1. www.morganlewis.com VII Kazenergy Eurasian Forum: The legal aspects of forming a single energy market MARTIN STEWART-SMITH Partner, Energy Transactions, Morgan Lewis 2 October 2012

2. © Morgan Lewis Contents 1.Single Energy Markets 2.Common issues experienced 3.Specific issues experienced in Latin America 4.Specific issues experienced in the EU 5.Drawing on the EU/Latin America Markets 6.Possible Issues specific to a CES Integrated Market 2

3. © Morgan Lewis Integration of energy markets around the world: –Europe the “third package” for gas and electricity access to infrastructure – e.g. UIOLI and rTPA to LNG terminals elimination of destination clauses the “All Island Electricity Market” –Asia the development of the Central Asia South Asia Regional Electricity Market (CASAREM) 1. Single energy markets – gas and power lead the way? 3

4. © Morgan Lewis Integration of energy markets around the world: –Africa the West African Power Pool Southern African Power Pool West African / Chad Cameroon Pipeline –Latin America the SIEPAC project in Central America. 1. Single energy markets – gas and power lead the way? 4

5. © Morgan Lewis Policy Framework Legal Framework Treaty level intergovernmental agreements under the Vienna Convention Secondary cooperation agreements – for example, regulatory coordination Commercial cooperation between national champions / national energy companies Infrastructure versus Molecules / Electrons Infrastructure does not guarantee molecules / electrons will flow Inadequate infrastructure or access to it guarantees nothing flows Key Elements? 5

6. © Morgan Lewis Temptation to protect national interests rather than pursue common regional interests: LatAm – Argentina determined its internal consumption a priority –Venezuela and “resource nationalism” EU – First two legislative packages for gas and electricity failed in providing for non-discriminatory network access Effective integration will restrict a state’s freedom in determination of governing rules and policies Economic barriers – trade conflicts often due to different pricing policies Political barriers – diplomatic conflicts and tensions 2. Common issues experienced 6

7. © Morgan Lewis Institutional barriers Lack of, or insufficient authority, of either international (regional) or national regulatory bodies established to execute and enforce joint decisions / agreements Governments reluctant to apply certain resolution/directives, while international (regional) authorities do not have the leverage to force transposition Regulatory barriers National regulatory bodies sometimes contribute to barriers to integration Conflicting regulatory policy objectives 2. Common issues experienced cont. 7

8. © Morgan Lewis The governing and unification of national laws and regulation is one of the biggest legal issues faced. –In 2007 34 infringement procedures launched against 20 EU states for violation and non-transposition of EU Directives –EU Regulation used as they have “direct effect” in national law Certain objective pre-conditions, such as existing legal frameworks at the national level impedes compromise –EU and LatAm experienced significant variation of regulations at national level e.g. concerning prices and pricing policies –The Cliff Edge Problem 2. Common issues experienced cont. 8

9. © Morgan Lewis Insufficient infrastructure. Need for significant investment – profitability of integration projects remains questionable The economies of the states concerned are less amenable to regulatory changes / impact. 3. Specific issues experienced in Latin America 9

10. © Morgan Lewis Issues relating to unfair competition: –Issue of transparency –Long-term gas transmission and downstream contracts often close access to downstream markets –Access to gas storage facilities, the availability of which is limited and often in the hands of incumbent companies Member states slow to implement relevant EU Directives into national law The cost of the “national champion” 4. Specific issues experienced in the EU 10

11. © Morgan Lewis Discriminatory access to networks due to the integration of Transmission System Operators and Supply Companies: –Non-discriminatory access to information could not be guaranteed and it could not be guaranteed that TSO’s did not release market sensitive information to the supply business –Original legislation did not remove incentive for discrimination with respect to third party access –Vertically integrated network operators had no incentive to develop/invest in the network 4. Specific issues experienced in the EU cont. 11

12. © Morgan Lewis EU – distinct institutional direction – member states play the leading role in integration of initiatives Latin America – economies orientated around raw-materials As both factors common to the CES, its possible to draw on experiences and proposed solutions. Solutions to Technical/Economic solutions –Attract private sector interest to integration projects –Formation of joint reservoirs/ reserves (as in LatAm) –Diversification of resources 5. Drawing on the EU/Latin America Markets 12

13. © Morgan Lewis Regulatory solutions: –Creation of a single legislative base/framework Both regulations concerning interrelations between member states and relations concerning states not in the integrated market This would necessitate the execution of multilateral (involving all member states) rather than bilateral agreements 3 rd Energy Package of the EU attempts to mitigate the impact of existing barriers via specific mechanisms: –Non-discriminative access to networks (e.g. through unbundling) –Harmonisation of the activities of market participants (e.g. The creation of European Networks of TSOs for electricity and gas) Harmonisation of the activities of market participants (e.g. The creation of European Networks of TSOs for electricity and gas) 5. Drawing on the EU/Latin America Markets cont. 13

14. © Morgan Lewis –Creation of a single administrative block of regulatory authorities on both international (regional) and national levels. With powers to implement and enforce a single legal framework and agreements achieved by the states The 3 rd Energy Package of the EU provided for the creation of an EU- level regulatory body – Agency for the Cooperation of Energy Regulators Functional independence of national regulatory authorities (NRAs), was also ensured by the EU, by granting NRAs power over: –Third party access to networks / Access to gas storage –Balancing mechanisms –Market surveillance –Cross border issues 5. Drawing on the EU/Latin America Markets cont 14

15. © Morgan Lewis CES specific issues: –Non-ratification of Energy Charter Treaty by Russia and Belarus –Outstanding bilateral treaties, between the CES countries will need to be dealt with before effective legal framework can be put in place –Russia and Kazakhstan are oil/gas producers –Price of energy in Kazakhstan much lower than that of Russia 6. Possible Issues specific to a CES Integrated Market 15

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