REGULATORY: EU Competition Law: EU Internal Energy Market Legislation Not Fully in Force By Suzanne Rab

by King & Spalding
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The Electricity and Gas Directives of the EU’s Third Energy Package were required to be implemented in EU national legislation by March 3, 2011 (with a year’s grace period until March 3, 2012 for unbundling rules). In our August 2011 newsletter article “The EU's Third Energy Package: Reforms Kick-In but Member State Implementation Lags Behind,”[1] we reported on the status of implementation at that date. On April 26, 2012, the European Commission (Commission) sent eight “reasoned opinions” to five Member States following their failure to implement the new rules on further opening of the EU’s energy markets.

The Story so Far – Background on the Third Energy Package

The Directives concerned comprise legislation relating to the EU’s Third Energy Package, namely:

  • Directive on common rules for the internal market in electricity (2009/72/EC); and
  • Directive on common rules for the internal market in gas (Directive 2009/73/EC).

The Third Energy Package contains provisions for the effective functioning of the EU’s energy markets, including new rules on unbundling of vertically integrated operators, rules strengthening the independence and powers of national regulators and rules that are designed to improve the functioning of retail markets for the benefit of consumers. The requirements of the Third Energy Package apply to any entity that operates in the EU, irrespective of its incorporation or headquarters.

Five Member States Not Fully in Line

On February 28, 2011, the European Commissioner for Energy, Gunther Oettinger, made clear that the March 2011 date was “not an absolute deadline.” However, the Commission has brought increasing pressure to bear on the Member States to speed their implementation efforts.

Article 258 of the Treaty on the Functioning of the European Union (TFEU) gives the Commission the power to take legal action against a Member State that does not comply with its obligations under EU law. The infringement procedure begins with a request for information to the Member State concerned. This must be answered within a specified period, usually two months. If the Commission is not satisfied with the information provided and decides that the Member State in question is failing to fulfil its legal obligations, the Commission may then send a formal request to comply with EU law (a “reasoned opinion”). This will call on the Member State to inform the Commission of the measures taken to comply within a specified period, usually two months.

At the time of writing, Finland, Sweden, and the United Kingdom have not provided information to the Commission of all the necessary measures that are required for full implementation of the Electricity and Gas Directives. Austria and Estonia have not informed the Commission of full implementation of the Electricity Directive. Consequently, last month the Commission sent opinions to these five Member States urging them to comply with their legal obligations. This step follows opinions sent to eight Member States (Bulgaria, Cyprus, Estonia, Luxembourg, Netherlands, Romania, Slovakia, and Spain) in February 2012, which at that time had not complied.

The Commission has stated that it is also assessing measures notified by other Member States which have only partially implemented the Directives. The Commission has indicated that it will decide on next steps in the coming months.

Ultimate Recourse – Court of Justice

The five Member States that received reasoned opinions in April now have two months to respond. If a Member State fails to comply with EU law, the Commission may then decide to refer the Member State to the Court of Justice of the EU. However, in around 95 per cent of infringement cases, Member States comply with their obligations under EU law before they are referred to the Court. If the Court rules against a Member State, the Member State must then take the “necessary measures” to comply with the judgment.

In cases of Member States that have failed to implement Directives within the deadline agreed by the EU’s Council of Ministers and the European Parliament, the Commission may request the Court to impose a financial penalty on the Member State the first time the Court rules on the issue. This possibility was introduced by the Lisbon Treaty. If, despite the first ruling, a Member State still fails to ensure compliance, the Commission may open another infringement case under Article 260 of the TFEU. Only one written warning is allowed before referring the Member State back to the Court.

If the Commission does refer a Member State back to the Court, the Commission can propose that the Court impose financial penalties on the Member State based on the duration and severity of the infringement and the size of the Member State concerned. Financial penalties comprise two elements: (a) a lump sum depending on the time elapsed since the original Court ruling; and (b) a daily penalty payment for each day after a second Court ruling until the end of the infringement. Financial penalties are proposed by the Commission and the Court may modify these amounts in its ruling.

The Commission has shown that it is prepared to refer Member States to the Court if they drag their heels in implementing EU energy legislation. For example, Directive 2002/91/EC imposes a requirement that when buildings are constructed, sold, or rented, energy performance certificates must be issued by a qualified expert. Italian legislation does not apply this requirement comprehensively and contains certain exceptions. Despite several formal letters from the Commission, Italy is reported to have not taken any measures to guarantee the requisite regular inspections, which include an assessment of the system efficiency of air-conditioning units. The Commission has now decided to refer Italy to the Court for its failure to implement the Directive.

“To Much, Too Fast” – Is the Legislation What’s Needed and Deliverable on Time?

There is clearly plenty of work left to do in order to complete the EU internal energy market. The implementation of the Third Energy Package is a starting point only. Beyond that, there is in particular a need to harmonise the market and network operation rules, enhance investments in infrastructure, enforce EU competition law and State aid rules, and promote regional initiatives.

There are also differences in the pace and extent of market opening in the electricity and gas markets and between the older and newer Member States. Romania, for example, is reported to be struggling to implement the Package where liberalisation in the electricity and gas markets is still incomplete and even though the necessary legislation has been passed.

Against this background, questions have been asked by businesses as well as politicians as to whether the legislation is well-conceived and the timetable realistic. Opponents raise the perennial tension between the Commission exercising its supra-national powers and Member States’ desires for some autonomy to organise their markets in circumstances where there is no consensus as to what is the ‘right’ energy mix or policy. Within the EU itself, there are significant divergences in the energy market, regulatory, and political landscape between the Member States that make the creation of a truly unified market a Herculean task. For example, France derives about 80 per cent of electricity from nuclear yet Germany has all but abandoned a nuclear agenda.

Another challenge relates to the extent that national regulatory authorities and, ultimately, the Commission, will allow exemptions from certain onerous requirements of the Third Directives, including third party access and unbundling. Such exemptions are not given lightly but can be justified in the case of “major new gas infrastructure” and “interconnectors.” In particular, the level of risk attached to an investment must be such that without an exemption the project would not be undertaken.

Whatever the future holds, it is clear that the speed of implementation and Member State readiness to abide by both the letter and the spirit of the Directives are not the only challenges to creation of the EU internal market. Market participants eyeing up opportunities in Europe can only urge the Commission and Member States to honor the Package not only as an aim in itself but also as a means to make the electricity and gas markets in the EU more efficient and competitive.
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[1] The EU's Third Energy Package: Reforms Kick-In but Member State Implementation Lags Behind, available at, www.kslaw.com/library/newsletters/EnergyNewsletter/2011/August/article1.html.


  Suzanne Rab
  London
  +44 20 7551 7581

  srab@kslaw.com
  View Profile »

 

 

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