Ms. Erofili Pontikaki has an LLM in Oil and Gas Law from the University of Aberdeen where her main research theme was the Evaluative study of the Internal European Gas market. In addition she holds a Master 1 in Business Law from the University Panthéon-Assas Paris II.As a part-time international associate at Josh and Mak, she contributes to our Energy related projects frequently.
A critical and evaluative study of the internal gas market (EU)
Date of Publishing :2010
Updates : None so far.
This study highlights the evolution of the Internal gas market from 1998 till nowadays under the influence of the third legislative package for energy adopted on the 13th of July 2009. The essential points concern the understanding of essential procedures that promoted competition while satisfying security of supply exigencies.
As a conclusion it has been demonstrated that competition has been reinforced by the mechanisms of third party access and unbundling. Security of supply has been assured since long term contracts can always find a place in the EU law, new investments are encouraged by attributing legal “gifts” and diversification of supply is busted by cross border cooperation
Table of Contents
- 1. Legal origins of the liberalisation.. 7
- 2. Economic origins of the liberalisation.. 8
- 3. Political and strategic reasons contributing to the liberalisation.. 8
Section 2: The liberalised European gas market as a tool in order to fulfil the EU’s major expectations in the energy sector
- 1. Creation of a unique market. 9
- 2. Better quality of service through competition.. 9
- 3. Reinforcing the security of energy supply. 10
- 4. Respect the protection of the environment. 10
Section 2: The adoption of “regulated” access tariffs to the network in all countries, in order to force the tariffs down to cost effective levels – the innovation of the second legislative package. 12
- 1. The publication of the access to networks tariffs. 14
- 2. The approval of the access to networks tariffs by a national regulatory authority. 15
- 1. The utility of cost reflective tariffs banished in case of ownership unbundling as introduced by the third gas directive 18
- 2. The utility of cost reflective tariffs assured in case of sole legal unbundling. 18
- 1. The introduction of legal unbundling for transmission and distribution services. 20
- 2. The introduction of management unbundling for transmission and distribution services in the gas sector 20
- 1. The choice of full ownership unbundling. 23
- 2. Ownership unbundling is not mandatory by the means of directive 2009/73/EC.. 25
- 1. The mitigated impact of liberalisation on long term contracts -the UK gas market example 28
- 2. The utility of long term contracts as a risk guarantee for new investments in the newly established EU Internal market 29
- 1. The introduction of an exception on third party access application by directive 2003/55/EC 31
- 2. Infrastructure exceptions granted under more stringed conditions by directive 2009/73/EC-the introduction of a capacity allocation procedure. 32
- 1. Absence of effective cross border cooperation in order to promote and facilitate diversification of supply in case of supply crisis in the second legislative gas package. 34
- 2. The introduction of cross border solidarity in order to promote diversification of supply 34
The representative of a major energy company has said that when searching for oil if you are lucky you find oil, if you are unlucky you find nothing and if you are very unlucky you find gas. By saying that he underlined the difficulties related to the transportation of gas that made it very costly -since excessively expensive infrastructures needed to be constructed- and thus uninteresting as a fuel. Hopefully the role of gas as an energy source has profoundly changed.
The attraction of gas is found in multiple sources. First of all significant undeveloped reserves of stranded gas are increasingly being viewed as the solution to the demand for secure, long term, supplies of energy and this is as much the case for emerging economies as it is for historical gas producing economies whose domestic reserves bases are in decline. Secondly, concerns about climate change, and the need to replace coal-fired power generation capacity with cleaner fuels such as gas has also given more enthusiasm regarding the development of gas (or LNG) production and consumption projects.
Energy markets worldwide are concerned increasingly with issues of security of supply and of “cleaner” energy. Under these circumstances the European Union (EU) cannot be indifferent to the advantages of gas. It was identified as a strategic resource in the EU Green Paper on Energy Supply Security of 2001, mainly because of its increased use in power generation, low carbon content and environmental advantages. Furthermore the EU has an ideal geographic position since major gas producing countries are in its vicinity (Russia, Middle East and Algeria). This is a not negligible advantage since the transportation of gas is always very costly and that just permits the creation of regional gas markets and not an international gas market.
Since gas has become an attractive source of energy for the EU, the emergence of a fully operational internal gas market has been considered elementary. The EU has proceeded to the deregulation of the gas market since 1998. This procedure has been undertaken in order to ensure security of energy supply and to enforce the environmental policy of the community while promulgating a competitive market that promotes the rights of the consumers.
The particularities of the European Gas market haven’t permitted an entirely satisfactory result at this moment. This is transparent by the statement made in the proposal for a directive of the European parliament and of the council amending directive 2003/55/EC: “at present, the right to sell gas in any Member State on equal terms and without discrimination or disadvantages cannot be guaranteed to any company in the Community. In particular, non-discriminatory network access and an equally effective level of regulatory supervision in each Member State do not yet exist, since the current legal framework is insufficient.” Proposal for a directive of the European parliament and of the council amending Directive 2003/55/EC concerning common rules for the internal market in natural gas. However, new efforts such as the third package of legislation concerning the internal energy market, that has been adopted on the 13th of July 2009, give confidence regarding the evolution of the European gas market and imply that the correct functioning of such a market is just a matter of time.
This dissertation will be a constructive critic of the liberalisation of the Internal European Gas Market. The central question guiding this paper is related to the utility of a gas producer country market model used over a non gas producer market. The question is even more constant since the reserves of natural gas are diminishing both in UK and USA countries that have been used as role models for the internal European gas market. Soon these two countries where gas market is entirely deregulated will be concerned with the same supply problems that concern continental Europe. Of course the utility of the deregulation will not be in stake by this study. It is understandable that even if in some European countries – such as France – the former monopoly in the gas market has revealed very functional, under the influences of internationalisation and the constant demand of energy security, Europe needed a consolidated and homogenous gas market.
The evaluation of the European gas market will be achieved by examining the major aspects of this market under the highlights of the three legislative packages adopted by the EU from 1998 till lately on the 13th of July 2009. The two essential points that will be presented and analysed concern the understanding of essential procedures that promoted competition (Part I) while satisfying security of supply (Part II) exigencies within the internal gas market.
The liberalisation of the European gas market has legal (§1), economic (§2) and political-strategic origins (§3).
The internal energy market has the same origins as the internal market in general. These are the articles 30, 37 and 90 of the Treaty of Rome and two principles of European law: the principle of competition and the free circulation of goods in the EU. The article 30 has been fundamental for the creation of the internal market as a whole. The gas market been just one part of the internal market is consequently equally influenced by the dispositions prohibiting restriction on imports. The article 37 is the primary legal basis of European law banishing national monopolies and replacing them by the internal market and on this specific subject by the internal gas market. Finally under the dispositions of the article 90: “the development of trade must not be affected to such an extent as would be contrary to the interests of the Community.” In order to achieve that Member States shall not maintain or enact measures that are contrary to the treaty. In addition public undertakings or privileged national undertakings shall respect the rules of EU’s competition law.
Monopolists seek to maximize their profits and as a result they are raising their tariffs. Since no competition exists we are in presence of a dominant market position. Correlatively monopolies seek to minimise their costs. As a consequence monopolies are not stimulated to develop their efficiency. The customers’ rights are not taken under consideration and the tariffs are not formulated under competition mechanisms and are thus unattractive and disproportionally high.
Into a European gas market the parallel existence of national liberalised markets and monopolies wasn’t possible. Member states with a gas market controlled by a monopoly would have the tendency to provide an advantage related to information in profit of this monopoly.
III. Technological evolution is augmenting the potential zones of competition and makes the exclusive property rights of no use
Technological evolution – within the EU and in third countries – creates new national gas markets. In the era of liberalisation Europe has an interest of interacting with these markets as a unique body. In order to achieve that the liberalisation of the European market is mandatory.
