Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on conditions for access to the network for cross-border exchanges in electricity

(presented by the Commission)

EXPLANATORY MEMORANDUM

REVISION OF THE ELECTRICITY AND GAS DIRECTIVES

1. Introduction

The European Council in Lisbon of 23-24 March 2000 called for "rapid work" to complete the internal market and asked "the Commission, the Council and the Member States, each in accordance with their respective powers ... to speed up liberalisation in areas such as gas, electricity ... The aim is to achieve a fully functional operational internal market in these areas; the European Council will assess progress achieved when it meets next Spring on the basis of a Commission report and appropriate proposals". The European Parliament equally requested the Commission to adopt a detailed timetable for the achievement of accurately defined objectives with a view to gradually by completely liberalising the energy markets [1].

[1] Resolution 'Liberalisation of energy markets' A5-0180/2000 of 6 July 2000.

The Energy Council of 30 May 2000 stressed "the importance and urgency of the conclusions reached at the Lisbon European Council" and invited the Commission "to present timely proposals for further action".

In the Commission Communication "Completing the Internal Energy Market" [2], the conclusion is reached that proposals aimed at completing the internal gas and electricity markets can now be made to the Parliament and Council, which would not only achieve this primary objective but also be compatible with, and contribute to, the Community's other relevant policies in this area.

[2] OJ C

The attached proposal to amend Directives 96/92/EC and 98/30/EC therefore meets the request of the European Council and the Energy Council; it follows the recent Green Paper on Security of Supply [3] which highlighted the links between the acceleration of the integration of energy markets within Europe and the need to ensure security of supply.

[3] COM(2000) 769, p. 71.

2. Objectives pursued

As explained in the abovementioned Communication, if the Community is to create a real and effective internal market for electricity and gas, any proposal must contain both quantitative and qualitative elements:

- The progressive freeing of all electricity and gas consumers to choose their supplier ("quantitative proposal"). There are three reasons for pursuing an ambitious program in this respect. First, to ensure that all EU companies receive the benefits of competition in terms of increased efficiency and lower prices, leading to increased EU competitiveness and employment. Secondly, to ensure that EU consumers receive the full benefits of market opening in terms of lower domestic bills for electricity and gas. Thirdly, to ensure a level playing field between Member States in terms of market opening and hence to fully integrate the 15 national markets into one true and fully operational single market.

- Improving, in structural terms, the Community electricity and gas markets ("qualitative proposals"). Experience in market opening, not only in the Community but also in other countries, has clearly demonstrated that certain approaches to market opening are far more likely to bring about the development of effective competition. The clear majority of Member States have adopted such an approach for electricity and a large number of Member States have also done so for gas.

As the internal market develops, particularly in terms of the abovementioned quantitative acceleration, it is therefore essential that methods by which market opening is implemented gradually converge between Member States if a real internal market is to develop on the basis of undistorted competition. This is equally necessary if all the possible benefits from the creation of the internal markets for electricity and gas are to be exploited and passed on to consumers.

It is generally acknowledged that third party access based on published and non-discriminatory tariffs, and a high level of unbundling, are not only conducive but necessary to ensure effective competition. To complete the internal market, it is not sufficient therefore to fully liberalise demand, but effective market structures must also exist. In addition to the need to ensure that the maximum benefits of competition develop to the profit of Community citizens, such measures are necessary to guarantee a level playing field between Member States and to ensure non-discrimination, notably in relation to vertically integrated companies enjoying a dominant position. Indeed, it has become increasingly clear that this issue is just as, if not more, important as the level of quantitative market opening if real reciprocity is to be attained between Member States.

In addition, it is appropriate that this proposal updates the Directives: certain provisions and options in the Directives have either become redundant, or have not been selected by Member States. This concerns the tendering procedure for liberalising generation (except as a back-up measure that can be taken for reasons of security of supply) and the single buyer model for network access. These can therefore be deleted from the Directive. This clarification is particularly important in terms of providing for a level playing field in terms of market structures of the gas and electricity markets in the countries that are candidates for accession to the Community. In addition, a number of administrative issues have been simplified in order to reduce red tape. This concerns obligations in the Directives that, in the light of experience, can be alleviated. Furthermore, a clarification has been made with respect to the provisions of both Directives with respect to the accounting unbundling requirements.

It also appears appropriate to repeal Council Directives 90/547/EEC and 91/296/EEC on the transit of electricity and natural gas in order to ensure homogeneous and non-discriminatory access regimes for transmission including when this involves cross-border transport in the Community. In order to ensure consistency and avoid confusion related to access regimes and terms, it is proposed to incorporate and streamline the rules of the transit directives into the proposal for a new directive on the completion of the internal energy market thereby allowing transmission system operators access, if necessary, to the grid of other transmission system operators on conditions that are non-discriminatory.

Finally, it is appropriate to improve the existing provisions regarding public service objectives, to permit an effective and continual benchmarking exercise, and to ensure that all citizens enjoy the right to be supplied with electricity at affordable and reasonable prices (universal service) and that they enjoy a minimum set of consumer protection rights.

These improvements to the Directives and the removal of redundant provisions will also provide more clarity and guidance to the candidate countries in the adoption of reforms of their electricity and gas sectors.

3. The proposals

3.1. Quantitative proposals - making all consumers progressively free to choose their supplier

It is proposed that Member States make all non-domestic electricity customers (i.e. all industrial and commercial properties) free to choose their electricity supplier by 1 January 2003, and that this be extended to all customers (i.e. 100% market opening) by 1 January 2005.

As the opening of gas markets is still behind electricity (Member States had to implement the Gas Directive 18 months after the Electricity Directive), and gas companies have had less time to prepare, it is proposed that all non-domestic gas customers be eligible by 1 January 2004, i.e. one year later than for electricity. The same deadline is however proposed as that for electricity for the introduction of full market opening: 1 January 2005, as this period is sufficiently long to permit the EU gas industry to fully prepare for full competition, and will then ensure that both internal markets are operating in parallel. This is particularly important due to the increasing convergence between the two sectors.

These proposals are made taking into account the experience of those countries that have already successfully introduced full competition, and the time that has been necessary to make all the necessary preparations, both administrative, technical and legal/regulatory, to ensure consumer protection and the respect of necessary public service objectives. In particular, it takes account of the fact that the eligibility of domestic consumers, unlike the industrial and commercial sector, often requires important preparation in terms of billing arrangements and the development of customer load profiling [4]. It also takes into account the intentions of a majority of Member States to introduce full competition under a timetable similar to the one proposed. The Commission Communication on completing the internal energy market clearly demonstrates that the main objectives of the Community in this area, notably high standards of public service and consumer protection, environmental protection, security of supply and socially consensual market opening, can be fully met in the context of such progress.

[4] Under a standardised load profile, an assumption on the consumption of electricity of a type of small consumer is made, in volume and timing of demand. Any discrepancies with the profile are settled after periodic readings of the existing meter, eliminating the need for expensive minute-to-minute reading of the consumer's actual consumption and off-setting that against his/her contracted volume.

3.2. Qualitative proposals

Two proposals are made in this respect, concerning unbundling and network access methodology. Almost all those that have commented in the context of the public hearing on the completion of the internal energy market, which the Commission organised in September 2000, stressed that high standards and clear measures with respect to both these issues are essential if effective competition is to be ensured throughout the internal market, and effective reciprocity is to exist between Member States and companies.

