink, to operate as the gas transmission ISO following a certification by CER in 2008.297 In 2009, the debate over unbundling of EirGrid was still ongoing, with the Chairman of the Competition Authority calling for the full unbundling option, since ,in his opinion, even the
286 ibid para 1.13 (note 284) 287 Ibid para 2.4 288 ibid para 1.37 289 ibid para 1.13, 1.18 290 ibid 1.23 291 O. Kelly ‘Endesa gets permit for Wexford gas station’ The Irish Times ( 2 August 2010) http://www.irishtimes.com/news/endesa-gets-permit-for-wexford-gas-station-1.631426 accessed 10/42016 292 LECG Report (note 284) para 1.23 293 See ibid para 1.26, 1.27 294 ibid para 1.28, 1.30 295 ibid para 1.31 296 ibid para 2.20 297 CER, Annual Report 2008, http://www.cer.ie/docs/000451/cer09207.pdf accessed 10/4/2016 58- 59
38 possibility of ESB to have access in sensitive market information under the legal unbundling arrangements could hamper competition.298 Following the above developments, 2010 proved to be the milestone year for Ireland. In early 2010, the “New Era” plan of the government was announced, in order to tackle financial problems, which, among others, included the privatization of arms of ESB and BGE;299 the plan caused opposition’s strong objections.300 Moreover, what was of even greater importance for Ireland was the signing of the financial agreement with the EU and IMF on 28 November 2010.301 At this point, it is important to refer to the basic principles governing the EU Financial Assistance to Member States and they have been governing the financial agreement of both Greece and Ireland. The most basic idea is that of “conditionality”. The latter forms the basis upon which the Member States of the Eurozone provide and receive financial assistance within the auspices of the European Mechanisms.302 Conditionality is referred in both the newest version of Article 136 para.3 TFEU and the EU legal instruments governing the financial assistance mechanisms.303 In essence, conditionality comprises of all those obligations (of macroeconomic nature) a recipient Member State has to meet, in agreement with its lenders, in order to receive the agreed financial assistance.304 These obligations affect an extremely wide range of the recipient State’s activities, including privatizations.305 With regards to energy, the Irish Program required the Irish Government to assess the functioning of the electricity and gas markets and then to consult the European Commission for options of privatization of energy companies, if it was determined that they would improve State revenues as well as competition.306 However, the Government, without following the above mentioned steps, adopted the view that ESB should be partially privatized, even though there had not been any ownership
298 B. Prasifka ‘ESB's power over a vital national interest is bad for the country’ The Irish Times (2 February 2009) http://www.irishtimes.com/opinion/esb-s-power-over-a-vital-national-interest-is-bad- for-the-country-1.690781 accessed 10/4/2016 299 S. Collins ‘Bruton says party will not back plan to save €3bn in budget’ The Irish Times (22 March 2010) http://www.irishtimes.com/news/bruton-says-party-will-not-back-plan-to-save-3bn-in-budget- 1.641013 accessed 10/4/2016 300 ibid 301 Department of Finance/ Home/What We Do/EU and International/Ireland’s Program (EU-IMF Program) http://www.finance.gov.ie/what-we-do/eu-international/irelands-programme-eu-imf- programme accessed on 10/4/2016 302 M. Ioanidis, ‘EU Financial Assistance Conditionality after 'Two Pack' (20 February 2014) 2 available at SSRN: http://ssrn.com/abstract=2398914 303 M. Ioanidis (note 302) 3 304 M. Ioanidis (note 302) 16 305 M. Ioanidis (note 302) 17 306B. O'Halloran ‘Decision by end of next year on ESB sale’ The Irish Times ( 2 December 2010) http://www.irishtimes.com/news/decision-by-end-of-next-year-on-esb-sale-1.684224 accessed 10/4/2016
39 separation between its functioning units (eg. generation-networks).307 BGE was also named a possible target for privatization.308 In their opinion309 in the Irish Times, Academics Dr. Donal Palcic and Dr. Eoin Reeves pointed out the difference between the government’s idea for privatizations and the creditors’ one: according to them, the former aimed in creating jobs and raise state money, whereas the latter considered privatizations of State-owned companies as a necessary reform in order to reduce national debt and improve competition.310They also considered the decision of the Government to move forward with privatizations, without having a concrete mandate by the creditors, as a short-term solution, which might fail to take into account long term needs of the industry and could lead to another failure of privatization, repeating the mistakes of the telecommunications’ company privatization, Eircom.311 The abovementioned position of the government had changed by early 2012, since instead of sharing sales of the integrated ESB, it decided to sale a part of its generation unit and therefore to split the ownership of the separate functions of ESB.312 With regards to BGE, the plans about its future were open for a long time, since after the initial decision of the government to sell the whole Board,313 then, in 2013, the sale was cancelled;314 At the end, BGE’s competitive activities315 was sold to Centrica in 2014.316 The above developments had major repercussions on the implementation of the Third Package Unbundling Provisions. In 2013, CER communicated to the European Commission its draft decision on the Certification of EirGrid as an unbundled TSO under Article 9(9) of Directive 2009/72.317 The Commission
307 D. Palcic and E. Reeves ‘Incoherent privatization policy a cause for concern’ The Irish Times (31 January 2012) < http://www.irishtimes.com/opinion/incoherent-privatisation-policy-a-cause-for- concern-1.454766 > accessed 10/4/2016 308 ibid 309 ibid 310 ibid 311 ibid 312 ‘Selling State assets’ The Irish Times (23 February 2012)
40 took the view that the proposed arrangements in order to safeguard an effective level of unbundling of EirGrid from ESB were sufficient.318 More specifically, the Commission considered that the fact that transmission asset management was to be carried out from a separate (unbundled) legal entity of the ESB Group, namely ESB Networks Limited319guaranteed effective separation of transmission activities from generation and supply activities of the vertical integrated company.320Moreover, personnel321 and compliance regulations322 with regards to the separate company were found to be well in place. With regards to the issues of investment funding by ESB, the Commission stressed out the need for safeguards that investments in the transmission network receive separate funding than the competitive activities of the ESB group and it concluded that funding through a separate legal entity does facilitate that purpose.323Investment decisions made by EirGrid form a “legal obligation” to ESB324 and according to CER, even the financial difficulties Ireland went through in recent years, did not affect ESB’s performance of its obligations;325in any case, EirGrid, supported by CER, is granted with extensive rights to force ESB to implement an investment decision.326However, according to the Commission, an amendment in Irish law should be introduced, so that EirGrid can finance and own a network investment in case ESB is unwilling or unable to do so.327 As a result, the Commission entrusted CER with the implementation of the above amendments and concluded that, with those in place, the application of EirGrid as a TSO under Article 9(9) could be successful.328 However, Ireland delayed in implementing the unbundling rules and, thus, the Commission took legal action against it first, with a formal notice in 2011 then, with a reasoned opinion in 2012 and 2013 and finally it asked the Court to impose a daily penalty for the delay.329 At last, Ireland transposed in full the unbundling provisions required by the Third Electricity Directive with Regulation S.I. 16/2015.330 According to the latter (in section 12), the Ownership Unbundling model is put in place for TSO applicants, except for TSOs which have been authorized under the rule of Article 9 (9) of Directive 2009/72. Therefore, EirGrid, remains as a TSO under Article 9 (9) of Directive 2009/72.
