COMMISSION DECISION. of XXX

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1 EUROPEAN COMMISSION Brussels, XXX [ ](2013) XXX draft COMMISSION DECISION of XXX on the exemption of the Slovakian-Hungarian natural gas interconnector from ownership unbundling rules in Article 9 of Directive 2009/73/EC ONLY THE HUNGARIAN TEXT IS AUTHENTIC EN EN

2 COMMISSION DECISION of XXX on the exemption of the Slovakian-Hungarian natural gas interconnector from ownership unbundling rules in Article 9 of Directive 2009/73/EC ONLY THE HUNGARIAN TEXT IS AUTHENTIC THE EUROPEAN COMMISSION, Having regard to the Treaty on the Functioning of the European Union, Having regard to Directive 2009/73/EC 1 ("Gas Directive"), and in particular Article 36 thereof, Whereas: 1. Procedure (1) On 14 December 2012 Magyar Gáz Tranzit ZRt. ("MGT"), the promoter of the Hungarian section of the Slovakian-Hungarian natural gas interconnector submitted its request to the Hungarian Energy Office (now the Hungarian Energy and Public Utility Regulatory Authority) to exempt the pipeline for 25 years from ownership unbundling rules, in particular from national provisions transposing Article 9(1)(b) and (c) of the Gas Directive (i.e. Article 121/H(1)(b) and (c) of Law no. XL. of 2008). (2) On 29 April 2013 the Hungarian Energy and Public Utility Regulatory Authority ("HEPURA") notified to the European Commission its preliminary decision (hereinafter, "exemption decision" 2 ) exempting MGT from applying the above mentioned ownership unbundling rules. (3) On 22 May 2013, the Commission published a note informing the public of the notification and inviting third parties to send any observations they may have on this subject until 5 June No such observations were received. (4) On 19 June 2013 the Commission requested additional information from HEPURA which was provided on 12 July and 16 July This request for information prolonged the initial two months deadline for the Commission's decision until 17 September in accordance with Article 36(9) of the Gas Directive. (5) On 18 July, the Commission services met HEPURA to discuss the case. 2. Description of the project (6) Once built, the interconnector will be 114 km long and connect the existing Slovakian and Hungarian gas transmission systems. This will be the first interconnection between the two countries. The interconnector will run from Vel'ké Zlievic (Slovakia), cross the Slovakian-Hungarian border at Balassagyarmat (Hungary) and continue through Gödöllő to Vecsés where it will connect to the Hungarian system. It will run some 20 km on Slovakian and 94 km on Hungarian territory. 1 2 OJ L 211 of , p.94. File reference number FEO_02_2013/(FEO-16/2013; FEO-224/2012) EN 2 EN