Unbundling: In order to ensure a common minimum standard of unbundling throughout the internal market for electricity and gas, it is proposed that Member States ensure, as a minimum, that transmission be carried out via a subsidiary company that is legally and functionally separate vis-à-vis its day to day operations from generation and sales activities of its parent company (an independent transmission system operator - TSO). A number of measures are specified that must be respected to ensure that the transmission subsidiary company is able to operate in functional terms independently of the other commercial interests of the group to which it belongs. The minimum requirements in terms of functional separation are the following:

- those responsible for the management of the transmission system may not participate in company structures responsible, directly or indirectly, for the day-to-day running of the generation/production, and supply functions of the integrated group;

- appropriate measures must be taken to ensure that the personal interests of the management of the transmission system company are taken into account in a manner that ensures that they are capable of acting independently;

- the transmission system operator must exercise full control over all assets necessary to operate, maintain and develop the network;

- 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 appointed by and reporting to the President/Chief Executive of the integrated company to which the transmission system operator belongs. An annual report, setting out the measures taken, must be submitted by the compliance officer to the national regulatory authority and published.

Many respondents at the public hearing further argued that distribution should also be unbundled in a similar manner, requiring legal separation [5], and stressed the importance of non-discriminatory access to distribution as vital [6].

[5] The Gas and Electricity Directives require only accounting unbundling at distribution level together with measures to ensure the non-disclosure of commercially sensitive information.

[6] Distribution costs are relatively significant. For gas, total investments in gas distribution will typically be twice as high as in transmission. In a country without gas production, gas distribution investment can account for 70% to 80% of total investment in the supply chain to the end user.

Further opening of the market will render independent distribution system operation as important as independent transmission system operation. For this reason, the Commission proposes a legal separation of electricity distribution system operators by 2003 and of gas distribution system operators by 2004 on largely the same conditions as those described above for the transmission system operator. However, Member States may decide to introduce a de minimis threshold, because it might not be proportional to impose this unbundling obligation on small local distribution companies.

It should be noted that this modification represents a greater development with respect to gas than to electricity. In the Gas Directive, only internal accounting unbundling of transmission, together with measures to ensure the non-disclosure of commercially sensitive information is required. However, six Member States have in fact moved to ownership, legal, or management unbundling, or are preparing to do so. In addition, it is worth noting that several integrated gas undertakings are pursuing similar policies of separating management and operation of transportation functions from the gas supply function. It is generally accepted that such a development will lead to a more effective and equivalent competitive structure throughout the internal market and will permit more market entry, as potential entrants will be confident of non-discriminatory access. Moreover, within integrated companies it will provide clearer cost signals and incentives to the different business functions. The adoption of this measure will thus lead to a more rapid and equitable development of an effective internal market for gas.

These provisions were the ones underlined as important by an overwhelming majority of those commenting during the hearing. In the light of experience in implementing the existing Directives, they have also proven to be the most important in ensuring effective functional independence.

Many respondents at the hearing argued that storage and LNG facilities for gas should be further unbundled and subject to regulated access. Many also argued that full ownership unbundling for transmission should take place. It is clear that measures such as these would result in more effective guarantees of non-discriminatory access. Furthermore, the Commission fully recognises the fundamental role that access to gas storage and other key ancillary facilities must play if a competitive market is to develop [7]. In this light, the Commission has decided to propose a clarification of the importance of access to storage, other ancillary services and flexibility instruments; strengthening the method of third party access regarding distribution and LNG facilities (see below); and to require that gas companies be obliged to identify and create separate operators responsible for storage and LNG activities (storage and LNG operators); thus increasing transparency for those requesting access to these key facilities. The Commission expects that these measures will be sufficient to ensure effective and non-discriminatory access to the gas and electricity systems. It has decided not to require, at least at present, unbundling requirements additional to this with respect to storage and LNG (i.e. not to require separate legal entities for these activities). Furthermore it is proposed to include a provision on non-discriminatory provision of balancing services for both gas and electricity.

[7] Gas offtake varies for all customers greatly, both within a single day and between seasons during the year. Gas supply, however, is more constant as gas producers wish to maximise the capacity usage of their pipeline infrastructure. Non-discriminatory access to flexibility instruments such as storage may therefore be crucial for an efficient access to the overall gas system and for ensuring a level playing field between incumbent utilities having significant storage facilities at their disposal and new entrants and customers without such facilities.

However, the Commission will continue to monitor carefully whether effective and non-discriminatory access develops for transmission (including upstream pipelines), distribution, LNG, storage and other key ancillary facilities. In order to ensure continued examination of these issues by all Community institutions, it is proposed that the Directives be revised to require the Commission to submit a report to the European Parliament and Council, inter alia on these issues before the end of the second and fourth years following the entry into force of this revision (Articles 1 and 2), together, if necessary, with appropriate proposals for further action.

Third party access: As mentioned above, effective third party access was also identified by all respondents at the hearing as vital to ensure the development of effective competition. It is almost universally considered that the minimum system necessary to ensure non-discrimination and the necessary transparency and predictability to create effective competition to develop is published and regulated tariffs, which are applied under non-discriminatory terms and conditions to all system users, be they customers or companies, including those belonging to the group to which the TSO belongs. Such tariffs may be divided into objective classes of customers, providing that this does not result in discrimination. This system has been adopted by almost all Member States with respect to electricity, but not concerning gas [8]. It is therefore proposed that a published and regulated tariff structure be the minimum norm for transmission and distribution tariffs in both markets. It is important to ensure that future accession countries also implement structures compatible with the approach pursued by Member States.

[8] For gas, the following Member States have either a system of negotiated access, or a hybrid published/negotiated system: Austria, Belgium (who, however, recently decided to change to regulated TPA), Denmark, France, Germany and The Netherlands.

In order to ensure that non-discrimination is effective in practice, Member States and national regulatory authorities will have to carefully monitor the behaviour of the legally separated transmission and distribution system operators. Thus, Member States and national regulatory authorities will need, inter alia, to ensure that transmission and distribution operators reply to access requests within a reasonable period of time. In the Commission's view a period of two weeks should, in principle, not be exceeded. They will equally need to ensure that transmission and distribution system operators do not ask questions to companies requesting access to the network, which relate to the source of the energy, the destination or the onward transport route that are not necessary for the carrying out of their responsibilities in relation to the operation of the network.

Regulation: Independent national regulatory authorities play a pivotal role in ensuring non-discriminatory access to the network, as they have the power to fix or approve transmission and distribution tariffs prior to their entry into force. Competition authorities can only act on competition distortions ex-post, while regulators have an active ex-ante function. These authorities also play a major role in issues relating to cross border trade, in the creation of a truly internal market. They also bring about regulatory continuity and transparency to the market. The proposed Directive therefore requires Member States to establish independent regulatory authorities with the competence, inter alia, to set and/or approve tariffs and conditions for access to gas and electricity transmission and distribution networks. Thus, the regulatory authority must approve the transmission and distribution tariffs prior to their entry into force. This approval may be on the basis of a proposal by thetransmission/distribution system operator(s), or on the basis of a proposal agreed between the transmission/distribution system operator(s) and the users of the network. Indeed, it is in any event appropriate for transmission/distribution system operators to consult closely with all categories of their network users prior to proposingtariffs to their regulatory authority. Although independent, these organisations will need to work closely with other government bodies such as competition authorities where these still retain the responsibility for settling other types of disputes relating to TPA, for example, questions of discrimination in individual cases.

Trade with non-EU countries: In a liberalised market there may be increased opportunities for EU businesses to trade with suppliers and customers outside the EU. Significant benefits could arise from such trade as in other industries. However, there must be agreement between the EU and third countries on reciprocal access to markets and on environmental and safety standards to prevent potential danger to the environment in the Community, particularly for the electricity market. A framework for bilateral or regional agreements could be envisaged to cover these matters. However, some Member States may already have separate arrangements with non-EU countries to exchange electricity. These agreements need to be monitored so that they are compatible with the Community objectives on, for example, nuclear power safety. Hence, the Directive requires Member States to inform the Commission of the imports of electricity from those countries to which the Electricity Directive does not apply.

