Strengthening European regulatory powers

Strengthening European regulatory powers

by David Haverbeke, Barbara Naesens and Wouter Vandorpe

In 2009 the European institutions adopted the Third Energy Package, a bundle of Directives and Regulations which aims to remove regulatory gaps in the EU Energy markets. One of the most important changes in the regulatory institutional framework was the establishment of an Agency for Cooperation between Energy Regulators (ACER). The creation of this Agency will unavoidably lead to a general repositioning of the role and competences of the existing regulatory bodies. David Haverbeke, Barbara Naesens and Wouter Vandorpe of Lydian Lawyers in Brussels, explain how European energy regulation has evolved in recent years, and what to expect of the future.
 

Article Higlights:

- With the adoption of the Third Energy Package, the European Commission has strengthened the independence of the national regulatory authorities. - It has also established an organisation (Agency for Cooperation of Energy Regulators or ACER) in which the national energy regulators will work together. - As the competences between the national authorities and ACER have not been clearly delineated, the question is now how their relationship will evolve. - It seems likely that ACER will gradually take over national competences and will develop in time into a real European regulator.

From the start of the liberalisation of the energy markets in the 1990s, the European Union placed a strong focus on the need for adequate market regulation. Brussels realised that market opening and cutting back of national monopolies and oligopolies could not be achieved without proper regulation at all levels. The idea was that clear and strong regulations would contribute to offer customers protection and better prices and to allow new entrants into the newly competitive markets.

In this context, the EU gradually imposed an obligation on Member States to set up national independent regulatory bodies. At the same time, voluntary platforms for international cooperation were established, such as the Council for European Energy Regulators (ERGEG). Nevertheless, practice and experience have shown that in many instances energy regulators still do not have adequate or sufficient powers to properly regulate markets. As an example, the European Court of Justice in a recent decision (C-474/08) condemned Belgium for not providing certain competences on tarification and access to the electricity market to the federal regulatory authorities. At the EU level, much is still unclear about the allocation of competences between the national and international bodies.

Platforms

The First Energy Directives, 96/92/EC (electricity) and 98/30/EC (natural gas), obliged Member States to set up independent authorities to settle disputes related to contracts and access to electricity networks and gas pipelines. In addition, voluntary platforms for cooperation and harmonisation were established at the European level, notably the Electricity Forum of Florence (1998) and the Gas Forum of Madrid (1999).

Within the framework of the Florence Forum, the Council of European Energy Regulators (CEER) was established in 2000, followed in 2003 by the creation of the European Regulators Group for Electricity and Gas (ERGEG). The CEER is characterised by a voluntary and active approach and acts as the preparatory body for ERGEG. The ERGEG, which was founded by the European Commission, has a formal advisory competence. Its activities, although limited, have nevertheless led to a number of non-binding market codes, albeit not to enforceable decisions.

Brussels realised that market opening and cutting back of national monopolies and oligopolies could not be achieved without proper regulation at all levels

The Second Energy Directives, 2003/54/EC and 2003/55/EC, broadened the concept of national regulatory authorities (NRA’s) and established a set of functions for these NRA’s to protect energy customers’ interests. The Directives stressed the independence of the NRA’s, and imposed an obligation on the Member States to provide them with the competence to determine calculation methodologies and terms for accessing national networks, including transmission and distribution tariffs. Moreover, any party having a complaint against a transmission or distribution system operator, could apply to the national regulatory authority which would act as dispute settlement authority. Although the Second Energy Directives included a cross-border Electricity Regulation (1228/03) and Gas Regulation (1775/05) a gap still remained in the cross-border regulatory framework.

Third Package

The Third Energy Package of 19 September 2007, leading to Directives 2009/72/EC and 2009/73/EC (to be implemented on 3 March 2011) calls for improved action on removing this regulatory gap. The Third Energy Package recognises that, on the EU level, an independent mechanism for cooperation among national regulators needs to be established and, on a national level, (bilateral) cooperation between the NRA’s and harmonisation of their powers needs to be enhanced. It also notes that the independence of the NRA’s at the national level needs to be improved.

Consequently, the Third Energy Package

1. further specifies the independence requirements of the NRA’s
2. extends the competences of the NRA’s by granting them powers to make individual decisions on electricity undertakings, carry out investigations, request certain information and impose penalties on undertakings for non-compliance, and
3. establishes the Agency for Cooperation of Energy Regulators (ACER)

ACER

The underlying objective behind the establishment of ACER was that ‘the voluntary cooperation between national regulatory authorities should now take place within a Community structure with clear competences and with the power to adopt individual regulatory decisions in a number of specific cases’.

The outcome of the subsidiarity test could be in favour of Community action

The nature and composition of ACER is considered a compromise between powers at the European and national levels. The idea behind the establishment of ACER is to have a far-reaching body capable of solving cross-border conflicts by bringing the relevant NRA’s together and making decisions when necessary. The Board of Regulators of ACER, its key decision-making body, will be composed of NRA representatives. The organisation, which is expected to be operational as from March 2011, will be seated in Ljubljana (Slovenia).

Apart from its official advisory role towards the European Parliament, the Council of Ministers and the European Commission, ACER has a role in the regional cooperation of transmission system operators and in defining good practices and network codes. In addition, ACER has three sets of decision-making competences:

• Firstly, ACER shall, according to Article 7.1 of Regulation 713/2009, adopt individual decisions on technical issues where those decisions are provided for in the Third Package of Directives and Regulations. This article could be interpreted broadly, thereby providing ACER with ample competences.
• Secondly, ACER shall have the competence to grant exemptions from third party access for new major electricity interconnectors or gas infrastructures, where the relevant infrastructure concerned is located in the territory of more than one Member State.
• Thirdly, for cross-border infrastructures, ACER shall decide upon regulatory issues falling within the competences of NRA’s, at the request of the NRA’s or when the NRA’s have not been able to reach an agreement within a period of six months from when the case was referred to the last of those regulatory authorities.