Energy supply is a major issue because it is linked directly with the economic development. The production of natural gas in Europe is inferior to its needs, so Europe is a major importer of gas in the international scene. In order to have a privileged access to the proven gas supplies around the world and to be a respected interlocutor the EU encouraged the organisation of an Internal gas market functioning under homogenous rules. This will simplify the relations of third countries with the Member states and provide security of supply since all Member States energy needs will be taken under consideration.
Section 2: The liberalised European gas market as a tool in order to fulfil the EU’s major expectations in the energy sector
The movement of the EU gas market liberalisation had four goals: the creation of a unique market (§1), the introduction of competition in order to achieve a better quality of service (§2), reinforcing the security of energy supply (§3) and finally respect the protection of the environment (§4).
In the first paragraph of the preamble of the directive 98/30/EC it is reminded that the creation of the gas market is a part of the project of a unique European market: “according to the article 7a (now article 14) of the EC Treaty the Community shall adopt measures with the aim of progressively establishing the internal market. The internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of this Treaty.”
The introduction of competition is reputed to assure more significant benefits for the Member States since new capital will be attracted in order to create new infrastructures, develop the gas network and as a consequence increase the number of potential consumers. Another benefit is that once the gas market will be mature enough the cost of supply and production will diminish. In contrast keeping a monopolistic gas market would have included the danger of keeping high prices even if the cost of infrastructures has been covered. Last but not least, competition contributes in an active way in the improvement of customers’ rights.
The security of supply is a major issue in world politics. EU cannot be excluded from this wave. The liberalisation of the market can reinforce the geographical diversification of supplies since the impact of a major gas consumer such as the EU is stronger and thus taken into higher consideration by potential gas producer countries.
The protection of the environment has been illustrated as an objective of the first gas directive in its paragraph 12 of the preamble. This goal is undertaken by the same directive in its articles 3, 7 and 10 stating that obligations may be imposed on natural gas undertakings by the Member States in order to ensure the protection of the environment.
Now that the origins and objectives of the liberalisation have been presented we can expose how the legal and regulatory mechanisms created by the EU have enforced and completed two of these goals: the promotion of competition (Part I) and the reinforcement of security of supply (Party II) within the EU.
Competition law is a significant tool in order to encourage the creation of a liberalised European gas market. The main instruments of European competition law are the articles 81 and 82 of the EC treaty that prohibit respectively the anti-competitive agreements and practices and the abuse of dominance. The latest illustration is the fines imposed on E.ON AG and its subsidiary E.ON Ruhrgas AG (of Germany) and on GDF Suez SA (of France) for market sharing in breach of EC Treaty rules on cartels and restrictive business practices (Article 81) by the Commission on the 8th of July 2009 (IP/09/1099) .
E.ON/E.ON Ruhrgas and GDF Suez have been fined €553 000 000 each. Ruhrgas AG (now E.ON Ruhrgas, part of the E.ON group) and Gaz de France (now part of GDF Suez) agreed in 1975, when they decided to jointly build the MEGAL pipeline across Germany to import Russian gas into Germany and France, not to sell gas transported over this pipeline in each other’s home markets. They maintained the market-sharing agreement after European gas markets were liberalised, and only abandoned it definitely in 2005.
Even if the role of competition law is significant it is not sufficient in order to create a full functioning internal gas market since. Harmonisation of national legislation is very important and it can be achieved mainly by EU legislation and regulation. That is way the EU has adopted adequate legislative packages starting from 1998 till nowadays promoting an effective third party access (THIRD PARTY ACCESS) (chapter 1) and a restructure of the supply and production networks by the mechanism of the unbundling (chapter 2). These two procedures are not the only ones used by EU in order to reinforce competition in the internal market. The creation and enforcement of national regulatory agencies is an additional provision that we won’t examine in this study.
In order to promote an effective competition a non discriminatory third party access is required. Essentially, the gas market is one of the so-called “network bound” sectors, in which a storage, transmission and/or distribution network is needed to compete. Therefore, liberalisation only works if potential competitors which will be referred to as “third parties” have access to these networks. This is called third party access. We will examine in a chronological order the introduction (section1) and reinforcement of third party access (sections 2 and 3).
Section 1: The first steps towards an effective third party access in the European gas market – the directive 98/30/EC
In the actual situation of EU energy law the previsions of this directive have been largely accomplished and its values is essentially of pedagogical interest. It has established the first steps towards an internal gas market. Its principal aims were ensuring security of supply to customers and creating a single market for natural gas across all EU member countries. The directive has the merit also of introduction of an effective third party access. Chapter 6 of the first gas directive provided the necessary rules in order to establish third party access to networks. This access might have been negotiated according to the article 15, regulated according to the article 16 or hybrid of the two according to the article 14. The article 17 presents the exceptions of the third party access application.
Based on conclusion of Madrid Forum the first gas directive did not go far enough to create a true internal gas market since negotiated third party access enabled the gas transmission company, which was usually a national or regional monopoly, to negotiate individual gas transportation terms and argue for higher tariffs. Furthermore with the negotiated approach to third party access and the non-transparent transport charges, the high tariffs charged by the network operators formed a barrier to new entry and competition. In order to correct the flows of the first directive a second legislative package has been adopted.
On the 16th June 2003 the European Council adopted the second directive on common rules for a single European natural gas market with an aim to open the market and the choice of suppliers from July 2004 (“all non-residential customers”) and from July 2007 (“all customers”).
The second gas directive maintained the choice among negotiated, regulated or a combination of both third party access regarding the storage and ancillary services (article 19). This is explained by the fact that storage is not necessarily a natural monopoly. According to C. W. Jones in EU Energy Law, Volume 1, The Internal Energy Market”, 2nd edition Claeys and Casteels 2006: “the gas storage business might be one in which competition can be introduced, providing that the technical and geographic possibilities for companies to invest in storage facilities exist. If the ownership of gas storage becomes sufficiently diversified, there may be needs for regulation”. In addition some storage and ancillary services are important regarding the security of supply during peak consumption periods. That is way some Member States have been opposed to third party access.
Still, this directive has innovated and reinforced competition since its article 18 requires that regulated third party access should be applied to all transmission and distribution networks as well as to LNG facilities. Balancing services are concerned also even if the article 18 of the gas directive doesn’t mention them. In order to achieve that, regulated access tariffs have been introduced. The regulation of the tariffs resulted from their publication (§1) and from their approval by a national regulatory authority (§2).
- 1. The publication of the access to networks tariffs
The transparency that occurs from the publication of tariffs restrained the existence of abuse of dominance and thus fulfilled the requirements of the article 82 of the EC treaty that prohibits this comportment. The publication of access tariffs should respect exigencies related to its formulation (I) and to its essence (II).
- Requirements regarding the formalities of the publication.
According to article 18(1) of the gas directive tariffs for access to the gas transmission and distribution systems, as well as balancing services and LNG facilities, must be published prior to their entry in force. Article 18 of the gas directive states that: “these tariffs, or the methodologies underlying their calculation shall be approved by a regulatory authority referred to in Article 25(1) and that these tariffs-and the methodologies, where only methodologies are approved-are published prior to their entry into force”. Actual tariffs must be published. It is not sufficient to publish a tariff methodology. The details of publication are left to the will of the Member States who should ensure of the accessibility and the transparency of the publication.
- Essential requirements.
The article 18(1) of the gas directive states that tariffs shall be: “applied objectively and without discrimination between system users.” The article explains clearly that there is no possibility for individual renegotiation, discount or exception. These measures are taken in order to prevent that the vertically integrated owner of the company will not grant rebates from its standard tariffs to its own supply company.
However there is no requirement for a standardized tariff. The Member States can choose freely the tariffs and methodologies according to the control of the national regulatory authorities.