3.3. Updating provisions

To reflect the fact that a number of options in the present Electricity Directive are implemented by no Member State, and are generally accepted to be less likely to lead to the development of competitive markets than those actually implemented, it is proposed that these are deleted from the Directive. This is important in ensuring a continued level playing field with potential accession countries. Thus, it is proposed that the tendering procedure with respect to generation be deleted. However, Member States are required to make provision for the launch of tenders for new capacity that might be used as an exceptional measure for reasons of security of supply. The "Single buyer" option with respect to TPA for electricity is also deleted.

An administrative improvement is also proposed to remove a procedural requirement that, in the light of experience, has been shown to be unnecessary, and can be deleted without reducing the effectiveness of the Directive. This concerns the requirement that in the event of a refusal to grant authorisation to construct new generating capacity, a copy of the relevant decision is forwarded to the Commission. It has become evident that this procedure is unnecessarily onerous as many such refusals take place for small facilities on simple planning grounds (Article 5(3) of Directive 96/92/EC). The benefits of this procedure are therefore outweighed by the administrative burdens it imposes, particularly on local authorities. This requirement is therefore dropped. Companies that are refused authorisations retain the right, however, to refer any case they may wish to the Commission.

Article 14(3) of the Electricity Directive and 13(3) of the Gas Directive require that integrated undertakings maintain separate accounts for their different activities. According to the definitions contained in Article 2(5) and (6) of the Electricity Directive and 2(3) and (5) of the Gas Directive both transmission and distribution mean the transport of electricity/gas "with a view to its delivery to final consumers". Certain companies have argued that this means that it is unnecessary to maintain separate accounts for distribution and supply activities. The Commission believes this to be incorrect and incompatible with the wording and objective of this provision, notably to create transparency and effective regulation. Nonetheless to ensure full clarity on this issue, the draft Directive proposes a modification of Article 14(3) of the Electricity Directive and 13(3) of the Gas Directive.

With respect to the reciprocity provision, contained in Article 19 of both Directives, it is now possible to fix a final date at which this provision shall cease to be valid. As it is proposed that all Member States must designate all consumers to be eligible by 1 January 2005, the clause becomes invalid on that date.

Finally, it is proposed to repeal the Gas and Electricity Transit Directives (Council Directives 90/547/EEC and 91/296/EEC) to avoid different regimes, publication requirements, dispute settlement systems, etc. for access to the network. Transmission system operators shall, if necessary and for the purpose of carrying out their functions including in relation to transit, have access to the network of other transmission system operators based on non-discriminatory terms and conditions.

3.4. Public service objectives

As mentioned in the Communication on completing the internal market, the attainment of public service objectives is one of the most fundamental objectives of the Commission in this area. Whilst existing provisions of the Gas and Electricity Directives have operated well to date, room for improvement exists, in particular in the context of full market opening. First, in order to ensure that universal service in electricity is ensured as market opening progresses, the Commission feels it is important to include a provision in the proposal stating that Member States should ensure universal service, meaning supply of high quality electricity to all customers in their territory (Article 3(3)). Equally, and as a complement to this, requirements (Article 3(3) and (4)) are introduced upon Member States, both for electricity and gas, to introduce appropriate provisions to ensure the attainment of the public service objectives and notably:

* The protection of vulnerable customers: Member States will, for example, need to ensure appropriate protection from unjustified disconnection of, inter alia, the elderly, the unemployed, the handicapped, etc.;

* The protection of final customers' basic rights: Member States will, for example, need to ensure a minimum set of conditions for contracts, transparency of information, and the availability of low-cost and transparent dispute settlement mechanisms [9];

[9] Appropriate provisions to ensure these basic rights can be found in Article 17 of the Commission proposal for a Directive of the European Parliament and of the Council on universal service and users' rights relating to electronic communications networks and services, COM(2000) 392 of 12 July 2000.

* Social and economic cohesion: beyond universal service, where necessary, Member States will need to take appropriate measures to ensure supplies at appropriate prices to, for example, peripheral areas;

* Environmental protection; and

* Security of supply; notably through ensuring appropriate levels of maintenance and development of infrastructure, and in particular interconnections.

Furthermore, and again as a complement to the above, in order to ensure that it is clear that Member States have available all necessary instruments to guarantee network maintenance and development, it is proposed that a new Article be inserted in the Gas and Electricity Directives (Article 8(5) of the Electricity Directive and Article 7(5) of the Gas Directive), which states that "Member States may require Transmission System Operators to meet minimum levels of investment for the maintenance and development of the transmission system, including interconnection capacity".

Finally, given the vital importance of continued secure supplies of electricity as highlighted in the Green Paper of Energy Supply - probably the most important public service objective - it is necessary to take a number of additional complementary measures to reinforce the existing safeguards contained in the Electricity and Gas Directives on this point. In particular, and in addition to the requirements on Member States to provide for the possibility of launching tenders for new capacity when necessary, it would be appropriate for Member States to be required to carefully monitor the state of the domestic electricity and gas markets, and in particular the existing demand/supply balance, the level of expected future demand, envisaged additional capacity under planning or construction, and the level of competition existing on the market. On an annual basis, the Member States should be required to publish a report outlining their findings, and indicating any measures envisaged to ensure supply security. Furthermore, given that due to the highly interconnected nature of the EU electricity and gas network, the relationship between demand and supply at the Community level is of vital importance for overall system security, the Commission, on the basis of the national reports and its own monitoring work, should publish a similar Communication covering the Community as a whole. For this reason, it is proposed to include these provisions in Article 6(6) of the revised Electricity Directive and in Article 4a of the revised Gas Directive.

Article 3(2) of the existing Directives requires Member States to notify public service objectives to the Commission. However, as no Member State has adopted such objectives, which require a derogation from either Directive, no such notifications have been made. In order to permit an effective benchmarking exercise by the Commission, enabling Member States to ensure that they maintain the highest levels of public service, it is appropriate to amend this provision to ensure that Member States notify, every two years, all measures taken to achieve public service objectives, irrespective of whether they require a derogation from the Directive and notably the new requirements mentioned above. On this basis, the Commission should be obliged to publish a report every two years analysing the different measures adopted, and, if necessary, make recommendations as to measures to be taken to achieve high public service standards.

Finally, a fully opened market needs an internalisation of external costs to ensure a true level playing field. The Commission will therefore promote initiatives in this sense, e.g. an EU-wide energy/CO2 tax, strict rules on State aid, demand-side management measures, measures to promote cogeneration and renewables which have a competitive disadvantage as long as external costs are not fully integrated.

4. Conclusion

All the evidence available to the Commission on the basis of the operation of the gas and Electricity Directives demonstrates that all the basic objectives pursued by the internal market; lower prices, increased competitiveness, high standards of public service, security of supply, and environmental protection, are being achieved; and in a socially consensual context. Experience in countries that have moved to full market opening demonstrates that these objectives can be and are met under conditions of full competition, and can indeed be better pursued under such circumstances. The overwhelming view of those commenting in the context of the public hearing on completing the internal gas and electricity markets, and comments received in writing, support this approach.

The rapid completion of the internal market in this area represents, therefore, an important step in meeting the Community's objectives set out at the European Council at Lisbon in spring 2000. The adoption of these proposals can be expected to bring important benefits in terms of competitiveness and employment, and provide competitive prices and higher standards of service to Community citizens for gas and electricity.

2001/0078 (COD)

Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on conditions for access to the network for cross-border exchanges in electricity

(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 95 thereof,

Having regard to the proposal from the Commission [10],

[10] OJ C

Having regard to the opinion of the Economic and Social Committee [11],

[11] OJ C

Having regard to the opinion of the Committee of the Regions [12],

[12] OJ C

Acting in accordance with the procedure laid down in Article 251 of the Treaty [13],

[13] 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 [14] constituted an important step in the completion of the internal market in electricity.

