COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT pursuant to the second subparagraph of Article 251 (2) of the EC Treaty concerning the common position of the Council on the adoption of a Directive of the European Parliament and of the Council concerning common rules for the internal market in electricity and repealing Directive 96/92/EC and concerning the common position of the Council on the adoption of a Directive of the European Parliament and of the Council concerning common rules for the internal market in natural gas and repealing Directive 98/30/EC

2001/0077 (COD)

COMMUNICATION FROM THE COMMISSION to the European Parliament pursuant to the second subparagraph of Article 251 (2) of the EC Treaty concerning the common position of the Council on the adoption of a Directive of the European Parliament and of the Council concerning common rules for the internal market in electricity and repealing Directive 96/92/EC and concerning the common position of the Council on the adoption of a Directive of the European Parliament and of the Council concerning common rules for the internal market in natural gas and repealing Directive 98/30/EC

A. Background

On 13 March 2001 the Commission adopted a proposal for a Directive of the European Parliament and of the Council amending Directives 96/92/EC and 98/30/EC concerning common rules for the internal markets in electricity and natural gas (document COM(2001) 125 final - 2001/0077 (COD)) for adoption by the co-decision procedure laid down in Article 251 of the EC Treaty [1].

[1] OJ .....

The European Economic and Social Committee delivered its opinion on 17 October 2001.

The Committee of the Regions has not expressed itself on the proposal.

On 13 March 2002, the European Parliament adopted a series of amendments at its first reading.

On 7 June 2002 the Commission amended its proposal, incorporating in whole, in part or in principle many of the amendments voted by the European Parliament in its first reading.

The Council, in accordance with Article 251 of the Treaty, adopted its common position on this proposal for a Directive on 3 February 2003.

B. Aim of the proposal

The aim of the Commission proposal is to arrive at a level playing field for all market actors on the electricity and gas markets in the European Union. The Electricity Directive (96/92/EC) and the Gas Directive (98/30/EC) have been producing benefits for large consumers in terms of lower prices and better service standards. However, these Directives leave a number of choices to Member States in terms of market opening, organisation of access to the network and regulation of the market. Practice demonstrates that this situation leads to distortion of competition, as some Member States' markets are more open to effective competition than others.

For this reason the Commission has proposed this amending Directive. It seeks to achieve full progressive opening of the electricity and gas markets, high standards of public service and a universal service obligation in electricity. It abolishes the choice of negotiated access to the gas and electricity networks and obliges Member States to legally separate the transmission and distribution network operators from other parts of the business. In addition, all Member States have to establish a regulatory authority with a set of minimum competencies.

In the framework of the accession process, the candidate countries have taken commitments in the Accession negotiations regarding the existing Electricity and Gas Directives. The Commission expects new Member States to fulfill the obligations created by these new Directives, but acknowledges that in duly justified and exceptional cases, it may be necessary to allow for a progressive phasing-in into the further developed electricity and gas markets. The Commission parts from the principle that any permanent derogation will, however, not be accepted.

C. Commentary on the Common Position of the Council

The main elements of the Commission proposal are retained in the Common position. The Council has taken on board nearly all Parliament amendments which the Commission had accepted in its amended proposal, either in the same form or in a way that does not substantially alter the intention of the amendments. Most of the changes introduced by the Council strengthen or clarify the Commission's proposal, without changing its substance.

The most important differences with the Commission proposal are the delay in the date for full market opening until July 2007 - as opposed to 2005 proposed by the Commission and supported by Parliament - and the delay in legal unbundling for distribution system operators until July 2007 - as opposed to 1 January 2004 as proposed by the Commission and supported by Parliament. The Commission is able to support the Common Position also on these points in the spirit of a general compromise. It has to be pointed out that the date of 2007 for full market opening is unconditional and will not be rediscussed.

The European Parliament adopted at its first reading 157 amendments to the original proposal of the Commission. As a result of the European Parliament's opinion, the Commission introduced several substantive changes in its amended proposal. Out of the 157 amendments adopted, the Commission has accepted 15 amendments in the form proposed by the Parliament or with some redrafting (amendments 2, 5, 13, 15, 20, 28, 32, 34, 47, 58, 61, 117, 123, 162 and 171). 57 amendments were accepted in principle (6-8, 12, 30, 33, 39, 40, 45, 46, 48, 50, 53-55, 57, 59, 60, 65, 66, 70, 75-79, 82, 84, 86, 89, 90, 95/96, 109-112, 118-120, 124, 127-132, 135, 137, 140, 145, 151, 153, 158-160 and 163), 16 amendments were accepted in part (amendments 4, 14, 18, 41-43, 51, 56, 62, 103, 104, 125, 126, 149, 172, 182 and 184).

