The Energy Package:– The New Regulatory Framework for Europe International Energy Conference, 12 March 2008 David Halldearn Senior Advisor European Affairs OFGEM

2 Why do we need a 3 rd package? How to achieve ‘security, sustainability and competitiveness’? Concerns on energy security – Ukraine gas issue 2006; 2003 and 2006 electricity blackouts Sustainability – climate change concerns now a central driver Competitiveness – no single market despite 2000 Lisbon agenda. Sector Inquiry finds ‘market is not working’

3 Sector Inquiry Findings Findings:  Vertical integration  Lack of market integration (‘regulatory gap’)  High market concentration  Lack of transparency  Possible market sharing/collusion Remedies:  Greater use of competition enforcement powers  Improved regulatory framework:  Unbundling  Filling regulatory gaps  Improved transparency  Addressing market concentration

4 What is the ‘regulatory gap’?  Despite developing regional markets and current EU legislation, existing national markets, and market designs, create a “regulatory gap”  National regulatory systems foster investment and fair trade:  Regulatory certainty over the rules for investment and cost recovery  Strong independent regulators to oversee the market  These essential things do not exist for cross border investments  And many regulators do not have the necessary tools to do the job

5 Lessons learned from national experience Well-designed, competitive markets backed by strong and independent regulation will deliver efficient investment GB facts: Markets investing over £10 bn in new gas import and storage capacity ,000 consumers “switch” every month, leading to some of the lowest domestic prices in Europe 12GW of renewables generation are under proposal Experience shows competitive markets can meet the challenges of: Security of supply: Increased investment in diverse sources Competitiveness: Consumer power driving down prices Sustainability: The efficient transition to a low carbon economy

6 How will the 3 rd package fill the regulatory gap? Subsidiarity: - Build on national frameworks, don’t over- harmonise - EU rules only need to “fill the gap” Accountability - Defined public interest objectives to protect consumer interests Regulatory oversight - Political independence - Predictable, enforceable decision-making - Build on NRAs Co-operation -TSOs to act together and share information where appropriate - Risk of cartels: Unbundling essential Starting point for an EU regulatory framework:

7 Implications of Commission proposals Political interference Stable climate for cross-border investment  Uncertainty leading to less investment / increased costs to consumers Scope EU framework to complement national regimes and “fill the gap”  Confusion in national decision- making Regulatory oversight EU regulatory agency oversees consumers interests  Cartelisation of TSOs IssueIf got right?If got wrong?

8 How does the Third Package Measure Up? RequirementAgencyNational Regulators IndependenceImprovements neededGood PowersImprovements neededGood DutiesGood

9 Conclusion 3 rd package is a good basis to address the regulatory gap Issues remain:  Unbundling is key  Will Regulatory Agency’s powers and independence be sufficient?  What will be the role of TSOs? Competition law will play an important part Action in the interim is needed – we can’t wait for legislation!

Thank you David Halldearn