[14] OJ L 27, 30.1.1997, p. 20; Directive as amended by Directive .../.../EC (OJ L ..., ..., p. ...).

(2) 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 the electricity and gas sectors and to speed up liberalisation in these sectors with a view to achieving a fully operational internal market in these areas.

(3) The creation of a real internal electricity market should be promoted through an intensification of trade in electricity, which is currently underdeveloped compared to other sectors of the economy.

(4) Fair, cost-reflective, transparent and directly applicable rules, completing the provisions of Directive 96/92/EC, should be introduced with regard to cross-border tarification and the allocation of available interconnection capacities, in order to ensure effective access to transmission systems for the purpose of cross-border transactions.

(5) In its Conclusions, the Energy Council of 30 May 2000 invited the Commission, Member States and national regulatory authorities/administrations to ensure a rapid introduction of a robust tarification system and methodology to allocate available interconnection capacity for the longer term.

(6) The European Parliament, in its Resolution of 6 July 2000 on the Commission's second report on the state of liberalisation of energy markets, called for conditions for using networks in Member States that do not hamper cross-border trade in electricity and called on the Commission to submit specific proposals geared to overcoming all the existing barriers to intra-Community trade.

(7) This Regulation should lay down basic principles with regard to tarification and capacity allocation, whilst providing for the adoption of guidelines detailing further relevant principles and methodologies, in order to allow rapid adaptation to changed circumstances.

(8) In an open, competitive market, transmission system operators should be compensated for costs incurred as a result of hosting transit flows of electricity on their networks by the operators of the transmission systems from which transits originate or for which they are destined.

(9) Payments and receipts resulting from compensation between transmission system operators should be taken into account when setting national network tariffs.

(10) The actual amount payable for cross-border access to the system can vary considerably, depending on the transmission system operators involved and as a result of differences in the structure of the tarification systems applied in Member States. A certain degree of harmonisation is therefore necessary in order to avoid distortions of trade.

(11) It would not be appropriate to apply distance-related tariffs, or a specific tariff to be paid only by exporters or importers.

(12) Competition on the internal market can only truly develop if access to the lines interconnecting the different national systems is granted in a non-discriminatory and transparent way. The available capacities of these lines should be set at the maximum complying with the safety standards of secure network operation.Any discrimination in the allocation of available capacities should be shown not to unreasonably distort or hinder the development of trade.

(13) There should be transparency for market actors concerning available transfer capacities and the security, planning and operational standards that affect the available transfer capacities.

(14) Any revenues flowing from congestion-management procedures should not constitute a source of extra profit for the transmission system operators.

(15) It should be possible to deal with congestion problems in various ways as long as the methods used provide correct economic signals to transmission system operators and market parties and are based on market mechanisms.

(16) To ensure the smooth functioning of the internal market, provision should be made for procedures which allow the adoption of decisions and guidelines with regard to tarification and capacity allocation by the Commission whilst ensuring the involvement of Member States' regulatory authorities in this process.

(17) National authorities should be required to provide relevant information to the Commission. Such information should be treated confidentially by the Commission. Where necessary, the Commission should have the possibility to request relevant information directly from undertakings concerned.

(18) National regulatory authorities should ensure compliance with the rules contained in this Regulation and the guidelines adopted on the basis of this Regulation.

(19) Member States should lay down rules on penalties applicable to infringements of the provisions of this Regulation and ensure that they are implemented. Those penalties must be effective, proportionate and dissuasive.

(20) 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 provision of a harmonised framework for cross-border exchanges of electricity, cannot be achieved by the Member States and can therefore, by reason of the scale and effect of the action, be better achieved by the Community. This Regulation confines itself to the minimum required in order to achieve those objectives and does not go beyond what is necessary for that purpose.

(21) In accordance with Article 2 of Council Decision 1999/468/EC of 28 June 1999 laying down the procedures for the exercise of implementing powers conferred on the Commission [15], measures for the implementation of this Regulation should be adopted by use of the regulatory procedure provided for in Article 5 of Decision 1999/468/EC, or by use of the advisory procedure provided for in Article 3 of that Decision, according to the nature of the measures to be adopted,

[15] OJ L 184, 17.7.1999, p. 23.

HAVE ADOPTED THIS REGULATION:

Article 1

Subject-matter and scope

This Regulation aims at stimulating cross-border exchanges in electricity and thus competition within the internal electricity market, through the establishment of a compensation mechanism for transit flows of electricity and the setting of harmonised principles on cross-border transmission charges and the allocation of available capacities of interconnections between national transmission systems.

Article 2

Definitions

1. For the purpose of this Regulation, the definitions contained in Article 2 of Directive 96/92/EC shall apply.

2. The following definitions shall also apply:

(a) "transit" means a physical flow of electricity hosted on the transmission system of a Member State, which was neither produced nor is destined for consumption in that Member State, including transit flows which are commonly denominated as "loop-flows"or "parallel-flows";

(b) "congestion" means a situation in which an interconnection linking national transmission networks cannot accommodate all transactions resulting from international trade by market operators due to a lack of capacity.

Article 3

Inter transmission system operator compensation mechanism

1. Transmission system operators shall receive compensation for costs incurred as a result of hosting transit flows of electricity on their network.

2. The compensation referred to in paragraph 1 shall be paid by the operators of national transmission systems from which transit flows originate and/or the systems where those flows end.

3. Compensation payments shall be made on a regular basis with regard to a given period of time in the past. Ex-post adjustments of compensation paid shall be made where necessary to reflect actual costs incurred.

The first period of time with regard to which compensation payments shall be made shall be determined in the guidelines referred to in Article 7.

4. Acting in accordance with the procedure referred to in Article 13(2), the Commission shall decide on the amounts of compensation payments payable.

5. The amounts of transit hosted and the amounts of transit flows originating and/or ending in national transmission systems shall be determined on the basis of the physical flows of electricity actually measured in a given period of time.

6. The costs incurred as a result of hosting transit flows shall be established on the basis of the forward looking long-run average incremental costs (reflecting costs and benefits that a network bears from hosting transit flows compared to the costs it would bear in the absence of such flows).

Article 4

Charges for access to networks

1. Charges applied by national network-operators for access to national networks shall reflect actual costs incurred, and shall be transparent, approximated to those of an efficient network operator and applied in a non-discriminatory manner. They shall not be distance-related.

2. Generators and consumers (load) may be charged for access to national networks. The proportion of the total amount of the network charges borne by generators shall be lower than the proportion borne by consumers. Where appropriate, the level of the tariffs applied to generators and/or consumers shall provide locational signals, and take into account the amount of network losses and congestion caused.

3. Payments and receipts resulting from the inter-transmission system operator compensation mechanism shall be taken into account when setting the charges for network access. Actual payments made and received as well as payments expected for future periods of time, estimated on the basis of past periods, shall be taken into account.

4. Subject to paragraph 2, charges for access to national networks applied to generators and consumers shall be applied independently of the country of destination and respectively origin of the electricity, as specified in the underlying commercial arrangement. Exporters and importers shall not be charged any specific charge in addition to the general charge for access to national networks.

5. There shall be no specific network charge on individual transactions for transits of electricity covered by the inter-transmission system operator compensation mechanism.

Article 5

Provision of information on interconnection capacities

1. Coordination and information exchange mechanisms shall be put in place by transmission system operators to ensure the security of the networks in the context of congestion management.

2. The safety, operational and planning standards used by transmission system operators shall be made public. This publication shall include a general scheme for the calculation of the total transfer capacity and the transmission reliability margin based upon the electrical and physical features of the network. Such schemes shall be subject to the approval of the national regulatory authority.

3. Transmission system operators shall publish estimates of available transfer capacity for each day, indicating any available transfer capacity already reserved. These publications shall be made at specified time intervals before the day of transport and shall include, in any case, week-ahead and month-ahead estimates.