3 (7) The interconnector will be a 75 bar bi-directional pipeline with a capacity of 5 bcm/a or 14 million m³/day. The interconnector is expected to start operations on 1 January The total investment on both sides of the border will amount to around 150 million Euro. Measured against the total expected import capacity to Hungary in 2015, the interconnector will represent around 15%. (8) The interconnector will be developed by two different transmission system operators ("TSO") on both sides of the border as two separate projects. In Slovakia the owner and developer is the existing gas TSO, eustream a.s., while the Hungarian section is developed and owned by a newly set up company, MGT. (9) MGT's owners are the state owned Hungarian electricity incumbent MVM Magyar Villamos Művek Zrt ("MVM") (49.983%), a subsidiary of the state owned Hungarian development bank MFB Invest Befektetési és Vagyonkezelő Zrt. ("MFB") (49.983%), and the city council of Hévíz (0.034%). MVM is a vertically integrated undertaking involved in the generation, supply and transmission of electricity. It is the largest power generator and wholesaler in Hungary. In addition it owns Mavir Zrt, the operator of Hungary's single electricity transmission system. After acquiring E.ON Földgáz Trade Zrt. and E.ON Földgáz Strorage Zrt it also became the dominant gas importer and provider of storage services Hungary. MGT is jointly controlled by its two major shareholders MVM and MFB. All decisions in the general assembly need to be taken by 90% majority of the votes cast. (10) The interconnector will form an important part of the North-South gas corridor with the Hungarian section benefiting from an EEPR grant of 26.7 million Euros, making up around 20% of the investment costs. 3. History of the project (11) The Slovakian-Hungarian interconnection project was originally agreed upon in June 2009 between eustream and FGSZ ZRt., the operator of the Hungarian high pressure natural gas pipeline system. (12) Since two consecutive open seasons have not attracted sufficient binding interest from shippers, in 2011 FGSZ has withdrawn from the project. The Hungarian government has subsequently mandated OVIT, a construction and maintenance subsidiary of MVM, to take over the project on an interim basis. On 1 January 2012 MGT was established and took over the project from OVIT and has developed it since. 4. The notified decision (13) The notified exemption decision grants MGT an exemption from applying the ownership unbundling rules for a period of 25 years. Namely, the decision grants an exemption from Article 121/H(1)(b) and (c) of Law no. XL. of 2008 (The Hungarian Gas Act) under the following conditions: (a) (b) (c) Members of the Board of Directors or the Supervisory Board of any company of the MVM group engaged in production and trading shall not simultaneously be members of the Board of Directors or the Supervisory Board of MGT; No company is entitled to contract more than 25% of the total available capacity at the import entry point (Balassagyarmat) of the pipeline. HEPURA may grant an exemption from this condition should this lead to the underutilisation of the capacity of the interconnector; MGT shall reorganise its decision-making structure to ensure that all decisions falling within the competence of the General Assembly are adopted by EN 3 EN

4 (d) (e) consensus between MVM and MFB (as the two members with the highest percentage of the capital held); The exemption shall be granted for a period of 25 years from the start date of the operation of the interconnector, i.e. 1 January HEPURA shall review the profitability of the HU-SK pipeline investment every 5 years after the start date of commercial operation. Should HEPURA establish that the investment has paid off, it shall revoke the exemption decision; MGT shall inform HEPURA about: any change in the ownership structure of MGT, the circumstances and results of competitive capacity allocation procedures, and any change that may make the reconsideration of the conditions of the exemption necessary. 5. Assessment of the conditions for an exemption (14) The Slovakian-Hungarian natural gas interconnection project qualifies as a major new gas infrastructure within the meaning of Article 36(1) of the Gas Directive, taking into account the definition of an interconnector in Article 2(17) therein. The interconnector will cross the border of the two countries close to the Hungarian town Balassagyarmat. The sole purpose of the interconnector is to connect the existing gas transmission systems of Slovakia and Hungary. It is a major infrastructure with a length of 114 km and a total investment of 150 million Euros. It will be capable of transporting 5 bcm/a gas towards Hungary. Its transport capacity will make up around 15% of the overall gas import capacity of the country Conditions for an exemption according to Article The investment must enhance competition in gas supply and enhance security of supply Enhancement of competition (15) In HEPURA's view the interconnector will increase the ability of Hungarian market participants to access competitively priced Western European spot gas markets. In combination with the capacity increase of the existing Hungary-Austria Gas pipeline (HAG), the capacity of the Slovakia-Hungary gas interconnector will enable the Hungarian market to be almost entirely supplied from Western European markets. This in turn will assert competitive pressure on Russian gas supplies which are currently higher priced than gas from alternative sources. In the longer term the pipeline will also provide access to gas supplied through the planned LNG terminal in Poland. (16) At the same time the pipeline's beneficial impact on Hungarian gas supplies can only be ensured if it does not strengthen market dominance. Based on the information provided by the notifying authority, the access to the pipeline will be fully regulated providing non-discriminatory and transparent access to all network users. At the same time and in order to avoid reinforcing of existing and supporting the development of new market dominance, HEPURA has provided that no network user can book more than 25% of the total available import entry capacity of the pipeline. (17) The Commission agrees with the HEPURA's assessment that, in particular as the pipeline is not exempted from regulated TPA rules, the regulated access to the network EN 4 EN

5 should be able to provide safeguards that the capacities will be nominated in a nondiscriminative way. However, in view of the competitive situation on the Hungarian market some additional safeguards, such as capacity caps, are necessary. In the Commission's view it is unclear why the condition as formulated in the exemption decision is applied to all network users, without distinguishing between dominant and not dominant market participants. The exemption decision only notes that "This requirement [i.e. the 25% cap] restricts capacity contracting by not only existing operators with dominant position but also all market operators intending to contract capacity. If non-dominant market operators can achieve a market share that is higher than the dominant market share, competition with earlier operators with significant market power will increase." (18) In this respect, the Commission considers that only undertakings with substantial market power should be considered as dominant and thus restricted in their bookings. Limiting the bookings of all the other (non-dominant) undertakings prevents them from maximising their market share and therefore has a negative effect on the competitive process. In addition, the Commission considers that the Hungarian gas supply market consists of several submarkets each with different market concentration. Each relevant submarket (e.g. upstream, retail, wholesale) can be dominated by a different undertaking resulting in more than one undertaking having a dominant position. Consequently, the definition of dominance must ensure that any undertaking individually or collectively having substantial market power on any of the relevant submarkets is considered as a dominant undertaking. (19) The exemption decision provides that in case the application of the capacity cap led to the underutilisation of the pipelines import entry capacity, HEPURA may at the request of the network user grant an exemption from the capacity restriction, subject to conditions, where necessary. The Commission agrees with this consideration provided that an exemption from the cap can only be granted by HEPURA after consulting with the national competition authority and subject, where appropriate, to conditions preserving competition on the gas market in Hungary. In particular, a mandatory gas release programme should be considered, corresponding to the volume of gas which dominant undertakings hold in excess of the cap with that gas offered to the market in an open, transparent and non-discriminatory procedure Enhancement of security of supply (20) HEPURA submits that the interconnector will enhance the security of gas supplies both in Slovakia and Hungary. It will not only give additional access to Western European markets but also open a new transport route diversifying the existing channels of transportation. In addition, the interconnector will be part of a wider system of pipelines allowing gas to be moved along the North-South axis linking markets in Croatia up to Poland. (21) HEPURA also submits that the interconnector will help the overall Hungarian gas system to better comply with the N-1 requirement of Regulation 994/ which foresees that in the event of a disruption of the single largest gas infrastructure element the capacity of the remaining infrastructure shall still be able to satisfy peak gas demand. The pipeline will increase the existing N-1 value by 12 percentage points and enable the overall Hungarian gas system to cover 124% of peak demand. 3 OJ L 295 of , p.1 EN 5 EN

6 (22) On this basis the Commission agrees with the notifying authority that the requirements of Article 36(1)(a) Gas Directive relating to enhancement of security of supply due to the investment are met The level of risk attached to the investment must be such that the investment would not take place unless an exemption was granted (23) HEPURA submits that the pipeline would not be built and operational on time unless the exemption is provided. This is because MGT is the only company (next to FGSZ) in possession of a TSO licence who is willing and also capable of building the interconnector. It has provided proof of sufficient human, technical and financial resources to carry out the project and it has concluded a joint development agreement with the Slovakian TSO, eustream. According to the notifying authority, when assessing the merits of an exemption, the possible involvement of an independent financial investor was also assessed. It was, however, concluded that a buy-out by an independent party cannot realistically be expected at this stage. In addition, the transfer of ownership including the necessary renegotiation of the financial agreements and regulatory procedures would create a risk which in view of HEPURA could endanger the realisation of the project. (24) In order to ensure appropriate governance structures, HEPURA required in its exemption decision that companies belonging to the MVM group and MGT do not share executive and supervisory board members. While the Commission agrees with the need to observe this requirement, it notes that Article 9(1)(d) Gas Directive, requires compliance with it and has an even broader scope, as long as it applies to any "undertaking performing any of the functions of production or supply" and is thus not limited to the MVM group. It furthermore covers not only members of the supervisory board and the administrative board, but also bodies legally representing the undertaking. A derogation from the national provisions transposing Article 9(1)(d) Gas Directive has not been required by the applicant and granted by HEPURA in the exemption decision. It is thus unclear why the above condition is envisaged. The Commission considers that the condition should not be included in the exemption decision, as it unnecessarily restricts the scope of a legal obligation which is not covered by the exemption in the first place and thus would create legal uncertainty. MGT has to fully comply with the national provisions transposing Article 9(1)(d) Gas Directive. (25) In addition, the exemption decision requires MGT to amend its decision-making structures so as to ensure that all decisions falling within the competence of the General Assembly ('GA') are adopted by consensus between MVM and MFB. This is currently not ensured since MGT's statutes provide that the GA has a quorum already when the simple majority of the shareholders are present. This rule could result in MVM making decisions without the consent of MFB in case where MFB is absent from the GA. (26) The Commission therefore agrees with HEPURA's conditions requiring the amendment of MGT's decision making structures The infrastructure must be owned by a natural or legal person which is separate at least in terms of its legal form from the system operators in whose systems that infrastructure will be built (27) The Hungarian section of the Slovakian-Hungarian gas interconnector will be owned by MGT who is independent of and separate from FGSZ, the owner and operator of EN 6 EN

7 Hungary's single gas transmission system. The interconnector is foreseen to connect to this system at Vecsés substation. (28) The Commission therefore agrees with the notifying authority that the requirements of Article 36(1)(c) Gas Directive are fulfilled Charges must be levied on users of that infrastructure (29) The notifying authority submits that MGT has not required an exemption from applying general third party access and tariff rules. The exemption decision states that the users of the pipeline will pay the regulated and generally applicable network fees in Hungary for using that infrastructure. (30) In light of this, the requirement of Article 36 (1)(d) of the Gas Directive is fulfilled The exemption must not be detrimental to competition or the effective functioning of the internal market in natural gas, or the efficient functioning of the regulated system to which the infrastructure is connected (31) The notifying authority submits that exempting the pipeline from ownership unbundling rules is not likely to be detrimental to competition or the effective functioning of the internal market. This is because the pipeline will apply regulated third party access rules and regulated network tariffs. These rules, in conjunction with the foreseen 25% capacity cap, ensure that competition is not distorted. In addition, the exemption decision notes that since MVM has only a minor share on the gas wholesale market it is unlikely that it could foreclose upstream and downstream markets. The potential foreclosure effect is further reduced by the fact that the pipeline only makes up around 15% of the overall Hungarian import pipeline capacities. 4 (32) The Commission notes that in March 2013 MVM has purchased E.ON's Hungarian wholesale and retail trade of natural gas business, including related services such as storage 5. Consequently, MVM will become the number one natural gas provider in Hungary, with a market share of 60-65% on wholesale gas markets next to its existing dominant position on the electricity market 6. It can be expected that its dominance as an integrated energy company controlling important upstream, generation, storage and transportation assets and as a selected vehicle of implementing governmental energy policy 7 will only grow further in the future. (33) The Commission also notes that although the interconnector makes up only 15% of the overall gas import capacities in Hungary it is capable of shipping 5 bcm/a gas from competitively priced Western European markets (which is a bit less than half of the total 2012 gas consumption in Hungary) making it to an important gas infrastructure. Even in the presence of regulated network access rules, the control over the technical and market operation of such an asset by a dominant player with commercial interests across gas and electricity markets can lead to the foreclosure of the upstream market. (34) It is therefore important that additional corrective measures are in place ensuring that the allocation of the capacities and the operation of the pipeline take place independently from MVM's business interests. The measures should foresee that a certified transmission system operator not controlled by MVM (e.g FGSZ as the Page 14 of the exemption decision. Page 15, National Energy Strategy EN 7 EN

