Amended proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directives 96/92/EC and 98/30/EC concerning rules for the internal markets in electricity and natural gas (presented by the Commission pursuant to Article 250 (2) of the EC-Treaty)

EXPLANATORY MEMORANDUM

A. Principles

1. On 13 March 2001, the Commission submitted a proposal for a Directive of the European Parliament and the Council amending Directives 96/92/EC and 98/30/EC concerning common rules for the internal market in electricity and natural gas.

2. On 13 March 2002, the European Parliament adopted a series of amendments at its first reading. The European Parliament agrees with the main elements of the Commission proposal. The Commission has indicated in broad lines its position on the amendments, indicating which groups of amendments it could accept, subject to minor redrafting, those that could be accepted in principle or in part and those that could not be accepted. This position is reflected in the changes made to the original proposal.

3. The Economic and Social Committee issued its opinion on the proposal on 3 October 2001. It contains many worthwhile suggestions, which have been taken into account in the amended proposal.

4. Discussions in the framework of the Council started in March 2001 and have led to changes proposed to the Commission proposal by the successive Presidencies. Many of these changes are helpful clarifications and are acceptable to the Commission and compatible with the parliamentary amendments with which the Commission agrees.

5. On the 16th of March 2002 the European Council of Barcelona adopted important Conclusions on the internal energy market. These will be taken into account by the Commission and the co-legislators in the framework of the co-decision procedure.

6. 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 this new Directive, 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.

7. In the light of these developments, the Commission has drafted this amended proposal.

B. European Parliament amendments

The amendments of the European Parliament have been incorporated as follows:

I. Amendments accepted in principle or in part

Recitals

Amendment 4 specifies in which areas obstacles to a functioning market remain. The principle of defining in which areas obstacles remain can be supported, although the Commission has defined in recital 4 of its initial proposal that the main obstacles relate to access to the network and different degrees of market opening. However, the addition of ensuring a level playing field in generation and protecting small and vulnerable customers' rights and of disclosure on fuel sources can be supported. (Recital 2). The reference to ownership unbundling cannot be incorporated (see justification under amendment 164). The reference to addressing the tendency to raise the demand for electricity will be incorporated in the forthcoming Commission proposal for a framework Directive on energy efficiency.

Amendment 6 specifies that the different approaches to internalisation of external costs do not contribute to a level-playing field. The Commission has always argued this, as demonstrated for instance in its proposal on energy taxation of 1997. (Recital 6). On the question of support for parts of the energy sector, the Commission is carrying out a survey of types of support for the different fuel sources. The report will be published in the course of the year and will, where necessary, propose measures.

Amendment 7 underlines the importance of non-discriminatory access to the network and the existence of favourable investment conditions. (Recital 7).

Amendment 8 states that construction and maintenance of network infrastructure will contribute to a stable supply. The Commission agrees with the assertion, but moves it from recital 5 to recital 20, which deals with security of supply.

Amendment 12, relating to regulation, emphasises the existence of effective regulation and the necessity to establish at least legally binding methodologies underlying transmission and distribution tariffs, instead of stressing the existence of national regulatory authorities with the competence to set or approve tariffs. This amendment can be supported in principle, the institutional element is less important than the guarantee of effective regulation. Practice in Member States with effective regulation allow for approval or fixing of the methodology by the national regulatory authority, leaving the publication of the individual tariffs to the system operators. When the methodologies are applied in a non-discriminatory manner and are published before entry into force, effective regulation can be ensured. The requirement that national regulatory authorities should be independent of government can not be accepted (Recital 12).

Amendment 59 requires national regulatory authorities to set up market based mechanisms for balancing power as soon as the electricity market is sufficiently liquid. This is reflected in Recital 13 and extended to balancing the gas system as well. The part of the amendment stating that the national regulatory authority shall not only approve or fix tariffs, but also publish these cannot be supported. This is not necessarily the task of the regulator, but can be that of the operators providing those services.

In amendment 75, national regulatory authorities are given the task to ensure that, in approving/fixing transmission and distribution tariffs, they take account of the benefits of distributed generation and demand-side management measures. This is reflected in Recital 14, and in Article 22(1g).

Amendment 14 states that the benefits resulting from the internal market are mainly economic and that the positive impact on employment is due to a reduction in energy bills. The latter part can be accepted, but is slightly reformulated to reflect the fact that efficiency gains constitute the benefit, these may translate in price reductions, but prices also depend on other, external factors; however, the benefits of the internal market are not only economic in nature. (Recital 15).

Amendment 18 specifies the provisions on the examination of the security of supply situation in the Community, taking into account the interconnection capacity between Member States. It is specified that this monitoring should be carried out early enough to allow any necessary actions to be taken in due time. The Commission supports these specifications. The last phrase of amendment 18 states that energy efficiency and energy saving measures should be promoted by tax incentives. The Commission cannot support this, as this is too restrictive. Tax incentives are an important instrument to promote energy efficiency and saving, but other measures, such as targets or positive incentives, will equally be necessary. (Recital 20).

Amendment 95/96 calls for consideration to be given to the increased external dependence of the Union on natural gas and to consider measures to encourage reciprocal arrangements for access to networks of third countries. The Commission supports this addition; it is fully in line with the Commission's policy on security of supply and with the policy of the Commission towards candidate countries and third countries. (Recital 5).

Amendments 103 and 104 can be accepted in so far as they are compatible with the objective of achieving effective regulation (and not assuming splitting the Directive into two). (Recital 12). However, the reference to prior approval of tariffs or methodologies for setting tariffs for storage access goes beyond the Commission proposal which allows for a choice between negotiated and regulated access to storage as different flexibility mechanisms exist which may be taken into account in negotiations. This latter proposal can therefore not be supported.

Amendment 110 calls for admission to the gas network for biogas and gas for biomass for environmental reasons provided this is compatible with the secure and efficient operation of the network on environmental grounds. The Commission has redrafted the recital for clarification purposes. (Recital 21).

Amendment 111 states that long-term 'take-or-pay' contracts will remain an important and necessary part of the gas supply of Member States and should be maintained as an option. The Commission is of the opinion that long-term contracts should be maintained as an option. (Recital 22).

Amendment 112 calls, in a recital, for an obligation to supply customers with gas. The Commission can only accept the concept of an obligation to supply customers with gas, in so far as they are connected to the gas network. In contrast to electricity, gas is a substitutable fuel and an obligation to supply all customers cannot be imposed. (Recital 23).

Article 1

Amendment 118 includes in Article 1 of the amended Gas Directive the reference that the Directive shall also apply to apply biogas and gas from biomass. The Commission can accept this addition, but adds a clause to the effect that this applies to these gases insofar as they can be technically and safely injected into the natural gas system. (Article 1, 10(3) gas Directive).

Article 2 - Definitions

The principle of amendment 30 on the definition of energy efficiency/demand side management is supported by the Commission, but the definition is reformulated, because it was insufficiently precise in wording. (Article 2(30)-electricity).

Amendment 33 defining embedded generator has been redefined as distributed generation connected to the distribution grid, as this term is used most commonly in literature. (Article 2(32)-electricity).

Amendment 39 on the definition of disclosure has been reworded and the requirement alleviated. The reference to the specification of costs should be taken out as, as pointed out in the justification under amendment 6, differences in internalisation of external costs, and in support for fuel sources, would give rise to distorted comparisons. (Article 2(33)-electricity).

Amendments 119 and 120 change the definitions of storage and LNG facilities to clarify the interface of these with regard to storage. The Commission accepts these amendments with rephrasing. (Articles 2(9) and 2(11)-gas).

Amendment 124 proposes the inclusion of a definition of 'flexibility instrument'. The principle is agreed to, the formulation slightly amended. (Article 2(15)-gas)

Article 3 - Universal and Public Service Obligations

Amendment 40 adding sustainable development to the scope of the Directive has been shortened in wording, without altering its sense.

Amendments 41 and 125 introduce climate change, energy efficiency and research and development among the subjects to which public service obligations may relate. The Commission subscribes to the importance of these and can accept the addition of energy efficiency and climate change measures as extensions of environmental protection already included in Article 3,2. Whilst research and development may, in certain cases, be carried out in the context of public service obligations, it is not necessary to specifically refer to this in Article 3(2).