The data published shall include a quantitative indication of the expected reliability of the available capacity.

Article 6

General principles on congestion management

1. Network congestion problems shall be addressed with non-discriminatory market based solutions which give efficient economic signals to the market participants and transmission system operators involved.

2. Transaction curtailment procedures shall only be used in emergency situations where the transmission system operator must act in an expeditious manner and redispatching or countertrading is not possible.

Market participants who have been allocated capacity shall be compensated for any curtailment of this capacity.

3. The maximum capacity of the interconnections shall be made available to marketparticipants, complying with safety standards of secure network operation.

4. Any allocated capacity that will not be used shall be reattributed to the market.

5. Transmission system operators shall, as far as technically possible, net the capacity requirements of any power flows in opposite direction over the congested interconnection line in order to use this line to its maximum capacity. In any event, transactions that relieve the congestion shall never be denied.

6. Any rents resulting from the allocation of interconnection capacities shall be used for one or more of the following purposes:

(a) guaranteeing the actual availability of the allocated capacity;

(b) network investments maintaining or increasing interconnection capacities;

(c) reduction of network charges.

These rents may be put into a fund that is managed by transmission system operators. They shall not constitute a source of extra profit for the transmission system operators.

Article 7

Guidelines

1. Where appropriate, the Commission shall, acting in accordance with the procedure referred to in Article 12 (2), adopt and amend guidelines on the following issues with regard to the inter-transmission system operator compensation mechanism:

(a) details of the determination of the transmission system operators liable to pay compensations for transit flows, in accordance with Article 3(2);

(b) details of the payment procedure to be followed, including the determination of the first period of time for which compensations are to be paid, in accordance with the second subparagraph of Article 3(3);

(c) details of methodologies to determine the amount of transits hosted and exports/imports of electricity made, in accordance with Article 3(5);

(d) details of the methodology to determine the costs incurred as a result of hosting transits of electricity, in accordance with Article 3(6);

(e) the participation of national systems which are interconnected through direct current lines, in accordance with Article 3.

2. The guidelines shall also determine details of the harmonisation of the charges applied to generators and consumers (load) under national tariff systems, in accordance with the principles set out in Article 4(2).

3. Where appropriate, the Commission shall, acting in accordance with the procedure referred to in Article 12(2), amend the guidelines on the management and allocation of available transfer capacity of interconnections between national systems set out in the Annex, in accordance with the principles set out in Articles 5 and 6. Where appropriate, in the course of such amendments common rules on minimum safety and operational standards for the use and operation of the network, as referred to in Article 5(2) shall be set.

Article 8

National regulatory authorities

National regulatory authorities shall ensure that national tariffs and methodologies for congestion management are set and applied in accordance with this Regulation and the guidelines adopted pursuant to Article 7.

Article 9

Provision of information and confidentiality

1. Member States and national regulatory authorities shall, on request, provide to the Commission all information necessary for the purpose of Articles 3(4) and 7.

. In particular, for the purpose of Article 3(4), national regulatory authorities shall provide on a regular basis, costs actually incurred by national transmission system operators associated with hosting transit flows as well as the amount of exports and imports made in a given period. They shall also provide the relevant data and information used for the calculation of those figures.

2. Member States shall ensure that national regulatory authorities and administrations are able and entitled to provide the information required pursuant to paragraph 1.

3. The Commission may also request all information necessary for the purpose of Article 3(4) and Article 7 directly from undertakings and associations of undertakings.

When sending a request for information to an undertaking or an association of undertakings, the Commission shall at the same time forward a copy of the request to the regulatory authority, established pursuant to Article 22 of Directive 96/92/EC of the Member State in whose territory the seat of the undertaking or the association of undertakings is situated.

4. In its request for information, the Commission shall state the legal basis of the request, the time-limit within which the information is to be provided, the purpose of the request, and also the penalties provided for in Article 11(2) for supplying incorrect, incomplete and misleading information.

5. The owners of the undertakings or their representatives and, in the case of legal persons, companies of firms, or of associations having no legal personality, the persons authorised to represent them by law or by their constitution, shall supply the information requested. Lawyers duly authorised to act may supply the information on behalf of their clients, in which case the client shall remain fully responsible if the information supplied is incomplete, incorrect or misleading.

6. Where an undertaking or association of undertakings does not provide the information requested within the time-limit fixed by the Commission or supplies incomplete information, the Commission shall by decision require the information to be provided. The decision shall specify what information is required and fix an appropriate time-limit within which it is to be supplied. It shall indicate the penalties provided for in Article 11(2). It shall also indicate the right to have the decision reviewed by the Court of Justice of the European Communities.

The Commission shall at the same time send a copy of its decision to the regulatory authority referred to in the second subparagraph of paragraph 3 of the Member State within the territory of which the residence of the person or the seat of the undertaking or the association of undertakings is situated.

7. Information collected pursuant to this Regulation shall be used only for the purposes of Articles 3(4) and 7.

The Commission shall not disclose information acquired pursuant to this Regulation of the kind covered by the obligation of professional secrecy.

Article 10

Right of Member States to provide for more detailed measures

This Regulation is without prejudice to the rights of Member States to maintain or introduce measures that contain more detailed provisions than those set out in this Regulation and the guidelines referred to in Article 7.

Article 11

Penalties

1. The Member States shall lay down the rules on penalties applicable to infringements of the provisions of this Regulation and shall take all measures necessary to ensure that they are implemented. The penalties provided for must be effective, proportionate and dissuasive. The Member States shall notify those provisions to the Commission by [indicate date] at the latest and shall notify it without delay of any subsequent amendment affecting them.

2. The Commission may by decision impose on undertakings or associations of undertakings fines not exceeding 1% of the total turnover in the preceding business year where, intentionally or negligently, they supply incorrect, incomplete or misleading information in response to a request made pursuant to Article 9(3) or fail to supply information within the time-limit fixed by a decision adopted pursuant to the first subparagraph of Article 9(6).

In setting the amount of a fine, regard shall be had both to the gravity and to the duration of the infringement.

3. Penalties provided for pursuant to paragraph 1 and decisions taken pursuant to paragraph 2 shall not be of criminal law nature.

Article 12

Regulatory committee

1. The Commission shall be assisted by a committee composed of the representatives of the Member States and chaired by the representative of the Commission.

2. Where reference is made to this paragraph, the regulatory procedure laid down in Article 5 of Decision 1999/468/EC shall apply, in compliance with Article 7 and Article 8 thereof.

3. The period provided for in Article 5(6) of Decision 1999/468/EC shall be two months.

Article 13

Advisory committee

1. The Commission shall be assisted by a committee composed of the representatives of the Member States and chaired by the representative of the Commission.

2. Where reference is made to this paragraph, the advisory procedure laid down in Article 3 of Decision 1999/468/EC shall apply, in compliance with Article 7 and Article 8 thereof.

Article 14

Entry into force

This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Communities.

It shall apply from [indicate date].

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels,

For the European Parliament For the Council

The President The President

ANNEX

Guidelines on the management and allocation of available transfer capacity of interconnections between national systems

General

1. Congestion management method(s) implemented by Member States should deal with short-run congestion in an economically efficient manner whilst simultaneously providing signals or incentives for efficient network and generation investment in the right locations.

2. In order to minimise the negative impact of congestion on trade, the current network should be used at the maximum capacity that complies with the safety standards of secure network operation.

3. The TSOs should provide non-discriminatory and transparent standards, which describe which congestion management methods they will apply under which circumstances. These standards, together with the security standards, should be described in open and publicly available documents.