The combined reading of the articles 18(1) and 25 (2)-(3) of the gas directive makes understandable that there is a choice for the regulatory authorities as far as it concerns the approval of the tariffs. Whether the tariffs shall be approved before their publication whether the methodology used in order to determine these tariffs should be approved. In case that the first method is chosen then the question of cost reflectivity of the tariffs arises (I). If on the other hand the tariff methodology prevails it is the level of detail that should be determined (II).
- The cost reflectivity of the tariffs.
As we will examine in Chapter 2 the second gas directive has introduced legal unbundling to the gas networks. Where there are legally-unbundled gas transmission companies, cost-reflective tariffs are needed in order to ensure fairly-priced access to transmission services. As Christopher W. Jones states in EU Energy law volume 1, the internal market: “if tariffs are not cost reflective they will generate excessive or even monopoly profits. For example if a vertically integrated undertaking acquires a significant or discriminatory advantage over its non-vertically integrated rivals on the supply market through the potential cross subsidy, it can afford to accept lower margins on the generation market to maintain or increase market share because the overall group profitability is maintained through artificially high profits from its business division.”
Even if the gas directive did not explicitly stated that tariffs for access to networks should be cost reflective, we can assume that this can be the result of the obligation to set non discriminatory tariffs and from the duty of regulatory agencies to ensure that non- discrimination is respected in practice. N. White supports that the requirement of cost effective tariffs have been adopted by the Regulation on gas transmission in the first paragraph the article 3(1) which states that: “tariffs shall reflect actual costs incurred, insofar as such costs correspond to those of an efficient and structurally comparable network operator and are transparent, whilst including appropriate return on investments”.
- The tariff methodology and its level of detail.
The tariff methodology should be detailed. This is highlighted by the combined lecture of the articles 18(1) and 25(4). The first article implies that the regulatory authority shall ensure that the methodology is precise enough in order to be certain that tariffs are cost reflective and non discriminatory. The second article, by giving authority to the regulator to modify the tariffs and methodologies if these ones are discriminatory or non cost reflective, contributes in the exigency of a sufficiently detailed methodology.
An illustration of the admission of the detail of tariff methodology is an opinion given by the French regulatory agency on the 18th of December 2007. While examining the proposal of a decree relating to the regulated tariffs of sale of natural gas by the local distribution networks and the company TEGAZ not relating to the tariffs of Gaz de France, the CRE underlined that the absence of detailed methodology rules for the establishment of the regulated tariffs of sale of GDF is prejudicial to the good performance of the French market of natural gas.
Section 3: Third party access in the third legislative package- a new approach to the cost reflectivity of the tariffs related to the level of unbundling.
The directive 2009/73/EC adopted on the 13th of July 2009 has replaced from now on the directive 2003/55/EC. It does not present any originality regarding third party access. The article 32 just repeats the exigencies of regulated access tariffs for the gas transmission and distribution systems, as well as balancing services and LNG facilities. For storage and ancillary services it is the article 33 of the third gas directive that gives once more the choice among regulated, negotiated or both procedures regarding third party access.
What is interesting however with this new directive is the effect that will have the ownership unbundling on the obligation of cost reflectivity of the tariffs. A precursor article of N. White examining the Dutch gas market which has introduced ownership unbundling since 2005 has demonstrated that cost reflective network access tariffs are useless under the situation of ownership unbundling (§1). However as long as ownership unbundling does not apply the cost reflectivity of tariffs finds its plain utility (§2).
- 1. The utility of cost reflective tariffs banished in case of ownership unbundling as introduced by the third gas directive
As it has been argued by White in case of ownership unbundling since a transmission and supply operations are fully separated the gas transmission operator has no incentive to favor any particular shipper. Furthermore applying different tariffs would be impossible for the transmission operator as a means to discriminate in favor of a related undertaking, because it does not have a related undertaking. As a result, regulatory authorities when examining access tariffs proposed by entirely unbundled gas transmission networks shall logically be focused on their transparency, and their non-discriminatory application.
Where there are legally-unbundled gas transmission companies, cost-reflective tariffs are needed in order to ensure fairly-priced access to transmission services as it has been argued previously in section 2 of this chapter.
However third party access cannot be entirely satisfactory as long as vertical integrated undertakings will exist. That is why the EU has introduced the mechanism of unbundling that we will examine in the following chapter.
Chapter 2: The development of non-discriminatory third party access through the introduction and elaboration of the unbundling mechanism in order to promote competition in the internal gas market
In Europe many gas transmission and distribution networks are owned by vertically integrated companies. Such companies therefore have the incentive, as well as the means to discriminate against their competitors regarding access to their transmission and or distribution networks. Different methods can be used. Obvious ways to discriminate is refusing to give access to networks or charging higher prices to competitors than to their own vertically integrated company for equivalent services. We can observe, by a decision IP/09/410 of the Commission on the 18th of March 2009 regarding the German gas market, that this behaviour is sanctioned in EU Law. In this affair it has been concluded that the operator had abused his dominant position when refusing to give access to his network and by maintaining his transportation access tariffs to artificially high levels to compress the margins of his competitors.
The ways that disposes a vertical integrated company to discriminate are very numerous. Among them we can find the manipulation of tariff categories so that whilst the same tariffs are apparently applied to all, in fact those used by the related supply business are cheaper than those available to competitors. Allocating scarce capacity to the advantage of the vertically integrated company is another way to discriminate competitors since on a “first come first served basis”, the vertically integrated company will have prior warning and will always therefore be the first applicant. An additional discriminative behaviour is the implementation of onerous or expensive procedures for final customers which wish to change supplier (such as an obligation to install a new meter, or to complete long administrative documents or procedures). The manipulation of capacity availability in order to ensure that lines required by competitors are “congested” is one more way element of the long list of possible discriminating behaviours.
The great number of discrimination comportments possibilities made clear in the EU level that even if third party access can limit discrimination, an effective separation from competitive activities (generation, supply and sales), inside a network company, is essential in order to promote competition. This mechanism is known under the name of unbundling. The EU has introduced (section 1) and elaborated (section 2) this mechanism in the internal gas market.
The introduction of unbundling has been made by the articles 12 and 13 of the first gas directive and it was limited to an accounting separation. It became clear very early that this measure was inadequate both at transmission and distribution level and that it didn’t serve the exigencies of competition. The second gas directive has been adopted in order to reinforce the mechanism by introducing legal (§1) and management (§2) unbundling for transmission and distribution. Account unbundling has persisted under the article 17 of directive 2003/55/EC.
It is the article 9 (1) of the directive 2003/55/EC that introduces legal unbundling. According to this article transmission and distribution companies must be established as legally separated entities, which may be subsidiaries of a vertically integrated gas company. The article adds that no obligation for ownership unbundling exists. This is an important point since legal unbundling has been seen in EU as a compromise in between Member States arguing that accounting and management unbundling is sufficient (especially France) and other Member States (UK) arguing that ownership unbundling is essential in order to promote competition in EU. Of course it is understandable that legal unbundling was just a formality whether what was truly important in order to reinforce THIRD PARTY ACCESS was management unbundling.
- 2. The introduction of management unbundling for transmission and distribution services in the gas sector
In the absence of ownership unbundling, management unbundling was the main mechanism in order to ensure that transmission and distribution operators act independently. The definition of the mechanism is given once more by the article 9(1) of the directive 2003/55/EC. In order to have effective management unbundling the second gas directive provided that transmission and distribution companies must be separate in terms of their organization (I) and decision (II) making.
- Assuring organisation separation of transmission and distribution companies by restriction of financial control in order to promote management unbundling
In order to assure the separate organisation of transmission and distribution companies financial control over subsidiary companies shall be restricted. It is logical that the mother company has to prove the annual financial plan since the eventual debts of the subsidiary company can influence the whole group. If this financial plan is very detailed it will deprive the subsidiary company of an independent management since it will give to the mother company the right to give instructions regarding essential decisions of the subsidiary company. There are no dispositions in the directive 2003/55/EC concerning the detail of the financial plan. We can conclude then that the plan shall reflect in a general way the subsidiary company’s debts and assets, without specifying individual projects.