The detailed comments on the way the Commission incorporated the 88 amendments it accepted by Parliament are to be found in the amended proposal of 7 June 2002 (document COM(2002) 304 final). The reasons for rejecting the other amendments are described in this document as well. It is recalled that out of the 69 rejected amendments by Parliament, 28 amendments were rejected because they implied the splitting of the Commission proposal into two separate proposals, one on Electricity and one on Gas. Only 41 amendments out of the 157 adopted were rejected on substantial grounds.

This Communication focuses therefore on the differences between the common position and the Commission amended proposal of 7 June 2002.

General

Two amendments accepted by the Commission in its amended proposal are rejected by Council. These are amendments 12 and 15 which relate to the recitals. No amendments accepted by the Commission relating to the operative part have been rejected.

The Common Position takes on board the parliamentary amendments splitting the Commission proposal in two separate texts, one amending the Electricity Directive 96/92/EC and one amending the Gas Directive 98/30/EC. The Commission had rejected these amendments.

Amendments 156-157 are rejected by Council on the grounds that they do not constitute amendements as they set the entry into force of the Directive 20 days after publication of the texts in the Official Journal (156) and state that the Directive is addressed to Member States (157).

A. Electricity Directive

Recitals

No major changes have been made to the recitals, some minor changes add clarity to the texts and some changes reflect the differences between the common position and the amended Commission proposal.

The rejected amendment 12 relates to recital 15 on the competencies of the regulatory authorities. The Commission retains that the spirit of the amendment, underlining the importance for legally binding methodologies for network tarification, is retained in the recital and in the operative part of the Directive (Article 23). The part of the amendment stating that regulatory authorities should be independent of governments had been rejected by the Commission in its amended proposal

The rejected amendment 15 relates to recital 20. The amendment underlines the need to fix a deadline for full market opening. This has not been included in the recital itself, but Article 21 sets a date for full market opening.

Article 3 - Public service obligations

The Commission proposal and Parliament position extended the coverage of the universal service obligation to all customers. The Common Position limits this coverage to household customers, and, where Member States deem it appropriate, to small enterprises.

The Commission can accept the limitation in the Common Position as especially household consumers, and small enterprises, if appropriate, most need to be protected and guaranteed of their electricity supply. Member States may decide to provide universal service protection to a larger group of enterprises, provided these measures are compatible with Community legislation.

The annex containing consumer protection and measures on transparency regarding contracts and conditions, general information and dispute settlement mechanisms measures was obligatory for all consumers in the Commission proposal, supported by Parliament. The Common Position only retains its obligatory nature for household customers. The Commission can accept this compromise, as especially household customers need this kind of protection in a competitive environment.

The Common Position adds in paragraph 4 of this Article the obligation that any form of compensation or exclusive rights for the carrying out of public service obligations shall be granted in a non-discriminatory and transparent way. The Commission considers this clarification to be an improvement of the text.

Concerning the labelling provision, the Commission had proposed apart from the specification on the bills of the overall fuel mix of the supplier over the preceding year and the fuel sources used to generate the electricity supplied, also the specification of the environmental impact of each fuel source in terms of greenhouse gas emissions on the bills. The Common Position retains the obligation of specification of the overall fuel mix of the supplier, but not of the specific electricity supplied. The environmental impact of the different fuel sources will be available on a specific website, of which the reference will figure on the bills. Apart from the CO2 emissions, also the nuclear waste will be specified on this site.

The Commission considers the introduction of a labelling obligation on suppliers to be a significant step forward in achieving increased transparency of the product electricity. The fact that the break-down of the fuel sources used to generate the supplied electricity will be available to all customers with their bills is important in terms of transparency and will make it possible for consumers to exercise their right to choose supplier based, not only on the price of the product, but also on its generation characteristics and the environmental impact of the fuel mix. The Commission will follow the implementation of the labelling obligation closely and it will be specifically covered in the report the Commission has to publish every year (Article 28).

Article 6 - Authorisation procedure

The Commission proposal adopted the parliamentary amendment seeking to streamline and expedite authorisation procedures for small (below 15MW) and distributed generation. The Common position retains this idea, but reformulates it to read: 'Member States shall ensure that authorisation procedures for small and/or distributed generation take into account their limited size and potential impact.' The Commission can accept this reformulation, as it leaves the aim of arriving at speedier authorisation procedures for smaller generation plants untouched.

Article 7 - Tendering for new capacity

In order to prevent a lack of generation capacity, the Commission proposal obliged Member States to provide for the possibility of launching a tendering procedure as a safety net, should the market not provide for sufficient generation capacity on the basis of the authorisation procedure.

The common position gives the Member States this possibility or the possibility to adopt other procedures equivalent in terms of transparency and non-discrimination. The Commission can accept this addition, because the aim of the provision, the availability of a safety net in case of market failure, is retained. It is left to the Member States to decide whether they consider a tendering possibility or another method, such as capacity payments, to be the most appropriate.