4. Different treatment of the different types of cross-border transactions, whether they are physical bilateral contracts or bids into foreign organised markets, should be kept to a minimum when designing the rules of specific methods for congestion management. The method for allocating scarce transmission capacity must be transparent. Any differences in how transactions are treated must be shown not to distort or hinder the development of competition.

5. Price signals that result from congestion management systems should be directional.

6. Every effort should be made to net the capacity requirements of any power flows in opposite direction over the congested tie line in order to use the congested tie line to its maximum capacity. In any adopted congestion management scheme, transactions that relieve the congestion should never be denied.

7. Any unused capacity must become available to other agents (the use-it-or-lose-it principle). This may be implemented by devising notification procedures.

8. Any rents resulting from the allocation of interconnection capacities may be used for redispatching or counter trading in order to comply with the firmness of the capacity that was allocated to market parties. In principle, any remaining rents should be spent on network investments for relieving the congestion or on reducing the total network tariff. TSOs may manage these funds, but cannot retain them.

9. TSOs should offer transmission capacity to the market as 'firm' as possible. A reasonable fraction of the capacity may be offered to the market under condition of decreased firmness, but at all times the exact conditions for transport over cross-border lines should be made known to market parties.

10. Considering the fact that the European continental network is a highly meshed network and that the use of interconnection lines has an effect on the power flows on at least two sides of a national border, national Regulators shall ensure that no congestion management procedure with significant effects on power flows in other networks, be devised unilaterally.

Position of long-term contracts

1. Priority access rights to an interconnection capacity can not be assigned to those contracts which violate Articles 81 and 82 of the EC Treaty.

2. Existing long-term contracts shall have no pre-emption rights when they come up for renewal.

Provision of information

1. TSOs should implement appropriate coordination and information exchange mechanisms to guarantee security of the network.

2. TSOs should publish all relevant data concerning the cross-border total transfer capacities. In addition to the winter and summer ATC values, estimates of transfer capacity for each day should be published by the TSOs at several time intervals before the day of transport. At least accurate week-ahead estimates should be made available to the market and the TSOs should also endeavour to provide month-ahead information. A description of the firmness of the data should be included.

3. The TSOs should publish a general scheme for calculation of the total transfer capacity and the transmission reliability margin based upon the electrical and physical realities of the network. Such a scheme should be subject to approval by the regulators of the involved Member States concerned. The safety standards and the operational and planning standards should form an integral part of the information that TSOs should publish in open and public documents.

Preferred methods for congestion management

1. Network congestion problems should in principle be addressed with market-based solutions. More specifically, congestion management solutions are preferred which give appropriate price signals to the market parties and the TSOs involved.

2. Network congestion problems should preferentially be solved with non-transaction based methods, i.e. methods that do not involve a selection between the contracts of individual market parties.

3. The system of market splitting, as used in the Nordpool area, is the congestion management procedure that, in principle, best meets this requirement.

4. In the short term, however, methods for congestion management in Continental Europe that may be used are implicit and explicit auctions and cross-border coordinated redispatching.

5. Cross-border coordinated redispatching or counter trading may be used jointly by the concerned TSOs. The costs that TSOs incur in counter-trading and redispatching must, however, be at an efficient level.

6. Transaction curtailment, following pre-established priority rules, should be left only for emergency situations where the TSOs must act in an expeditious manner and redispatching is not possible.

7. The possible merits of a combination of market splitting for solving 'permanent' congestion and counter trading for solving temporary congestion should be immediately explored as a more permanent approach to congestion management.

Guidelines for explicit auctions

1. The auction system must be designed in such a way that all available capacity is being offered to the market. This may be done by organising a composite auction in which capacities are auctioned for differing duration and with different characteristics (e.g. with respect to the expected reliability of the available capacity in question).

2. Total interconnection capacity should be offered in a series of auctions, which, for instance, might be held on a yearly, monthly, weekly, daily and intra-daily basis, according to the needs of the markets involved. Each of these auctions should allocate a prescribed fraction of the available transfer capacity plus any remaining capacity that was not allocated in previous auctions.

3. The explicit auction procedures should be prepared in close collaboration between the national regulatory authority and the TSO concerned and designed in such a way as to allow bidders to participate also in the daily sessions of any organised market (i.e. power exchange) in the countries involved.

4. The power flows in both directions over congested tie lines should in principle be netted in order to maximise the transport capacity in the direction of the congestion. However, the procedure for netting of flows should comply with safe operation of the power system.

5. In order to offer as much capacity to the market as possible, the financial risks related to the netting of flows, should be attributed to those parties causing those risks to materialise.

6. Any auction procedure adopted should be capable of sending directional price signals to market participants. Transports in a direction opposite the dominant power flow relieve the congestion and should therefore result in additional transport capacity over the congested tie line.

7. In order not to risk creating or aggravating problems related to any dominant position of market player(s), capping of the amount of capacity that can be bought/possessed/used by any single market player in an auction should be seriously considered by the competent regulatory authorities in the design of an auction mechanisms.

8. To promote the creation of liquid electricity markets, capacity bought at an auction should be freely tradeable before the moment of notification.

LEGISLATIVE FINANCIAL STATEMENT

Policy area(s): Energy and Transport

Activity(ies): Energy Industry and Internal Market

Title of action: Regulation of the European Parliament and of the Council on conditions for access to the network for cross-border exchanges in electricity

1. BUDGET LINE(S) + HEADING(S)

In 2002: Chapter B4-10, Article B4-1040 (ETAP)

2. OVERALL FIGURES

2.1. Total allocation for action (Part B): EUR 5 million (1998 - 2002)

2.2. Period of application:

2002 [16]

[16] In accordance with the work programme of the Commission for 2001, a proposal for a new Energy Framework programme succeeding the current one, which expires in 2002, will be made this year. This new proposal will include the financial needs for the action in the coming years.

2.3. Overall multiannual estimate on expenditure:

(a) Schedule of commitment appropriations/payment appropriations (financial intervention) (see point 6.1.1)

EUR million (to 3rd decimal place)

>TABLE POSITION>

(b) Technical and administrative assistance and support expenditure (see point 6.1.2)

Non-Applicable

>TABLE POSITION>

>TABLE POSITION>

(c) Overall financial impact of human resources and other administrative expenditure (see points 7.2 and 7.3)

>TABLE POSITION>

>TABLE POSITION>

2.4. Compatibility with the financial programming and the financial perspective

Proposal compatible with the existing financial programming

This proposal will entail reprogramming of the relevant heading in the financial perspective

This may entail application of the provisions of the Interinstitutional Agreement.

2.5. Financial impact on revenue [17]:

[17] For further information, see a separate guidance paper.

No financial implications (involves technical aspects regarding implementation of a measure)

Financial impact - the effect on revenue is as follows:

>TABLE POSITION>

3. BUDGET CHARACTERISTICS

>TABLE POSITION>

4. LEGAL BASIS

The Treaty establishing the European Community, in particular Article 95.

Council Decision 1999/21/EC, Euratom of 14 December 1998 adopting a multiannual framework programme for actions in the energy sector (1998 to 2002) and connected measures (OJ L 7, 13.1.1999, p. 16).

Council Decision 1999/22/EC of 14 December 1998 adopting a multiannual programme of studies, analyses, forecasts and other related work in the energy sector (1998 to 2002) (OJ L 7, 13.1.1999, p. 20).

5. DESCRIPTION AND GROUNDS

5.1. Need for Community intervention [18]

[18] For further information, see a separate guidance paper.