318 Commission Decision of 12.4.2013 pursuant to Article 3(1) of Regulation (EC) No 714/2009 and Article 10(6) of Directive 2009/72/EC – Ireland – Eirgrid / ESB C(2013) 2169 final, Article 1 [hereafter EirGrid Decision] 319 ibid para 42 320 Ibid 47-48 321 ibid 56. With regards to senior staff of ESB meeting with ESB Networks Limited, the Commission agreed with the view of CER to enforce stringer independent rules, see para 55 322 EirGrid Decision 4.1.4 and more specifically para 69-70 323 EirGrid Decision (note 318) 71-72 324 Ibid 73 325 ibid 74 326 ibid 75 327 ibid78-79 328 Ibid Article 1 329 European Commission Press Release ‘Internal energy market: Commission refers Ireland to Court for failing to transpose EU rules’ (Brussels 20/2/2014) http://europa.eu/rapid/press-release_IP-14- 155_en.htm accessed 12/4/2016 330 SI No 16 of 2015 - European Communities (Internal Market in Natural Gas and Electricity) (Amendment) Regulations 2015 http://www.irishstatutebook.ie/eli/2015/si/16/made/en/print accessed 12/4/2016
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With regard to gas, the situation became more complicated, heavily affected by the privatization attempts by the government.331At first, also in 2013, CER drafted a decision to certify BGE as an ITO and asked for the respective opinion of the European Commission.332 CER requested that a preliminary certification of an ITO is given to BGE while the sale of its competitive activities was proceeding,333 under the condition that all relevant ITO provisions were in place until April 2014 and not immediately, as the latter could create extra financial difficulties and thus impede BGE’s sale.334The Commission insisted on the parallel implementation of ITO rules along with the sale proceedings, with the aim for BGE to be granted certification by April 2014 under either model.335 Therefore, BGE was certified as an ITO in July 2013 with a preliminary decision by CER.336 After the sale of the competitive part of BGE to a private company,337former BGE’s network arm (consisted of former operator Gaslink and Board Gais Networks338) was renamed “Ervia”339 and became full ownership unbundled and the ownership unbundling model was introduced by Regulation 16/2015.340
331 CER Annual Report (2013) (note 317) 46 332 ibid 333 European Commission Opinion of 23.5.2013 pursuant to Article 3(1) of Regulation (EC) No 715/2009 and Article 10(6) of Directive 2009/73/EC – Ireland – Certification of BGÉ ITO C(2013) 3117 final 2 334 Ibid 3-4 335 Ibid 4-5 336 CER Annual Report (2013) (note 317) 46 337 J. Simmons ‘Strong Irish M&A activity likely to continue into 2015’ the Irish Times (5 January 2015) http://www.irishtimes.com/business/strong-irish-m-a-activity-likely-to-continue- into-2015-1.2054477 accessed 12/4/2016 338 European Commission, ‘Single market progress report 2014 country report: Ireland’ https://ec.europa.eu/energy/sites/ener/files/documents/2014_countryreports_ireland.pdf Accessed 12/4/2016 [hereafter 2014 Report: Ireland] 117 339 Website of Ervia/Who We Are/Ervia Explained http://www.ervia.ie/who-we-are/ervia-explained Accessed 12/4/2016 340 SI No 16 of 2015 (supra note 330)
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3.4 Effectiveness of Ireland’s Unbundling Arrangements and Relevant Considerations
According to the 2015 Commission’s Report on Ireland,341 the Irish gas market seems to perform well in general, since competition in generation and supply has increased and the market share of former BGE has been reduced substantially.342 In electricity, progress in retail competition appears slower and new regulations might be in need.343 However, the switching pace in both wholesale and retail markets exceeds the EU average levels.344 The above show that Ireland benefited from the structural changes introduced in its energy sector in years 2010-2015. The relevant question in this respect seems to be whether the above positive results in competition have been the mere result of implementing the unbundling provisions of the Third Directives, or the structural reforms (privatizations) required by the Irish financial agreement. The answer seems to be that both played a strong part in transforming the Irish energy environment. It is also worth mentioning that the Irish approach with respect to ownership unbundling and privatizations proved to be at least a positive, if not a proactive one. It might be true that, at first, Ireland hesitated to implement the full unbundling model or privatize business arms of its precious Semi-State enterprises. However, the liberal-driven considerations were apparent since the White Paper of 2007. Without the intervention of the creditors in 2010, it is highly possible that Ireland would act in a slower pace in implementing the above reforms, mostly due to political debates and previous bad privatization experiences. A striking point is that Ireland managed to protect its views on the energy sector since, it kept networks under public hands (ESB, Ervia), as it had planned. Moreover, the sale of production units had been introduced by the Irish Government before the signing of the financial package. In other words, even with the pressure of the creditors for Ireland to deliver certain results, Ireland managed to do it without compromising its own agenda, while at the same delivering the results the creditors expected. Would the case have been different if there was not mutual understanding and overlapping agendas? The case of Greece will show.
