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Summary:The European Commission has finally adopted its Decision on power utilities' so-called "stranded costs" - pre-deregulation investment no longer economically viable following the liberalisation of the EU electricity market under the Internal Market Directive agreed three years ago. On the one hand, Germany will be granted a conditional derogation for VEAG's lignite-fired power plants in its Eastern part and Luxembourg will be allowed an exemption from the obligation of publishing detailed accounts. On the other hand, national schemes involving financial compensation - Spain, UK, France, Denmark, Austria, and the Netherlands - will be treated as state aid and dealt with as such.

German utility VEAG will be allowed to derogate from the provisions of the EU Electricity Directive until 2003, but the European Commission wants big electricity users consuming more than 100 GWh per year and per site to be liberalised - 15 to 20 customers. As lignite-generated power is much less competitive than electricity from other fuels, one can expect that those will not be quick to change supplier. Hence the Commission is proposing a two-year moratorium before this decision enters into force, obtained by German Regional Policy Commissioner Monika Wulf-Mathies from Energy Commissioner Christos Papoutsis, who initially favoured a one-year derogation.

In August 1990, the German Government sold the East-German electricity system to the three biggest West-German utilities RWE Energie (26.25%), Bayernwerk (22.5%) and Preussenelektra (26.25%), the remaining 25% being hold by 4 other German Transmission System Operators (TSOs) through the holding company EBH. The new company VEAG was committed to maintain the electricity generation from lignite (brown coal) and to invest huge amounts of money in its modernisation. Moreover, regional distributors were committed to buying 70% of their power consumption at a price based on the total cost, over a period of twenty years. The Commission estimates that 30,000 people or so are dependent on the lignite industry in Eastern Germany. Since 1990, VEAG has invested 13 billion Deutschemarks in modernising its lignite-fired power plants.

Article 24 of the Electricity Directive (96/92/EC) allows Member States to derogate from some of its provisions, namely its chapters IV (transmission system operation), VI (unbundling and transparency of accounts) or VII (oranisation of access to the system), if their transitional regime is accepted by the European Commission, thus fully justified. They had to notify their transition schemes by February 1998. All but two Member States (Finland and Sweden) have shown an interest in running a transition scheme. Italy, Belgium, Portugal, Ireland and Greece may outline the details of their national scheme - involving state aids - later on, when rules become clearer. Financial compensation in itself is not really the same things as a transition scheme as defined in Article 24. Although the Commission recognises that "the payment of such levies can result in economic consequences substantially similar to those resulting from a total or partial derogation from some of the obligations" of the Electricity Directive, this transitional scheme will have to be examined pursuant to state aid rules, i.e. Article 87@3 of the EU Treaty.

Luxembourg has been granted only one derogation from the Electricity Directive, namely, from CEGEDEL's obligation to publish separate accounts for its activities of generation and distribution until December 31, 2001. However, CEGEDEL still has to publish its accounts for transmission. Luxembourg argued that it might harm CEGEDEL's competitive position since it is 90% dependent on a sole supplier - RWE - and that its competitors only have to disclose the average costs of purchased power, with no distinction between suppliers. The Commission recognised that protecting the confidentiality of CEGEDEL's power purchase prices was legitimate, but that the transparency of transmission costs would not hamper such confidentiality. Luxembourg will be allowed to ask for an extension of the Commission Decision, if necessary.

The Commission decided not to allow a transitional regime until December 31, 2000 to protect CEGEDEL's exclusive supply contract with RWE expiring at the of next year since it felt CEGEDEL would not be in a situation where it would have to buy power from RWE and not being able to sell it to its customers. The third demand - also rejected - from Luxembourg concerns the interpretation of an article of the Electricity Directive. "Luxembourg will get an official answer by letter from the Commission before the Summer", said a Commission official.

State aid cases.

The following six cases will be examined under state aid rules by the Commission. According to Pablo Benavides, Director-General for Energy, said that it was highly probable that the decisions on those cases "will be taken separately", which means that some cases may be solved quicker than others.

The Spanish Government has notified two schemes: first, the 'CTC' (costs of transition to competition) regime, which provides compensation - for a maximum period of ten years - to Spanish power generators due to the drop in electricity prices. The lion's share, i.e. 1,693 billion Pesetas (or 85%), will be granted to 11 utilities, and the remaining 295 billion Pesetas (15%) is designed to cover a fixed premium of 1 Peseta/kWh power from indigenous coal. This money will be recovered in the regulated tariff and transmission fees. The second scheme concerns the 'systems of the islands and extrapeninsular systems'. The operators Unelco (Canary Islands), Gesa (Baleares) and Endesa (Ceuta and Melilla) benefit from specific exemptions from the market rules that govern the mainland power market until end 2000. The comparatively higher cost of generation and distribution in these isolated systems are redistributed through a specific levy on the mainland power tariffs and transmission fees.