The addition in amendment 125 that public service obligations shall not unduly restrict competition is incorporated by the fact that, in the report of the Commission on the measures to fulfil public service obligations, the Commission will assess their effect on competition in both the electricity and gas market. This equally follows on from amendments 127 and 128. However, the reference to the monitoring of retail tariffs by regulators, the proper consultation of consumer organisations and the possibility of introducing price caps are too detailed for this framework Directive. Furthermore, the existence of price caps has contributed to the crisis in security of supply in California, as the price signal was distorted. These matters should be left to subsidiarity. (Articles 3(2), 3(8), 26(1) electricity and 3(2), 3(7) and 28(1) gas)

Amendments 42 and 126 reinforce the provisions on the protection of vulnerable customers and oblige Member States to guarantee that effective procedures are in place to enable individual customers to switch supplier. The Commission has modified this last provision slightly and refers to eligible customers, as they are entitled to choose their supplier and should therefore be able to switch. The inclusion of a sentence that 'affordability should be properly defined' is not appropriate for an Article of a Directive. The assertion that universal service is a dynamic concept or that nothing in this Directive should prevent Member States from strengthening the position of small customers does not add value to the Directive. The restriction of paragraph 3, Article 3, in amendment 126 to domestic customers cannot be accepted. (Articles 3(3 and 4) electricity, 3(4)gas)

Amendment 43 introduces the obligation to specify fuel sources into the body of the Directive. In the initial proposal this was part of the annex. Furthermore it specifies the disclosure requirements in more detail. The Commission agrees that disclosure is important in enabling effective choice, and does not oppose inclusion in the Article, nor a certain specification. However, the amendment is too detailed. The Commission therefore alleviates the disclosure requirements to a certain extent. The obligation to impose penalties on companies which do not comply with the requirements, specify the percentage production of CHP plants or the establishment of a certified body to guarantee transparency in quantity and methods of generation, are too detailed and should be left to subsidiarity. (Article 3(5)-electricity).

Amendment 45 obliges Member States to set minimum criteria for delays within which system operators must effectuate connections and repairs. The Commission has added the observance of the measures taken by Member States to assure this, to the tasks of the regulator in Article 22. (Article 22(d) electricity and added in Article 22(d) for gas).

Amendment 46 specifies that Member States shall notify all their measures to fulfil public and universal service obligations upon implementation and subsequently every two years any modifications to those measures. Amendment 46 and part of amendment 125 specifically add public service obligations relating to environmental protection, through promotion of renewable energy sources and energy efficiency demand side management measures. (Article 3(8) electricity, 3(2) gas)

Amendments 48 and 129 specify that customers shall be informed about their rights regarding universal service. (Annex, point f)

Article 5 - Authorisation procedures (electricity)

Amendment 50 calls for simplified authorisation procedures for small or embedded generation under 15 MW. The Commission can accept this principle, but has changed the wording in accordance with the relevant provision from Directive 2001/77/EC on renewable sources of energy in the internal electricity market. The Commission does not support the part of the amendment stating that no authorisation should apply to fuel cell, micro CHP or similar technology on domestic premises. Authorisation should be required, for instance with regard to neighbouring premises with regard to noise etc., but speedier procedures should be achieved. (Article 5(3)).

Article 6 - Tendering (electricity)

Amendment 51 adds to the tendering option a possibility to tender explicitly for energy efficiency/demand side management measures in the interest of security of supply and environmental protection. The Commission agrees to the importance of energy efficiency and saving for both security of supply and environmental protection. The provision that the Commission may co-ordinate the tendering process if more than one Member State is concerned is superfluous, given the fact that the calls for tender are published in the Official Journal. (Article 6(1) electricity).

Article 6a (electricity), 4a (gas) - Monitoring of Security of Supply

Amendments 53, 54, 130 and 131 suggest the creation of a European Regulatory Group for the European electricity and gas markets by the Commission. The Commission has the intention to create such a consultative body shortly, through a Commission decision. The purpose of this group will be to encourage co-operation and co-ordination of national regulatory authorities, in order to promote the development of the internal market for electricity and gas, and to seek to achieve a consistent application, in all Member States, of the provisions set out in this Directive and in the Regulation on cross-border exchanges of electricity.

Amendment 109 includes the environment and public service requirements in addition to security of supply as a reason to monitor the demand/supply balance. The Commission can accept this addition. It does acknowledge the importance of energy efficiency and saving in the context of security of supply, as reflected in amendment 51. (Article 6a (electricity), 4a (gas)).

Amendment 132 adds in the report by the Commission on security of supply in natural gas, an examination of issues relating to system capacity levels. This is accepted; the Commission proposed in its recent Communication on European energy infrastructure to combine the security of supply report with a report on the situation regarding infrastructure. (Article 26(1) electricity, 28(1) gas).

Article 7/a - 10 - Unbundling of Transmission and Distribution System Operators

Of amendment 56, the part amending Article 7, 6c, which proposes that the system operator shall have efficient decision making rights as to the assets necessary to maintain and develop the network, can be accepted, with modified wording. This equally applies to amendment 163, which states the same objective in different wording, and to 62 on the distribution system operator. The Commission has changed the wording of amendment 137 relating to gas system operators in the same sense. (Article 7,(4c) electricity, 7a,(2c) gas).

Amendment 135 specifies that at least the methodologies for the establishment of tariffs and terms for balancing the gas system shall be approved or fixed by the national regulatory authority. The tariffs and terms shall be published. This is in line with amendment 76. (Article 7(3) electricity and gas).

Amendment 140 calls for admission to the gas network for biogas and gas for biomass for environmental reasons on condition that this is compatible with the secure and efficient operation of the network on environmental grounds. The Commission proposes to redraft this amendment for clarification purposes. (Article 10(3), gas).

Article 8 - Maintenance and Development of the network by the TSOs.

Amendment 57 states that costs of connecting producers of electricity from renewables and combined heat and power shall be objective and non-discriminatory. The Commission is of the opinion that the costs of connection of all producers should be non-discriminatory, but that, in addition, the specific characteristics and the costs and benefits of connecting producers from renewables and combined heat and power to the grid should be taken into account. This is reflected in Article 22. The explicit reference to ensure no obstacles exist to the stimulation of dispersed generation, is taken on board in Article 22(1g) as well, where the regulators shall monitor the measures taken by Member States to ensure that the benefits of connecting renewables producers and distributed generation to the system are taken in account. (Article 22(1g) electricity).

Article 13/14 - Unbundling of Accounts

Amendment 66 specifies that the national regulatory authority shall have access to the accounts of generation, transmission, distribution and supply undertakings. This can be supported, but has been reformulated to ensure that it is made explicit that these authorities shall have access to these accounts, even if the activities are not carried out by separate undertakings. This was implied in the Commission proposal. The reference to trading and retail can not be supported, as these terms are not used in the Directive. (Article 13 electricity).

Article 15 and 16 - Access to the Network

Amendment 172 introduces the notion that tariffs should 'reflect long-term, marginal avoided network costs from decentralised electricity production and demand side management measures. The Commission proposal confers the task of monitoring/setting these tariff conditions to the national regulatory authorities. They will take account of the work on this subject carried out in the Madrid and Florence Fora and in the framework of the Regulation. (Recital 14, Article 22, electricity and gas). Amendment 172 furthermore introduces the notion of published benchmarking tariffs. This leaves room for deviation or negotiation with respect to the published tariffs, this part of the amendment cannot be accepted.

Amendment 70 obliges system operators to quote terms for reinforcing the network. The principle can be supported, but to avoid undesired consequences obliging system operators to engage in costly feasibility and cost studies after every refusal of access, the Commission has changed the wording to reflect the fact that such quotes should be provided on request. (Article 16(2) electricity).

Amendment 145 refers to access to flexibility instruments. The Commission can accept to add access to flexibility instruments to access to storage, which is one of the most important flexibility instruments in most Member States. The Commission can not accept, however, that access requires that it is necessary both in technical and economic terms. If it is necessary for only one of these reasons, access should be provided. (Article 15(2) gas).

Article 22 - Regulation

Amendments 75, 76, 149 and 184 on the national regulatory authority can be supported in part. With respect to the independence of the national regulatory authority, the Commission proposes that it is important that the regulatory authority is independent from the interests of industry. The reference to benchmarking tariffs in amendment 75 under paragraph 1a cannot be supported. The Commission can accept the approving or fixing by the regulator of methodologies underlying the calculation of the transmission and distribution tariffs, terms and conditions and tariffs for the provision of balancing services (this also applies to amendment 12). (Article 22(2) and 22(4) electricity and gas).

Amendments 77 and 78 can be accepted, however the wording 'competent body' is replaced with 'national regulatory authority' as this is the competent body in question. (Article 22(1) electricity and gas).

Amendments 79, 149 and 151 add to the tasks of the national regulatory authority the reporting on market dominance, market concentration and predatory and anti-competitive behaviour. These requirements are added to Article 22, by requiring the national regulatory authority to monitor 'effective competition'. (Article 22(1) electricity and gas).

Amendments 60 and 65 state that transmission and distribution system operators shall be placed 'under a positive obligation' to release information on capacity allocation. This is translated as a task of the national regulatory authority to monitor that system operators do indeed publish aggregated information on interconnectors, grid usage and allocation to interested parties. (Article 22(1)(e) electricity and added in 22(1)(e) for gas).

Amendment 90 on the prohibition of cross-subsidisation is accepted in principle and reflected in Article 22(1f).

Article 23 (electricity) - EU imports

Amendment 82 changes the reporting obligation on imports of electricity from once a year to once every three months. The Commission is, in principle, willing to except a shorter periodicity for the reporting obligation. Article 23(a).