- Independency of decision making in order to promote management unbundling
- Establishment of independent management
The articles 9(2)(a) and 13(2)(a) introduced the obligation of independent management of the transmission and distribution activities. This means that those responsible for the management of the transmission company cannot be active in a distribution company and vice versa. A contradiction has arisen by the combined lecture of these articles and article 15 of the second gas directive that permits the establishment of a legally separate combined transmission and distribution company and thus permits to one manager exercise control to both activities. In this respect the note of the Commission’s DG TREN stated that: “an executive director of the network company may not at the same time be an executive director of the related supply/production company and vice versa. It remains however, possible for an executive director of the holding company to perform a supervisory function in the network company, without being involved in day to day decisions”.
- Separation of professional interests
The articles 9(2)(b) and 13(2)(b) provided separation of professional interests in order to enforce independent management and ensure the existence of management unbundling. There are numerous ways, of practical interest, under which a vertically integrated company can influence the management of its subsidiary companies (such as salary and promotion issues). No specific requirements are set by the second gas directive in order to achieve that. Each Member State is free to undertake appropriate measures in order to achieve this goal.
Promoting ownership unbundling has been a difficult issue inside the EU. On one hand there were Member States criticizing the absence of an effective unbundling by the directive 2003/55/EC (UK, Netherlands, Spain). On the other hand the absence of will for ownership unbundling of other Member States was very demonstrative. An illustration is the act implementing directive 2003/55/55 adopted by the French parliament on the 7th December 2006 which introduces an obligation regarding the ownership of GRT gas (transmission operator). This one can be owned only by Gaz de France (which in the mother company), the State or public entities. Refuse of ownership unbundling is obvious when there is an obligation that the transmission operator is owned by the vertical integrated company in which it belongs.
Under these circumstances the EU, after presenting the merits of ownership unbundling in its article 4 of preamble, has made a compromise present in the article 9 of directive 2009/73/EC. The different choices proposed to the Member States are full ownership unbundling (§1) or alternatively an independent system operator (ISO) or an independent transmission operator model (ITO) (§2).
- 1. The choice of full ownership unbundling
- Application of full ownership unbundling
Article 9(1)(a) of the third gas directive states that: “Member States shall ensure that from 3 March 2012 each undertaking which owns a transmission system acts as a transmission system operator”. UK, the Netherlands and Spain have already introduced ownership unbundling. As a result they won’t have to apply any further changes to their national gas markets. Other Member States are encouraged to follow this example by the third gas directive.
- Arguments promoting full ownership unbundling
The Members States that have opted for ownership unbundling support that even if the requirements of legal and management unbundling have made a positive contribution to the emergence of competitive gas markets in several Member States, experience has shown that where the transmission system operator is a legal entity within an integrated company, numerous problems arise such as discrimination of the vertical integrated company in regards of third party access and information. An additional critic is that new investments are not encouraged.
As long as it concerns the first critic providing that the transmission system operator may treat its affiliated companies better than competing third parties. In fact, integrated companies may use network assets to make entry more difficult for competitors. The underlying reason is that legal and management unbundling do not solve the fundamental conflict of interest within integrated companies which is the will of supply and production interests to maximise their sales and market share while the network operator is obliged to offer non-discriminatory access to competitors. This inherent conflict of interest is almost impossible to control by regulatory means as the independence of the transmission system operator within an integrated company is impossible to monitor without an excessively burdensome and intrusive regulation.
However this argument can be critisised since even if what is stated above is entirely true the Member States that have opted for ownership unbundling had a mature gas market (the UK gas market is liberalised since 1998) and have chosen ownership unbundling in order to promote companies interests and not to reinforce their gas market (which is the primary goal of EU.
An additional eventual problem where ownership unbundling is absent is that under directive 2003/55/EC unbundling rules, non-discriminatory access to information cannot be guaranteed as there is no effective means of preventing transmission system operators releasing market sensitive information to the generation or supply branch of the integrated company.
This argument has been taken under consideration by the EU. In directive 2009/73/EC the dispositions of article 9 (7) and article 16(1) reinforce the confidentiality of information that the transmission operator disposes. Since these provisions are very new we cannot have an impact of their effect.
Another criticism is that investment incentives within an integrated company are distorted. Vertically integrated network operators have no incentive for developing the network in the overall interests of the market and hence for facilitating new entry at generation or supply levels. On the contrary, they have an inherent interest to limit new investment when this will benefit its competitors and bring new competition onto the incumbent’s “home market”.
This argument also is relative since the EU has already taken legal measures with directive 2003/55/EC encouraging the creation of new infrastructures. In fact in this specific case, under regulated conditions presented by the second gas directive, the investing company can have the guarantee that no third party access will be allowed for a specific period of time. The accordance of this exception is considered by the national regulatory authorities.
It is important to take under consideration that an Internal gas market of 27 distinct Member States with different levels of maturity (regarding to their national gas markets) is an operation that takes time. This has been the main argument of the Member states opposed to the ownership unbundling since they have considered it as a radical and not progressive solution. That is the main reason that ownership unbundling is not mandatory and alternative choices are proposed.
- Arguments against ownership unbundling
France has been opposed to ownership unbundling in a very demonstrative way. Didier Sire head of strategy division at Gaz de France warned in a statement on 19th of September 2007 that: “ownership unbundling is a dangerous proposal,” that could lead to “a strategic mistake if national specificities are not taken into account. He added that: “this is a decision that risks deteriorating supply security, since ownership unbundling will weaken gas operators when they negotiate long-term contracts with large suppliers, such as Russia’s Gazprom, which are heavily integrated and do not hesitate to wield influence on European markets.”
These arguments have been defended previously by H. Kazzi who has demonstrated that the impacts of ownership unbundling are different related to the maturity of the gas market as well as the national production or the vicinity to gas producer countries which are essential criteria in regard to security of supply. According to this author ownership unbundling will make the negotiation and conclusion of long term contracts harder because companies will be weaker. As a result security of supply will be compromised in countries where the gas market is immature and additionally alternative resources are difficult to find in an immediate way, since local production does not exist. Furthermore, the same author exposes that according to a study of the European Federation of Energy Traders (EFET) it has been demonstrated that a vertically integrated undertaking does not lack in transparency or in tariff regulation in comparison to fully unbundled companies.
- The alternative choices to ownership unbundling
Directive 2009/73/EC in article 13 of the preamble presents the alternative choices to ownership unbundling: “the setting up of a system operator or a transmission operator that is independent from supply and production interests should enable a vertically integrated undertaking to maintain its ownership of network assets whilst ensuring an effective separation of interests, provided that such independent system operator or such independent transmission operator performs all the functions of a system operator and detailed regulation and extensive regulatory control mechanisms are put in place.” Article 9(8) of the third gas directive presents two alternative choices to ownership unbundling, the independent system operator model (ISO) (A) and the independent transmission operator model (ITO) (B) since full unbundling has not been accepted by all Member States. Both solutions have the merit to reinforce management unbundling.
- The independent system operator model (ISO)
This option would enable energy companies to retain the ownership of their transmission networks but Member States could oblige them to transfer the technical and commercial operation of their transmission networks to a separate body designated by the Member State (the “ISO”). The creation of a separate body dealing with the technical and commercial operations will reinforce the independency of the management.
- The independent transmission operator model (ITO).
The ITO model which is presented in the fourth chapter of the directive would also allow integrated companies to retain ownership of their transmission networks but would require them to comply with certain rules, such as the putting in place of a supervisory body overseeing the operation of transmission networks and to ensure that the transmission operation business is run independently from supply and production activities. This solution will demand more State interference and regulation. It is still a positive compromise in case of public networks that are heavily regulated by the State in order to reinforce management unbundling.
