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News in Brief, BB200802

The internal market proposal and the ‘third option’

17.03.2008

On 28 February, the German energy giant E.ON unexpectedly announced that it would sell off its high voltage electricity grid to an independent operator. By doing so, it would be ‘unbundling’ or separating its generation and transmission activities, in line with Commission proposals. E.ON’s declaration came just before the EU’s Energy Council meeting, at which no compromise position between pro- and anti-unbundling Member States was reached.

The European Commission mooted the breaking up of large energy firms through unbundling, in order to make the energy sector more competitive, in its third liberalisation package proposals in September 2007. It also gave a second option - a compromise whereby companies involved in energy production and supply would be allowed to retain their network assets. However, they would lose control over how they are managed, with commercial and investment decisions left to an independent company (the Independent System Operator, or ISO), to be designated by national governments.

On 29 January 2008, France, Germany and six other Member States sent a letter to the Commission and the Parliament’s Industry (ITRE) Committee, proposing a ‘third option’ on energy liberalisation. The letter stated that the Commission’s proposal was “not compatible with national law and the free movement of capital”, that vertically-integrated energy firms do not impede competition and that unbundling has no proven effect on energy prices or grid investments.

Instead, the ‘third option’ proposed to make the transmission systems operator (TSO) distinct from the parent company via a number of safeguards concerning the TSOs’ independence, management and investment decisions. TSOs would have separate management, for example. Moreover, the regulatory authority would be able to oblige the TSO to carry out an infrastructure upgrade.

It appeared that France and Germany were worried that the Commission’s proposed legislation would leave their large energy companies – EDF and E.ON – open to attack from foreign suppliers such as the Russian giant Gazprom.

In early February, the Commission reacted by stating that this ‘third option’ did not take ownership unbundling far enough, and mentioned ‘other measures’ such as the reciprocity clause, designed to protect European firms from takeovers. Yet ten days later, the Commission appeared to soften its stance, indicating that it could accept a ‘third option’ provided further safeguards are introduced, particularly regarding the investment decisions of electricity and gas transmission subsidiaries.

E.ON’s announcement that it had decided to ‘unbundle’ came therefore as a great surprise, and is seen as a key victory for the pro-unbundling side. The German government, however, remains opposed to unbundling, as do a number of Member States. At the Energy Council discussions on 28 February, ministers clashed on the electricity market liberalisation plans, and in the end discussions were postponed until the next Energy Council meeting in June.

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