341 European Commission, ‘Country Fact Sheet Ireland’ (Staff Working Paper) accompanying Communication od the Commission to the European Parliament, the Council, the Economic and Social Committee, the Committee of Regions and the European Investment Bank ‘State of the Energy Union’ SWD(2015) 228 final [hereafter 2015 Ireland Factsheet] 342 2015 Ireland Factsheet (note 345) 4 343 ibid 344 ibid
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4 The Case of Greece
4.1 Historical Overview of the Energy Market in Greece
At the end of the 19th century, electricity made its appearance in Greece and the first State power corporation was established in 1889.345In following years, multinational private enterprises, the most important ones being Belgian and American, started to be active in the Greek electricity production and electrification of the inhabited areas.346By 1929, a great number of cities and communities had been using electricity.347 However, it was after World War II, that foreign investments, originating mostly from the USA, flawed the Greek territory in order to assist the development of the electricity system, which led to the improvement of the electricity grid and allowed the electricity connection of the majority of the populated areas of the country.348 Nevertheless, the electrification of remote and low-density populated areas (e.g. islands) was not an attractive investment for the multinational companies, being considered as a very difficult and risky task and not that lucrative at the same time.349As it has been mentioned in the introduction, the Greek territory comprises a great number of inhabited islands, spread in the Aegean and Ionian Seas, both of large and small size, with their population ranging from dozens to hundreds of thousands. Thus, until the 1950s, electrification in islands and inland remote and rural areas was the initiative of domestic private enterprises or municipalities which constructed small production units to meet the needs of specific areas.350The operation of a large number of enterprises in Greece led to the increase of prices of petroleum and coal (mostly lignite), the main resources used by electricity production units.351 The above considerations led to the establishment of “Public Power Corporation” in 1950352,353.According to Law 1468/1950, PPC was granted exclusive rights in construction of thermo and hydroelectric units and subsequent production , transmission, distribution and supply of electricity in the whole Greek territory.354According to a subsequent legal Act, that of 3523/1956, all licenses and contracts which had been granted to parties other than PPC, were no longer to be valid and thus PPC was appointed as the sole player of the market, having excessive rights in the whole electricity chain, such as expropriating and thus acquiring independent units and providing compensation for its activities, even to municipalities.355
345 RAE, ‘History of electrical energy in Greece’, available at http://www.rae.gr/site/categories_new/consumers/know_about/electricity/history.csp# accessed 19/4/2016 346 ibid 347 ibid 348 E.D. Cross (supra note 216) 53 349 RAE ‘History of electrical energy in Greece’ (supra note 345) 350 ibid 351 ibid 352 ibid 353 Moreover, according to Cross, nationalization of the electricity sector had been pursued by the Greek State and that the operation of foreign investors was not planned to be permanent see E.D. Cross (supra note 216) 53 354 T. P. Fortsakis, Energy Law in Greece (Kluwer Law International/Ant.N. Sakkoulas 2009) para 442 355 ibid
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With regards to PPC’s legal nature, it was clarified in Law (Legislative Decree) 3785/1957, which confirmed that PPC comprised elements of entities of both private and public legal persons and that it was subject to regulation tailor-made for it;356 as a matter of fact, general public law did not apply to it as such.357 Thus, PPC was considered a “sui generis” private legal entity, whose sole shareholder was the Greek State, while its aim was to serve the general interest.358 The above status of PPC was not altered materially by subsequent laws until 1991, when Presidential Decree 360/1991 entered into force and allowed the exit of PPC from the public sector with its transformation to a private law company with full State participation.359 As stated above, from its establishment, PPC performed all tasks relevant to the Greek electricity sector. A breeze of change was attempted by Law 1559/1985 in order to achieve entry of new players in the production sector.360With this Act, auto production was allowed (in limited cases) and in all circumstances the outcome had to be sold to PPC.361 A few years later, Law 1914 (amended by Law 2000/1991) provided for the market entry of independent generators, ceasing the previous regime of production restrictions, subject to both PPC’s and the Ministerial Council’s approval, making the framework complicated enough.362 Once again the production was obliged to be sold to PPC.363 With the same view, Law 2244/1994 aimed to encourage independent production, which was to be sold to PPC.364 The Minister of Energy was granted with wider rights with regards to authorization procedures of the production units, as an attempt to narrow PPC’s discretionary power, whose position was limited to the proposal and technocratic assessment of the situation.365 Regarding transmission and distribution rights, as well as TPA, these did not exist under the abovementioned instruments, since PPC was holding the pure monopoly of those sectors.366 Overall, PPC evolved into “the most important company in Greece”367, not only by covering all electricity needs of the country, but also by being very profitable and providing for the vast majority of jobs.368 With regards to the gas sector, it is considered very new, since gas was introduced in the Greek market on a large scale only in 1995.369 More precisely, the decision to include gas in the country’s energy mix, adopted in 1987, was a result of considerations behind strategic reasons (to reduce the country’s dependence on petroleum), environmental reasons as well as market reasons (improvement of competition).370 Algeria and Russia were the first exporters of
356 E.D. Cross (note 216) 56 357 ibid 358 T.P. Fortsakis (note 354) para 442 359 E.D. Cross (note 216) 56 360 E.D. Cross (note 216) 58 361 E.D. Cross (note 216) 58-59 362 E.D. Cross (note 216) 60 363 ibid 364 ibid 365 E.D. Cross (note 216) 62 366 E.D. Cross (note 216) ibid 62-63 367 E.D. Cross (note 216) 56 368 ibid 369 RAE ‘History of natural gas in our country’ available at http://www.rae.gr/site/categories_new/consumers/know_about/gas/greece.csp accessed 19/4/2016 370 T.P. Fortsakis (supra note 354) para 91
45 natural gas to Greece, while PPC was the first and largest customer in the country, signing a supply contract with DEPA in 1994.371 Thus, Law 2364/1995 was the legal act establishing the gas market.372 The first actor of the gas sector was DEPA (Public Gas Corporation), which was established in 1988 as a subsidiary of the Public Petroleum Corporation.373 DEPA’s major shareholder was the Greek State with a 65%, while the remaining shares were held by Hellenic Petroleum (ELPE S.A.).374 According to Law 2364, DEPA was appointed as the sole operator of the gas market, having monopoly rights over every activity relevant to natural gas.375Distribution of gas was planned to take place via EDAs, (Gas Distribution Companies) established by DEPA, operating in the largest regions of the country, namely Attica, Thessaloniki and Thessaly.376 The above situation formed the basis on which the liberalization of the electricity and gas sector was to take place through the (first) EU Energy Directives.
4.2 Developments prior to Third Energy Package
In order to implement the provisions of the First Electricity Directive, Greece enacted Law 2773/1999377. More specifically, the Law provided for the establishment of the National Regulatory Agency for Energy, namely RAE;378 Articles 9-11 introduced the licensing regime for authorization of independent production, according to the geographical location of the power plant: in case the power plant was in mainland, only the respective license (article 9) was required; if the production facility was to operate on an island not interconnected to the System379 or the Distribution Grid, then a tendering procedure was set up and if the latter brought no sufficient results, the competent Minister, following RAE’s approval, could appoint PPC as the license holder, in order to achieve an interrupted flow of electricity in the non-interconnected areas(article 11 para. 1). As an exception, generation plants not meeting a certain capacity threshold did not require a prior license according to Article 10. In addition to the production license, an installation and operation license of the unit was required, making the whole licensing framework extremely bureaucratic and inefficient both for the regulatory authorities and the market participants.380
371 DEPA ‘History’ available at http://www.depa.gr/index3.php//content/article/002001008/64.html accessed 19/4/2016 372 T.P. Fortsakis (note 354) para 93 373 DEPA ‘History’ (note 371) 374 T.P. Fortsakis ( note 354) para 98 375 ibid 376 T.P. Fortsakis (note 354) para 169 377 Law 2773/1999, (Official Gazette Vol. A, Number 286) [hereafter Law 2773/1999] 378 Article 4, Law 2773/1999 (note 377) 379 The System, according to Article 2 of Law 2773/1999, consists of the high-transmission lines as well as the interconnections established in the Greek territory. It does not include production installations, lines incorporated in the (Distribution) Grid and Grids of non-interconnected islands. 380 T.P. Fortsakis (supra note 354)para 454; see paragraph 464, due to bureaucracy, even PPC was not able to obtain all necessary licenses for every one of its operating installations and thus, a provisional universal license for PPC was issued until 2005 that was renewed until 2008 and then until 2013.
