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Unbundling energy in the EU has a long way to go.

Sunday, 01 August 2010 00:00

THE PROCESS of 'unbundling' in the European Union (EU) gas industry as called for under the EU's third energy package, notably the gas directive 2009/73/EC, adopted in 2009, has come to a bit of a standstill. This will not last. The 27 EU member countries have to begin implementing the directive in March 2011 and the general appearance of inaction is certainly masking a furious buzz of political and industrial negotiation behind the scenes. All EU member states now accept that liberalisation of the gas energy sector is unstoppable but the directive allows them to choose between different options to achieve it and they are far from unanimous on this point. Unbundling of course is shorthand for separating the supply and production of gas (and electricity) from the transmission networks and is an indispensable element of the European Commission's plans for introducing genuine competition into the EU energy sector. When it first proposed this measure in 2007, the Commission pushed for full ownership unbundling as the only way of tackling the "inherent conflict of interest" that inevitably occurred when incumbents were told to grant access to their network to new competitors. "Their self-interest is to impede access in order to protect their market share," said the Commission.

As the Petroleum Review has reported, full ownership unbundling js disliked by the giant integrated energy giants, notably Gaz de France and, in Germany, E.ON and RWE and so was opposed by France and Germany (supported by Austria, Bulgaria, Greece, Luxembourg, Latvia and Slovakia), with the UK, the Netherlands, Spain and Poland strongly in favour. The result was of a compromise between the EU Council of Ministers and the European Parliament, allowing three options:

* Full ownership unbundling under which the integrated energy companies would have to sell off their gas and electricity grids so as to establish separate transmission system operators, with no energy supplier permitted to hold a majority share in a transmission system operator.

* The independent system operator (ISO) option where companies hand over the technical and commercial operation of their transmission networks to a separate body designated by the member state.

* And the independent transmission operator (ITO) option (a 'third way' devised and favoured by France and Germany) integrated supply/transmission operations would be permitted if they complied with rules to ensure that the two activities operated independently in practice. Companies would be able to retain commercial and investment decisions, but would have to set up a framework for ensuring the independent operation of the transmission network. Of all these three options, the 'third way' has since been criticised on both sides. Advocates of total unbundling say the proposal would leave the parent utility in control of financial decisions, giving it leverage over decisions taken by the transmission company. But the compromise is not universally popular with gas suppliers, many of whom fear that independent transmission companies could prove awkward to manage and potentially unstable, undermining their importance as part of an integrated "national champion" in the energy sector. A further crucial and controversial element of the EU legislative package is the so-called 'Gazprom clause', which prevents non-EU companies taking control of transmission systems in the EU countries unless it also complies fully with the unbundling requirements--which would require Russia, for instance, to undertake major liberalisation reforms. Also, both the member state and the Commission would have to be satisfied that the deal does not threaten the EU's security of supply in energy. A working paper released in May this year by the National Centres of Competence in Research in Switzerland asks whether the Gazprom clause is compatible with the EU's obligations under World Trade Organisation (WTO) rules, saying "the question arises to what extent the EU is entitled to impose additional requirements to third state operators under WTO rules." Good question. And one that could be tested in a WTO disputes hearing.

Commenting on the package from the industry standpoint, Margot Loudon, deputy secretary general of the gas company organisation Eurogas, said that different companies had different preferences "but I think the final directive which is to be implemented in stages from March 2011 is regarded as a satisfactory compromise." Ms Loudon said the companies were now applying themselves to implementation. "I don't think you'll see any more ownership unbundling in the very near future but they are focusing on the ITO/ISO options and analysing those with a view to correct implementation," she said.

But Ms Loudon said she thought the "dynamics of the markets" would work in favour of unbundling. "On the one hand you've got the package and on the other hand you've got the dynamic coming from the market itself. The mindset is changing which I think is equally as important as the legislation," she said.

