This third liberalisation package, replacing the 2003 gas and electricity directives, aims to overcome both discrimination of new energy companies seeking to enter EU markets and the problem of lower incentives for network investment by dominant operators, usually vertically integrated undertakings (VICs). The key solution given in the 2009 directives is ‘effective unbundling’. Member states are thus given a choice between having major energy producers and suppliers sell off grids or set up independent system operators. Other important objectives include ensuring an equally effective level of regulatory supervision in each member state, protecting consumers rights and security of supply (see separate articles).

OWNERSHIP UNBUNDLING

The European Parliament, in a resolution of 10 July 2007, dubbed ownership unbundling (OU) as the “most effective” tool to promote investments in infrastructure in a non-discriminatory way and to gain fair access to the network for new entrants as well as transparency on markets. This most radical solution involves vertically integrated companies selling off their electricity or gas transmission networks so as to completely separate them from their supply or production companies. As set out in the 2009 directives, OU implies the appointment of a network owner as system operator and independence from any supply and production interests, whether in the same or other member state. Member states must ensure that no company or person may control, whether directly or indirectly, both a production or supply undertaking and, at the same time, a transmission system operator or transmission system1.

INDEPENDENT SYSTEM OPERATOR

Aside from OU, the 2009 directives allow for two other solutions to the challenge of ‘effective unbundling’: the independent system operator (ISO) and the independent transmission operator (ITO). These two solutions are to be ensured by additional rules. ISOs are defined as wholly separate companies operating transmission systems that are still owned by vertically integrated undertakings (in contrast to the ownership unbundling model). Whilst the ISO is still proposed by the transmission system owner, it is designated by the member state and subject to approval by the Commission. Importantly, both the ISO and the TSO owner shall prevent own commercially advantageous information from being disclosed in a discriminatory manner, notably to the other parts of the undertaking (unless necessary for carrying out a business transaction). To ensure the full respect of the rules on information unbundling, the ISO and TSO owner must not use joint services such as common legal services; although they may use joint services for “purely administrative or IT” functions.

The company applying to be an ISO must also demonstrate that it complies with the ownership unbundling requirements as well as prove that it has the financial, technical, physical and human resources necessary to carry out its tasks. Candidate operators have to comply with a ten-year network development plan that is monitored by the national regulatory authority. The ISO – and not the transmission system owner - is responsible for granting and managing third-party access, including the collection of access and congestion charges, for operating, maintaining and developing the transmission system as well as investment planning, construction and commissioning of new infrastructure. Under the ISO model, the transmission system owner is to finance investments decided by the ISO and approved by the regulatory authority. The relevant financing arrangements are subject to approval by the regulatory authority following consultation with the transmission system owner and other interested parties.

INDEPENDENT TRANSMISSION OPERATOR

The so-called third option, not foreseen by the Commission in its original proposal of September 2007, allows for independent transmission operators (ITOs). Like the ISO option, this third alternative allows the vertically integrated company (VIC) to still own the transmission system operator. However, instead of selecting an external company, a completely separate and independent (own) company must be set up to manage the TSO. This self-owned TSO, or ITO, is certified by the national regulatory authority and is then approved and designated by the member state concerned.

The detailed rules governing the ITO prohibit, for example, the leasing and sharing of personnel and services (including IT systems) between the ITO and the parent company. Upon approval of the regulatory authority, an ITO may only render services to the VIC if so doing does not discriminate between system users and does not restrict, distort or prevent competition in production or supply. The ITO must also maintain completely separate auditing/accounts, corporate identity, communication, branding and premises from the VIC.

The ITO is to have sufficient financial resources, including the ability to raise money on capital markets, to carry out its tasks. The regulatory authority is also to be informed of the ITO’s financial resources available for future investment projects and replacement of existing assets.

The 2009 directives further stipulate that the VIC must not determine, whether directly or indirectly, the competitive behaviour of the TSO or the latter’s management of the network and activities with respect to the ten-year network development plan. Any commercial and financial relations between the VIC and ITO, to be approved by the regulatory authority, must also comply with market conditions.

(1) Exemptions to the unbundling rules apply to ‘small’ gas and electricity markets, such as Cyprus, Luxembourg and Malta as well as to ‘isolated’ gas markets, such as Estonia, Latvia and Finland.

Ownership unbundling by the back door

German Conservative MEPs, staunchly opposed to ownership unbundling, have criticised the European Commission for making it legally binding on German energy giants RWE and E.ON to sell their network. The leader of the German EPP group, Werner Langen, even accuses the Commission of imposing ownership unbundling by the back door and stepping out of line with its powers. With other energy companies similarly being investigated for abuse of market position, the Commission may try again to force ownership unbundling on other national energy champions.