The European regulatory framework and the role of European Energy Regulators in creating an internal energy market Eric DYEVRE Annual conference of Russian energy regulators Moscow, 1 April 2010

1.The European regulatory framework 2.Independence, duties and powers of the European energy regulators 3.The third energy package

3Annual Meeting of Russian Energy Regulators, Moscow, April 1 st 2010 Advantages of a European internal energy market Aim of a EU internal energy market: offering consumers real freedom to choose their energy supplier and benefit from fair prices, by removing historical (production and supply) monopolies and creating fair competition between companies at European level improving security of supply by encouraging investment in facilities, as well as diversification of transport routes and energy sources contributing to sustainable development, notably by enabling suppliers of electricity from renewable energy sources to enter the market

4Annual Meeting of Russian Energy Regulators, Moscow, April 1 st 2010 The European legal framework A historical outline (1/3) The “first energy package” ( ): a regulatory basis comprising a minimum of common rules for the opening-up of European electricity and gas markets Key principles: Freedom of establishment of producers Freedom of choice of energy supplier Unbundling of activities Third party access to networks / transmission grids Obligation of result but choice of means to the discretion of the Member States

5Annual Meeting of Russian Energy Regulators, Moscow, April 1 st 2010 The European legal framework: A historical outline (2/3) The “second energy package” (2003): towards an effective harmonization process in order to improve the functioning of European energy markets Two directives concerning the internal market in electricity and natural gas This package has been completed by two regulations concerning conditions for access to the natural gas transmission networks and electricity cross-border exchanges The current European legal framework comprises 2 directives and 2 regulations

6Annual Meeting of Russian Energy Regulators, Moscow, April 1 st 2010 Sustainability 2000 Liberalization Security of supply 1 st electricity directive 2nd gas & elec. directives 1 st green paper towards a European strategy for the security of energy supply Directive on security of supply Green and white papers on renewable energy sources 1 st gas directive Directive promoting RES based power generation 2001 Green paper for a secured, competitive and sustainable European energy strategy Berlin summit: call for a new industrial revolution 2008/ rd legislative package Revision of the Directive on security of supply Climate- energy legislative package The European legal framework: A historical outline (3/3)

1.The European regulatory framework 2.Independence, duties and powers of the European Energy regulators 3.The third energy package

8Annual Meeting of Russian Energy Regulators, Moscow, April 1 st 2010 Independence, duties and powers of the regulators: First energy package requirements ( ) Member States were required: to designate an independent authority to settle disputes between energy undertakings, in particular concerning contracts, negotiations and refusal of access (regulated or negotiated third party access to transmission networks) or refusal to purchase (single buyer model) Authorities had to be provided with a right of access to the accounts of generation, transmission and distribution undertakings to « create appropriate and efficient mechanisms for regulation, control and transparency… »

9Annual Meeting of Russian Energy Regulators, Moscow, April 1 st 2010 Independence, duties and powers of the regulators: Second energy package requirements (2003) Member States were required to establish regulatory authorities which are independent from the industry to monitor and deal with: the management of interconnections and possible congestions and, globally, the way in which system operators fulfill their missions account unbundling access to national networks and related contracts transmission and distribution tariffs evaluation of the level of transparency and competition on the markets dispute settlement publication of an annual activity report

10Annual Meeting of Russian Energy Regulators, Moscow, April 1 st 2010 Evolution of the framework for the cooperation of European Energy Regulators Set up on a voluntary basis in 2000, the Council of European Energy Regulators (CEER) is the association through which regulators meet regularly within specialized working groups focused on electricity, gas, consumers, financial services… “Second energy package” requirements (2003): Regulators to contribute to the development of the internal market and of a level playing field by cooperating with each other and with the Commission in a transparent manner. According to the directives, the European Commission has set up a European Regulators Group for Electricity and Gas (ERGEG) with a mission of advising and assisting it in its action to consolidate the internal market and of encouraging co-ordination among national regulators

11Annual Meeting of Russian Energy Regulators, Moscow, April 1 st 2010 An example of what European Energy Regulators do: The Regional Initiatives (1/2) In 2006, ERGEG launched the Regional Initatives establishing 7 regional electricity and 3 regional gas markets in Europe Every region has its own priorities, action plan and agenda so as to: Identify existing barriers to entry / obstacles to regional market integration Propose concrete improvements, with detailed timetables, to remove these obstacles Implement those practical improvements at regional level ERGEG carefully monitors the coherence of rules specific to each region so as to ensure further convergence towards a European single market

12Annual Meeting of Russian Energy Regulators, Moscow, April 1 st 2010 Electricity Regional Initatives Gas Regional Initatives An example of what European Energy Regulators do: The Regional Initiatives Process (2/2)

1.The European regulatory framework 2.Independence, duties and powers of the European Energy regulators 3.The third energy package

14Annual Meeting of Russian Energy Regulators, Moscow, April 1 st 2010 Objectives of the third package The third energy legislative package adopted in June 2009 consists of 5 texts: Two directives concerning the internal market in electricity and natural gas Two regulations concerning conditions for access to the natural gas transmission and electricity cross-border networks A regulation establishing an Agency for the Cooperation of Energy Regulators (ACER) Key objectives Harmonize and reinforce the independence and the competencies of the National Regulatory Authorities (NRAs) Ensure a non discriminatory network access by TSO unbundling and a better TSO coordination at European level Intensify investments in electricity and gas infrastructure Improve transparency and market functioning Reinforce consumer protection Coordinate actions of NRAs at European level via the creation of an ACER