Now that we have presented how competition has been introduced in the Internal gas market by two essential procedures that are third party access and unbundling we can examine how supply in assured in the Internal gas market.
Security of gas supply has been defined quite simply and briefly as ‘‘an insurance against the risk of an interruption of external supplies’’ in a study of the International Energy Agency (IEA),(IEA, 2003, p. 1). In the era of liberalisation security of supply seems to be endangered by strict competition rules.
In order to promote security of supply within the Internal gas market construction of new infrastructures (chapter 1) and diversification of supply (chapter 2) are important elements that the EU legislation has taken under consideration and will be examined below.
Large investments are necessary to bridge the gap between supply and demand. They include not only investments in distant production zones but also massive investments in Europe for transmission and gas storages. Therefore a policy framework is needed that recognises the necessary requirements such as long term contracts (section 1) and provides appropriate incentives such as exception from third party access exigencies (section 2).
A gas commercialisation project has a high capital cost since it is necessary to create the necessary infrastructure. Producers have been reluctant to develop significant projects without the comfort of a long term purchase commitment from a creditworthy buyer in order to underpin their investment.
These contracts have a duration of 20 to 25 years in general and apply take or pay clauses that are accommodating to both parties. The buyer may require the flexibility to take delivery or not to take delivery of gas as its operational needs dictate. In accommodation of this the seller may require the buyer to make payment to the seller for all quantities of gas, with the subsequent right to recover the quantity of gas represented by a payment made in respect of gas not requested for delivery by the buyer.
In European national gas markets, previously to liberalisation, where local monopolies existed and no competition was applicable, long-term contracts were seen as ensuring a consistent distribution of market risks along the supply chain since they presented certain advantages such as price indexation to oil which gave gas buyers long-term protection against prices exceeding those of the main competing fuels. Under this contractual bond the buyers bore the volume risk, and the sellers the price risk .
The experience of liberalisation in gas market in countries such as UK has demonstrated that long term contracts can be real obstacles to competition (§1). Still their presence is essential as long as spot markets are absent and a fully operational gas market does not exist in order to encourage investment for new infrastructures(§2).
Historically in the UK approach the negotiation of gas sales was influenced by the fact that British Gas was a nationalized industry with a monopoly of supply and distribution. Under these influences gas sales contracts were always long term contracts. The scenery has changed after 1988 with the introduction of competition mechanism to the UK’s gas market. Spot markets were one of the mechanisms that have appeared after the introduction of competition. In recognition of the relative inflexibilities of commodity pricing where gas is bought under a long term contract, and recognising that trading short term volatility in gas prices can offer a commercial opportunity to gain, many buyers have elected to conclude their gas buying activities within a spot trading regime. Such preference recognised the possibility of short term gas price variations and the opportunity to trade gas for profit through exploiting those variations.
The spot market in UK (National balancing point-NBP) in the end of 1990’s has driven down the price of gas and BG Centrica had to face the negative side of competition since its long term contracts were above market’s prices. The company was forced to renegotiate its contracts.
However, economical analysis of the UK gas market has demonstrated that long term contracts have been adapted to the new market situation as they are of great importance in regards of security of supply and are combined with spot market gas sales agreements. In fact market development led towards a demand for contracts of shorter duration. As a result the duration of the contracts has diminished but still term contracts exist. The limitation of duration has been manageable for new contracts since already existing producers were mature enough and did not need to cover a risk cost. As a result they have been able to make use of existing processing and transport facilities. In addition mature extraction areas often involved smaller fields with a shorter extraction period. The reduction in investments and extraction time reduced the producers’ need for long-term volume commitments from the buyers.
- 2. The utility of long term contracts as a risk guarantee for new investments in the newly established EU Internal market
The European gas market has not been fully liberalised. The advancement of deregulation varies in each Member State, where mature gas markets (as the UK) intermediate gas markets (such as France where a new spot market is about to be created) and less developed gas markets (such as Greece) coexist. Under these circumstances of great diversity it is impossible to apply the same rules uniformly to all Member States. Newly established gas markets need the conclusion of long term contracts in order to develop their infrastructures. Mature markets depend less on them since spot markets have been created.
The three legislative packages of EU have taken under consideration this situation and even if they have not been very welcoming to the existence of long term contracts they haven’t banished them either. The third gas directive is demonstrative of this policy since in its article 39 preamble states that: “Member States or, where a Member State has so provided, the regulatory authority, should encourage the development of interruptible supply contracts”. This statement sends a clear message of the EU policy makers to diminish the existence of long term contracts. Still, in article 42 preamble by stating that: “long-term contracts will continue to be an important part of the gas supply of Member States and should be maintained as an option for gas supply undertakings in so far as they do not undermine the objective of this Directive and are compatible with the Treaty, including the competition rules. It is therefore necessary to take into account long-term contracts in the planning of supply and transport capacity of natural gas undertakings”, EU makes clear that long term contracts have their place in the Internal gas market.
It is important to add at this point that long term contracts are what their name indicates: term contracts. This means that they stop to apply when their term arrives, as long as they do not have a clause of automatic renewal. An example the is the non renewal of the LNG sales contract in between Gas Natural and Sonatrach that expired on 2004 and left open for negotiations an important volume of LNG. So even if they create a temporary bilateral monopoly they cannot be characterised as abusive under the lights of article 81 of EC Treaty because this situation is not perpetual.
We can conclude that long term contracts should remain crucial for most companies within EU since they secure investments along the whole gas chain by the predictability they give, and because they tie together buyer and seller with a mutually acceptable balance of risks.
The presence of long term contracts however, is not sufficient in order to encourage investment. Exceptions from exigencies promoting competition such as third party access are also essential.
Section 2: The limitations of third party access in order to promote new “merchant” infrastructures
Third party access as we have already explained encourages competition. But it can present also undesirable effects. For example it could diminish incentives for financiers to invest in new gas infrastructures since it makes future revenues less certain. As a consequence, such infrastructures may not receive finance, and could perhaps not be built at all. If these infrastructures are not built security of supply will be compromised.
- Requirements demonstrating the need of derogation
In order to find a solution to this issue article 22 of the second gas directive enabled national regulatory authorities to exempt new infrastructures from third party access if a number of conditions have been met. The most important are that the exemption must strengthen competition and the security of supply and moreover, the project’s financial risks must be so high, that the infrastructure would not be built without the exemption. The article 22 of the second gas directive adds that: « the exemption decision shall be notified, without delay by the competent authority to the Commission, together with all the relevant information with respect to the decision ».
- Illustrations of the applications of the article 22 of directive 2003/55/EC.
According to an interpretation note made by the Commission, exemptions may only be granted in exceptional circumstances. Therefore, the conditions of article 22 of the second gas directive must be strictly upheld. However, in practice, the national regulatory authorities considered the conditions to be relatively easily met. The domestic authorities seem rather lenient in their assessments of the exemption requests. They seemed to directly link an increase in capacity to an enhanced security of supply, and even to an improved competition regime. The conditions are interpreted in such a way, that arguably any new gas infrastructure is likely to benefit from an exemption.
Illustrations are the construction of LNG terminals in the United Kingdom (Dragon, South Hook, Grain and Isle of Grain) the Netherlands (Gate, Eemshaven and LionGas ) and Italy (Rovigo and Brindisi ). Also, exemptions were requested for interconnectors between the United Kingdom and the Netherlands (BBL ) and between Italy and Greece (IGI ).
This approach is not too surprising for two main reasons. Some conditions in the second gas directive were by their very nature easily met by a new infrastructure, especially since it increased overall network capacity. Moreover, the lenient stance of the national regulatory agencies is understandable if one considers that almost all of the exemption requests are made by new competitors. Their entry into the market should be encouraged, since it decreases the market power held by incumbents.