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Article 14 of Law 2773/1999 introduced legal unbundling with respect to PPC’s transmission activities. As a result, a new legal entity was created381, governed by general company law (Law 2190/1920) named “Hellenic Transmission Operator (HTSO).” The Greek state became the major shareholder of the new company with 51% of the shares, while the remaining 49% became available to the production license holders interconnected to the System;382 however, initially, PPC was named the sole shareholder of the 49%.383 Respecting the legal unbundling rules provided by the Directive, PPC remained the owner of the System according to Article 12, while HTSO was appointed as the sole384 operator of the System, entrusted with all functions introduced by the First Electricity Directive (inter alia non-discriminatory TPA,385 day-to-day operations, maintenance and development of the System ect).386 Article 19 para 2 introduced the regulated regime for TPA to eligible customers, stating that TPA shall be granted according to an Operation Code drafted by the HTSO and approved by the Minister after RAE expressed its opinion. With regards to Distribution Grid, both its ownership as well as its operation remained on the hands of PPC according to Article 21. Eligible customers were defined in Article 25, exempting from its scope the Non-Interconnected Islands. Accounting unbundling for all vertical integrated companies active in electricity was introduced by Article 30. Finally, PPC’s transformation into a S.A. as prescribed by Article 43, was enforced by Presidential Decree 333/2000.387 It is rather obvious that Greece decided to opt for the minimum rules of the First Electricity Directive with the exception of legal unbundling that was enforced by the establishment of HTSO. Thus, despite the enforcing of the main liberalization provisions, the results proved more than disappointing.388 First of all, with regards to generation, no substantial change occurred after liberalization took place, since no other producers became active in the market and thus, PPC remained the dominant producer389 as well as exporter of electricity in Greece.390 The reasons for the failure of the real opening of the generation market have been assessed by RAE and, as stated by Kolia,391 reflected the various advantages that were granted to PPC by the then new legislation.392 To make matters worse, actual accounting unbundling lagged behind, since RAE assessed that the fist proposal of PPC was not sufficient to deliver adequate results according to the then
381 With Presidential Decree 328/2000, as cited by T.P. Fortsakis (supra note 354) para 446, footnote 2 382 Article 16 Law 2773/1999 (note 377) 383 ibid 384 Article 18 para 1 Law 2773/1999 (note 377) 385 Article 19 para 1: “access to the System shall be granted …on a non-discriminatory way”(note 377) 386 For the complete list of tasks of HTSO see Article 15 Law 2773/1999 (note 377) 387 Presidential Decree 333/2000 (Official Gazette Vol. A, Number 278) 388 See M. Kolia ‘Chapter 9: Greece’ in P. Cameron Legal Aspects of EU Energy Regulation: Implementing the New Directives On Electricity and Gas across Europe (Oxford university press, 2005) para 9.01 389 M. Kolia (note 388) 9.39 390 M. Kolia (note 388) 9.27 391 M. Kolia (note 388) 9.39 392 Among others, complexity of electricity licenses while PPC was granted a “provisional” universal license, as stated above in the Chapter.
47 existing legislation.393Kolia refers to a specific shortcoming of accounting unbundling, which was the non-separation of accounts with regards to both distribution/supply activities in the mainland as well as PSO activities of PPC on the islands.394 Additionally, problems arose in the relationship between the System Owner and the Operator soon enough, since by 2003, RAE had spotted a non-cooperative approach of PPC with regards to delivering the network projects that, the competent, HTSO had approved.395 Finally, by then end of 2004, the Second Electricity Directive had not been transposed in the Greek Legislation.396Nevertheless, Law 3426/2005397 was enacted and amended the Energy Law of 1999, bringing it in line with the Second Electricity Directive. According to the new version of Article 12, due to its amendment by Article 22a of Law 3426/2005, the development and expansion of the System lies with the TSO, after concluding the respective agreement with the owner of the System (para 3);with regards to feasibility of the TSO’s development plans, crucial role in their approval play both RAE and the Minister of Development.398In addition, Law 3426/2005 set the time limit for the operation of the new TSO on the 1st of July 2007.399 With regards to gas, as it was mentioned above, DEPA S.A. was formed by Law 2364 as the sole vertical integrated company active in import and transmission (as well as sell of gas to EDAS and eligible customers)400 and EDAs were appointed as regional distributors and suppliers in the designated areas.401 DEPA’s participation in EDAs was 85 percent, while the remaining was owned by the local authorities.402 Later on, in 2000, the three EDAs established three Gas Supply Companies (EPAs) following successful international tendering procedures.403Under the new structure, DEPA held 51% of the shares, while the remaining was owned by the private investor.404Moreover, EPAs acquired by EDAs all rights concerning the distribution and supply activities through licenses, valid for thirty years.405Thus, EPAs became responsible for facilitating customers’ connection to gas according to pre-published terms.406 As a transmission operator, DEPA was obliged to keep separate accounts for its transmission activities.407 The shift towards liberalization in the gas sector took place with the enactment of Law 3428/2005,408 which transposed into national law the Second Gas Directive.409 Even though
393 M. Kolia (note 388) 9.45 394 M. Kolia (note 388) 9.46 395 M. Kolia (note 388) 9.56 396 M. Kolia (note 388) 9.01 397 Law 3426/2005 (Official Gazette Vol. A, Number 309) 398 T.P. Fortsakis (supra note 354) para 494 399 Article 22 para 1 Law 3426/2005 (note 397) 400 Article 3 para 5 Law 2364/1995 401 Article 4 Law 2364/1995 402 M. Kolia (note 351 ) 9.13 403 DEPA ‘History’ (note 371) 404 ibid 405 M. Kolia (note 388) 9.13 406 M. Kolia (note 351 ) 9.23 407 Article 3 para 3 Law 2364/1995 408 Law 3428/2005 (Official Gazzete Vol A Number 313) 409 T.P. Fortsakis (supra note 354) para 96
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Greece was granted additional time to fully implement the Directive (November 2006) due to its status as an “emergent market” in gas, the country followed a proactive approach and speeded the liberalization process.410 Article 7 of Law 3428/2005 provided for the establishment of the TSO, named DESFA S.A. through the transferring of shares of DEPA S.A. to it. Therefore, DEPA became the sole shareholder of DESFA.411 The new company was established pursuant to PD 33 and 34 of 2007412 following the transferring to DESFA of the ownership of the National Gas Transmission System as well as staff and property, as provided by paragraphs 3 and 4 of Article 7.413Moreover, DESFA was entrusted with all tasks of a TSO under the Second Gas Directive414 and became operational in April 2007 as a legally unbundled company.415 Even though the liberalization-driven character of the above provisions is apparent, elements of the legislation, such as the appointment of Board Members of DESFA by the Government for the first ten years,416 reflect the willingness of the State for retaining strong involvement in the operation of the market. Finally, with regards to distribution, Article 21 of Law 3428/2005 formed the legal basis for the merger of the EPAs into a new EDA S.A. owned entirely from DEPA S.A.417
4.3 Towards the Third Energy Package
It is of high importance to mention that the transposition of the Third Energy Package in Greece, as in Ireland, overlapped with a time, when, the repercussions of the global economic crisis had stared to appear. Greece, not being able to meet its debt obligations, signed a series of financial agreements with the EU and IMF, firstly, in 2010 and then in 2012 and 2015.418 Coming back to the Third Energy Package, Greece transposed the Third Electricity and Gas Directives, by enacting Law 4001/2011.419 First of all, with regards to electricity, Article 99 of Law 4001/2011 provided for the secession of the transmission activities from the former TSO (HTSO)420 and their transfer to a new legal entity, named ADMIE S.A., a total subsidiary of PPC S.A. ADMIE, thus, became the owner of
410 ibid 411 Article 7 para 5 Law 3428/2005 (note 408) 412 Presidential Decree 33-34/2007 (Official Gazzete Vol A Number 31) 413 T.P. Fortsakis (supra note 354) para 141 414 Article 8 Law 3428/2005 (note 408) 415 DEPA ‘History’ (note 371) 416 Article 11 para 3 PD 33-34/2007 ( note 372) 417 T.P. Fortsakis (supra note 354) para 172 418 Detailed list of the Agreements on the DG ECOFIN http://ec.europa.eu/economy_finance/assistance_eu_ms/greek_loan_facility/index_en.htm accessed 25/4/2016 419 Law 4001/2011 (Official Gazette Vol. A Number 179) 420 The former HTSO was also the market operator and according to paragraph 1 of Article 117 of Law 4001, following the transfer of the transmission activities to the new entity (ADMIE S.A.), HTSO, was renamed LAGIE S.A.