Which maybe so, but first national EU governments have to implement the latest EU legislation. This is far from a given. The European Commission is already unhappy about the way the EU member countries have implemented earlier legislative energy liberalisation packages, in particular the second. "We've checked on the way that the member states implement the laws and we found that almost all did not implement them the way we wanted," said Marlene Holzner, Commission energy spokesperson (NOTE--SPELLING CORRECT). "The problem is lack of transparency," she said. "A central system operator should have a website and put on it what the company has to pay and say what capacity there is so that others can see if they could book it but in both Germany and France there is a lack of this transparency at the moment. The Commission had sent a 'reasoned opinion'--the last step before it takes European Court of Justice (ECJ) action--to France and Germany and others in order to enforce transparency and a response is due form governments at the end of August. Meanwhile, the merits of transparency and full ownership unbundling have been set out in a paper published earlier this year by the European Centre for International Political Economy (ECIPE), a Brussels-based policy research think tank dedicated to trade policy and other international economic issues. Using the examples set by the UK and the Netherlands which have dismantled previously vertically integrated national gas companies, ECIPE says more market competition is the key to unlocking, in a sustainable way, the required energies to invest in infrastructure and better interconnect the EU's national gas markets.

However, whatever happens with legislative implementation, full ownership unbundling--of the kind carried out by the UK and the Netherlands--will be adopted by a minority of member states in the EU. "Worse, in the member states that have the least competitive gas markets there will be no change at all to the status quo," argued the ECIPE. "Estonia, Latvia and Finland are explicitly exempted from any unbundling provisions. Most central and eastern European member states, and in particular the ones that have been most damaged by the January 2009 gas crisis, Bulgaria and Slovakia, will adopt the so-called Third Option, which only imposes changes in the management structure of companies but does not dismantle ownership. This means that the market restrictive behaviour of the national gas champions will continue," said the paper.

Gas markets in all these countries are controlled by the huge gas importing and distributing monopoly, the Russian company Gazprom which not only supplies up to 100% of gas but also holds investments in the dominant gas company and/or the intermediary gas trading companies. With an incentive structure linked to Gazprom, these countries did not see it as economically rational to diversify imports or to invest in significant storage capacity and were therefore not ready for full ownership unbundling, said the ECIPE.

The research paper was written at the end of 2009 when the think tank warned that the EU's gas market "is as weakly structured as ever." But "the sad news is that not much has happened on the unbundling side since then," said Ms Iana Dreyer, analyst at ECIPE and author of the paper (NOTE--SPELLING IS CORRECT). "The political winds are not going in the right direction," she said. The new regulations left it up the member states to decide if they wanted to go for full ownership unbundling or the third option "and so it's about taking political decisions and maybe having Brussels pressing some member states to do something about it". She warned that "everything that sounds right is not economically in fashion at the moment". Furthermore, she argued the new energy Commissioner (Germany's Gunther Oettinger) "is not putting great emphasis on these kinds of structural changes and who is focusing on other things like pipelines and subsidising interconnectors before reform of the sector." There was a need for Germany and France to show leadership in this field "but it hasn't happened -France has not even applied the energy directive of 2004 when the EU started to liberalise the sector." There are such differences between the views of operators in the sector that Gas Infrastructure Europe (GIE) whose 66 members cover the entire spectrum of those affected by unbundling has found itself unable to define a common position. Speaking privately a senior official said it was probably true that unbundling in some form or other was now inevitable "but you cannot see unbundling as something which will solve everything." The official said it had already had some side effects, which "perhaps are not positive," citing security of supply. "You had vertically integrated companies in the past and they had responsibility for security of supply through all the chain. Now this responsibility has been fragmented and there may be some not so positive effects," he said.

Scepticism about unbundling was also expressed by Ms. Valerie Ducrot, manager of the United Nations Economic Commission for Europe (UNECE) Gas Centre (NOTE--SPELLING IS CORRECT), a technical cooperation programme established to assist governments and gas companies in central and eastern Europe to create more decentralised and market-based gas industries. "There is a big difference between the western European countries such as the UK and the Netherlands and the eastern European countries," she said.

"Concerning unbundling there's a reluctance these days to move too far too quickly especially with the Transport System Operators (TSO). They are very, very cautious. They see that this directive exists but they see that, even in the Netherlands for instance where they are very advanced in the implementation of the directive, they want to go cautiously, especially in matters relating to the tariffs. In the beginning they said that because of unbundling the price would go down but exactly the contrary has happened so we can't say that unbundling is a good thing for the consumer in the end."

Ms Ducrot said that potential members of the EU such as Croatia "will have very, very severe difficulties in implementing this directive. It's the same in other Balkan countries and in Romania. These countries would all much prefer to stay in a single integrated model. They don't have the human resources, they don't have the infrastructure, to unbundle. To unbundle means to be rich in resources and they don't have the experts in the different fields that unbundling requires," she said.
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Author:Osborn, Alan
Publication:International News
Date:Aug 1, 2010
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