8 operator of the overall Hungarian gas transmission system) handles capacity allocations including nominations and matching on the pipeline. That transmission system operator shall also be responsible for the operation of the pipeline including balancing and maintenance, as well as making decisions in relation to the enhancement of the pipeline. The Commission considers that such measures would also be beneficial from a wider market perspective ensuring that shippers continue facing a single capacity booking and nomination procedure when using the Hungarian transmission system. This would ensure that transaction costs are not unnecessarily increased and market efficiency not reduced through the separate operation of the pipeline. HAS ADOPTED THIS DECISION: Article 1 The European Commission requests the Hungarian Energy and Public Utility Regulatory Authority to amend in accordance with Article 36(9) of Directive 2009/73/EC its exemption decision notified to the Commission on 29 April 2013, as set out in the subsequent articles. Article 2 The condition that members of the Board of Directors or the Supervisory Board of any company of the MVM group engaged in production and trading shall not simultaneously be members of the Board of Directors or the Supervisory Board of MGT should be deleted from the exemption decision. Article 3 The condition in relation to setting limits for capacity bookings as referred to in point 2 of the exemption decision shall: (a) (b) (c) provide that any undertaking which holds a dominant position, within the meaning of Article 102 TFEU, in any relevant product market for the supply of gas in Hungary, or on the upstream market of supplying gas to the Hungarian market, shall not be allowed to book more than the cap foreseen in the exemption decision (i.e. 25% of the total capacity at the import entry point of the interconnector). For the calculation of the capacity cap, undertakings belonging to the same group shall be considered together, 8 not set a capacity cap for non-dominant undertakings, provide that, where due to insufficient interest by other parties, the capacity cap causes existing capacity to remain idle, an exemption from the cap can only be granted by HEPURA after consulting with the national competition authority and subject, where appropriate, to conditions preserving competition on the gas market in Hungary. In particular, a mandatory gas release programme should be considered, where the cap can be exceeded only on condition that the party concerned offers the volume of gas relating to the capacity it holds in excess of the 25% cap to the market in an open, transparent and non-discriminatory procedure which is subject to HEPURA's approval. The gas volume release shall be accompanied by a corresponding capacity release. 8 For the purpose of this decision undertakings belonging to the same group are defined as all undertakings controlled, directly or indirectly, by the same undertakings or persons. EN 8 EN

9 Article 4 The exemption decision shall provide the condition that capacities on the Hungarian section of the interconnector are not allocated by MGT but by a certified transmission system operator not controlled by MVM within arrangements generally used to allocate capacities on the Hungarian system. In addition, that transmission system operator should be responsible for: (a) (b) (c) (d) (e) collecting fees for the use of the pipeline including auction revenues if applicable, for handling nominations and matching on the pipeline, for technical maintenance of the pipeline, for making decisions in relation to the enhancement of the pipeline s capacity, and for system operation including balancing, metering and reconciliation of system users' accounts. The exemption decision shall also ensure that, should the fees referred to in point (a) not be sufficient for that transmission system operator to comply with its obligations under this article, it is entitled to collect additional fees from users of the overall transmission system in order to make up for the difference. Article 5 In line with Article 36(9) of Directive 2009/73/EC, the Commission s approval of an exemption decision shall lose its effect two years from its adoption in the event that construction of the infrastructure has not yet started, and five years from its adoption in the event that the infrastructure has not become operational unless the Commission decides that any delay is due to major obstacles beyond control of the person to whom the exemption has been granted. Article 6 This Decision is addressed to Hungarian Energy and Public Utility Regulatory Authority. Done at Brussels, For the Commission Member of the Commission EN 9 EN