Article 10/15 - Legal unbundling of transmission and distribution system operators

The text of the Articles in the common position have rendered it clear that legal unbundling does not in any way mean a transfer of ownership of the assets to the legally unbundled system operator. The text also clarifies that a degree of co-ordination between the owner of the assets and the system operator should exist to safeguard a return on the assets for the owner. The Commission can accept this clarification. Without this clarification, it might be argued that the legally unbundled system operator would have the sole right to decide on any investments, which would in fact amount to ownership unbundling. Although of course the day-to-day decisions on investments will be taken by the system operator, it is appropriate that, for instance, the annual financial program of the system operator be discussed with the owner of the assets.

Article 21 - Market opening

The Common Position sets the date of 1 July 2007 for full market opening. The Commission proposal, supported by Parliament, was 2005. The Commission can accept this delay in the spirit of the general compromise. It is most important that an unconditional date for market opening to all customers has been set in the Directive and that all customers will be able to benefit from the internal market in the medium term.

Article 26 - Derogations

A possibility of derogation from the obligation to have non discriminatory authorisation procedures in place for new generation capacity is introduced for micro isolated systems, which are defined as non-interconnected systems with an annual consumption not exceeding 500 GWh. This derogation only applies to extension and upgrading of existing plants, and not for the construction of new generation plants, for which an authorisation procedure will continue to be required.

For electricity systems with specific problems of a technical nature for the introduction of customer choice to all non-domestic customers, a derogation from the obligation to grant all categories of non domestic customers the right to choose their supplier may be granted by the Commission for a period of a maximum of 18 months after 1 July 2004. Some Member States have argued that due to the specific consumption patterns of some of the smaller industrial customers, it will be difficult to distinguish all non-domestic customers from domestic customers. This derogation will apply to very limited groups of non-domestic customers.

The Commission can accept these derogations because of their limited economic impact on the internal market.

In the event that the report to be published in 2006 reaches the conclusion that, given the effective manner in which network access has been carried out in a Member State - which gives rise to fully effective, non-discriminatory and unhindered network access - the Commission concludes that certain obligations imposed by this Directive on undertakings (including those with respect to legal unbundling for distribution system operators) are not proportionate to the objective pursued, the Member State in question may request to the Commission that it be exempted from the requirement in question. The Commission will formulate an opinion on this request within three months from its receipt, and may forward appropriate proposals to Council and Parliament.

This is a helpful clarification. In any event the Commission has the right to initiate and change legislation if circumstances dictate that this should be appropriate.

Articles 27 and 28 - Review procedure and Reporting

The reporting provisions have been significantly extended. They oblige the Commission to publish more detailed reports on security of supply, the impact of market opening on public service levels and on the labelling provision.

In addition a special report shall be published by the Commission at the latest on 1 January 2006 which takes stock of the overall progress on the internal electricity and gas markets, regarding price developments, service levels, independence of system operators, network access, regulation and the way in which effective competition develops. In particular this report will focus on the experience gained in the application of the Directive as far as the effective independence of system operators in vertically integrated undertakings is concerned and whether other measures in addition to functional independence and separation of accounts have been developed which have effects equivalent to legal undbundling. On the basis of this report the Commission can, when appropriate, forward proposals to Parliament and Council, in particular, with the aim to review the public service provisions and the obligation to legally separate the distribution system operator from the vertically integrated company.

The Commission finds these additions to the reporting obligation to be helpful. They allow a thorough evaluation of the progress in creating a single market and will allow a fair assessment of whether the functional unbundling requirements for distribution system operators are sufficient to guarantee non-discriminatory access to the network for all players.

Article 30 - Legal unbundling of distribution system operators

Article 30 (2) gives Member States the possibility to delay the introduction of legal unbundling of the distribution system operators until 1 July 2007, the date of full market opening. Whilst the Commission considers legal unbundling a very important element in ensuring the non-discriminatory behaviour of system operators it can nevertheless accept this delay.

It has to be kept in mind that the Directive is a decisive step forward in the sense that from the date of implementation the following functional unbundling measures (Article 15, 2) will apply:

(a) those persons responsible for the management of the distribution system operator may not participate in company structures of the integrated electricity undertaking responsible, directly or indirectly, for the day-to-day operation of the generation, transmission, supply of electricity;

(b) appropriate measures must be taken to ensure that the professional interests of the persons responsible for the management of the distribution system operator are taken into account in a manner that ensures that they are capable of acting independently;

(c) the distribution system operator shall have effective decision-making rights, independent from the integrated electricity undertaking, with respect to assets necessary to operate, maintain and develop the network. This should not prevent the existence of appropriate co-ordination mechanisms to ensure that the economic and management supervision rights of the parent company in respect of return on assets in a subsidiary are protected;

(d) the distribution system operator shall establish a compliance programme, which sets out measures taken to ensure that discriminatory conduct is excluded, and ensure its respect is adequately monitored. The programme shall set out the specific obligations of employees to meet this objective. An annual report, setting out the measures taken, shall be submitted by the person or body responsible for monitoring the compliance programme to the regulatory authority referred to in Article 23(1) and published.

