Liberalization of Electricity Markets and Public Service Obligations in the Energy Community Rozeta Karova Wolters Kluwer Law & Business
List of Figures List of Tables List of Abbreviations Preface Acknowledgements Introduction xv xvii xix xxi xxiii xxv Parti The Framework 1 Chapter 1 From a Textbook Model to an Incrementally Developing European Model for the Liberalization of Electricity Markets 3 1. The Textbook Model of Electricity Market Liberalization 4 2. Regulation of Electricity Markets before Liberalization: Strong Regulation of a Natural Monopoly 7 2.1. Definition of Regulation 7 2.2. Rationales for Regulation 8 2.2.1. Network Industries: The Case of Electricity 10 2.2.2. The Concept of a Natural Monopoly 11 2.2.3. Regulation of a (Natural) Monopoly 12 2.3. Regulatory Strategies 15 2.4. Regulation of the EU Electricity Markets before Liberalization 18
3. Liberalization of the Electricity Markets in the EU: Compromise between the Member States 19 3.1. The European Policy for Liberalization of Electricity Markets in the EU 19 3.1.1. Defining the Concept of Privatization and Reasons for Privatization 23 3.1.2. Deregulation of the Electricity Industry 25 3.2. Indicators for Liberalization 27 3.3. Introducing Competition in the Electricity Industry 28 3.3.1. Competition in the Wholesale Generation Market 30 3.3.2. Competition in the Retail Supply Market 32 3.4. Change in the Regulatory Strategy: Less Restrictive Regulation of the Remaining Monopolistic Activities 33 4. The Incrementally Developed European Model of Liberalization 37 4.1. The De Facto Liberalization of the European Electricity Markets 37 4.2. The European Model of Liberalization of the Electricity Industry 39 5. The EU Legal Framework 41 5.1. Application of the Treaty Rules to the Electricity Sector 41 5.2. Sector-Specific Legislation 43 5.2.1. Sector Inquiry and the Third Package for Liberalization 45 5.2.2. Overview and Development of the Key Provisions of the Electricity Directive 48 6. First Intermediary Remarks 51 Chapter 2 PSO as a Regulatory Tool to Tackle the Impact of Electricity Market Liberalization 53 1. Sequential Development of the PSO Concept and its Interpretation in Case Law 54 1.1. Change in the Policy of State Intervention in Markets 54 1.2. The Tensions between Conflicting Values and Regulatory Techniques 56 1.3. The Legal Basis for Services in the General Interest and the CJ Case Law 58 1.3.1. Article 37 TFEU and Article 106 TFEU 58 1.3.1.1. Article 37 TFEU 59 1.3.1.2. Article 106 TFEU 60 1.3.1.3. The Energy Monopoly Cases 63 1.3.2. Article 14 TFEU: From the Treaty of Amsterdam to the Lisbon Treaty 65 1.3.3. Article 36 European Charter on Fundamental Rights 67 viu
2. SGEI Seen through the Eyes of the Different Actors in the Liberalization Process: The European Commission, the European Courts and the Member States 68 2.1. The Commission's Documents: How difficult it is for European Definitions to Develop? 68 2.1.1. Services of General Interest 70 2.1.2. Services of General Economic Interest 71 2.1.3. Non-economic Services of General Interest 73 2.1.4. Public Service Obligation 74 2.1.5. The Link between the Public Service Obligation and Universal Service 76 2.2. Public Service Obligations: A Sector-specific Regulatory Tool to Balance Conflicting Values 78 2.3. The EU Legislator: Conditions for PSOs Assessment under Article 3 Electricity Directive 80 2.3.1. Publication of PSO and Article 3(2) Electricity Directive 80 2.3.2. Notification of PSO 81 2.3.3. PSO as a Justification for Derogations from the Electricity Directive 82 2.3.4. Financial Compensation or Granting Exclusive Rights 82 2.4. The Member States Filling in the Gaps: National Solutions for Implementing PSOs 87 2.4.1. Types of PSOs 88 2.4.2. Price of Electricity Supply: Regulated End-user Energy Prices 89 2.4.2.1. End-user Energy Price Regulation in the Member States of the EU: An Overview 90 2.4.2.2. The Commission's View on Regulated Enduser Electricity Prices: Investigations and Infringement Procedures 92 2.4.3. Security of Electricity Supply 95 2.4.3.1. What Is Security of Electricity Supply? 95 2.4.3.2. How Can Security of Supply Be Provided? 99 2.4.4. Security of Electricity Supply in the EU Acquis 99 2.4.4.1. Security of Supply Measures that the Member States Adopt for Ensuring Security of Supply, and the Commission's Position 102 2.5. The Court of Justice Corrective Function: How much Flexibility Remains for Member States? 105 2.5.1. CJ's Interpretation of Regulated End-user Prices as a PSO: Questioning the Speed of the UK-Inspired Commission Policy for Liberalization? 105 IX
2.5.2. Justification of Regulated End-user Prices as PSO: Lessons from the Member States 109 2.5.2.1. Regulated Prices for Vulnerable Customers (Article 3(7) and Article 3(8)) - Is it Allowed as Protection? 109 2.5.2.2. Regulated Prices for All Households and Small Businesses - Justified as a PSO under the Universal Service Provision? 112 2.5.2.3. Regulated End-user Electricity Prices for Medium- and Large size Businesses - also Justified as a PSO? 113 2.5.3. CJ's Interpretation of Member States' Measures Related to Security of Supply 113 2.5.4. Interaction between the Security of Supply Measures and the Establishment of Competitive Electricity Markets 114 2.5.4.1. Assessment under Competition Law 115 2.5.4.2. Assessment under the Electricity Acquis 116 2.5.5. Justification of Measures for Security of Electricity Supply as a PSO: Lessons from Member States 117 3. Second Intermediary Remarks 119 Chapter 3 The Power of the Commission in Implementing the Incrementally Developed European Model of Electricity Market Liberalization in Third Countries 123 1. Export of the European Model to Central and Eastern Europe 124 1.1. The European Union's Policy towards CEE 124 1.2. Regulatory Strategies in CEE 126 1.3. Lessons from Exporting the EU Electricity Acquis to the CEE Countries 127 2. The New EU Policy and Regulatory Strategies for the Liberalization of SEE Electricity Markets 128 2.1. The European Union's Energy Policy towards SEE 128 2.2. The Athens Process: New Policy and Establishment of the Energy Community 131 2.2.1. The Athens Memoranda 132 2.2.2. Treaty Establishing the Energy Community 132 2.3. Regional Initiatives for SEE 136 2.3.1. Benefits from Regional Integration in SEE 137 2.3.2. Regionalization Imposed on the SEE Countries from Outside 138 2.3.3. Open Regionalism and Regional Ownership of Regional Initiatives in SEE 141 2.4. The Rationale behind the Athens Process 142 2.4.1. The Rationale of the EU to Launch the Athens Process 143
2.4.2. The Rationale of the SEE countries 148 2.4.2.1. Benefits from Regional Integration and Establishing a REM 148 2.4.2.2. The EU Membership Perspective 155 2.4.3. Concluding Remarks on the Rationale behind the Athens Process 157 2.5. Regulatory Strategies in the SEE 159 2.5.1. Regulation of the Electricity Industry in Former Yugoslavia 159 2.5.2. Regulatory Strategies for the Liberalization of Electricity Markets in the SEE: Using the Same Tools as in the Old Member States 162 3. Third Intermediary Remarks 163 Part II Analysis of Electricity Market Liberalization in SEE 165 Chapter 4 Implementation of the Incrementally Developed European Model of Electricity Market Liberalization in Third Countries 167 1. What is so specific about the SEE Electricity Markets? 168 1.1. The Problems and Developments of the SEE Countries in the Years of Transition 168 1.2. Difference between the Needs and Expectations of the Developing and Developed Countries 170 1.3. Differences between the SEE and CEE Countries 173 2. Establishing a REM 175 2.1. Preconditions for Establishing a REM 176 2.2. Benefits from the Creation of a REM and Obstacles for Effective Integration 177 2.3. Development of the European ERI 179 2.4. Definition of the SEE REM 182 3. Implementing the European Model - Phase 1: National Reforms as Preconditions for SEE REM 183 3.1. Legislative Reforms 185 3.2. Institutional Reforms 191 3.2.1. Independence and Competences of the NRAs 194 3.2.2. International Cooperation and Regional Institutional Activities 195 3.3. Economic and Structural Reforms: Restructuring and Privatization 196 3.4. Wholesale Electricity Markets in the Contracting Parties 205 3.4.1. Generation Markets 205 3.4.2. TSOs Unbundling 207 3.4.3. TPA and Adoption of Technical Rules 211 XI
3.5. Retail Electricity Markets in the Contracting Parties 211 3.5.1. DSO Unbundling from the Supply and Generation Activities 211 3.5.2. Definition of Traders and Suppliers 216 3.5.3. Licensing and Numbers of Traders and Suppliers 222 3.5.4. Market Opening and Eligibility Threshold 230 4. Implementing the New European Policy for SEE - Phase 2: Market Design and Cross-Border Issues 241 4.1. National Market Designs 242 4.2. Standard Market Design for SEE REM 251 4.3. Cross-Border Issues 253 4.3.1. Inter-TSO Compensation Mechanism (ITC Mechanism) 253 4.3.2. Access Charges 255 4.3.3. Capacity Allocation and Congestion Management: The SEE CAO 255 4.3.3.1. The ERI Approach towards Common Congestion Management 257 4.3.3.2. The Common Congestion Management in the Eight REM: The SEE CAO 259 4.3.3.3. Transparency Requirements 263 5. Outlining the Progress and Identifying the Obstacles in the Liberalization Reforms in the Contracting Parties 263 5.1. Progress in the Reforms at National and Cross-Border Levels 264 5.2. Obstacles to Trade in the SEE REM 265 6. Fourth Intermediary Remarks 267 Chapter 5 Rethinking Liberalization through an Analysis of PSO: Is PSO a Useful Tool to Tackle the Impact of Electricity Market Liberalization in the Contracting Parties? 269 1. Understanding the PSO in the Contracting Parties 270 1.1. Assessment of PSOs in the Contracting Parties under Article 3 Electricity Directive 270 1.2. Defining the PSOs in the Contracting Parties - Are They Clearly Described, Transparent, Non-discriminatory and Verifiable? 271 2. Price of Supply PSO Measures in the Contracting Parties 278 2.1. End-user Energy Price Regulation in the Contracting Parties 278 2.1.1. Legislative Analysis of Tariff Methodologies 278 2.1.2. Customer Categories in the Contracting Parties 291 2.1.3. Regulated Prices, Tariff Evolution and Cross-subsidies in the Contracting Parties 295 2.1.4. Breakdown of Electricity Revenues 299 2.1.5. Relationship Between Tariff Levels and Consumption Patterns 302 xn
2.1.6. Reversibility and Road Maps for Abolishing Regulated Prices: Tariff Reforms 302 2.1.7. Some Summary Remarks on Regulated End-user Electricity Prices 304 2.2. Interaction Between the Regulated End-user Electricity Prices and Opening the Retail Electricity Markets to Competition: How much Discretion Remains for the Contracting Parties after Learning the Member States' Lessons? 305 3. Alternatives to the Regulated End-user Electricity Prices 310 3.1. Energy Poverty and the Affordability Issue 310 3.2. Protection of Vulnerable Customers in the Member States: An Overview 315 3.3. Protection of Vulnerable Customers in the Contracting Parties 317 3.3.1. Definition of Vulnerable Customers 317 3.3.2. Measures for Protection of Vulnerable Customers 320 3.3.3. Concluding Remarks on the Definition and Measures for Protection of Vulnerable Consumers in the Contracting Parties 331 3.4. Customer Protection in the Contracting Parties 332 4. PSO Measures Related to Security of Supply in the Contracting Parties 334 4.1. Security of Supply in the Energy Legislation of the Contracting Parties 334 4.2. Analysis of the Security of Supply Measures in the Contracting Parties 338 4.3. The Interaction Between the Security of Supply PSOs and Opening of the Wholesale Electricity Markets to Competition: Drawing on the Lessons from the Member States 344 5. Fifth Intermediary Remarks 346 Conclusion 349 1. Conceptual Remarks 350 1.1. Recommendations in Relation to Understanding and Defining the PSOs 351 1.2. Proposal for Notification of PSOs 353 2. The Role of the Different Actors in the Liberalization Process 356 3. Recommendation for more Efficient Use of the PSO Tool 360 3.1. Policy Lessons for the Contracting Parties Related to Price of Supply PSO and Proposal for Alternative Measures for Customer Protection 361 3.1.1. Proposals for Identification of Vulnerable Customers 363 3.1.2. Proposals for Measures for Protection of Vulnerable Customers Other than Price Regulation 364 3.2. Policy Lessons for the Contracting Parties in Relation to the Security of Supply PSO Measures 366 Xlll
3.3. Regulated Price of Electricity Supply and SoS Measures as PSOs: Interaction 368 4. Policy Lessons for the EU and the Path Forward for the Contracting Parties 370 Appendices 375 Annex I: Market Participants in the Electricity Markets of the Contracting Parties 375 Annex II: Energy Consumption and Supply, and Installed Capacity to Meet Electricity Demand in the Contracting Parties 382 Bibliography 389 Table of Statutes 403 Table of Cases 413 Energy Community Documents 415 Index 423 xiv