The French authorities have notified the following transitional measures: contracts for purchasing the electricity produced by the 'peak' independent producers (worth 250 million Francs a year until 2012); commitments linked to the Superphenix fast breeder reactor (worth FF 12.7 billion; and commitments linked to the financing of the special pension scheme for electricity and gas industry employees, for which EdF has made no reserve (or estimate). For the first two measures, the French Government foresees a recovery method based on a fund made up of a contribution payable by all users, and based on consumption. Pablo Benavides said that France might only struggle on the first scheme, but that the two others are likely to be discarded by the French Government.

The United Kingdom Government asked for a transitional regime for the electricity sector in Northern Ireland. It concerns the existence of power purchase agreements between Northern Ireland Electricity plc (NIE) and the main four IPPs. The commitments in relation to the power purchasing agreements are the following: stranded capacity (worth up to GBP25 million); excess cost linked to gas contract between NIE and Premier Power (worth up to GBP25 million); cost of gas pipeline (worth up to GBP14 million); and flue gas desulphurisation (worth up to GBP18 million). The UK Government assumes that any eligible stranded cost will be recovered through the introduction of a surcharge on the final power consumption, the so-called 'Franchise Customer Excess Cost'.

The Danish Government has notified transitional regimes for three types of commitments: take-or-pay (TOP) gas contracts with Dangas (stranded costs estimated 993 million Kroner); closure of 30 or so power plants by 2025 (with total stranded costs amounting to DKr 2.75 billion); and pension obligations of municipal utilities (stranded costs estimated DKr 600-700 million). Those costs would all be recovered through a surcharge on electricity consumption.

The Dutch Government has notified four transitional measures in two steps. The initial notification identified two more schemes which were withdrawn from the final notification, but which may be examined by the Commission: the delay of privatisation of the electricity sector, where express agreement of the Minister will be necessary for any sales of shares outside the circle of present shareholders until the end of 2001; and the phasing in of corporation tax keeping pace with the liberalisation process. In an early assessment, the Commission noted that these issues could not considered under article 24 of the Electricity Directive. The Dutch Government finally notified four schemes (the last one being added to the initial notification): recovery of the losses on some district heating projects until 2021 (worth 1.628 to 2.0 billion Guilders); recovery of extra costs of construction and operation of Demoklec - demonstration coal gasification plant in Buggenum (stranded costs worth maximum 550 million Guilders); a Protocol agreement concluded between Dutch generators and distributors up to and including 2000 (impossible to estimate what financial consequences the repeal of the Protocol would have for generators); international commitments, or recovery of possible losses from power procurement contracts between SEP and EdF, PreussenElektra and Statkraft, from investment obligations of SEP to Statnett for the NorNed cable, and from a TOP gas contract between SEP and Statoil (depending on the evolution of power and gas prices on the market, but at least 3.1 billion Guilders at 7 cents/kWh up to 4.6 billion Guilders at 5 cents/kWh). Apart for the Protocol scheme, all other stranded costs would be recovered by a levy on transport tariffs. If the Protocol is cancelled, the Minister of Economic Affairs retains the right and legal mandate to impose the agreement or one similar, by law. However, it is unclear what form any imposition by the Minister of an agreement between generators and distributors might take.

The Austrian Government notified two schemes: guarantees of operation given to power plants based on the pre-liberalisation authorisation procedure, limited to three hydro-power plants - Freudenau, Mittlere Salzach and Kraftwerskete Obere Drau (stranded costs were estimated 6.27 billion Schillings); and long-term procurement contracts for indigenous lignite for the Voitsberg power plant belonging to Verbundgesellschaft (estimated stranded costs amounting to 2.43 billion Schillings). The transitional regime is limited until 2009. The payments would be financed by a levy on power consumption.

Italy is suspected to have missed the deadline for examination of a transitional regime under Article 24. Nevertheless, it is allowed to notify a compensation scheme to recover stranded costs - if any - and it would be examined pursuant to state aid rules, just as the other ones will be. Pablo Benavides declared at a press conference that Italy should send its application "the sooner the better". It might involve stranded costs linked to renewables.
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Title Annotation:Government Activity; German utility VEAG will be allowed to derogate from the provisions of the EU Electricity Directive
Comment:ELECTRICITY: EUROPEAN COMMISSION ADOPTS DECISIONS ON TRANSITIONAL REGIMES.(German utility VEAG will be allowed to derogate from the provisions of the EU Electricity Directive)(Government Activity)
Publication:Europe Energy
Geographic Code:4EUGE
Date:Jul 9, 1999

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