Interaction

Given the creation of different authorities with binding and non-binding competences, both at EU and national level, an obvious concern is the interaction between the various bodies, in particular with reference to the question whether competences between these bodies are sufficiently delineated.

Interaction of energy regulatory bodies

Between ACER and ERGEG/CEER
The composition of ACER’s Board of Regulators, which will have a central role in developing its regulatory policies and decisions, is similar to that of ERGEG: both are composed of NRA representatives. Until ACER becomes operational, ERGEG will continue to act as an advisory body. After that, ERGEG will most likely assimilate into ACER, and will then be formally dissolved by the European Commission. CEER will have an additional role in advising ACER, and will continue to co-exist with ACER. CEER and ERGEG have already proposed draft guidelines for the cooperation between the NRA’s and ACER, and for cooperation among the NRA’s.

 

Between the NRA’s
In principle, each NRA has its competences geographically delineated by its national borders. However, cross-border connections require (bilateral or multilateral) cooperation agreements between Member States. NRA’s also regularly meet within ERGEG, CEER and the Florence and Madrid Forums, where discussions are held and decisions are reached by consensus.

Between the NRA’s and regional initiatives
In addition to the Member States’ regulating bodies and the European regulators, regional units were set up by the Commission during the 10th Florence Forum in 2004, and were subsequently monitored by ERGEG. These ‘regional initiatives’ aim at enhancing the integration of the national energy markets. After the ERGEG published its consultation paper in 2005 (the Electricity Regional Initiative), seven electricity Regional Energy Markets and three Regional Gas Markets were set up.

Between the NRA’s and ACER
To achieve consistent application of European law in all Member States and to achieve coherence at the EU level, in particular with regard to cross-border issues, cooperation between the NRA’s and ACER will be necessary. This cooperation seems guaranteed by the fact that ACER’s Board of Regulators is composed of NRA representatives. In theory,this means that the competences of the NRA’s and ACER should not conflict, as there will be constant interaction and control. But in fact competences between the NRA’s and ACER have not been clearly delineated in many ways. Thus the main question is whether the competences allocated to ACER will reduce the competencies of the NRA’s.

On the one hand, Regulation 713/2009 expressly states that the participation and cooperation of national regulatory authorities at the Community level cannot be sufficiently achieved by the Member States, and that, as a result, these aims will be better achieved by an independent regulator. ACER’s competences are circumscribed. It has general advisory powers through its opinions, recommendations, network codes and non-binding guidelines. It also has decision-making powers for granting exemptions from third party access to new major electricity interconnectors or gas infrastructures and for adopting individual decisions on technical issues. The NRA’s must comply with and implement all of ACER’s legally binding decisions.

‘It will always be possible to argue that some Community intervention will always be necessary’

On the other hand, according to the subsidiarity principle (Article 5 of the EC Treaty, reiterated by recital 11 of Directive 96/92/EC), although general principles providing for a framework must be established at the Community level, detailed implementation should be left to Member States. Each Member State must be able to choose the regime which corresponds best to its particular situation. For areas of Community Law in which the allocation of competencies is unclear, Article 5 of the EC Treaty provides a three-levelled subsidiarity test. Firstly, the Community may only take action if and insofar as the objectives of the Treaty cannot be sufficiently achieved by the Member States. Secondly, it can only take measures when the Community is better able to achieve the action because of its scale or effects. Thirdly, the proportionality test must be passed, which means that if the Community does take action then this should not go beyond what is necessary to achieve the objectives.

Recital 29 of Regulation (EC) No 713/2009 states that ACER cannot go beyond what is necessary in order to achieve its objectives of ‘participation and cooperation’. A broad interpretation of these objectives however, could indicate that powers expressly allocated to ACER will also be broadly interpreted, and that, after applying the subsidiarity test to a particular unclear case, the competence will be allocated to ACER. As one legal expert has stated, ‘Even in those [regulatory] areas in which there seem to be clear reasons in favour of national, or even regional or local, regulation... it will always be possible to argue that due to the close relationship between these areas and the development of the single market, some Community intervention will always be necessary.’ (A. Estella, The EU Principle of Subsidiarity and its Critique, Oxford, Oxford University Press, 2002, 114).

So although the subsidiarity test in practice aims to restrict the Community’s competences by stimulating self-restraint by the Community, it remains an open question whether this will be the reality. The outcome of the subsidiarity test could be in favour of Community action.

Stronger powers

With the establishment of ACER, the EU has shown its urge to reorganise the EU energy regulatory framework and its intention to allocate stronger powers to the European level. But the creation of ACER will only be a considerable step towards further integration of the energy markets if it is given effective and sufficient powers, without, however, violating the subsidiarity principle. At the same time, to achieve a harmonised European market, the NRA’s and ACER will increasingly have to cooperate to create transparent and efficient regulation, in particular with regard to cross-border issues.

DAVID HAVERBEKE Partner, Energy & Utilities Unit, Lydian Lawyers, Brussels BARBARA NAESENS Lydian Lawyers, Brussels WOUTER VANDORPE Lydian Lawyers, Brussels Affiliated Junior Researcher at K.U. Leuven