49 the transmission System, following the contribution of PPC’s Electricity Transmission Directorate General and the relevant activities of HTSO to the new subsidiary.421 Moreover, Greece opted for the ITO model of Directive 2009/72.422 Therefore, according to Article 113 of Law 4001, ADMIE applied for TSO certification to RAE and the latter communicated its draft decision to the EC in August 2012.423 In its opinion, the EC expressed its concerns with regards to certain unclear arrangements between the two companies. Firstly, the transitional period of 12 months, during which PPC was to provide support services to ADMIE, was considered too long.424 Furthermore, it should be ensured that totally different auditors are employed for each company,425 as well as that all employers of the Management Team fulfill the independence requirements of the Directive.426Following the above recommendations, the final certification by RAE was given by Decision 962A/2012. With regards to gas, the certification of DESFA as a TSO became highly related to its privatization, according to the mandate of the 2012 financial agreement.427 The story begun in December 2013 when the Azeri State Oil Company, SOCAR, signed a deal with the Hellenic Republic Asset Development Fund (HRADF)428 in order to acquire 31% of the HRADF shares and 35% of the shares of Hellenic Petroleum (ELPE) on DESFA.429 Thus, DESFA was required to apply to RAE for certification as a TSO, according to Articles 64 and 65 of Law 4001/2011, transposing the Third Gas Directive Unbundling provisions. More specifically, Article 11 of the Directive (Article 65 of Law 4001) concerned the certification of a TSO under the control of person(s) from third countries. Thus, in May 2014, RAE issued its draft decision on the certification of DESFA as an ITO and communicated to the EC.430 The EC agreed on the fact that DESFA was eligible to apply as an ITO, since it was part of a vertical integrated company by September 2009.431 Nevertheless, the EC formed the opinion that given the unique situation that was going to be established, having a third-country company to be the major shareholder of the Greek Gas TSO, a number
421 Article 98 para 1 Law 4001/2011 (note 421) 422 Article 97 para 1 Law 4001/2011 (note 421) 423 European Commission, Opinion of 2012 pursuant to Article 3(1) of Regulation (EC) No 714/2009 and Article 10 of Directive 2009/72/EC - Greece - Certification of ADMIE S.A. 2 424 Ibid 3 425 ibid 426 ibid 427 See Second Economic Adjustment Program for Greece, 31-33 http://ec.europa.eu/economy_finance/assistance_eu_ms/greek_loan_facility/index_en.htm accessed 25/4/2016 428 The HRADF had acquired the State’s shares on DESFA according to the Greek Law of 2011 implementing the financial agreement of 2010, see A. Gerontas, Public Economic Law (2nd Edition, Sakkoula Publications 2011) 614 (in Greek) 429 HRADF ‘Press Release’ (21 December 2013) available at http://www.hradf.com/sites/default/files/attachments/20131221-press-release-desfa-el1.pdf accessed 26/4/2016 430 RAE, ‘Decision 287/2014’ available at http://www.rae.gr/site/file/categories_new/about_rae/actions/decision/2014/2014_A0287?p=files&i =0 431 European Commission, Opinion of 17/10/2014 correcting Opinion C(2014) 5483 final of July 2014 pursuant to Article 3(1) of Regulation (EC) No 715/2009 and Article 10(6) and 11(6) of Directive 2009/73/EC-Greece-Certification of DESFA [hereafter Commission Opinion DESFA] page 3.
50 of additional requirements needed to be met. The latter should aim at safeguarding security of supply of gas both in Greece and EU as well as conformity with the independence requirements of an ITO.432 More specifically, the Commission requested that a number of safeguards are introduced (through an intergovernmental agreement) in order to address potential risks that could arise due to acts of the Azeri Government contrary to EU law.433 Precisely, the risks could consist in the following: making it difficult for DESFA to deliver its investment obligations, or its compliance obligations under EU law, as well as they could impede the regular flow of natural gas to the EU.434The Commission suggested that suspension of voting rights of the major shareholder (SOCAR) should be used as a tool to address the above concerns.435 Indeed, Law 4001/2011 was amended and article 65A was inserted to it, implementing the above mentioned voting-right suspension by RAE for the time required to address the issues arisen and after the right to a hearing has been granted to owner of voting rights.436 Following that, RAE published its final decision granting certification to DESFA as an ITO in September 2014.437
4.4 Effective (?) Unbundling, the crisis and the example of Ireland
In order to assess the level of effectiveness of the Greek Unbundling arrangements, the following approach is followed: At first, a review of the ITO model will be made. Secondly, the focus is shifted to the energy market developments that have taken place after the Second and Third Adjustment Program for Greece have been signed (years 2013-2016).438 Beginning with the electricity sector, as it has been discussed above, by the end of 2012 the Greek transmission system was owned and operated by ADMIE S.A. organized under the ITO model. According to the Compliance Report of 2013, concerning the activities of ADMIE,439 in broad lines, the arrangements were deemed to be effective, since, neither major complaints were filed nor were excessive shortcomings reported.440 Two points are of greater interest: the Report referred to the fact that the connection arrangements of PPC were being facilitated by ADMIE according to market rules (through typical commercial agreements), whereas third users were in charge of constructing their connection under the monitoring of ADMIE.441 Secondly, the Compliance Officer was of the opinion that since ADMIE is responsible for all constructions regarding the electricity System,
432 Commission Opinion DESFA 4 433 Commission Opinion DESFA 7 434 ibid 435 ibid 436 Article 15 Law 4286/2014 (Official Gazzete Volume A Number 194) 437 RAE, ‘Decision 523/2014’ (Official Gazzete Volume B number 2572) 438 Detailed list of the Agreements on the DG ECOFIN (supra note 418) 439 See Article of Third Electricity Directive 440 2013 ADMIE Compliance Report (Athens, March 2014) 15-16 available at http://www.admie.gr/fileadmin/groups/ADMIE_DSRTH/Ektheseis_YpSymmorfwshs/Etisia_Ekthesi_20 13.pdf (in Greek) 441 2013 ADMIE Compliance Report (note 440) 12
