EU Unbundling Introduced

20 July 2008 (Last Updated July 20th, 2008 18:30)

Customers and competition: will proposals for the unbundling of the European energy market go ahead? Nicola Boyes reports.

EU Unbundling Introduced

In September 2007, following a lengthy gestation, the European Commission finally gave birth to a proposed new structure for the continent's energy industry.

Conceived in the hope of increasing competition in the previously integrated market, the proposal, which would see energy companies separated from their transmission networks, all started as a glint in the eye of the European Council in 2005.

Conflicting decisions have been made by the European Parliament on how it might want to deal with electricity and gas suppliers. The question seems to be whether the proposal will be the little unbundle of joy the European Commission and Council had hoped for, or whether it will turn into the proverbial problem child for both the industry and its consumers.

FORCING FAIR PLAY

Back in 2005 the Council said that Europe needed a true European Energy Policy to encourage competition and make sure consumers got a fair deal. Attempts to liberalise the industry over the past decade had made some gains for consumers on choice (they had to be given the right by 1 July 2007) but a commitment to a truly competitive energy market, in one still essentially dominated by monopolies, needed to be made.

"The Commission's preference has been for the full unbundling of supply from transmission networks with a second option of an 'independent system operator'."

The answer was a green paper produced by the Commission in March 2006 proposing a common, coherent, European Energy Policy.The final report together with a package of measures to see it implemented was signed off in September 2007. Just under a year later the proposal itself seems to have unbundled, with differing stances supported for electricity and gas by the European Parliament. Big differences are still left to resolve.

The Commission's preference has been for the full unbundling of supply from transmission networks with a second option of an "independent system operator". This has made it possible for vertically integrated companies to retain network ownership provided their assets are operated by a completely independent company or body.

What the European Parliament has said is that it will support the full unbundling of the electricity sector but will hold back on gas, opting instead to support the appointment of internal compliance officers to enforce non-discrimination on grid access to ensure network businesses have adequate resources.

When you consider that behind all this the Commission has been working away investigating the major energy players for illegal business practices including allegedly colluding to shut out competition, you are left wondering about the strength of internal management to ensure fair play.

One thing is for certain, if unbundling in the EU goes ahead in any form, it will be the regulatory processes put in place to oversee it that will determine whether it will succeed or not.

PROGRESS SO FAR

The Commission's investigation into utility companies such as E.ON and RWE of Germany, Italy's Eni and Gaz de France (GdF) offers some hope.

"The Commission has proposed an agency to be established to oversee the cooperation of energy regulators throughout the EU."

E.ON has already "voluntarily" agreed to sell its electricity transmission grid to resolve two commission probes into the company's business practices. In May, Germany's RWE agreed to sell its gas-transmission network to settle a commission inquiry, the investigations both testing and showing the Commission's mettle on the matter.

The Commission has proposed an agency to be established to oversee the cooperation of energy regulators throughout the EU, with the view of developing a real European network. A new European Network for Transmission System Operators is also proposed to get grid operators to cooperate in developing common standards and codes. Past experiences led by other countries have show regulation is the key to achieving success.

When New Zealand moved to unbundle its energy sector there was initially no regulatory body established. Instead, the mantra was: "as much industry self-regulation as possible; as much regulation as necessary".

Electricity prices shot up five-fold while companies went to court to determine who should pay to remove transmission constraints from the system.

By 2003 the country finally realised the importance of regulation and established the Electricity Commission to oversee the industry and markets.

Conversely, the UK's establishment of new regulations in the 1990s saw energy companies voluntarily unbundle.

EU PROPOSALS

"Currently 11 countries in the EU already have laws ensuring the separation of supply and transmission."

Currently 11 countries in the EU already have laws ensuring the separation of supply and transmission. The UK, Netherlands and Scandinavian countries, which have in some cases already removed transmission from supply, support the proposal for full unbundling. France and Germany are vehemently opposed and for the Commission's proposals to become law, the EU member states will still have to agree with Parliament's wording.

The Commission is continuing to investigate illegal business practices; some suggest this has weakened the positions of France and Germany. Others see the Parliament's decision to support gas companies in appointing internal compliance officers as strengthening the industry.

Whatever the proposals finally grow into, be it a singular policy or some kind of split with differing measures for gas and electricity, it will be the regulatory measures brought in which will affect whether or not the proposal will bear its own fruit for consumers and the industry as a whole.