Friday, 4 April 2008

Opening up Europe's energy markets to competition

The creation of more efficient energy markets in Europe is currently being debated in the Parliament's Energy Committee following the publication of the Commission's proposals in September 2007. As a key part of the EU's energy policy, the Commission wants to remove the remaining barriers to creating a fully functioning internal energy market that ensures fair and open competition and effective regulation, and ultimately lower electricity and gas prices for European consumers along with a single European electricity and gas grid, by January 2009.

To boost increased competition and investment in the EU energy market and greater choice for consumers, the Commission proposes to break up the power of Europe's large energy companies by splitting energy producers from their distribution networks through
full ownership unbundling of all gas and electricity transmission businesses across the EU. Ownership unbundling would see those companies that own gas pipelines or electricity networks (grids) and which provide the gas or generate the electricity at the same time be forced to sell off large parts of their business.

A second unbundling option would be to allow large energy suppliers to retain ownership of transmission assets but the management of the networks would be taken over by separate companies called Independent System Operator (ISO). The designation of the ISO will have to receive prior approval from the Commission to ensure a sufficient level of independence.

The Commission has warned that choosing the ISO option would entail a greater regulatory burden, as national regulators would be given more powers to intervene - and issue fines to companies - in the event of anti-competitive behaviour.

Dawn raids by the Commission of the offices of the German energy company, EON, in 2006 together with the imposition of a fine of 38 million euro for the breaking of an official EC seal in a room on EON's premises with highly sensitive documents underline the seriousness with which the Commission is trying to tackle anti-competitive behaviour in for example the German energy market. Indeed, EON has now agreed to sell off its electricity networks to an operator which would have no interest in electricity generation and/or supply businesses to settle current antitrust investigations by the Commission.

The Commission's proposals for liberalising Europe's energy markets are being resisted by many countries, not least France, Germany, Austria, Bulgaria, Greece, Latvia, Luxembourg and Slovakia. They argue that complete separation of ownership and control of both gas and electricity transmission (from supply and production activities) will not resolve all the problems in Europe's energy markets. Instead of leading to lower energy prices and more grid investment, the 8 countries consider that the Commission's unbundling proposals and the ISO option would increase sector instability and create legal insecurity and uncertainty for investors at a time when companies are also being asked to invest in upgrading the grid network for more renewable generation or to improve security of gas supplies.

Supporters of ownership unbundling (Sweden, Finland, Belgium, Denmark, Spain, the Netherlands, Portugal and the UK) argue that full ownership unbundling is the only way to create more competition, transparency and integration in the EU energy markets. Anything less would not be able to assure adequately of any potential conflict of interest. They take the view that when it comes to a vertically integrated company there is the potential to frustrate competition by having access to confidential business information about competitors' activities or by exerting influence over competitors' rights of access to the transmission system which the vertically integrated company still owns, thereby preventing fair access for new entrants.

How Scotland's energy market operates offers the EU an alternative. The current system was set up only in 2005 by the UK Regulator (Ofgem) which integrated the English and Scottish electricity markets by appointing an Independent System Operator (ISO) (i.e. the National Grid) to carry out the operation of the Scottish electricity transmission system previously carried out by two vertically integrated Scottish Companies, Scottish and Southern Energy (SSE) and Scottish Power (SP). SSE and SP are each classed as a Transmission Owner (TO) in this arrangement and continue to own, maintain and invest in their networks as the TOs while the National Grid operates the day to day control and is responsible for contracting with users for access to and use of the grid and assures of non-discriminatory access for connecting new entrants to the grid.

Ironically, the UK set the system up in this way to avoid any issues of potential conflict and yet it continues to push for full ownership unbundling which can only have negative implications for Scotland's energy industry and come at the expense of our industry. I want to see greater liberalisation of Europe's energy markets with greater competition, openness and transparency which can only be a good thing for Scottish consumers and our energy companies to ensure they can compete and invest on a fair basis in other European countries. Rapidly rising energy prices across the EU are bad for business and are increasing fuel poverty especially among low income households and other vulnerable groups as well as remote areas.

Energy prices in the UK have gone through the roof since January 2008 accompanied at the same time by a shameful rise in energy companies' profits and quite rightly there have been calls for the Competition Commissioner to investigate what is happening in the UK's energy market.
The House of Commons Business and Enterprise Committee has since launched its own investigation into energy prices and the UK's energy market as well as the interaction between UK and European energy markets. UK energy companies blame rising energy prices, especially gas prices, on the lack of competition in Europe's energy markets.

However, what we mustn't see happen is Scotland's energy industry become expendable as part of some compromise and trade-off in smoke-filled rooms behind closed doors in Brussels. I want to be able to see Scotland's energy companies competing in Europe's energy markets on a fair and equal basis.

As an alternative to the Commission's unbundling proposals 8 Member States led by France and Germany presented a
'Third Way' in February 2008. Their suggestion being that the effective unbundling of energy operators' activities should be done through a network of regulators guaranteeing free access to infrastructure and independence of investment decisions. In response, the Commission issued two 'non papers' in which it argues that the "Third Way" proposals, which prefer "structural separation" within a business to ownership unbundling, cannot be a credible alternative unless they guarantee the independence of the TSOs. In many respects the Scottish model is actually more robust than the Third Way because there is ownership unbundling of the system operation together with strict controls and regulatory oversight of investment.

Over in the European Parliament discussions on the Commission's proposals aren't much better. The Energy Committee is due to vote on 6 May with a first reading expected from the Parliament in June 2008.
There are over 1,000 amendments to the whole internal energy market package which MEPs will now start to try and negotiate compromises.

The most contentious issue remains ownership unbundling on which the Committee is split along national lines - though I suspect a deal may already have been done on this for the issue to be returned to in 2010 and for all other aspects of the energy market package to be agreed to. Not least given that much of the real negotiation will be done under the French Presidency of the European Council in the second half of the year - the French government of course being the co-authors of the 'Third Way' proposal and its opposition to the Commission's full ownership unbundling proposals. For the moment the Energy Council remains divided.

The UK Labour MEP, Eluned Morgan is drafting the Energy Committee's report on the internal electricity market and has taken the UK government line in her support for full ownership unbundling which she says is "the only model that can give an assurance to competitors who want to enter the market and ensure no conflict of interest arises" and consequently has sought to delete the ISO model as an alternative option. There are amendments from the SNP and Scottish Labour backing the Scottish model with a number of French, German, Hungarian, Bulgarian, Luxembourg, Greek and Austrian MEPs backing the Third Way as an amendment.

Since its setting up three years ago, the "Scottish model" has shown that it works and can deliver the key requirements of non-discriminatory access. By fully separating the operating system and the commercial arrangements for accessing contracts and tariffs and placing it with the ISO, this ensures there is no potential conflict of interest and the confidentiality of information is also ensured. Equally, in terms of investment, both SSE and SP are responsible for delivering an investment plan which is then reviewed by the ISO and it can comment on whether it considers it to be adequate or not. Once agreed the TSO (i.e. SSE and SP) implement the investment plan even if it could be detrimental to the interests of its affiliate companies.

Despite its critics, the Scottish model does offer Europe's energy markets a viable solution to the unbundling issue and on this one Scotland's energy industry cannot and should not be expendable.

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