Still, third party is the principle, exemptions thereto shall only be granted only if they are necessary.
- 2. Infrastructure exceptions granted under more stringed conditions by directive 2009/73/EC-the introduction of a capacity allocation procedure
The critics made above about easily accepted exception of third party access have been taken into account by the third gas directive that has elaborated the conditions of exception in Article 36(6). In this paragraph the article introduces a capacity allocation procedure by stating that: “before granting an exemption, the regulatory authority shall decide upon the rules and mechanisms for management and allocation of capacity. The article adds that this procedure shall be additional criteria to the acceptance of exception.
The rules determining allocation of capacity according to the article 36(6): “shall require that all potential users of the infrastructure are invited to indicate their interest in contracting capacity before capacity allocation in the new infrastructure, including for own use, takes place.” Furthermore the regulatory authority shall introduce an obligation into the congestion management rules “providing that unused capacity on the market shall be offered”, and users of the infrastructure shall “be entitled to trade their contracted capacities on the secondary market.”
From now on increasing capacity is not directly considered as promoting security of supply. The national regulatory authorities shall verify that the increased capacity will find buyers in the gas market and in addition examine that users are entitled to trade their contracted capacities in spot markets.
Diversification of supply is essential in order to achieve security of supply. Promoting diversification of supply shall be realised both by internal relations of the Member States (section 1) and international relations with gas producer countries (section 2).
Absence of autonomy is the key word describing the situation of EU’s internal gas market. Importations of natural gas are very common. Strengthening Europe-wide cooperation in order to promote and facilitate diversification of supply in case of emergency is essential but has not been effective by the second gas legislative package (§1). The third legislative package by introducing the concept of solidarity cooperation is promoting diversification of supply in a more effective way (§2).
- 1. Absence of effective cross border cooperation in order to promote and facilitate diversification of supply in case of supply crisis in the second legislative gas package
The encouragement of the development of cross-border tariffs and it is looking into issues of capacity constraint, particularly between Member States were present in second gas directive. However, in case of emergency no specific measures have been provided. An illustration of the undesirable results of this absence is the commercial dispute between Gazprom of Russia and Natftogaz of Ukraine.
This incident has caused Russian gas supplies to the EU via Ukraine to be completely halted on the 7th of January 2009. Normal supply conditions were not restored until the 20th of January 2009. Not only did the supply interruption come during a period of peak gas demand, but it also coincided with Europe experiencing one of the coldest winters of recent years. The disruption was of particular concern for the EU, given its reliance on Russian gas imports transited through Ukraine. 23% of the gross inland EU gas consumption comes from Russia, around 80% of which passes via Ukraine. Eastern Europe’s Member States such as Bulgaria, Romania or Poland, that were more affected since they depend largely on Russian gas, had to diminish the demand of natural gas by alternative sources of heating such as electricity or even wood burning.
In order to provide a solution and promote solidarity the third gas directive has introduced a more effective cross border cooperation.
Article 55 of the preamble of directive 2009/73/EC exposes the necessity of cross border solidarity with the following terms: “in order to contribute to security of supply whilst maintaining a spirit of solidarity between Member States, notably in the event of an energy supply crisis, it is important to provide a framework for regional cooperation in a spirit of solidarity. Such cooperation may rely, if Member States so decide, first and foremost on market-based mechanisms. Cooperation for the promotion of regional and bilateral solidarity should not impose a disproportionate burden on or discriminate between market participants.”
In fact each Member State has different sources of gas supply in relation to its geographical emplacement and its political affinities with gas producer countries. By providing cross border solidarity in case of emergency like the one described above, a natural diversification of gas supplies occurs since Member States – that are not affected directly by the incident- share their stored gas or provide gas from non habitually solicited producer countries to Member States where the emergency occurs.
It is the article 6 of the third gas directive that promotes the concept of cross border solidarity by requiring Member States to cooperate in the event of severe disruptions of gas supply and by coordinating national emergency measures by stating that : « in order to safeguard a secure supply on the internal market in natural gas, Member States shall cooperate in order to promote regional and bilateral solidarity. Such cooperation shall cover situations resulting or likely to result in the short term in a severe disruption of supply affecting a Member State. »
This concept is enforced by the creation of an Agency for the Cooperation of Energy Regulators (ACER) by the regulation 713/2009/EC which will coordinate cross border cooperation within the EU and as a consequence will provide more effective solutions.
With more pipelines being built, and with emerging negotiated third party access, the European gas customers will have access to more sources of gas supply. Thus, the emphasis on security of supply is likely to be reduced. However, the basic sources of supply the producer countries are not to be changed. Negotiation between suppliers and sellers at industry level was and is the fundamental basis for organising European gas supply. But it is very necessary that this relation be supported by solid political relations, in bilateral and most importantly European dialogues between consumer countries on the one hand and producing and transiting countries on the other hand. The development of this aspect is related to international relations studies and thus will not be exposed in this paper.
This study has proceeded to an evaluative critic of the Internal gas market as this one has been constructed by the three legislative packages from 1998 till nowadays. The European gas market is not fully functional yet since, inherent divergence exists regarding the level of maturity of the national gas markets.
However, as it has been demonstrated in the first part of this paper; competition has been reinforced by the mechanisms of third party access and unbundling. Both mechanisms even if implemented in different levels in the Member States have contributed to transparency and limited abusing comportments as regarded in articles 81 and 82 of the EC Treaty.
Furthermore security of supply has been reinforced since long term contracts can always find a place in the EU law, new investments are encouraged by attributing legal “gifts” – such as exception to third party access- and diversification of supply is busted by cross border cooperation.
At this moment we can stay optimistic as long as it concerns the functioning of the Internal gas market. In order to make this market fully functional the implementation of liberalisation to the national gas markets, previously owned by the Member States and exercising a monopoly is essential. Understanding that change can come only with time is very important and the EU legislation and regulation have had the wisdom to implement changes little by little in order to permit to less mature gas markets to follow this new wave while encouraging mature markets to accelerate the liberalisation process.
Treaty establishing the European Community as Amended by Subsequent Treaties, Rome 25 March 1957.
- EC secondary legislation:
Directive 98/30/EC 22 June 1998 concerning common rules in the internal market of natural gas.
Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in natural gas.
Regulation 1775/2005/EC of the European Parliament and of the Council of 28 September 2005 on conditions for access to the natural gas transmission networks.
Directive 2009/73/EC of the European Parliament and the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC.
Regulation 713/2009/EC of the European Parliament and the Council of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators.
Regulation 715/2009/EC of the European Parliament and the Council of 13 July 2009 on conditions for access to the natural gas transmission networks and repealing Regulation (EC) No 1775/2005.
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Gordon G, Patterson J: “Oil and gas law”, Chapter 9 « Competition law and the upstream oil and gas business” Judith Aldersey-Williams, Dundee University press, 2007.
Jones Christopher W: “EU Energy Law, Volume 1, The Internal Energy Market”, 2nd edition Claeys and Casteels 2006.
Künneke W, Arensten M.A, eds: “European Gas Markets in Transition”, Finon D: “French gas industry in transition: Breach in the public service model”, Elsevier, 2002.
Roberts Peter: “Gas sales and gas transportation agreements, Principles and practice”, Sweet and Maxwell 2008.
Whish Richard: “Competition Law”, sixth edition, Oxford.
- Case law:
Conseil d’Etat, 10 déc. 2007, n° 289012, 289776, « Sté Poweo, Fédération française des combustibles, carburants et chauffage » : JurisData n° 2007-072835 ; JCP E 2007, act. 592.
Arnold R: « Chronique 2005 : La nouvelle loi relative à l’approvisionnement en électricité et en gaz du 13 juillet 2005 », Droit Administratif n° 12, Décembre 2005, Alerte 23.