5.1.1. Objectives pursued

The Electricity Directive progressively opens up national electricity markets to competition. However, in order to create a real integrated internal market, effective trading rules are necessary, and notably a harmonised approach on cross-border tarification for transmission tariffs and commonly implemented mechanisms for dealing with congestion at borders. In order to deal with this, the Commission launched the "Florence process", a Forum composed of the Commission, national Regulators, Member States and industry. Much progress has been made, but no final agreement has been reached or mechanisms put in place. To deal with this the Commission will propose, on 7 March 2001, a Regulation which (a) sets out the basic principles according to which cross-border tarification and congestion management must be dealt with (b) permits the Commission, subject to a comitology procedure, to adopt binding guidelines on the precise mechanism according to which the harmonised rules on tarification and congestion will enter into force, and (c) calculate and implement, on the basis of data provided by national regulators, cross-border tariffs. Thus, the Commission takes on new executive responsabilites, acting in many respects as a European regulator regarding cross-border electricity trade.

The objectives pursued by the Regulation are, therefore, the rapid entry into force of cost-reflective mechanisms on tariffs and congestion permitting trade to function freely. It is expected that the Regulation may enter into force in late 2001/early 2002. A new tarification system through guidelines should therefore be in place by september 2002. Tariffs should then be adopted by end 2002. Finally, common rules on congestion management will enter into force on the adoption of the Regulation, as they are contained in Annex to the legislative text. These will need to be reviewed and, if necessary, amended by end 2002. The objectives pursued by this financial action is to provide the Commission with the means to effectively carry out these new responsibilities.

5.1.2. Measures taken in connection with ex ante evaluation

To prepare the adoption of the proposed Regulation, the Commission set up the Florence Forum. This has now met five times. Equally, the results of the Forum have been discussed on four occasions by the energy Council which has underlined the importance of the rapid introduction of such measures. On the basis of the work at the Forum, the Commission adopted on 16 May 2000 a Communication on "recent progress with building the internal electricity market". Furthermore, this issue was addressed at a Public Hearing organised by the Commission on 14 September 2000. Furthermore, this issue was examined in the Green Paper on securtity of supply (COM(2000) 769).

The discussions at the Florence Forum and at Council, as well as the reaction to the Commission's Communication on this subject, has shown that the introduction of effective rules on cross-border tarification and congestion management is a fundamental requirement for the creation of a real internal market for electricity. It has also shown that the development of such rules is technically extremely complex, and controversial. Furthermore, once a robust methodology is determined, calculation of costs relating to cross-border trade will be difficult and time-consuming. In this light, a Regulation has been viewed as necessary to deal with the issues effectively.

5.1.3. Measures taken following ex post evaluation

It is believed that a detailed review of the effectiveness of the approach set out in the Regulation in developing common rules, as well as the effectiveness of the financial actions taken by the Commission to support this effort, should take place two years after the entry into force of the Regulation.

5.2. Actions envisaged and arrangements for budget intervention

The adoption of common rules on cross-border tarification and congestion management would lead to increased competition throughout the EU and thus lower electricity prices, thus benefiting all consumers, both domestic and industrial. The financial actions envisaged are to prepare the entry into force of such rules, and are thus highly technical and specific in nature, and would thus be of interest to national regulators, Member States, the European Parliament and relevant industry.

- the specific objectives set for the programming period

The specific objectives of the Regulation are the entry into force, by end 2002 of a harmonised system for cross-border transmission tarification based on principles of simplicity, cost-reflectiveness and non-discrimination. Also they are the entry into force of common rules on congestion management at the adoption of the Regulation and, if necessary in the light of experience, their revision by end 2002. The specific objectives of the financial actions are thus to (i) complete the studies leading to the entry into force of a detailed guidelines on tarification by september 2002, (ii) the fixing and entry into force of actual tariffs through the verification of data submitted by national Regulators by end 2002 and (iii) the entry into force of any revision of the guidelines on congestion management, on the basis of necessary study, by end 2002. Thereafter, the specific objective is the revision of these guidelines, if necessary, on the basis of additional studies on an annual basis, and the recalculation and re-adoption of tariffs.

- the concrete measures to be taken to implement the action

First, the launch of studies leading to the adoption and agreement of guidelines on cross-border tarification (to September 2002); secondly, the adoption of a decision on actual tariffs (end 2002) on the basis of figures submitted by Regulators and received by the Commission, thirdly, the re-examination of guidelines on congestion management contained in the Regulation on the basis of necessary study work (end 2002).

To achieve these objectives, two financial actions are envisaged:

Action 1: In order to develop the detailed guidelines with respect to tarification upon which the new system will be based, considerable preparatory work is necessary, often technical (engineering) and financial (accounting) in nature. This also applies to the question whether and how the guidelines contained in the Regulation on congestion management are amended. To achieve this, it is cost effective to prepare the guidelines through expert studies.

Action 2: Once the guidelines on cross-border tarification have been adopted, national Regulators will forward calculations on the costs/benefits to their network resulting from electricity trade. The Commission must determine whether these figures are correctly calculated, and on the basis of these, calculate the individual payments between systems to compensate for trade. This will require very specialised auditing skills, for a limited period every year. The most cost-effective manner of carrying out much of this verification work is therefore to engage outside expertise.

- the immediate outputs of each action, and their contribution to

The expected outcome is the entry into force, and subsequent maintenance and refinement of a system of cross-border tarification and congestion management permitting electricity trade to function effectively.

- the expected outcomes solving needs or problems

1. The Commission should adopt and amend guidelines which further detail the basic principles with regard to tarification and congestion management contained in the draft Regulation These guidelines can be adopted and amended without changing the Regulation in order to allow rapid adaptation to changed circumstances. This is necessary since issues, such as cost calculation methodologies and the concrete identification and measurement of physical flows, develop continuously and, therefore, it must be possible to make refinements and improvements in future.

2. The Commission determines, on a regular basis, the level of compensation payments to be made between transmission system operators for transit flows of electricity hosted. The main objective of this action is to ensure that transmission system operators are accurately compensated for costs incurred, in particular with a view to exclude overcompensation and thus excessive transaction costs.

Member States alone cannot resolve this issue: to develop an effective tarification system a harmonised approach is imperative and cannot be developed at national level. As demonstrated above, an informal collaborative approach will not lead to the implementation of an appropriate system with necessary procedural and democratic safeguards. Such a proposal is therefore wholly in line with the subsidiarity principle, and indeed is made necessary by it.

However, Member States' regulatory authorities need to be involved in this process. The Commission would therefore take these decisions after consultation of a committee made up of representatives of Member States, created in accordance with Council Decision 1999/468 laying down the procedures for the exercise of implementing powers conferred on the Commission ("Comitologie").

5.3. Methods of implementation

The financial actions seek to provide the Commission with the resources necessary to effectively carry out the new executive functions accorded to it by the adoption of the proposed Regulation on cross-border tarification and congestion. The Regulation provides three new tasks: the adoption via a comitology committee of detailed rules on cross-border tarification, the fixing and imposition of those tariffs, and the amendment, through a comitology procedure, of guidelines contained in the Regulation on congestion management.

Much of this work will be carried out internally by the Commission, preparing the final text of guidelines, ensuring their adoption through the comitology procedure, and adopting decisions on actual tariff levels. However, in preparing this work:

Action1: In developing and improving the guidelines, it will be necessary to have recourse to external studies providing economic, accounting and technical expertise.

Action 2: once the methodology is established and guidelines adopted, the Commission will have to calculate exact tariff levels. This will be done on the basis of data provided by national regulators, calculated in accordance with the guidelines. The Commission has the role of verifying the data provided at national level. As this is highly specialised audit work, needed for a relatively short period each year, it is cost efficient that this verification is carried out by external expertise.

6. FINANCIAL IMPACT

6.1. Total financial impact on Part B - (over the entire programming period)

6.1.1. Financial intervention

Commitments in EUR million (to 3rd decimal place)

>TABLE POSITION>

6.2. Calculation of costs by measure envisaged in Part B (over the entire programming period) [19]

[19] For further information, see a separate guidance paper.

