22 February 2007 ERGEG approach to the internal energy market Nick Thompson – Ofgem IFIEC Europe Energy Forum, 22 February 2007

22 February 2007 Objectives  Background  ERGEG Response to the Commission’s Strategic Energy Review: –Integrating EU grids –Regulatory oversight –Accountability –Unbundling  Regional Initiatives  Challenges and Prospects?

22 February 2007 Background  Who are CEER and ERGEG?  2007 Work Programme: –Year of the customer –Regulatory framework: Implementation and compliance Guidelines New legislation –Regional Initiatives –Security of supply  Pivotal year for single EU energy markets?

22 February 2007 Strategic Energy Review / Sector Inquiry  European Energy Regulators strongly welcomed the Commission’s Communication “An Energy Policy for Europe” and the Sector Inquiry  Single European energy markets do not yet exist; yet are at the heart of achieving “security, sustainability and competitiveness”  Despite developing regional markets and current EU legislation, existing national markets, and market designs, create a “regulatory gap” ERGEG therefore published formal advice to the Commission (8 February) setting out the comprehensive regulatory framework required for single energy markets and an integrated EU grid

22 February 2007 The ERGEG approach: overview  Key features of the proposed model, which builds on successful national models: –The development of integrated electricity and gas grids –Regulatory oversight at national and EU level, including appropriate organisational structures –Accountability of regulators and TSOs –Effective unbundling To achieve this a new “3 rd package” EU legislation is essential, based on achieving the conditions for cross-border investment and competition

22 February rd package of liberalisation legislation  New legislation will need to: –Define high level public interest objectives –Place collective obligations on TSOs to develop EU operating and security standards; and EU network bodies to achieve this –Place individual obligations on TSOs comply with EU standards –Define roles and responsibilities to ensure investment –Harmonise upwards powers and independence of national regulators –Place responsibility on national regulators to ensure national grids meet EU standards –Enhance existing European regulatory group to oversee EU networks bodies –Ensure effective market oversight and duty for NRAs to co-operate –Ensure proper accountability of EU networks and regulatory bodies –Ensure effective unbundling of transmission assets, preferably ownership unbundling

22 February 2007 The model explained: integrating EU grids  Objective: define roles and responsibilities for cross-border investment  Rationale: –Integrated EU grid achieved by joining together national grids –“EU” grid = infrastructure needed for cross-border flows  Key elements:  TSOs responsible: –Collectively, for developing EU operating and security standards –Individually, for developing (and joining) national grids in line with EU standards  Central EU networks bodies required to meet collective obligations – develop ETSOplus/GIEplus?  Transparency vitally important

22 February 2007 The model explained: regulatory oversight  Objective: developing stable, predictable regulatory climate for investment, including across borders  Rationale: –Strong, independent regulation essential –Regulatory oversight and organisation should be based on practical reality –Cross-border market oversight essential as markets integrate  Key Elements:  NRAs should have harmonised powers and guaranteed political independence  NRAs should oversee obligations, including EU obligations, on national TSOs  Enhanced ERGEGplus regulatory body should over see ETSOplus/GIEplus  NRAs should co-operate, including through ERGEGplus, on cross- border investigations and enforcement

22 February 2007 The model explained: accountability  Objective: EU organisations to be accountable to EU Institutions  Rationale: –Democratic accountability essential, alongside independent decision- making –National models again provide a basis  Key Elements:  ETSOplus/GIEplus to provide public annual reports and eg. winter outlook reports, 7/10 year statements  ERGEGplus to provide public annual reports and e.g. appear before EP Committee

22 February 2007 The model explained: unbundling  Objective: Fair access and appropriate investment incentives  Rationale: –TSOs must act, and be perceived to act, independently –Level of unbundling required should be proportionate to the level of discrimination –Recognise central political decision  Key Elements:  Ownership unbundling is the “cleanest” and most secure response  “Independent system operator” can be made to work in right circumstances, but heavy and complicated regulation required  Essential policy outcome must not be delayed

22 February 2007 The “Interim”  Legislation essential, but slow – change cannot wait  Member Sates should back practical reforms: –Full implementation in the spirit and the letter of Directives –Supporting the work of ERGEG –Raising powers and independence of regulators –Supporting co-operation eg. data-sharing –Robust application of competition law, including DG Comp

22 February 2007 Next Steps:  15 February Energy Council  8/9 March European Council  Commission legislative proposals – by the summer?  Follow up to Sector Inquiry – will DG Comp pursue cases? The European Regulators call on Member States to show the political leadership and commitment, and to endorse Commission plans to develop a “3 rd package” of liberalisation legislation as soon as possible

22 February 2007 The Regional Initiatives  Practical projects to bring together all stakeholders  7 in electricity, 4 in gas  Vehicle for change in creating regional energy markets; and a stepping stone towards a single EU energy markets  Move from planning and analysis in 2006 to delivery in 2007  Success depends on: –Continued engagement from market participants –Political backing –Effective management

22 February 2007 Challenges  Political resistance – especially to unbundling –Maintaining momentum of reform is essential  Moving from national to regional to EU markets in parallel to legislation –Coherence  Can regulators deliver? –Strong independent regulation is central to investment; and effective national regulators are central to ERGEGplus

22 February 2007 Prospects? Long way to go…but the glass is half full!

22 February 2007 Promoting choice and value for all gas and electricity customers