Article 24 (electricity)- Stranded costs and small, isolated systems

Amendment 84 deletes Article 24 (electricity). This can be accepted for paragraphs 1 and 2 relating to stranded costs as all Member States have had the possibility to introduce their application under the Directive, and the deadline referred to in paragraph 2 has expired. Paragraph 3, however, should be maintained as exemptions for small, isolated systems may continue to be required.

Article 26 (electricity) - 28 (gas) - Reports

Amendments 55, 130 and 132 (relating to Article 6 which is moved to Article 26(1) electricity) and 28(1)gas) specify the provisions on the examination of the security of supply situation in the Community, taking into account the interconnection capacity between Member States. It is specified that this monitoring should be carried out early enough to allow any necessary actions to be taken in due time. The Commission supports these specifications.

Amendment 86 regroups in one article the different reports that the Commission is obliged to publish. The Commission supports the principle of regrouping the reports, but the amendment is formulated too restrictively. The Commission maintains all the elements in essence, and adds the report on public service obligations and on harmonisation requirements of former Article 3a and Article 25 respectively.

Amendment 153 on reporting on gas imports from third countries is incorporated in Article 28 of the amended Gas Directive under the reporting obligation of the Commission.

Annex

Amendments 89, 158, 159 and 160 specify some provisions of the annex on consumer protection. Most of these can be accepted. However, as the obligation on disclosure is moved from the annex to Article 3(5) for electricity, point d) of the annex is deleted. The part on debt staggering is deemed too detailed, and will fall under protection of vulnerable customers. The obligation to offer customers with a connection capacity of less than 10 kW at least one contract without a fixed minimum price, should equally be left to subsidiarity.

II. Rejected amendments

All amendments (1, 3, 10, 11, 17, 21, 22, 23, 25, 85, 87, 91, 92, 93, 94, 98, 99, 100, 101, 105, 106, 107, 108, 113, 114, 116, 156, 157) relating to, or implying, the splitting of the proposal of the Commission into two separate proposals, one amending the Electricity Directive 96/92/EC and one amending the Gas Directive 98/30/EC are not accepted. The electricity and gas markets are increasingly interdependent and should therefore be treated in parallel. The majority of new power generation plants are gas fired. Confronting actors working on both markets with two separate sets of rules would severely hamper the efficient functioning of the internal market. Furthermore, there is a risk that the splitting of the proposal would lead to a divergence in the dates of adoption.

Recitals

Amendment 9 states that only locally owned utilities can benefit from the exemption to the obligation to legally unbundle the distribution system operator in distribution companies supplying more than 100.000 customers. This would be a discriminatory distinction between companies.

Amendment 16 states that the same rules on tax, subsidies and concessions form the basis of a functioning market. The European Union has not arrived at this degree of harmonisation and one cannot assert that the market is not functioning. Improvements can be made. For this reason the Commission has presented its proposal on energy taxation, and is now examining the situation regarding support for fuel sources.

Amendments 19 and 83 call on the Commission to come forward with proposals on combined heat and power and on access from third countries imports respectively. Whilst it is the intention of the Commission to come forward this year with the proposal on combined heat and power, and where necessary, measures on access from third countries, a Directive is not the place to call on the Commission to present proposals.

Article 2 - Definitions

Amendments 180, 27, 29, 31, 35, 36, 37, and 38 concern amendments introducing definitions which are too detailed or serve no purpose in the framework of this Directive in the light of the fact that the Commission rejects the amendments in which these defined terms are used.

Amendments 121 and 122 deleting the definitions of system and ancillary services cannot be accepted as, in combination with amendment 120, it would not change anything in substance, but renders the definition of the different parts of the system more difficult to understand.

Article 6 (electricity) - Security of Supply

Amendment 52 deletes the provision from Article 6 requiring that offers from existing producers shall be received in calls for tender for generation capacity if additional requirements can be met by existing generators. This is incompatible with public procurement rules and indeed general principles of fair competition. A specification of primary energy sources can in any case be included and applies equally to existing generation should Member States wish to exclude certain types of fuel.

Article 7 (electricity), 7a (gas) - Unbundling of Transmission System Operator

Amendment 164 calls for ownership unbundling in electricity in principle. If Member States were not to choose ownership unbundling, they should be able to prove that the unbundling measures they apply will have the same results in terms of non-discrimination as ownership unbundling. The Commission has proposed legal unbundling coupled with measures of functional unbundling and following adoption of this proposal will carefully monitor results to dertermin whether this is adequate to achieve the objective of non-discriminatory network access. The Commission will review the effectiveness of this provision in its report referred to in Articles 26 (electricity) and 28 (gas), and may propose further measures, if necessary.

Amendments 133 and 139 would allow the integrated gas undertaking to be in control of transmission and distribution system operation. The responsibility for operating these networks should lie with the legally separated transmission and distribution system operator, not the integrated company.

Article 10 - Unbundling of Distribution System Operator

Amendment 170 increases the threshold for the exemption of the obligation to legally unbundle the distribution system operator in electricity from 100.000 to 150.000 clients; furthermore, this would only apply to locally owned utilities (see rejected amendment 9). This would lead to an exemption for too many distribution companies.

Amendments 63, 138, 142 either change or delete altogether (in the Gas part of the proposal) the obligation to nominate a compliance officer to guarantee that the non-discrimination and confidentiality measures are upheld in a legally separate system operator. The Commission cannot accept these changes to this provision.

Amendment 64 proposes that only the book value can be used for the valuation of the network in the event that new utilities are set up which would be owned or controlled by local authorities. The Directive is not the place to enter into details regarding the valuation of networks, which has a significant impact on tariffs and on the viability of these companies. This should be left to subsidiarity and the European regulatory fora and, possibly, be examined under competition rules, including state aid rules.

Article 14 (electricity) - Unbundling and Transparency of Accounts

Part of amendment 67 alters the provision on accounting unbundling to apply only to transmission or distribution activities on the one hand and generation or supply activities on the other hand. This cannot be accepted, as for a number of years, companies will retain de jure or de facto captive customers. The risk of cross subsidisation therefore persists and should be controlled by national regulatory authorities. The details on what can be calculated in the distribution tariffs should be left to subsidiarity, to national regulatory authorities.

Amendment 68 relating to the separate accounting and management of future nuclear decommissioning funds and waste management activities cannot be supported. While the Commission agrees to the importance of the issue, this matter has to be addressed under the relevant Community rules, which deal with such measures. Its place is not in this Directive. The Commission is preparing a report on the different forms of public support for fuel sources. This report will be published later this year and will contain conclusions and, where appropriate, propose measures.

Article 16 (electricity), 14 (gas) - Access to the Network

Amendments 72 and 146 stipulate that the available capacity of the gas and electricity networks not used shall be made available to system users. This is dealt with under the Regulation for electricity, and in the Madrid Forum for gas.

Amendments 161, 175 and 183 seek to reintroduce a possibility of negotiation concerning access to the gas network and allow for reservation of capacities in gas infrastructure. The tariffs or, at least, the methodology used to establish or calculate the tariffs shall be approved by the national regulatory authority prior to their entry into force. Only access on the basis of published tariffs can achieve the objective of non-discrimination.

Article 19 - Reciprocity

Amendment 74 extends the reciprocity principle in electricity. The Commission opposes any changes to the current provisions on reciprocity, which adequately balance competition and market opening objectives.

Amendment 148 deletes the reciprocity principle from the amended gas Directive. This is unacceptable, as Member States with a greater degree of market opening might want to maintain this option until market opening has been completed in all Member States.

Article 22 - Regulation

Amendments 81 and 152 contain a possibility for national regulators to require release of electricity generation and gas and electricity capacity from long-term contracts Amendment 81 also stipulates that Member States shall ensure that national regulators can impose public service obligations on electricity companies. It also includes a requirement on national regulators to report to national parliaments once a year. These measures have to be left to subsidiarity. The Commission considers that, at least at this stage, it is necessary to monitor progress in creating a competitive internal market prior to deciding on electricity and gas release programs at Community level.

Miscellaneous

Amendment 155 gives Member States two years to implement this Directive. This is unnecessarily long as the basic legislation is in place or under preparation in all Member States

Amendment 87 only repeals the electricity transit Directive, leaving the gas transit Directive in existence and would thus allow for negotiated third party access for transit of gas. The Commission maintains that there should be homogeneity in access regimes, publication requirements and dispute settlement mechanisms for the whole network, including for transit and cross-border transmission within the internal gas market to achieve non-discriminatory access to the network.

Amendments 44 and 80 are too detailed in this Directive which is essentially a framework Directive, and should be left to subsidiarity.

C. Developments in the framework of the Council

Many changes made by the subsequent Presidencies are compatible with parliamentary amendments and need no further explanation. Other changes are largely textual or detailed in nature, and principally serve to clarify the texts..

D. European Council Conclusions of Barcelona

The European Council Conclusions stipulating that all non-household customers should be eligible by 2004 at the latest, have been incorporated in Article 19 (electricity) and Article 18 (gas).

Furthermore, in Article 3(4)electricity and 3(3)gas, the Council Conclusions concerning the protection of remote areas have been taken into account.

The request by the European Council that the European Commission publish a report on progress with the implementation of these Directives on a yearly basis, has been integrated in Articles 26 (electricity) and 28 (gas).

2001/0077 (COD)

Amended proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directives 96/92/EC and 98/30/EC concerning rules for the internal markets in electricity and natural gas

(Text with EEA relevance)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 47(2), Article 55 and Article 95 thereof,

Having regard to the proposal from the Commission [1],

[1] OJ C

Having regard to the opinion of the Economic and Social Committee [2],

[2] OJ C

Having regard to the opinion of the Committee of the Regions [3],

[3] OJ C

Acting in accordance with the procedure laid down in Article 251 of the Treaty [4],

[4] OJ C

Whereas:

(1) Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996 concerning common rules for the internal market in electricity [5] and Directive 98/30/EC of the European Parliament and of the Council of 22 June 1998 concerning common rules for the internal market in natural gas [6] have made very important contributions towards the creation of internal markets for electricity and gas.

[5] OJ L 27, 30.1.1997, p. 20.

[6] OJ L 204, 21.7.1998, p. 1.

(2) Experience in implementing those Directives demonstrates the benefits that have begun to result from the internal markets in electricity and gas, in terms of efficiency gains, price reductions, higher standards of service and increased competitiveness. However, important shortcomings and possibilities for improving the functioning of the markets remain, notably in ensuring a level playing field in generation and addressing the risks of predatory behaviour, ensuring non-discriminatory transmission and distribution tariffs, through access to the network on the basis of tariffs published prior to their entry into force, and ensuring that the rights of small and vulnerable customers are protected and that information on fuel sources for electricity generation is disclosed.

(3) At its meeting in Lisbon on 23 and 24 March 2000, the European Council called for rapid work to be undertaken to complete the internal market in both electricity and gas sectors and to speed up liberalisation in these sectors with a view to achieving a fully operational internal market. The European Parliament, in its Resolution of 6 July 2000 on the Commission's second report on the state of liberalisation of energy markets, requested the Commission to adopt a detailed timetable for the achievement of accurately defined objectives with a view to gradually but completely liberalising the energy market.

(4) The freedoms which the Treaty guarantees European citizens - free movement of goods, freedom to provide services and freedom of establishment - are only possible in a fully open market, which enables all consumers freely to choose their suppliers and all suppliers freely to deliver to their customers.

(5) In view of the anticipated increase in dependency as regards natural gas consumption, consideration should be given to initiatives and measures to encourage reciprocal arrangements for access to third-country networks and market integration.

(6) The main obstacles in arriving at a fully operational internal market are related to issues of access to the network, network tarification, different degrees of market opening between Member States and different approaches to internalisation of external costs.

(7) For competition to function, network access must be non-discriminatory, transparent and fairly priced. Favourable investment conditions should exist.

(8) In order to achieve non-discriminatory access to the network, the independence of the transmission system operator is of paramount importance. The provisions on unbundling should therefore be strengthened. In order to ensure non-discriminatory access to the distribution network, unbundling requirements for the distribution system operator should be introduced for both electricity and gas distribution system operators.

(9) To avoid imposing a disproportionate financial and administrative burden on small distribution companies, Member States should be able, where necessary, to exempt such companies from the unbundling requirements.

(10) Further measures should be taken in order to ensure transparent, predictable and non-discriminatory tariffs for access to essential transportation and related infrastructure, including storage and other ancillary facilities. Those tariffs should be applicable to all system users on a non-discriminatory basis.

(11) In the light of the experience gained with the operation of Council Directive 90/547/EEC of 29 October 1990 on the transit of electricity through transmission grids [7] and Council Directive 91/296/EEC of 31 May 1991 on the transit of natural gas through grids [8], measures should be taken to ensure homogeneous and non-discriminatory access regimes for transmission, including cross-border flows of gas and electricity between Member States.

[7] OJ L 313, 13.11.1990, p. 30. Directive as last amended by Commission Directive 98/75/EC (OJ L 276, 13.10.1998, p. 9).

[8] OJ L 147, 12.6.1991, p. 37. Directive as last amended by Commission Directive 95/49/EC (OJ L 233, 30.9.1995, p. 86).

(12) The existence of effective regulation, carried out by national regulatory authorities, is an important feature in guaranteeing non-discriminatory access to the network. Those authorities should at least have the competence to fix or approve the tariffs, or at least, the methodologies underlying the calculation of transmission and distribution tariffs and tariffs for access to liquefied natural gas (LNG) facilities. These tariffs should be published prior to their entry into force.

(13) In order to ensure effective market access for new entrants, non discriminatory and cost-reflective balancing mechanisms are necessary. As soon as the electricity and gas markets are sufficiently liquid, this should be achieved through the setting up of transparent market-based mechanisms for the supply and purchase of electricity and gas needed in the framework of balancing requirements. In the absence of such liquid markets, national regulatory authorities should play an active role to ensure that balancing tariffs are non-discriminatory and cost-reflective.

(14) National regulatory authorities should be able to fix or approve tariffs, or the methodologies underlying the calculation ot the tariffs, on the basis of a proposal by the transmission system operator or distribution system operator(s) or LNG system operator, or on the basis of a proposal agreed between these operator(s) and the users of the network. In carrying out these tasks, national regulatory authorities should ensure that transmission and distribution tariffs are non-discriminatory and cost-reflective, and should take account of the long-term, marginal, avoided network costs from distributed generation and demand-side management measures.

(15) The benefits resulting from the internal market should be available to all Community industry and commerce, including small and medium-sized enterprises, and to all Community citizens as quickly as possible, for reasons of fairness, competitiveness, and indirectly, to create employment as a result of the efficiency gains that will be enjoyed by enterprises.

(16) Gas and electricity customers should be able to choose their supplier freely. Nonetheless a phased approach should be taken to completing the internal market for electricity and gas, coupled with a specific deadline, to enable industry to adjust and ensure that adequate measures and systems are in place to protect the interests of customers and ensure they have a real and effective right to choose supplier.

(17) Progressive market opening towards full competition should gradually remove differences between Member States. Transparency and certainty in the implementation of this Directive should be ensured.

(18) Directive 98/30/EC provides for access to storage as part of the gas system. In the light of the experience gained in implementing the internal market, additional measures should be taken to clarify the provisions for access to storage and other ancillary services and to reinforce the separation of the operation of transmission and distribution systems, and gas storage and LNG facilities.

(19) Nearly all Member States have chosen to ensure competition in the electricity generation market through a transparent authorisation procedure. However, Member States should have the possibility to ensure security of supply through the launching of a tendering procedure in the event that sufficient electricity generation capacity is not built on the basis of the authorisation procedure.

(20) In the interest of security of supply, the supply/demand balance in individual Member States should be monitored, followed by a report on the situation at Community level, taking account of interconnection capacity between areas. Such monitoring should be carried out sufficiently early to enable appropriate measures to be taken if security of supply is compromised. The construction and maintenance of the necessary network infrastructure, including interconnection capacity, should contribute to ensuring a stable electricity and gas supply.

(21) Member States should ensure that biogas and gas from biomass is granted non-discriminatory access to the gas system, provided such access is compatible with the relevant technical rules and safety standards.

(22) 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 objectives of this Directive and are compatible with the Treaty, including competition rules.

(23) Member States should ensure that all customers enjoy the right to be supplied with electricity of a specified quality at affordable, clearly comparable, transparent and reasonable prices. Member States should also ensure that all final customers connected to the gas system are informed about their rights to be supplied with natural gas of a specified quality at reasonable prices. In order to ensure the maintenance of the highest possible standards of public service in the Community, all measures taken by Member States to achieve the objectives of this Directive should be regularly notified to the Commission. The Commission should regularly publish a report analysing measures taken at national level to achieve public service objectives and comparing their effectiveness, with a view to making recommendations as regards measures to be taken at national level to achieve high public service standards.

(24) The requirement to notify the Commission of any refusal to grant authorisation to construct new generation capacity has proven to be an unnecessary administrative burden and should therefore be dispensed with.

(25) In accordance with the principles of subsidiarity and proportionality as set out in Article 5 of the Treaty, the objectives of the proposed action, namely the creation of fully operational internal electricity and gas markets, in which fair competition prevails, cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale and effects of the action, be better achieved by the Community. This Directive confines itself to the minimum required in order to achieve those objectives and does not go beyond what is necessary for that purpose.

(26) To ensure homogeneity in the treatment of access to the electricity and gas networks, also in the case of transit, Directives 90/547/EEC and 91/296/EEC should be repealed.

(27) Directives 96/92/EC and 98/30/EC should therefore be amended accordingly.

(28) This Directive respects the fundamental rights and observes the principles recognised in particular by the Charter of Fundamental Rights of the European Union,

HAVE ADOPTED THIS DIRECTIVE:

Article 1

Amendments to Directive 96/92/EC

Directive 96/92/EC is amended as follows:

(1) Articles 1, 2 and 3 are replaced by the following:

"Article 1

This Directive establishes common rules for the generation, transmission, distribution and supply of electricity. It lays down the rules relating to the organisation and functioning of the electricity sector, access to the market, the criteria and procedures applicable to calls for tender and the granting of authorisations and the operation of systems.

Article 2

For the purposes of this Directive:

1) "generation" shall mean the production of electricity;

2) "producer" shall mean a natural or legal person generating electricity;

3) "autoproducer" shall mean a natural or legal person generating electricity essentially for itsown use;

4) "independent producer" shall mean:

(a) a producer who does not carry out electricity transmission or distribution functions in the territory covered by the system where it is established;

(b) in Member States in which vertically integrated undertakings do not exist and where a tendering procedure is used, a producer corresponding to the definition of point (a), who may not be exclusively subject to the economic precedence of the interconnected system;

5) "transmission" shall mean the transport of electricity on the high-voltage interconnected system with a view to its delivery to final customers or to distributors, but not including supply;

6) "transmission system operator" shall mean a natural or legal person responsible for operating, ensuring the maintenance of and, if necessary, developing the transmission system in a given area and, where applicable, its interconnections with other systems, and for ensuring the long-term ability of the system to meet reasonable demands for the transmission of electricity;

7) "distribution" shall mean the transport of electricity on medium-voltage and low-voltage distribution systems with a view to its delivery to customers, but not including supply;

8) "distribution system operator" shall mean a natural or legal person responsible for operating, ensuring the maintenance of and, if necessary, developing the distribution system in a given area and, where applicable, its interconnections with other systems and for ensuring the long-term ability of the system to meet reasonable demands for the distribution of electricity;

9) "customers" shall mean wholesale and final customers of electricity;

10) "wholesale customers" shall mean any natural or legal persons who purchase electricity for the purpose of resale inside or outside the system where they are established;

11) "final customer" shall mean a customer purchasing electricity for his/her own use;

12) "household customer" shall mean a customer purchasing electricity for his/her own household consumption, excluding commercial or professional activities;

13) "non-household customer" shall mean any natural or legal person purchasing electricity which is not for its own household use and shall include producers and wholesale customers;

14) "eligible customers" shall mean customers who have access to competitive suppliers of electricity in accordance with this Directive;

15) "interconnectors" shall mean equipment used to link electricity systems;

16) "interconnected system" shall mean a number of transmission and distribution systems linked together by means of one or more interconnectors;

17) "direct line" shall mean either an electricity line linking an isolated production site with an isolated customer or an electricity line linking an electricity producer and an electricity supply undertaking to supply directly their own premises, subsidiaries and eligible customers ;

18) "economic precedence" shall mean the ranking of sources of electricity supply in accordance with economic criteria;

19) "ancillary services" shall mean all services necessary for the operation of a transmission or distribution system;

20) "system user" shall mean any natural or legal person supplying to, or being supplied by, a transmission or distribution system;

21) "supply" shall mean the sale of electricity to customers;

22) "integrated electricity undertaking" shall mean a vertically or horizontally integrated undertaking;

23) "vertically integrated undertaking" shall mean an undertaking or a group of undertakings whose mutual relationships are defined in Article 3(3) of Council Regulation (EEC) No 4064/89* and where the undertaking/group concerned is performing at least two or more of the functions of transmission, distribution, generation and supply of electricity ;

24) "horizontally integrated undertaking" shall mean an undertaking performing at least one of the functions of generation for sale, or transmission, or distribution, or supply of electricity, and another non-electricity activity;

25) "tendering procedure" shall mean the procedure through which planned additional requirements and replacement capacity are covered by supplies from new or existing generating capacity;

26) "long-term planning" shall mean the planning of the need for investment in generation and transmission and distribution capacity on a long-term basis, with a view to meeting the demand for electricity of the system and securing supplies to customers;

27) "small isolated system" shall mean any system with consumption of less than 2500 GWh in the year 1996, where less than 5% of annual consumption is obtained through interconnection with other systems;

28) "energy imbalance" shall mean the difference between the quantity of electricity notified to the transmission ordistribution system operator for injection or withdrawal at one or more given locations over a given time period and the metered quantity of electricity withdrawn or injected at one or more given locations over the same time period;

29) "security" shall mean both security of supply and provision of electricity, and technical safety;

30) "energy efficiency/demand-side management" shall mean a global or integrated approach aimed at influencing the amount and timing of electricity consumption in order to reduce primary energy consumption and peak loads by giving precedence to investments in energy efficiency measures, or other measures, such as interruptible supply contracts, over investments to increase generation capacity, if the former are the most effective and economical option, taking into account the positive environmental impact of reduced energy consumption and the security of supply and distribution cost aspects related to it;

31) "renewable energy sources" shall mean renewable non-fossil energy sources (wind, solar, geothermal, wave, tidal, hydropower, biomass, landfill gas, sewage treatment plant gas and biogases);

32) "distributed generation" shall mean generation plants connected to the low-voltage distribution system;

33) "disclosure" shall mean making available in aggregate form commercial information associated with the production of electricity and relating to the sources used to produce electricity, their location, or environmental impact.

Article 3

1. Member States shall ensure, on the basis of their institutional organisation and with due regard for the principle of subsidiarity, that, without prejudice to paragraph 2, electricity undertakings are operated in accordance with the principles of this Directive, with a view to achieving a competitive and sustainable market in electricity, and shall not discriminate between these undertakings as regards either rights or obligations.

2, Having full regard to the relevant provisions of the Treaty, in particular Article 86 thereof, Member States may impose on undertakings operating in the electricity sector, in the general economic interest, public service obligations which may relate to security, including security of supply, regularity, quality and price of supplies and environmental protection, including energy efficiency climate protection. Such obligations shall be clearly defined, transparent, non-discriminatory and verifiable. In relation to security of supply, energy efficiency/demand-side management and for the fulfilment of environmental goals, as referred to in this paragraph Member States may introduce the implementation of long-term planning, taking into account the possibility of third parties seeking access to the system.

3. Member States shall ensure that all final customers enjoy universal service, that is the right to be supplied with electricity of a specified quality within their territory at reasonable prices. To that end, Member States may appoint a supplier of last resort. Member States shall impose on distribution companies an obligation to connect customers to their grid under terms, conditions and tariffs set in accordance with the procedure laid down in Article 22, 2.

4. Member States shall take appropriate measures to protect final customers, and shall in particular ensure that there are adequate safeguards to protect vulnerable customers from disconnection. In this context, Member States may take appropriate measures to protect final customers in remote areas. They shall ensure high levels of consumer protection, particularly with respect to transparency regarding contractual terms and conditions, general information and dispute settlement mechanisms. Member States shall ensure that the eligible customer is effectively able to switch to a new supplier. These measures shall include, in particular, those set out in the Annex.

5. Member States shall ensure that electricity suppliers specify in the bills and in all advertising and promotional materials made available to final customers:

(a) the percentage contribution of each energy source to the commercial fuel mix for the electricity supplied;

(b) the overall fuel mix of the supplier over the preceding year;

(c) the relative importance of each energy source with respect to the production of greenhouse gases.

With respect to electricity obtained via an electricity exchange, the aggregate figures provided by the exchange over the preceding year may be used.

6. Member States shall implement appropriate measures to achieve the objectives of social and economic cohesion, environmental protection, which may include energy efficiency/demand-side management measures and means to combat climate change, and security of supply. Such measures may include, in particular, the provision of adequate economic incentives, using, where appropriate, all existing national and Community tools, for the maintenance and construction of the necessary network infrastructure, including interconnection capacity.

7. Member States may decide not to apply the provisions of Articles 5, 6, 16 and 21 in so far as their application would obstruct the performance, in law or in fact, of the obligations imposed on electricity undertakings in the general economic interest and in so far as the development of trade would not be affected to such an extent as would be contrary to the interests of the Community. The interests of the Community include, inter alia, competition with regard to eligible customers in accordance with this Directive and Article 86 of the Treaty.

8. Member States shall, upon implementation of this Directive, notify the Commission of all measures adopted to fulfil universal service and public service obligations, including consumer protection and environmental protection, and their possible effect on national and international competition, whether or not such measures require a derogation from this Directive. They shall inform the Commission subsequently every two years of any changes to such measures, whether or not they require a derogation from this Directive.

*OJ L 257, 21.9.90, p.13."

(2) Article 4 is deleted.

(3) Articles 5 and 6 are replaced by the following:

"Article 5

1. For the construction of new generating capacity, Member States shall adopt an authorisation procedure, which shall be conducted in accordance with objective, transparent and non-discriminatory criteria.

2. Member States shall lay down the criteria for the grant of authorisations for the construction of generating capacity in their territory. These criteria may relate to:

(a) the safety and security of the electricity system, installations and associated equipment;

(b) protection of public health and safety;

(c) protection of the environment;

(d) land use and siting;

(e) use of public ground;

(f) energy efficiency;

(g) the nature of the primary sources;

(h) characteristics particular to the applicant, such as technical, economic and financial capabilities;

(i) compliance with measures adopted pursuant to Article 3.

3. Member States shall take appropriate measures to streamline and expedite authorisation procedures for small and/or distributed generation. These measures shall apply to all facilities of less than 15 MW and to all distributed generation.

4. The authorisation procedures and criteria shall be made public. Applicants shall be informed of the reasons for any refusal to grant an authorisation. The reasons must be objective, non-discriminatory, well founded and duly substantiated. Appeal procedures shall be made available to the applicant.

Article 6

1. Member States shall ensure the possibility, in the interests of security of supply and environmental protection, to tender for new capacity or energy efficiency/demand-side management measures on the basis of published criteria. A tendering procedure can, however, only be launched if on the basis of the authorisation procedure the generating capacity being built or the energy efficiency/demand-side management measures being taken are not sufficient to ensure security of supply and to meet environmental targets.

2. Member States may ensure the possibility, in the interests of environmental protection and the promotion of infant new technologies, to tender for new capacity on the basis of published criteria. This tender may relate to new capacity or energy efficiency/demand-side management measures. A tendering procedure can, however, only be launched if on the basis of the authorisation procedure the generating capacity being built or the measures being taken are not sufficient to achieve these objectives.

3. Details of the tendering procedure for means of generating capacity and energy efficiency/demand-side management measures shall be published in the Official Journal of the European Communities at least six months prior to the closing date for tenders.

The tender specifications shall be made available to any interested undertaking established in the territory of a Member State so that it has sufficient time in which to submit a tender.

The tender specifications shall contain a detailed description of the contract specifications and of the procedure to be followed by all tenderers and an exhaustive list of criteria governing the selection of tenderers and the award of the contract, including incentives, such as subsidies, which are covered by the tender. These specifications may also relate to the fields referred to in Article 5(2).

4. In invitations to tender for the requisite generating capacity, consideration must also be given to electricity supply offers with long-term guarantees from existing generating units, provided that additional requirements can be met in this way.

5. Member States shall designate an authority or a public body or a private body independent of electricity generation, transmission, distribution and supply activities, which may be a national regulatory authority referred to in Article 22(1), to be responsible for the organisation, monitoring and control of the tendering procedure referred to in paragraphs 1 to 4. Where a transmission system operator is fully independent from other activities not relating to the transmission system in ownership terms, the transmission system operator may be designated as the body responsible for organising, monitoring and controlling the tendering procedure. This authority or body shall take all necessary steps to ensure confidentiality of the information contained in the tenders."

(4) The following Article 6a is inserted:

"Article 6a

Member States or the national regulatory authorities referred to in Article 22(1), shall ensure the monitoring of security of supply issues. This monitoring shall, in particular, cover the supply/demand balance on the national market, the level of expected future demand and envisaged additional capacity under planning or construction, and the quality and level of maintenance of the networks. They shall publish, by 31 July each year at the latest a report outlining the findings resulting from the monitoring of these issues, as well as any measures taken or envisaged to address them and forward this report to the Commission forthwith."

(5) Article 7 is replaced by the following:

"Article 7

1. Member States shall designate or shall require undertakings which own transmission systems to designate, for a period of time to be determined by Member States having regard to considerations of efficiency and economic balance, one or more transmission system operators.

2. Member States shall ensure that technical rules establishing the minimum technical design and operational requirements for the connection to the system of generating installations, distribution systems, directly connected consumers' equipment, interconnector circuits and direct lines are developed and published. These requirements shall ensure the interoperability of systems and shall be objective and non-discriminatory. They shall be notified to the Commission in accordance with Article 8 of Council Directive 98/34/EC*.

3. For the purposes of this Directive, the transmission system operator shall be responsible for:

a) ensuring the long-term ability of the system to meet reasonable demands for the transmission of electricity;

b) contributing to security of supply through adequate transmission capacity and system reliability;

c) managing energy flows on the system, taking into account exchanges with other interconnected systems. To that end, the transmission system operator shall be responsible for ensuring a secure, reliable and efficient electricity system and, in that context, for ensuring the availability of all necessary ancillary services;

d) providing to the operator of any other system with which its system is interconnected sufficient information to ensure the secure and efficient operation, co-ordinated development and interoperability of the interconnected system;

e) the non-discrimination as between system users or classes of system users, particularly in favour of its subsidiaries or shareholders.

4.. Unless the transmission system operator is already fully independent from other activities not relating to the transmission system in terms of ownership, the system operator, within the integrated electricity undertaking, shall be independent at least in terms of its legal form, organisation and decision making from other activities not relating to transmission.

In order to ensure the independence of the transmission system operator, the following minimum criteria shall apply:

(a) those persons responsible for the management of the transmission 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, distribution and supply of electricity;

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

(c) the transmission system operator must have effective decision-making rights, independent from the integrated electricity undertaking, with respect to assets necessary to maintain or develop the network;

(d) the transmission system operator must establish a compliance programme, which sets out measures taken to ensure that discriminatory conduct is excluded. The programme must set out the specific obligations of employees to meet this objective. It must be drawn up and its respect monitored by a compliance officer. An annual report, setting out the measures taken, must be submitted by the compliance officer to the national regulatory authority referred to in Article 22(1) and published

*OJ L 204, 21.7.1998, p. 37."

(6) The following Article 7a is inserted:

"Article 7a

Transmission system operators shall procure the energy they use for the carrying out of their functions according to transparent, non-discriminatory and market based procedures."

(7) In Article 8, the following paragraphs 5 and 6 are added:

"5. Member States may require transmission system operators to comply with minimum standards for the maintenance and development of the transmission system, including interconnection capacity.

6. Rules adopted by transmission system operators for balancing the electricity system shall be objective, transparent and non-discriminatory, including rules for the charging of system users of their networks for energy imbalance. Terms and conditions, including rules and tariffs, for the provision of such services by transmission system operators shall be established pursuant to a methodology compatible with Article 22(2) in a non-discriminatory and cost-reflective way and shall be published."

(8) Articles 9 and 10 are replaced by the following:

"Article 9

Without prejudice to Article 13 or any other legal duty to disclose information, the transmission system operator must preserve the confidentiality of commercially sensitive information obtained in the course of carrying out its business, and shall prevent information about its own activities which may be commercially advantageous being disclosed in a discriminatory manner.

Article 10

1. Member States shall designate or shall require undertakings that own or are responsible for distribution systems to designate one or more distribution system operators. Member States shall ensure that distribution system operators act in accordance with Articles 10(2), 11 and 12.

2. Unless the distribution system operator is already fully independent from other activities not relating to the distribution system in terms of ownership, the distribution system operator within the integrated electricity undertaking shall be independent at least in terms of its legal form, organisation and decision making from other activities not relating to distribution.

In order to ensure the independence of the distribution system operator, the following minimum criteria shall 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 and 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 sufficient decision-making rights, independent from the integrated electricity undertaking, with respect to assets necessary for the maintenance and development of the network ;

(d) the distribution system operator must establish a compliance programme which sets out measures taken to ensure that discriminatory conduct is excluded. The programme must set out the specific obligations of employees to meet this objective. It must be drawn up and its respect monitored by a compliance officer. An annual report, setting out the measures taken, must be submitted by the compliance officer to the national regulatory authority referred to in Article 22(1), and published.

This paragraph shall apply from 1 January 2004. Member States may decide not to apply this paragraph to integrated electricity undertakings serving less than 100 000 customers."

(9) The following Article 10a is inserted:

"Article 10a

Distribution system operators shall procure the energy they use to cover energy losses and reserve capacity in their system according to transparent, non-discriminatory and market based procedures."

(10) In Article 11, the following paragraphs 4 and 5 are added:

"4. Where distribution system operators are responsible for balancing the electricity distribution system, rules adopted by them for that purpose shall be objective, transparent and non-discriminatory, including rules for the charging of system users of their networks for energy imbalance. Terms and conditions, including rules and tariffs, for the provision of such services by distribution system operators shall be established in accordance with Article 22(2) in a non-discriminatory and cost-reflective way and shall be published.

5. When planning the development of the distribution network, energy efficiency/demand-side management measures and/or distributed generation that might supplant the need to upgrade or replace electricity capacity shall be considered by the distribution system operator."

(11) Article 12 is replaced by the following:

"Article 12

Without prejudice to Article 13 or any other legal duty to disclose information, the distribution system operator must preserve the confidentiality of commercially sensitive information obtained in the course of carrying out its business, and shall prevent information about its own activities which may be commercially advantageous being disclosed in a discriminatory manner."

(12) The following Article 12a is inserted:

"Article 12a

The rules in Articles 7(4) and 10(4) do not prevent the operation of a combined transmission and distribution system operator, which is fully independent in terms of its legal form, organisation and decision making from other activities not relating to transmission or distribution system operation and which meets the requirements of Article 7(4)."

(13) Article 13 is replaced by the following:

"Article 13

Member States or any competent authority they designate, including the national regulatory authorities referred to in Article 22(1) shall have right of access to the accounts of generation, transmission, distribution and supply undertakings which they need to consult in carrying out their checks."

(14) In Article 14, paragraph 3 is replaced by the following:

"3. Integrated electricity undertakings shall, in their internal accounting, keep separate accounts, for their transmission, distribution, generation and supply activities, as they would be required to do if the activities in question were carried out by separate undertakings, with a view to avoiding discrimination, cross-subsidisation and distortion of competition. They shall keep separate accounts for supply activities for eligible customers and supply activities for non-eligible customers. Revenue from ownership of the transmission/distribution system shall be specified in the accounts. Where appropriate, they shall keep consolidated accounts for other, non-electricity activities. The internal accounts shall include a balance sheet and a profit and loss account for each activity.

3a. Member States may decide that companies with an annual production not exceeding 1 TWh are not obliged to publish separate accounts for generation and supply.They shall, at the request of the national regulatory authority referred to in Article 22(1), provide the unbundled accounts to that authority."

(15) Article 15 is deleted.

(16) Article 16 is replaced by the following:

"Article 16

1. Member States shall ensure the implementation of a system of third party access to the transmission and distribution systems based on published tariffs, applicable to all eligible customers and applied objectively and without discrimination between system users. Member States shall ensure that these tariffs, or the methodologies underlying their calculation, are approved prior to their entry into force by a national regulatory authority referred to in Article 22(1) and that these tariffs are published prior to their entry into force.

2. The operator of a transmission or distribution system may refuse access where it lacks the necessary capacity. Duly substantiated reasons must be given for such refusal, in particular having regard to Article 3. Member States shall ensure, where appropriate and when refusal of access takes place, that the transmission or distribution system operator provides relevant information on measures that would be necessary to reinforce the network. The party requesting such information may be charged a reasonable fee reflecting the cost of providing such information."

(17) Articles 17 and 18 are deleted.

(18) Article 19 is replaced by the following:

"Article 19

1. The eligible customers are the customers, which are free to purchase electricity from the supplier of their choice within the Community. Member States shall ensure that these eligible customers are:

a) until 1 January 2004, the eligible customers as specified in article 19(1) to 19(3) of directive 96/92/EC. Member States shall publish by 31 January each year the criteria for the definition of these eligible customers;

b) from 1 January 2004 at the latest, all non-household customers;

c) from 1 January 2005 at the latest, all customers.

2. To avoid imbalance in the opening of electricity markets:

(a) contracts for the supply of electricity with an eligible customer in the system of another Member State shall not be prohibited if the customer is considered as eligible in both systems involved ;

(b) in cases where transactions as described in point (a) are refused because of the customer being eligible only in one of the two systems, the Commission may oblige, taking into account the situation in the market and the common interest, the refusing party to execute the requested electricity supply at the request of the Member State where the eligible customer is located."

(19) Article 20 is deleted.

(20) Articles 21 and 22 are replaced by the following:

"Article 21

1. Member States shall take the necessary measures to enable:

-(a) all electricity producers and electricity supply undertakings, established within their territory to supply their own premises, subsidiaries and eligible customers through a direct line;

-(b) any eligible customer within their territory to be supplied through a direct line by a producer and supply undertakings.

2. Member States shall lay down the criteria for the grant of authorisations for the construction of direct lines in their territory. These criteria must be objective and non-discriminatory.

3. The possibility of supplying electricity through a direct line as referred to in paragraph 1 shall not affect the possibility of contracting electricity in accordance with Article 16.

4. Member States may make authorisation to construct a direct line subject either to the refusal of system access on the basis, as appropriate, of Article 16 or to the opening of a dispute settlement procedure under Article 22.

5. Member States may refuse to authorise a direct line if the granting of such an authorisation would obstruct the provisions of Article 3. Duly substantiated reasons must be given for such refusal.

Article 22

1. Member States shall designate one or more competent bodies as national regulatory authorities. These authorities shall be wholly independent of the interests of the electricity industry. They shall at least be responsible for continuously monitoring the market to ensure non-discrimination, effective competition and the efficient functioning of the market, in particular with respect to:

(a) the level of competition;

(b) the rules on the management and allocation of interconnection capacity, in conjunction with the national regulatory authority or authorities of those Member States with which interconnection exists;

(c) any mechanisms to deal with congested capacity within the national electricity system;

(d) the time taken by transmission and distribution undertakings to make connections and repairs;

(e) the publication of appropriate information by transmission and distribution system operators concerning interconnectors, grid usage and capacity allocation to interested parties, taking into account the need to treat non-aggregated information as commercially confidential;

(f) the effective unbundling of accounts, as referred to in Article 14, to ensure there are no cross-subsidies between generation, transmission, distribution and supply activities. For this purpose they shall have access to the accounts;

(g) the terms, conditions and tariffs for connecting new producers of electricity to guarantee that these are objective, transparent and non-discriminatory, in particular taking full account of the benefits of the various renewable energy sources technologies, distributed generation and combined heat and power.

2. The national regulatory authorities shall at least be responsible for fixing, approving or proposing prior to their entry into force, the methodologies used to calculate or establish the terms and conditions for :

(a) connection and access to national networks, including transmission and distribution tariffs;

(b) the provision of balancing services.

3. National regulatory authorities shall have the authority to require transmission and distribution system operators, if necessary, to modify the terms and conditions, tariffs, rules, mechanisms and methodologies referred to in paragraph 2, to ensure that they are reasonable and applied in a non-discriminatory manner.

4. Any party having a complaint against a transmission or distribution system operator with respect to the issues mentioned in paragraphs 1, 2 and 3 may refer the complaint to the national regulatory authority which, acting as dispute settlement authority, shall issue a decision within two months after receipt of the complaint. This period may be extended by two months where additional information is sought by the national regulatory authority. This period may be further extended with the agreement of the complainant. Any appeal against such a decision shall not have suspensive effect.

Where a complaint concerns connection tariffs for major new generation facilities, the two-month period may be extended by the national regulatory authority.

5. Member States shall take measures to ensure that national regulatory authorities are able to carry out their duties referred to in paragraphs 1 to 4 in an efficient and expeditious manner.

6. Member States shall create appropriate and efficient mechanisms for regulation, control and transparency so as to avoid any abuse of dominant position, in particular to the detriment of consumers, and any predatory behaviour. These mechanisms shall take account of the provisions of the Treaty, and in particular Article 82 thereof.

7. Member States shall ensure that the appropriate measures are taken, including administrative action or criminal proceedings in conformity with their national law, against the natural or legal persons responsible where confidentiality rules imposed by this Directive have not been respected.

8. In the event of cross-border disputes, the national regulatory authority shall be the national regulatory authority covering the system operator which refuses use of, or access to, the system.

9. Recourse to the national regulatory authority shall be without prejudice to the exercise of rights of appeal under Community law."

(21) The following Article 23a is inserted:

"Article 23a

Member States shall inform the Commission every three months of imports of electricity, in terms of physical flows, that have taken place during the previous calendar year from third countries."

(22) Article 24 is replaced by the following:

"Article 24

Member States which can demonstrate, after the Directive has been brought into force, that there are substantial problems for the operation of their small isolated systems, may apply for derogations from the relevant provisions of Chapters IV, V, VI, VII, which may be granted to them by the Commission. The latter shall inform the Member States of those applications prior to taking a decision, taking into account respect for confidentiality. This decision shall be published in the Official Journal of the European Communities. This Article shall also be applicable to Luxembourg."

(23) Article 25 is deleted.

(24) Article 26 is replaced by the following:

"Article 26

1. The Commission shall monitor and review the application of this Directive and submit an overall progress report to the European Parliament and the Council before the end of the first year following the entry into force of this Directive, and thereafter on an annual basis,. The report shall at least cover:

(a) the experience gained and progress made in creating a complete and fully operational internal market in electricity and the obstacles that remain in this respect, including aspects of market dominance, concentration in the market, predatory or anti-competitive behaviour;

(b) the extent to which the unbundling and tarification requirements contained in this Directive have been successful in ensuring fair and non-discriminatory access to the Community's electricity system and equivalent levels of competition, as well as the economic, environmental and social consequences of the opening of the electricity market for customers;

(c) an examination of issues relating to system capacity levels and security of supply of electricity in the Community, and in particular the existing and projected balance between demand and supply, taking into account the physical capacity for exchanges between areas;

(d) a general assessment of the progress achieved with regard to bilateral relations with third countries which produce and export or transport electricity, including progress in market integration, trade and access to the networks of such third countries;

(e) the need for possible harmonisation requirements that are not linked to the provisions of this Directive.

Where appropriate, this report may include recommendations.

2. Every two years, the report referred to in paragraph 1, shall also cover an analysis of the different measures taken in the Member States to meet public service obligations, together with an examination of the effectiveness of those measures and, in particular their effects on competition in the electricity market. Where appropriate, this report may include recommendations as to the measures to be taken at national level to achieve high public service standards, or measures intended to prevent market foreclosure."

(25) The Annex, the text of which is set out in Annex I to this Directive, is added.

Article 2

Amendments to Directive 98/30/EC

Directive 98/30/EC is amended as follows:

(1) Articles 1, 2 and 3 are replaced by the following :

"Article 1

This Directive establishes common rules for the transmission, distribution, supply and storage of natural gas. It lays down the rules relating to the organisation and functioning of the natural gas sector, including liquefied natural gas (LNG), access to the market, the operation of systems, and the criteria and procedures applicable to the granting of authorisations for transmission, distribution, supply and storage of natural gas. The rules established by this Directive for natural gas shall also apply to biogas and gas from biomass in so far as such gases can technically and safely be injected into the natural gas system.

Article 2

For the purposes of this Directive:

1. "natural gas undertaking" means any natural or legal person carrying out at least one of the following functions: production, transmission, distribution, supply, purchase or storage of natural gas, including LNG, which is responsible for the commercial, technical and/or maintenance tasks related to those functions, but shall not include final customers;

2. "upstream pipeline network" means any pipeline or network of pipelines operated and/or constructed as part of an oil or gas production project, or used to convey natural gas from one or more such projects to a processing plant or terminal or final coastal landing terminal;

3. "transmission" means the transport of natural gas through a high pressure pipeline network other than an upstream pipeline network with a view to its delivery to customers, but not including supply;

4. "transmission system operator" means a natural or legal person who carries out the function of transmission and is responsible for operating, ensuring the maintenance of, and, if necessary, developing the transmission system in a given area and, where applicable, its interconnections with other systems, and to ensure the long-term ability of the system to meet reasonable demands for the transportation of gas;

5. "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;

6. "distribution system operator" means a natural or legal person who carries out the function of distribution and is responsible for operating, ensuring the maintenance of, and, if necessary, developing the distribution system in a given area and, where applicable, its interconnections with other systems, and to ensure the long-term ability of the system to meet reasonable demands for the distribution of gas;

7. "supply" means the sale of natural gas, including LNG, to customers;

8. "supply undertaking" means any natural or legal person who carries out the function of supply;

9. "storage facility" means a facility used for the stocking of natural gas and owned and/or operated by a natural gas undertaking, including the part of LNG facilities used for storage but excluding the portion used for production operations;

10. "storage system operator" means a natural or legal person who carries out the function of storage and is responsible for operating a storage facility;

11. "LNG facility" means a terminal which is used for the liquefaction of natural gas or the importation, offloading, and re-gaseification of LNG, but shall not include any part of LNG terminals used for storage;

12. "LNG system operator" means a natural or legal person who carries out the function of liquefaction of natural gas, or the offloading, storage and re-gaseification of LNG and is responsible for operating a LNG facility;

13. "system" means any transmission networks and/or distribution networks and/or LNG facilities owned and/or operated by a natural gas undertaking, including its facilities supplying ancillary services and those of related undertakings necessary for providing access to transmission and distribution;

14. "ancillary services" means all services necessary for the operation of transmission and/or distribution networks and/or LNG facilities including storage facilities and equivalent flexibility instruments, load balancing and blending;

15. "flexibility instrument" means any instrument, which may help balance the gas demand load of customers with gas supply and includes storage facilities, flexibility in the LNG chain and linepack;

16. "interconnected system" means a number of systems which are linked with each other;

17. "direct line" means a natural gas pipeline complementary to the interconnected system;

18. "integrated natural gas undertaking" means a vertically or horizontally integrated undertaking;

19. "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 and where the undertaking/group concerned is performing at least two or more of the functions of transmission, distribution, production, supply and storage of natural gas ;

20. "horizontally integrated undertaking" means an undertaking performing at least one of the functions of production, transmission, distribution, supply or storage of natural gas, and a non-gas activity;

21. "related undertaking" means affiliated undertakings, within the meaning of Article 41 of the Seventh Council Directive, 83/349/EEC, and/or associated undertakings, within the meaning of Article 33(1) thereof, and/or undertakings which belong to the same shareholders;

22. "system user" means any natural or legal person supplying to, or being supplied by, the system;

23. "customers" means wholesale and final customers of natural gas and natural gas undertakings which purchase natural gas;

24. "household customer" means a customer purchasing natural gas for his/her own household consumption;

25. "non-household customer" means a customer purchasing natural gas which is not for its own household use;

26. "final customer" means a customer purchasing natural gas for his/her own use;

27. "eligible customer" means a customer who is free to purchase gas from the supplier of his or her choice, in the meaning of Article 18;

28. "wholesale customers" means any natural or legal persons other than transmission system operators and distribution system operators who purchase natural gas for the purpose of resale inside or outside the system where they are established;

29. "long-term planning" means the planning of supply and transportation capacity of natural gas undertakings on a long-term basis with a view to meeting the demand for natural gas of the system, diversification of sources and securing supplies to customers;

30. "emergent market" means a Member State in which the first commercial supply of its first long-term natural gas supply contract was made not more than 10 years earlier;

31. "security of supply" means both security of supply of natural gas, and technical safety;

32. "energy imbalance" means the difference between the quantity of gas notified to the transmission or distribution system operator for injection or withdrawal at one or more given locations over a given time period and the metered quantity of gas withdrawn or injected at one or more given locations over the same time period.

Article 3

1. Member States shall ensure, on the basis of their institutional organisation and with due regard for the principle of subsidiarity, that, without prejudice to paragraph 2, natural gas undertakings are operated in accordance with the principles of this Directive with a view to achieving a competitive and sustainable market in natural gas, and shall not discriminate between such undertakings as regards either rights or obligations.

2. Having full regard to the relevant provisions of the Treaty, in particular Article 86 thereof, Member States may impose on natural gas undertakings, in the general economic interest, public service obligations which may relate to security, including security of supply, regularity, quality and price of supplies, and environmental protection, including energy efficiency and climate protection. Such obligations shall be clearly defined, transparent, non-discriminatory and verifiable. In relation to security of supply, and the fulfilment of environmental goals, including energy efficiency, Member States may introduce the implementation of long-term planning, taking into account the possibility of third parties seeking access to the system.

3. Member States shall take appropriate measures to protect final customers and to ensure high levels of consumer protection, and shall, in particular, ensure that there are adequate safeguards to protect vulnerable customers from disconnection. In this context, they may take appropriate measures to protect customers in remote areas who are connected to the gas system. Member States may appoint a supplier of last resort for customers connected to the gas network. They shall ensure high levels of consumer protection, particularly with respect to transparency regarding general contractual terms and conditions, general information and dispute settlement mechanisms. Member States shall ensure that the eligible customer is effectively able to switch to a new supplier. These measures shall include, in particular, those set out in the Annex.

4. Member States shall implement appropriate measures to achieve the objectives of social and economic cohesion, environmental protection, which may include means to combat climate change, and security of supply. Such measures may include, in particular, the provision of adequate economic incentives, using, where appropriate, all existing national and Community tools, for the maintenance and construction of necessary network infrastructure, including interconnection capacity.

5. Member States may decide not to apply Article 5 with respect to distribution insofar as their application would obstruct, in law or in fact, the performance of the obligations imposed on natural gas undertakings in the general economic interest and insofar as the development of trade would not be affected to such an extent as would be contrary to the interests of the Community. The interests of the Community include, inter alia, competition with regard to eligible customers in accordance with this Directive and Article 86 of the Treaty.

6. Member States shall, upon implementation of this Directive, notify the Commission of all measures adopted to achieve public service obligations, including consumer and environmental protection, and their possible effect on national and international competition, whether or not such measures require a derogation from the provisions of this Directive. They shall notify the Commission subsequently every two years of any changes to such measures, whether or not they require a derogation from this Directive."

(2) The following Article 4a is inserted:

"Article 4a

Member States or the national regulatory authorities referred to in Article 22(1), shall ensure the monitoring of security of supply issues. This monitoring shall, in particular, cover the supply/demand balance on the national market, the level of expected future demand and available supplies, envisaged additional capacity under planning or construction, and the quality and level of maintenance of the networks. The competent authorities shall publish, by 31 July each year at the latest a report outlining the findings resulting from the monitoring of these issues, as well as any measures taken or envisaged to address them and forward this report to the Commission forthwith."

(3) Articles 5, 6 and 7 are replaced by the following:

"Article 5

Member States shall ensure that technical rules establishing the minimum technical design and operational requirements for the connection to the system of LNG facilities, storage facilities, other transmission or distribution systems, and direct lines, are developed and made available.

These technical rules shall ensure the interoperability of systems and shall be objective and non-discriminatory. They shall be notified to the Commission in accordance with Article 8 of Council Directive 98/34/EC of 22 June 1998*.

Article 6

Member States shall take the measures necessary to ensure that transmission, storage and LNG system oper