Commitments in EUR million (to 3rd decimal place)

>TABLE POSITION>

If necessary, explain the method of calculation

Explanation of the method of calculation:

Action 1: Studies to assist the Commission in preparing guidelines on cross-border tarification and congestion management,

Two studies per year are necessary in order to prepare the adoption and/or amendment of the guidelines: per study 130 man/days at EUR 900 (average rate of auditors and other experts) = 2 x 117 000 = EUR 234 000

Action 2: Verification of cost-calculations regarding the costs of transits incurred by national transmission system operators.

- verification of documents submitted and benchmarking exercise: Cost per Member State: 20 man/days at EUR 1 000 (average rate of auditors) = EUR 300 000

- following the benchmarking exercise: On-spot verification with regard to seven Member States (estimate). Cost per Member State: 10 man/days per Member State at EUR 1 000 = EUR 70 000

Since the above calculations are based on estimates, an indicative amount of EUR 600 000 needs to be foreseen.

7. IMPACT ON STAFF AND ADMINISTRATIVE EXPENDITURE

7.1. Impact on human resources

>TABLE POSITION>

7.2. Overall financial impact of human resources

>TABLE POSITION>

The amounts are total expenditure for twelve months.

7.3. Other administrative expenditure deriving from the action

>TABLE POSITION>

The amounts are total expenditure for twelve months.

___________________________

(1) Specify the type of committee and the group to which it belongs.

I. Annual total (7.2 + 7.3)

II. Duration of action

III. Total cost of action (I x II) // EUR 258 000

not limited

EUR 258 000/year

The requirements in terms of human and other administrative resources are to be met within the resources made available to DG TREN in the framework of the annual allocation process.

8. FOLLOW-UP AND EVALUATION

8.1. Follow-up arrangements

The result of the measures foreseen in the draft Regulation will be assessed in the light of the future development of intra-Community trade in electricity, as of the relevant Eurostat Statistics.

8.2. Arrangements and schedule for the planned evaluation

Two years following the entry into force of the Regulation it is intended to carry out an internal evaluation of the success in adopting the necessary guidelines and rules permitting a tarifiaction and harmonised congestion management system to enter into force. The success of this system will be evaluated in terms of its ability to reduce transaction costs for electricity consumers. The use and value of the study work carried out in achieving this will also be evaluated as well as the accuracy of the audit work carried out on calculations of individual country tariffs and the cost-effectiveness of the approach.

9. ANTI-FRAUD MEASURES

Reimbursement of experts and payment of experts for studies carried out will be made in compliance with applicable financial rules.

IMPACT ASSESSMENT FORM

THE IMPACT OF THE PROPOSAL ON BUSINESS WITH SPECIAL REFERENCE TO SMALL AND MEDIUM-SIZED ENTERPRISES (SMEs)

Title of proposal

- Communication from the Commission to the Council and the European Parliament: Completing the internal energy market

- Proposal for a Directive of the European Parliament and of the Council amending Directives 96/92/EC and 98/30/EC concerning common rules for the inernal market in electricity and natural gas

- Proposal for a Regulation of the European Parliament and of the Council on conditions for access to the network for cross-border exchanges in electricity

Document reference number

COM(2001) 125 of .....

The proposal

1. Taking account of the principle of subsidiarity, why is Community legislation necessary in this area and what are its main aims-

The creation of the internal energy market forms part of the objective of creating a fully operational internal market in the European Union, with a view to encouraging the possibilities of growth and of employment to the benefit of the citizens of the Union.

The main goals of the proposals are:

- the complete opening of the markets of electricity and of gas in 2005, accompanied with guarantees on non-discriminatory access to the tranmission and distribution networks;

- additional guarantees for the European citizens as regards energy supply and public service;

- the guarantee of a genuine European market, and not 15 open national markets, thanks, in particular, to a regulation on the cross-border tarification of electricity and management of congestions.

These objectives cannot be carried out, or be achieved adequately by the Member States and can, owing to the dimensions and owing to the effects of the envisaged action, better be achieved at the Community level.

The impact on business

2. What areas of business will be affected by the proposal-

General competitiveness of the European companies

With regard to the electricity price, the degree of competition already reached in this sector made it possible to lower the prices considerably. The proposed measures will make it possible to maintain and improve the general competitiveness of the European companies. At the time when the opening of the markets progresses quickly in the majority of the countries where the principal competitors of the European companies are situated, the completion of the internal market is essential in order not to fall behind on this point.

Reduction of the inequalities between the industrial and private energy users

All the companies will have the possibility of choosing their electricity suppliers as from 2003 and as from 2004 also their gas supplier. This aspect is particularly important for small and medium-sized enterprises which for the moment are often handicapped in relation to the large industrial consumers, in particular if they are still captive customers in their Member State. This denies them the benefit that competition is creating for eligible customers, in terms of competitive prices and of tailor-made energy services. Moreover, the opening of the market in all the companies will end the distortions of competition induced by the eligibility of the distributors in certain Member States, while they are not eligible in others.

Innovation and development of new technologies

The total opening of the market also encourages innovation and the development of new technologies. The techniques of energy production are in full development, in particular with regard to the renewables and micro-power stations and to fuel cell technology.

Improvement of the quality of services

The increasing opening of the markets should also improve the quality of the services rendered to the consumers, especially to the final consumers. The quality of services offered concerns, for example, repairs, new services and billing arrangements, which constitute some of the sectors where companies are exposed to competition. This development is already observed in the countries where markets are completely open.

Facilitate the introduction of competition within the gas sector itself

The completion of the internal market would make it possible to facilitate the introduction of competition within the gas sector (gas-to-gas competition). At the present time, the natural gas price in mainland Europe is linked to the oil price. It will be beneficial therefore for the EU companies to continue developing competition inside the gas sector, so as to gradually eliminate the link between oil prices and gas prices, because that will improve the diversity of energy supply in the EU and increase the competitiveness of the supplies as well.

- Which sectors of companies are affected-

All the European companies consuming electricity and gas, as well as the electric and gas sectors.

- Are there in the Community individual geographical areas where these companies are established-

No.

3. What measures will companies have to take to conform to the proposal-

Aspects relating to legal unbundling of distribution activities of electricity and gas companies in particular.

4. Which economic effects is the proposal likely to have:

- on employment

The energy price reduction, as well as the new outlets for new technologies following the introduction of competition into the energy sector will bring increased employment in European industry as a whole.

Nevertheless, with regard to the short-term development, the introduction of competition is likely to result in a reduction of manpower following the adaptation to competition of the old national monopolistic companies. Until now, however, no forced redundancies have been made by energy companies due to the introduction of competition.

During the last years, the technical jobs for semi-skilled and skilled employees, as well as the use of junior staff and the related administrative jobs were reduced gradually. New job profiles appeared in fields such as marketing, services to customers, information technology and services for the companies. Moreover, the appearance of new economic activities, such as the exchanges in the field of energy, created new jobs.

5. Does the proposal contain measures aiming to take account of the specific situation of small and medium-sized enterprises (reduced or different requirements, etc.)-

The draft proposal for a Directive envisages legal unbundling for electricity and gas distribution network operators. Insofar as distribution is often ensured by communal services having small structures, the unbundling requirement could prove to be disproportionate in relation to their size. This is why, the proposal for a Directive enables the Member States to exonerate from this obligation the companies having less than 100 000 consumers.

CONSULTATION

6. List of the organisations which were consulted on the proposal and statement of the essential elements of their position

A public hearing on the completion of the internal energy market was organised on 14 September 2000, in which almost 120 professional organisations and undertakings took part (social partners, undertakings of distribution and of supply, traders, gas and electricity companies, network managers, SME, consumers' associations, non governmental environmental organisations, power exchanges).

The complete list of the organisations and their comments are available on the site europa at the following address:

http://europa.eu.int/comm/energy/en/elec_single_market/hearing/index_en.htm