These functional unbundling requirement will serve to attenuate the fact that legal unbundling of the system operator might be delayed until 2007. These requirements go a long way to ensure the non-discriminatory behaviour of system operators. It is the effect of these functional unbundling measures that the Commission will evaluate more specifically in its report mentioned in Article 28(3).

B. Gas Directive

Most of the comments made regarding the Electricity Directive are valid for the Gas Directive as well. This communication only mentions the specific gas related points of divergence between the common position and the Commission amended proposal.

The Council rejected two amendments accepted by the Commission. These are amendments 124 and 145.

Article 2 - definitions

Rejected amendment 124 concerns the definition of flexibility instrument. The Council has cancelled the definition of flexibility instrument and its use throughout the operative part. The notion is made explicit and refers to storage facilities and linepack (new definition 15). The Commission welcomes this clarification.

Article 19 - Access to storage

The provisions regarding access to storage and ancillary services in LNG facilities are reinforced in the sense that access to temporary storage and ancillary services necessary for the regasification process and the subsequent delivery of the LNG to the transmission system should be on a regulated basis. Access to storage and ancillary services in general can be organised either on the basis of negotiated or regulated access. The Commission welcomes this reinforcement which ensures that the access to the whole of the LNG facility is on a transparent, regulated basis, and that a different access regime to the storage/ancillary services necessary to process the LNG cannot form a discriminatory obstacle to access.

The rejection of amendment 145 follows on from the clarification of the definition of flexibility instruments, which is a term no longer used in the Directive.

Article 22 - New infrastructure

The common position includes a possibility of derogation from non-discriminatory third party access for some major new gas infrastructures, meaning interconnectors, LNG and storage facilities. The conditions under which an exemption can be granted are strict. The investment should not take place if the exemption were not granted. The investment furthermore needs to enhance competition on the gas market and needs to improve security of supply.

The regulator either decides on the request for a derogation or advises the competent authority in the Member State. The advise of the regulator has to be published together with the final decision. After approval by the relevant authority in the Member State, the Commission either confirms or annuls this decision within a period of two months, extendable by another month should the Commission seek additional information.

This exemption from non-discriminatory third party access has been introduced to safeguard investments in very high-risk projects, which would not take place if such an exemption were not given. For some major investments the regulated rate of return on investment impedes investors to commit their money to a project for which the risks of it becoming profitable are very high.

The Commission feels that the strict limitative conditions and the Commission scrutiny of any regulatory decision on an exemption should be sufficient guarantees that this possibility of exemption will only be used in cases in which it is not absolutely necessary to safeguard an investment in the interest of the internal market and security of supply.

C. Conclusion

The Council Common Position was arrived at by unanimity; the Common Position takes on board nearly all amendments, which were expressed by the European Parliament in its first reading and which the Commission accepted in its amended proposal. Where the common position deviates from the amended proposal it remains close to the principles behind the Commission's original proposal. Consequently, the Commission supports the common position of the Council.

D. Annex

The Commission has made two declarations which have been included in the minutes of the Council meeting of 25 November 2002. These declarations serve as an indication for the interpretation of certain provisions that the Commission will take. The Commission declaration on Article 32 referring to possible future gas supply agreements should, of course, not be interpreted as a derogation to the legislation in force, including the provisions of the Gas Directive which equally apply to transit.

Declarations of the Commission to the minutes of the Council meeting

1. COMMISSION STATEMENT ON NEW INFRASTRUCTURES (ARTICLE 22 OF THE GAS DIRECTIVE AND ARTICLE 7 OF THE REGULATION ON CROSS-BORDER EXCHANGES IN ELECTRICITY)

"Where there is a non-discriminatory and transparent auction procedure approved by the Regulator in conformity with this Directive the Commission confirms that this represents regulated third party access within the meaning of the Directive."

"The Commission emphasises its intention of interpreting this exemption restrictively in order to ensure that such an exemption is restricted to the minimum necessary, in particular for the duration of the exemption and the relevant capacity of the project to which the exemption relates in order to achieve the objective of financing investments of an exceptional level of risk."

2. COMMISSION STATEMENT ON ARTICLE 32 (GAS DIRECTIVE)

"Repeal of Directive 91/296/EEC of 31 May 1991 on the transit of natural gas through grids does not affect the legal framework for future long-term contracts, important for the security of the European Union's supplies."