Arowolo O: “ Abolition of long-term contracts: the implications and options for bankability in energy project financing”, Journal of energy and natural resources law, vol. 24 n° 1, 2006.
Arshed Y: “Can a Liberalised European Energy Market Secure Long-Term Gas Supply?” OGEL Vol. 5 – issue 2, April 2007.
Aschea F, Osmundsenb P, Tveter°asa R: “European market integration for gas? Volume flexibility and political risk”, Energy Economics 24 (2002) 249-265.
Bazex M. Blazy S: « La place des données économiques et concurrentielles dans la détermination des tarifs réglementés du gaz », Droit Administratif n° 2, Février 2008, comm. 29.
Billet P: « Loi relative au secteur de l’énergie », Environnement n° 1, Janvier 2007, comm. 5
Davey: “Take or pay and send or pay: a legal review and long term prognosis” 11 OGLTR, 1997.
Decocq Georges, Laquièze Alain: « Chronique sur le droit de la concurrence interne et communautaire » La Semaine Juridique Entreprise et Affaires n° 10, 6 Mars 2008, 1314.
Devos J.M: “The Global Competition for Energy and the European Natural Gas Internal Market”, OGEL, Vol. 3 – issue 3, October 2005.
Eurogas: “The European Gas Market: Eurogas Views on the Way Forward”, Vol. 4 – issue 4 November 2006.
Farnejad Hooman: “EU Gas Directive & Its Impact on Integrated European Companies”, OGEL Vol. 2 – issue 5, December 2004.
Gunst A. J: “Energy trade in the European common market-free movement, exceptions and regulatory inaction”, Journal of energy and natural resources law, vol. 21 n°4, 2003.
Hirschhausen C, Neumann A: “Less long-term gas to Europe? A Quantitative Analysis of European long-term gas supply contracts”, OGEL Vol. 3 – issue 1, March 2005.
Idot L: « L’activité en matière de pratiques anticoncurrentielles »Europe n° 5, Mai 2009, comm. 199.
Kazzi H: « La politique communautaire de l’énergie : à la recherche d’un équilibre », Contrats Concurrence Consommation n° 8, Août 2007, étude 11.
Lazar R., Lignières P: « L’énergie en France au 1er juillet 2007, hésitations autour de la libéralisation et de la privatisation », Droit Administratif n° 8, Août 2007, Etude 13
Le Gall A: Chronique, La Semaine Juridique Entreprise et Affaires n° 7, 14 Février 2008, 1240.
Moen K.B: “The gas directive and third party transport rights-what pipeline volumes are available?”, Journal of energy and natural resources vol. 21 n°68, 2003.
Remme U, Blesl M, Fahl U: “Future European gas supply in the resource triangle of the Former Soviet Union, the Middle East and Northern Africa”, Energy Policy 36 (2008) 1622–1641.
Rodriguez J.A: “The Growing Impact of EC competition law on gas sale and transportation agreements”, OGEL Vol. 4 – issue 1 May 2006.
Simonetti Sander: “Two models of Last resort Supply in the liberalised European energy market”, Journal of energy and natural resources law vol. 24 n°24 2006.
Stern Jonathan P: “The British Gas market 10 years after privatisation: a model or a warning for the rest of Europe?” Energy Polio3, Vol. 25, No. 4, pp. 387-392, 1997.
Talus Kim: “First interpretation of energy market directives by the ECJ”, Journal of energy and natural resources law vol. 24 n°1, 2006.
Van der Vijver Tjarda: “Exemptions to third party access for new infrastructures in the European Community gas sector – the exception that defies the rule?”, European Competition Law Review 2008.
White N: “The Requirement for Tariff Benchmarking for European Gas /Transmission”, OGEL Vol. 6 – issue 3, November 2008.
Wright P: “Liberalisation and the security of gas supply in the UK”, Energy Policy 33 (2005) 2272–2290
- Internet sites:
 Roberts Peter: “Gas sales and gas transportation agreements, Principles and practice”, Sweet and Maxwell 2008.
 The cost of natural gas transportation is very high. It is 6 to 7 times higher than the equivalent cost for oil. As a result only 23% of the international gas production is exported (by contrast of 53% of oil production).
 According to the World factbook Russia, Iran and Qatar dispose more than half of the world’s natural gas proven reserves. See: http://en.wikipedia.org/wiki/List_of_countries_by_natural_gas_proven_reserves.
The UK is one of the states that has seen its domestic resources declining and is facing an increasing demand for imported gas. See: Remme U, Blesl M, Fahl U: “Future European gas supply in the resource triangle of the Former Soviet Union, the Middle East and Northern Africa”, Energy Policy 36 (2008) 1622–1641.
 Roberts Peter, “Gas sales and gas transportation agreements, Principles and practice”, Sweet and Maxwell 2008.
 See: Remme U, Blesl M, Fahl U: “Future European gas supply in the resource triangle of the Former Soviet Union, the Middle East and Northern Africa”, Energy Policy 36 (2008) 1622–1641.
 Künneke W, Arensten M.A, eds: “European Gas Markets in Transition”, Finon D: “French gas industry in transition: Breach in the public service model”, Elsevier, 2002.
 Treaty establishing the European Community as Amended by Subsequent Treaties Rome, 25 March 1957.
 “Quantitative restrictions on imports and all measures having equivalent effect shall, without prejudice to the following provisions, be prohibited between Member States.”
 Member States shall progressively adjust any State monopolies of a commercial character so as to ensure that when the period has ended no discrimination regarding the conditions under which goods are procured and marketed exists between nationals of Member States”.
 Directive 98/30/EC 22 June 1998 concerning common rules in the internal market of natural gas.
 Directive 98/30/EC 22 June 1998 concerning common rules in the internal market of natural gas.
 Moen K.B: “The gas directive and third party transport rights-what pipeline volumes are available?”, Journal of energy and natural resources vol. 21 n°68, 2003.
 “Member States shall ensure the implementation of a system of third party access to the transmission and distribution system, and LNG facilities based on published tariffs, applicable to all eligible customers, including supply undertakings, and applied objectively and without discrimination between system users. Member States shall ensure that these tariffs, or the methodologies underlying their calculation shall be approved prior to their entry into force by a regulatory authority referred to in Article 25(1) and that these tariffs — and the methodologies, where only methodologies are approved — are published prior to their entry into force”.
 According to the directive 2003/55/EC: ‘transmission’ means the transport of natural gas through high pressure pipeline network other than an upstream pipeline network with a view to its delivery to customers, but not including supply.
 According to the directive 2003/55/EC: ‘distribution’ means the transport of natural gas through local or regional pipeline networks with a view to its delivery to customers, but not including supply.
 Even if article 18 of the directive doesn’t mention explicitly balancing services the preamble 15 of the gas directive states that: “In order to ensure effective market access for all market players including new entrants, non discriminatory and cost-reflective balancing mechanisms are necessary. As soon as the gas market is sufficiently liquid, this should be achieved through the setting up of transparent market-based mechanisms for the supply and purchase gas needed in the framework of balancing requirements. In the absence of such a liquid market, national regulatory authorities should play an active role to ensure that balancing tariffs are non-discriminatory and cost-reflective. At the same time, appropriate incentives should be provided to balance in-put and off-take of gas and not to endanger the system.
 According to the directive 2003/55/EC: ‘vertically integrated undertaking’ means a natural gas undertaking or a group of undertakings whose mutual relationships are defined in Article 3(3) of Council Regulation (EEC) No 4064/89 of 21 December 1989 on the control of concentrations between undertakings (1) and where the undertaking/group concerned is performing at least one of the functions of transmission, distribution, LNG or storage, and at least one of the functions of production or supply of natural gas.
 Jones Christopher W: “EU Energy Law, Volume 1, The Internal Energy Market”, 2nd edition Claeys and Casteels 2006, chapter 3.