51 a sense of priority should be given to the latter, provided that all users are benefited by them.442 In the Report Compliance of 2014, the focus is shifted towards the economic situation of the Company, given the country’s financial crisis. It is stated that notwithstanding the liquidity problems of the market, the company has been economically self-sufficient and thus, able to facilitate loans for itself, if needed.443 However, due to the negative economic climate, investments have taken a downward trend.444 With regards to the commercial relations between ADMIE AND PPC, as mentioned above, they have to be governed by market conditions, applicable to all System users.445The Report stated that the above requirements are met and a universal tariff system applicable to all users has been put in place, even though its approval by RAE was pending.446 Concerning investments, the Compliance Report states that in 2013, major steps have been taken, since the relevant tendering procedures for the connection of the Aegean Islands to the inland Electricity System were successfully completed.447At the same time, a major priority of ADMIE included its participation to the European PCI investment of Greece-Israel-Cyprus interconnection.448 Regarding user connection to the System, the Report replicates that PPC’s infrastructure is being constructed traditionally (emphasis added) by ADMIE.449 Moreover, a delay has been reported with regards to market clearance by ADMIE, due to PPC’s difficulties in fulfillment of its financial obligations as the dominant electricity supplier.450 Overall, the 2014 Report concludes that the core obligations of ADMIE as a TSO (non- discrimination, TPA, protection of sensitive information) are met.451However, it states that the Compliance Program should be amended in order to cover more grey areas (such as PPC- ADMIE’s commercial relationship) as well as to enforce transparency.452 It is obvious from the above that the “effectiveness checklist” requirements are met in the case of ADMIE as an ITO, as the reported shortcomings are not substantial. However, what is also obvious is the strong position of PPC in the market. Indeed, according to a research paper of 2013,453 even though Greece has adopted 7 out of the 10 steps prescribed for effective market liberalization, including unbundling, it has failed to create a fully effective liberalized electricity market.454 The ones not having been met are the policy makers’ willingness to fully liberalize the market, the inadequate operation and
442 ibid 443 2014 ADMIE Compliance Report (Athens, March 2015) 4, http://www.admie.gr/fileadmin/groups/ADMIE_DSRTH/Ektheseis_YpSymmorfwshs/ETHSIA_EKTHESH _2014.pdf (in Greek) 444 ibid 445 2014 ADMIE Compliance Report (note 443) 5 446 ibid 447 2014 ADMIE Compliance Report (note 443) 8 448 ibid 449 Ibid 10 450 Ibid 13 451 ibid 17 452 Ibid 18 453 N. Danias, J.K. Swales, P. McGregor “The Electricity Market Reforms: Political and Regulatory Considerations” (Energy Policy 62) [2013] 1040 454 N. Danias, J.K. Swales, P. McGregor (note 453) 1045
52 political dependency of RAE and the lack of an adequate level of competition in the generation sector.455 According to the criteria of Littlechild, as referred to in the research, unbundling of monopolistic from competitive activities appears as the first step in the liberalization list.456 In this regard, the authors stress out that the State remains the main owner of the most important energy entities in Greece.457 It is highly relevant that the authors associate liberalization not having been effectively achieved, with the strong level of State participation and its influence on market entities:458 It is a fact that PPC has been used to serve various political agendas throughout the years and that creates problems to market evolution, since market entrants are not attracted by a politically influenced market.459 The above have been considerations form part of Greece’s financial agreements. More specifically, the Second Memorandum of Understanding, signed in 2012460 clearly states that, inter alia, privatizations (sale of hydro and/or lignite fired PPC’s power plants) in order to enhance competition in the electricity generation sector are in need, on top of (emphasis added) meeting the unbundling requirements of the Third Directives.461 Indeed, in years following the signing of the second financial package (2012-2014), the Governments attempted to find the appropriate privatization arrangement with respect to PPC,462 while, at the same time, vivid oppositions to any kind of privatization were taking place, mostly led by politicians and workers’ unions.463 The (partial) privatization of ADMIE was also being discussed.464 Thus, Law 4273/2014465 provided for the establishment of a new power company, active in production, trading and supply of electricity, via the divestiture of 30% of the production and client portfolio of PPC.466 However, things did not go as planned and, in early 2015, the newly elected government decided to not further implement the above plan, but rather to keep PPC under State ownership.467
455 ibid 456 N. Danias, J.K. Swales, P. McGregor (note 453) 1041 457 N. Danias, J.K. Swales, P. McGregor (note 453) 1042 458 N. Danias, J.K. Swales, P. McGregor (note 453) 1045 459 ibid 460 2nd Adjustment Program (note 427) 461 2nd MoU as part of the 2nd Adjustment Program (note 427) 35 462 On privatization plans see C. Liaggou ‘Plan to split PPC is announced’ on E-Kathimerini.com (15 May 2013) http://www.ekathimerini.com/151233/article/ekathimerini/business/plan-to-split-ppc-is- announced accessed 2/5/2016 463 ‘PPC showdown looms as union threatens rolling strikes’ on E-Kathimerini.com (1 July 2014) http://www.ekathimerini.com/161196/article/ekathimerini/news/ppc-showdown-looms-as-union- threatens-rolling-strikes accessed 2/5/2016 464 ‘PPC: Selling ADMIE is not feasible’ on Naftemporiki.gr (7 June 2015) http://www.naftemporiki.gr/finance/story/962768/dei-entelos-asumfori-i-polisi-tou-admie accessed 2/5/2016 465 Law 4273/2014 ((Official Gazzete Volume A Number 146) 466 Article 1 Law 4273/2014 467‘ Greece to freeze plans to privatize power utility PPC, new Energy Minister says’ on E- Kathimerini.com (28 January 2015)
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Nevertheless, the obligation to perform structural changes in the energy sector was included in the third Memorandum of Understanding, signed in August 2015 by Greece and the European Commission on behalf of the European Stability Mechanism.468 The reason for that was stated to be, among others, the monopolistic and other kind inefficiencies of the Greek energy markets.469 The main objective of the reforms, inter alia, are to fully open the gas market for all customers by 2018, to lower the retail and wholesale market PPC dominance by 25% until 2015 and by 50% by 2020.470 With regards to privatization, the MoU states that the Greek Government was obliged to deliver a detailed plan on ADMIE’s privatization, unless an alternative scheme is provided.471In any case, the approach followed shall deliver a result of “Full Ownership Unbundling from PPC“ (emphasis added).472 The Greek Government expressed its will to keep the majority of PPC’s shares under public control, which also formed a pre-election promise.473At the end of the year, the governmental proposed scheme for ADMIE was announced, providing for 51% of the shares to pass from PPC to the State, 29% to be offered to the stock market and the remaining 29% to be acquired by a private investor.474 The above option was referred to as inter State unbundling.475 An option like the above, clearly respects article 345 TFEU. Nevertheless, the above described plan was made under the conditionality that its effectiveness would be assessed and only if deemed feasible it would move forward.476 If not, full separation of ADMIE from PPC through selling the latter’s shares shall occur.477 One could argue that the latter provision clearly breaches Article 345 TFEU, since it enforces a privatization on a Member State, even as an alternative. It is relevant, of course, to assess the circumstances under which the abovementioned plan was agreed upon, in which crucial role plays the term of “conditionality”. The latter was analyzed with respect to the case of Ireland. In any case, it appears to be a challenging task to draw the line on whether conditionality has gone a bit far. Greece’s elected government had made clear to both its voters and its creditors that privatization was not in its plans. Should have the lenders met the
http://www.ekathimerini.com/166653/article/ekathimerini/business/greece-to-freeze-plans-to- privatize-power-utility-ppc-new-energy-minister-says accessed 2/5/2016 468 Memorandum of Understanding on behalf of the European Commission Acting on Behalf of the ESM and the Hellenic Republic and the Bank of Greece (19 August 2015) 25-26 available at http://ec.europa.eu/economy_finance/assistance_eu_ms/greek_loan_facility/pdf/01_mou_2015081 1_en.pdf [hereafter Third MoU] 469 Ibid 470 Ibid 471 ibid 472 ibid 473 ‘Greece wants to keep majority stake in PPC, says Skourletis’ on E-Kathimerini.com (28 September 2015) http://www.ekathimerini.com/201973/article/ekathimerini/business/greece-wants-to-keep- majority-stake-in-ppc-says-skourletis accessed 5/5/2016 474 European Commission ‘Report on Greece's compliance with the second set of milestones of December 2015’ (21 December 2015) 7, available at http://ec.europa.eu/economy_finance/assistance_eu_ms/greek_loan_facility/pdf/2nd_set_milestone s_note_to_ewg_en.pdf 475 ibid 476 ibid 477 ibid
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Greek government half way and explore only options of similar nature, rather than imposing a strict privatization plan as an alternative? The case of Ireland does not provide any comparable evidence, since in that case, the Irish Government had shown a pro-active approach towards privatization, even more than the creditors had asked for. In the case of Greece, as we explained, a similar attitude was and is still missing. It is possible that the discussion should be shifted towards the concept of sovereignty of the recipient states. It has already been stated that a country having been excluded from the markets and thus, requesting for financial help, loses a part of its sovereignty, since it is not able anymore to fully implement its own views on its domestic economic policy.478 What is also relevant to the concept of sovereignty is the weak role of national parliaments with respect to the conditions that are being attached to the financial assistance, since they only have the limited power to be informed about the deal and also the ‘rhetorical’ power to reject the loan agreements and the respective MoU.479Obviously, they never proceed with a radical approach like the above. To return to the position of the EU, by imposing the OU model, when it has already approved the ITO model by certifying ADMIE, it seems like the EU either rejects its own legislation, or it considers it inadequate (at least for the case of Greece and in some extent for Ireland as well as we have analyzed) and our conclusion is confirmed that under the Third Energy Package unbundling is assessed by the EU not only according to the “effectiveness checklist” but also according to its overall contribution to a competitive market. To conclude with ADMIE, at the time of writing, the initial plan is being explored by the government and the creditors.480As for PPC481, the former government’s decision to privatize 30% of it, is being cancelled and under the current plan, a competition will be introduced by commencing NOME auctions so that PPC’s share is reduced.482 Other energy-related privatizations were included in the Annex I483 of the MoU, namely the privatization of DESFA,484 and DEPA.485 As it was mentioned above, DESFA was agreed to be sold to SOCAR in late 2013 and in 2014 it was certified as an ITO. Following that, the DG Competition of the Commission opened an investigation on the planned sale, raising its concerns on the effects of the merger on access
478 E. Venizelos ‘State Transformation and the European Integration Project, Lessons from the financial crisis and the Greek Paradigm (CEPS No. 130/February 2016) SELIDA https://www.ceps.eu/publications/state-transformation-and-european-integration-project-lessons- financial-crisis-and accessed 5/5/2016 479 M. Ioanidis (note 302) 42 480 C. Liaggou ‘Agreement reached on timetable for sale of power grid operator’ E-Kathimerini.com (20 April 2016) http://www.ekathimerini.com/208125/article/ekathimerini/business/agreement-reached- on-timetable-for-sale-of-power-grid-operator accessed 5/5/2016 481 Annex I (note 461) 23 482 ‘P. Skourletis: this is how ADMIE and PPC were saved from the MoU’ ,H AYGI, (http://www.avgi.gr/article/6471518/p-skourletis-etsi-sothikan-apo-ta-mnimonia-dei-kai-admie accessed 5/5/2016 483 Annex I ‘Asset Development Plan’ (30 July 2015) to Third MoU (see note 468) http://ec.europa.eu/economy_finance/assistance_eu_ms/greek_loan_facility/pdf/01_mou_annex1_2 0150730_en.pdf 484 ibid 8 485 Ibid 25
55 to the Greek market.486The proposed amendments have been for SOCAR to provide additional guarantees, or another investor to be added to the picture.487 Up until the time of writing, (May 2016) the sale has not been concluded and DESFA remains an ITO. The conclusions on the case of Greece are presented in the final Conclusion along with the overall conclusions of the paper. At this point it is stated that given Greece’s crucial geographical position as well as peculiar composition it seems wiser to retain electricity and gas networks under State ownership, or at least keep State participation on a high level. Hence, enforcement of competition could be succeeded by privatizing, even partially, DEPA and some of the competitive parts of PPC, as it had been planned by the previous government.
486 European Commission ‘Press Release: Mergers: Commission opens in-depth investigation into proposed acquisition of Greek gas transmission system operator DESFA by SOCAR’ (5 November 2014) 487 Annex I (note 483) 8
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CONCLUSION
As it has been discussed in the First Chapter, the Third Energy Package included three Unbundling options namely the OU, the ISO and the ITO. Member States such as the UK and the Netherlands fully supported the OU model, while the ITO was an expression of compromise and merely a lobbying success of Germany and France. We have also seen that countries implementing the OU and relevant reforms, such as privatizations, have been clearly benefited from them. With regards to the ITO model, it formed an opportunity for some Member States, such as Greece and Ireland, to “escape” the more intrusive model of OU and thus to retain their State- companies and de facto monopolistic market structure. As a result, it is proven that the ITO model, or the “compromise”, only delayed the effective implementation of the unbundling requirements in Member States with strong monopolies, such as Greece and Ireland. Nevertheless, implementation of the OU model was enforced in these two Member States through the financial agreements they concluded with the EU and IMF. As a part of the conditionality principle the agreements were governed by, most of the times OU was accompanied by the obligation to privatization. In that regard, Ireland generally projected a proactive approach and it was proved flexible with respect to the proposed energy market reforms. Greece on the other hand, fully supported the milder ITO model. Things became more complicated when it was called upon to deliver the reforms of the financial agreements, since the previous government that reluctantly supported the proposed reforms faced a tremendous domestic opposition, while the lastly elected one has a completely negative view on privatizations. A conclusion one can draw from the above analysis is that the Commission assesses the “effectiveness” of the unbundling requirements in a widely different way when it comes to countries with different markets and sizes. More precisely, for France and Germany, the ITO was proven effective. For Greece and Ireland on the other hand, meeting the “effectiveness checklist” designed for an ITO was not sufficient. The above deduction is supported by economic analysts, stating that privatization and unbundling are strongly interrelated when it comes to energy market liberalization. It is unquestionable that both steps were in need in cases such as the Greek and Irish energy sector, operating under strong monopolies up until the European unbundling requirements came along. Notwithstanding, we have seen that privatization is prescribed neither by the Third Energy Package nor the TFEU. On the other hand, one could argue that the liberal interpretation of Article 345 TFEU from the CJEU might alter the above conclusion. Nonetheless, privatizations fostering the competitive internal energy market should be decided by the Member State concerned and not to be imposed by the EU. In that regard, it is relevant to assess in what extent the decision of Member State under financial assistance to adopt privatizing measures is their own decision. We already referred to the changes in the definition of sovereignty under the concept of conditionality, which governs the financial assistance in the Eurozone. The argument can go both ways and it is not the aim of this paper to address this particular issue. It is only stated that it seems that lowering the standards of State sovereignty serves, in principle, the purpose of both the
57 recipient of assistance as well as the borrowing states; in any case, a certain line must not be crossed. As a final comment on the Third Energy Package, it would have been more beneficial to having included only the option of OU in the Third Directives. That way, the predominant aim of liberalization of markets with strong monopolies, such as the Greek and Irish, would have been pursued by a piece of EU legislation and not as a part of a negotiated financial agreement, which at some extent puts the sovereignty of the assistance-receiving MS into question. Alternatively, another approach could have been followed, according to which, the Directives could provide for unbundling options according to the market needs of each Member States (or group of Member States). In any case, falling under the EU energy legislation, a highly intrusive measure such as a privatization (or unbundling) of an energy entity would not only appear more legitimate, but it would also be more easily perceived by the national populations. The approach towards unbundling, being ,maybe, the most important energy market-related measure taken by the EU, should be carefully evaluated, as it could provide valuable experience for the development of the Energy Union,488 especially when it comes to coordinating the different needs and capabilities of the Member States.
488 European Commission, Communication from the Commission, State of Energy Union, COM (2015)572 final ,available at http://ec.europa.eu/priorities/energy-union/state-energy- union/docs/communication-state-energy-union_en.pdf
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European Commission ‘Inquiry pursuant to Article 17 of Regulation (EC) No 1/2003 into the European gas and electricity sectors’ (Final Report) COM(2006) 851 final European Commission ‘Prospects for the internal gas and electricity market’ COM(2006) 841 final European Commission Green Paper of 8 March 2006 ‘A European strategy for sustainable, competitive and secure energy’ COM(2006) 105 final European Commission ‘An Energy Policy for Europe’ COM(2007) 1 final European Commission, ’Proposal for a Directive of the European Parliament and the Council, amending Directive 2003/54/EC concerning common rules for the internal market in electricity’ COM(2007) 528 final European Commission ‘Explanatory Memorandum accompanying the Proposal for a Directive of the European Parliament and the Council, amending Directive 2003/54/EC concerning common rules for the internal market in electricity’ COM(2007) 528 final European Commission, ‘Interpretative Note on Directive 2009/72 /EC concerning common rules for the internal market in electricity and Directive 2009/73/EC concerning common rules for the internal market in natural gas: The Unbundling Regime’ (Staff Working Paper) Brussels,22 January 2010 European Commission, ‘Single market progress report 2014 country report: the UK’ https://ec.europa.eu/energy/sites/ener/files/documents/2014_countryreports_unitedkingd om.pdf> European Commission, ‘Single market progress report 2014 country report: the Netherlands’ http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52015SC0241&from=EN > European Commission, ‘Single market progress report 2014 country report: France’ https://ec.europa.eu/energy/sites/ener/files/documents/2014_countryreports_france..pdf European Commission, ’Single market progress report 2014 country report: Germany’ https://ec.europa.eu/energy/sites/ener/files/documents/2014_countryreports_germany.pd f European Commission, ‘Single market progress report 2014 country report: Ireland’ https://ec.europa.eu/energy/sites/ener/files/documents/2014_countryreports_ireland.pdf European Commission, ‘Country Fact Sheet United Kingdom’ (Staff Working Paper) accompanying Communication od the Commission to the European Parliament, the Council, the Economic and Social Committee, the Committee of Regions and the European Investment Bank ‘State of the Energy Union’ SWD(2015) 242 final European Commission, ‘Country Fact Sheet the Netherlands’ (Staff Working Paper) accompanying Communication of the Commission to the European Parliament, the Council, the Economic and Social Committee, the Committee of Regions and the European Investment Bank ‘State of the Energy Union’ SWD(2015) 241 final European Commission, ‘Country Fact Sheet France’ (Staff Working Paper) accompanying Communication of the Commission to the European Parliament, the Council, the Economic and Social Committee, the Committee of Regions and the European Investment Bank ‘State of the Energy Union’ SWD(2015) 224 final European Commission, ‘Country Fact Sheet Germany’ (Staff Working Paper) accompanying Communication of the Commission to the European Parliament, the Council, the Economic and Social Committee, the Committee of Regions and the European Investment Bank ‘State of the Energy Union’ SWD(2015) 225 final
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European Commission, ‘Country Fact Sheet Ireland’ (Staff Working Paper) accompanying Communication od the Commission to the European Parliament, the Council, the Economic and Social Committee, the Committee of Regions and the European Investment Bank ‘State of the Energy Union’ SWD(2015) 228 final European Commission, ‘Report on the ITO model’ (Staff Working Document) SWD (2014) 312 European Commission ‘Report on Greece's compliance with the second set of milestones of December 2015’ (21 December 2015) European Commission, Communication from the Commission, State of Energy Union, COM (2015)572 final ,available at http://ec.europa.eu/priorities/energy-union/state-energy- union/docs/communication-state-energy-union_en.pdf European Commission Decisions and Opinions European Commission, Decision of 12.4.2013 pursuant to Article 3(1) of Regulation (EC) No 714/2009 and Article 10(6) of Directive 2009/72/EC – Ireland – Eirgrid / ESB C(2013) 2169 final European Commission, Opinion of 23.5.2013 pursuant to Article 3(1) of Regulation (EC) No 715/2009 and Article 10(6) of Directive 2009/73/EC – Ireland – Certification of BGÉ ITO C(2013) 3117 final European Commission, Opinion of 2012 pursuant to Article 3(1) of Regulation (EC) No 714/2009 and Article 10 of Directive 2009/72/EC - Greece - Certification of ADMIE S.A. European Commission, Opinion of 17/10/2014 correcting Opinion C(2014) 5483 final of July 2014 pursuant to Article 3(1) of Regulation (EC) No 715/2009 and Article 10(6) and 11(6) of Directive 2009/73/EC-Greece-Certification of DESFA European Commission Press Releases European Commission Press Release ‘Internal energy market: Commission refers Ireland to Court for failing to transpose EU rules’ (Brussels 20 February 2014) European Commission ‘Press Release: Mergers: Commission opens in-depth investigation into proposed acquisition of Greek gas transmission system operator DESFA by SOCAR’ (5 November 2014)
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