15Annual Meeting of Russian Energy Regulators, Moscow, April 1 st 2010 General objective of NRAs Promoting a competitive, secure and environmentally sustainable internal energy market, an effective market opening-up and ensuring appropriate conditions for the effective and reliable operation of electricity and gas networks, taking into account long-term objectives

16Annual Meeting of Russian Energy Regulators, Moscow, April 1 st 2010 Harmonizing and strengthening the independence and the competencies of the NRAs Member States shall designate a single NRA at national level and: Strengthen their independence: Legal distinction and functional independence from any private or public interest Autonomy in the implementation of the budget Adequate human and financial resources Strengthen their competencies and powers: Control of TSO and DSO activities : certification of TSOs, approval and modification of congestion management and cross-border capacity allocation… Approval of transmission and distribution tariffs or their methodologies, possible inclusion of incentive regulation Monitoring of TSO investment plans Market monitoring, adoption of measures to promote effective competition (Virtual Power Plants, Gas release...) Contribution to consumer protection: access to data, implementation of Annex A of the directives Cooperation with ACER and other NRAs on cross-border issues

17Annual Meeting of Russian Energy Regulators, Moscow, April 1 st 2010 Strengthening the independence of TSOs Member States have the choice between 3 unbundling options in electricity and gas: Ownership Unbundling (OU) : Vertically integrated undertakings (VIUs) dispense their shareholding in electricity and gas transmission activities Independent System Operator (ISO) : VIUs are split into two entities, one entity holding shares and another entity in charge of the operation, the development and the maintenance of the network Independent Transmission Operator (ITO) : Reinforcement of the existing legal and account unbundling rules (stricter provisions concerning TSO independence and deontology clauses) Stricter requirements to ensure DSO independence

18Annual Meeting of Russian Energy Regulators, Moscow, April 1 st 2010 Promoting regional cooperation Affirmation of the role of the Regional Initiatives: NRAs shall take appropriate measures to develop “competitive and properly functioning regional markets in view of the achievement of a competitive, secure and environmentally sustainable internal energy market” Furthermore, “Member States as well as the regulatory authorities shall cooperate with each other for the purpose of integrating their national markets at one or more regional levels, as a first step towards the creation of a fully liberalised internal market” Creation of an Agency for the Cooperation of Energy Regulators with the purpose of “assisting the NRAs in exercising, at Community level, the regulatory tasks performed in the Member States and, where necessary, to coordinate their action.”

19Annual Meeting of Russian Energy Regulators, Moscow, April 1 st 2010 ACER governance arrangements Administrative Board (AB) 9 members: 2 appointed by the European Commission (EC), 2 by the European Parliament (EP) and 5 by the Council Tasks: all administrative and budgetary matters (budget, financial regulations, internal rules) Board of Regulators (BoR) 27 NRAs and one non-voting representative of the EC Tasks: all regulatory matters Director Appointed by the AB following a favourable opinion of the BoR Tasks: management and representation of the Agency Board of Appeal 6 members Any person and NRA may appeal against a decision addressed to this person or of individual concern to that person

20Annual Meeting of Russian Energy Regulators, Moscow, April 1 st 2010 ACER duties and powers (1/4): Tasks as regards NRAs In order to ensure that national regulatory tasks are coordinated at European level, ACER may: Make non-binding recommendations to facilitate the cooperation of NRAs (e.g. in order to share good practices), and, where it considers that binding rules on such cooperation are required, make recommendations to the European Commission Issue an opinion on whether a decision taken by a NRA complies with the third package requirements, upon request by another NRA or the European Commission Take individual decisions on technical issues (exemption decisions, regulatory decisions which may include the terms and conditions for access to, and operational security of, cross-border infrastructure), concerning cross-border infrastructure

21Annual Meeting of Russian Energy Regulators, Moscow, April 1 st 2010 ACER duties and powers (2/4): Tasks as regards the cooperation of TSOs In order to ensure that the cooperation between the TSOs is efficient, non- discriminatory and transparent, ACER shall: Provide opinions: to the Commission on the draft statutes, list of members and draft rules of procedure of the European Network of Transmission System Operator (ENTSOs) for electricity and gas to the ENTSOs on their draft annual work programmes and on their draft 10 years Community-wide network development plans Develop non-binding framework guidelines on cross-border issues, according to the priorities defined by the European Commission after stakeholders’ consultation Provide a reasoned opinion on the network codes to be developed by the ENTSOs in accordance with the framework guidelines Monitor the execution of the tasks of the ENTSOs, including the implementation of the network codes and of the Community-wide network development plans

22Annual Meeting of Russian Energy Regulators, Moscow, April 1 st 2010 ACER duties and powers (3/4): Other monitoring tasks The Agency shall publish a monitoring report on the internal electricity and gas markets, identifying any barriers to the completion of the internal energy market Focus on retail prices, access to the network including access of electricity produced from RES and respect of consumer rights This monitoring task will be done in close cooperation with the European Commission and the NRAs The Agency may submit an opinion on possible measures to remove existing barriers to the European Parliament and to the Commission

23Annual Meeting of Russian Energy Regulators, Moscow, April 1 st 2010 Indicative time schedule for the application of the third energy legislative package Member States must transpose the two directives concerning the internal market in electricity and natural gas into national law by March 3 rd, 2011 The two regulations concerning conditions for access to the natural gas transmission and electricity cross-border networks will be applicable as of March 3 rd, 2011 ACER will be operational as of March 3 rd, 2011

Thank you for your attention!

25Annual Meeting of Russian Energy Regulators, Moscow, April 1 st 2010 CEER and ERGEG Structure in 2009