 2. The regulatory authorities shall be responsible for fixing or approving prior to their entry into force, at least the methodologies used to calculate or establish the terms and
conditions for :
(a) connection and access to national networks, including transmission and distribution tariffs. These tariffs, or methodologies, shall allow the necessary investments in the networks to be carried out in a manner allowing these investments to ensure the viability of the networks;
(b) the provision of balancing services.
- Notwithstanding paragraph 2, Member States may provide that the regulatory authorities shall submit, for formal decision, to the relevant body in the Member State the tariffs or at least the methodologies referred to in that paragraph as well as the modifications in paragraph 4. The relevant body shall, in such a case, have the power to either approve or reject a draft decision submitted by the regulatory authority. These tariffs or the methodologies or modifications thereto shall be published together with the decision on formal adoption. Any formal rejection of a draft decision shall also be published, including its justification.
 White N: “The Requirement for Tariff Benchmarking for European Gas /Transmission”, OGEL Vol. 6 – issue 3, November 2008.
 Regulation 1775/2005/EC of the European Parliament and of the Council of 28 September 2005 on conditions for access to the natural gas transmission networks.
 “tariffs, or the methodologies used to calculate them, applied by transmission system operators and approved by the regulatory authorities pursuant to Article 25(2) of Directive 2003/55/EC, as well as tariffs published pursuant to Article 18 (1) of that Directive, shall be transparent, take into account the need for system integrity and its improvement and reflect actual costs incurred, insofar as such costs correspond to those of an efficient and structurally comparable network operator and are transparent, whilst including appropriate return on investments, and where appropriate taking account of the benchmarking of tariffs by the regulatory authorities.”
 Regulatory authorities shall have the authority to require transmission, LNG and distribution system operators, if necessary, to modify the terms and conditions, including tariffs and methodologies referred to in paragraphs 1, 2 and 3, to ensure that they are proportionate and applied in a non-discriminatory manner.
 Avis 18 déc. 2007 : Journal Officiel 29 Décembre 2007, texte n° 97
 Gaz de France.
 Directive 2009/73/EC of the European Parliament and the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC
 “Member States shall ensure the implementation of a system of third party access to the transmission and distribution system, and LNG facilities based on published tariffs, applicable to all eligible customers, including supply undertakings, and applied objectively and without discrimination between system users. Member States shall ensure that those tariffs, or the methodologies underlying their calculation are approved prior to their entry into force in accordance with Article 41 by a regulatory authority referred to in Article 39(1) and that those tariffs — and the methodologies, where only methodologies are approved — are published prior to their entry into force.
 “NV Nederlandse Gasunie (formerly co-owned by Shell, ExxonMobil and the Dutch Government) no longer exists in its previous form. The current situation (since 1 January 2005) is that Gasunie (the owner of the transmission assets, within which Gas Transport Services sits as TSO) is owned for the full 100% by the Dutch Government (Ministry of Finance), and Gas Terra is now owned by Shell and ExxonMobil as to 25% each and the Dutch Government (Ministry of Economic Affairs) as to 50%, through a direct stake of 10% and an indirect stake of 40% held via EBN). Gasunie and GasTerra are completely autonomous, have different Boards of Directors, etc. There is therefore full ownership unbundling” as stated by White N. in “The Requirement for Tariff Benchmarking for European Gas /Transmission”, OGEL Vol. 6 – issue 3, November 2008).
 Ownership unbundling has not been accepted in a generalised way as we will see in Chapter 2 and thus the obligation of cost reflective tariffs subsists.
 According to the article 2(20) of the directive 2009/73/EC: “vertically integrated undertaking’ means a natural gas undertaking or a group of natural gas undertakings where the same person or the same persons are entitled, directly or indirectly, to exercise control, and where the undertaking or group of undertakings perform at least one of the functions of transmission, distribution, LNG or storage, and at least one of the functions of production or supply of natural gas”.
 “Where the transmission system operator is part of a vertically integrated undertaking, it shall be independent at least in terms of its legal form, organisation and decision making from other activities not relating to transmission. These rules shall not create an obligation to separate the ownership of assets of the transmission system from the vertically integrated undertaking”.
 “Those persons responsible for the management of the transmission system operator may not participate in
company structures of the integrated natural gas undertaking responsible, directly or indirectly, for the day-to-day operation of the production, distribution and supply of natural gas.”
 “Those persons responsible for the management of the distribution system operator may not participate in
company structures of the integrated natural gas undertaking responsible, directly or indirectly, for the day-to-day operation of the production, transmission and supply of natural gas”.
Loi n°2006-1537 du 7 décembre 2006 relative au secteur de l’énergie. See: http://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000000462914
 “Without effective separation of networks from activities of production and supply (effective unbundling), there is a risk of discrimination not only in the operation of the network but also in the incentives for vertically integrated undertakings to invest adequately in their networks.”
 “Member States shall ensure that neither commercially sensitive information referred to in Article 16 held by a transmission system operator which was part of a vertically integrated undertaking, nor the staff of such a transmission system operator, is transferred to undertakings performing any of the functions of production and supply”.
 “In order to ensure the full respect of the rules on information unbundling, Member States shall ensure that the transmission system owner including, in the case of a combined operator, the distribution system operator, and the remaining part of the undertaking do not use joint services, such as joint legal services, apart from purely administrative or IT functions”.
 Kazzi H: « La politique communautaire de l’énergie : à la recherche d’un équilibre », Contrats Concurrence Consommation n° 8, Août 2007, étude 11).
 The countries that have opted for ownership unbundling have a local production of gas (UK and Netherlands) and a mature gas market (the UK gas market is fully liberalised since 1998).
 EFET, Benchmarking gas transmission access systems in Europe, p. 9
 In occurrence the study has been conducted for Gaz de France?
 “Where on 3 September 2009, the transmission system belongs to a vertically integrated undertaking a Member State may decide not to apply paragraph 1. In such case, the Member State concerned shall either: (a) designate an independent system operator in accordance with Article 14, or (b) comply with the provisions of Chapter IV.”
 Wright P: “Liberalisation and the security of gas supply in the UK”, Energy Policy 33 (2005) 2272–2290
 Hirschhausen C, Neumann A: “Less long-term gas to Europe? A Quantitative Analysis of European long-term gas supply contracts”, OGEL Vol. 3 – issue 1, March 2005.
 This is the new denomination of the former British Gas after its privatisation.
 Davey: “Take or pay and send or pay: a legal review and long term prognosis” 11 OGLTR, 1997.
 Hirschhausen C, Neumann A: “Less long-term gas to Europe? A Quantitative Analysis of European long-term gas supply contracts”, OGEL Vol. 3 – issue 1, March 2005
 Aschea F, Osmundsenb P, Tveter°asa R: “European market integration for gas? Volume flexibility and political risk”, Energy Economics 24 (2002) 249-265.
 See the Interpretation Note of DG Energy & Transport on Directives 2003/54-55 and Regulation 1228/03 in the electricity and gas internal market, Exemptions from certain provisions of the third party access regime (January 30, 2004), p.5.
 Van der Vijver Tjarda: “Exemptions to THIRD PARTY ACCESS for new infrastructures in the European Community gas sector – the exception that defies the rule?” European Competition Law Review 2008.
 http://ec.europa.eu/energy/gas/infrastructure/exemptions en.htm [Accessed January 22, 2008].
 Remme U, Blesl M, Fahl U: “Future European gas supply in the resource triangle of the Former Soviet Union, the Middle East and Northern Africa”, Energy Policy 36 (2008) 1622–1641.
 The possibility of a Member State to sale gas that has not produced is possible since destination clauses are prohibited inside the EU by the jurisprudence of the Commission.
 Regulation 713/2009/EC of the European Parliament and the Council of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators.