OPINION OF ADVOCATE GENERAL

CRUZ VILLALÓN

delivered on 21 July 2011 ( )

Case C‑242/10

ENEL Produzione SpA

v

Autorità per l’energia elettrica e il gas

(Reference for a preliminary ruling from the Tribunale amministrativo regionale per la Lombardia, Italy)

(Directive 2003/54/EC– Internal market in electricity – Dispatching and balancing service – Installations essential to the operation and security of the electricity system – Public service obligations imposed on certain electricity producers)





I – Introduction

1. By the present reference for a preliminary ruling, the Tribunale amministrativo regionale per la Lombardia (Regional Administrative Court, Lombardy) essentially asks the Court of Justice whether certain obligations imposed, in respect of ‘dispatching and balancing’ services, on electricity companies which own installations categorised as ‘essential’ to the operation of the Italian electricity system are compatible with European Union (‘EU’) law.

2. The rules governing ‘essential installations’ are intended to meet the requirements of dispatching and balancing services, which – as is well known – are intimately connected to the security of the network and the regularity of supply. Viewed in that light, therefore, the case clearly falls within the scope of Article 11 of Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity and repealing Directive 96/92/EC. ( ) However, the Italian legislature and the regulatory authorities indicate that the contested measure also pursues the wider aim of controlling the prices which final customers pay for electricity. That aspect, in combination with the particular features of the Italian rules, mean that the analysis must be supplemented by a reference to Article 3(2) of Directive 2003/54, which has been invoked by a number of the parties to these proceedings, in so far as it allows Member States, in specific circumstances and subject to certain conditions, to impose public service obligations on electricity undertakings. The judgment in Federutility ( ) – the first case-law concerning those rules on public service obligations in the energy sector ( ) – provides a direct precedent for the interpretation of Article 3(2) of Directive 2003/54. In those terms, the present case will enable the Court to give a ruling on the application of that provision to a situation which clearly differs from the circumstances examined in Federutility.

II – Legal framework

A – EU law

3. Article 3 of Directive 2003/54 governs public service obligations and customer protection. Article 3(2) provides:

4. ‘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 and climate protection. Such obligations shall be clearly defined, transparent, non- discriminatory, verifiable and shall guarantee equality of access for [EU] electricity companies to national consumers. 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.’

5. Under Article 3(9) of Directive 2003/54, ‘Member States shall, upon implementation of this Directive, inform the Commission of all measures adopted to fulfil universal service and public service obligations’.

6. Paragraph 2 of Article 11, on dispatching and balancing, ( ) provides that ‘[t]he dispatching of generating installations and the use of interconnectors shall be determined on the basis of criteria which may be approved by the Member State and which must be objective, published and applied in a non-discriminatory manner which ensures the proper functioning of the internal market in electricity. They shall take into account the economic precedence of electricity from available generating installations or interconnector transfers and the technical constraints on the system.’ In addition, Article 11(6) provides: ‘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, whenever they have this function.’

B – National legislation ( )

1. AEEG Decisions No 168/03 and No 111/06

7. On 30 December 2003, the Autorità per l’energia elettrica e il gas (the Regulatory Authority for Electricity and Gas; ‘AEEG’) adopted Decision No 168/03, ( ) which lays down the conditions for the operation of the public service of dispatching in order to ensure that the demand for electricity is satisfied in conditions of adequate security.

8. Decision ERG/alt No 111/06, adopted by the AEEG on 9 June 2009, ( ) amended Decision No 168/03, authorising Terna Rete Elettrica Nazionale SpA – the electricity system operator in Italy with responsibility for dispatching throughout the national territory ( ) – to determine the installations essential to the security of the electricity system, a mechanism which makes it possible to identify the resources needed for performance of the dispatching service.

2. Law No 2/09

9. Law No 2 of 28 January 2009 ( ) introduced a number of amendments to the rules on essential installations laid down in Decision No 111/06. Article 3(10)(d) of Law No 2/09 refers to the reform of the dispatching services market, the management of which is entrusted ‘to the operator of the transmission and dispatching service in order to make it possible for the resources needed to ensure the security of the electricity system to be selected on the basis of the various services provided by each resource to the system, by means of an evaluation which is transparent and, in economic terms, efficient. Dispatching services shall be provided through the purchase of the necessary resources by the authorised operators. On the dispatching services market, the price of energy shall be determined by reference to the various prices which each authorised user bids on a binding basis and which are accepted by the dispatching services operator, preference being given to bids offering the lowest prices until all requirements are met in full …’

10. Article 3(11) of Law No 2/09 provides that, in the light of the exceptional international economic crisis and its effects on the prices of raw materials, and ‘in order to guarantee lower costs for families and businesses and to reduce the price of electricity’, the AEEG must ensure that its decisions, including those relating to electricity dispatching, are consistent with the following principles and criteria:

‘(a) entities which have at their individual disposal installations or groups of installations essential for the purposes of meeting dispatching service requirements, as identified on the basis of the criteria laid down by the [AEEG] in accordance with the principles set out in this point, shall be required to submit tenders on the markets under the conditions laid down by the [AEEG], which shall implement specific mechanisms designed to minimise the costs for the electricity system and to secure fair remuneration for producers: in particular, installations shall be regarded as essential for the purpose of meeting dispatching service requirements, solely during periods in which the conditions set out below are satisfied, where they are technically and structurally vital for resolving network congestion or for maintaining adequate security levels for the national electricity system for significant periods of time;

…’

3. AEEG Decision No 52/09

11. On 29 April 2009, the AEEG adopted, pursuant to Law No 2/09, Decision ARG/elt No 52/09 ‘Decision No 52/09’), which amends Decision No 111/06, introducing new rules governing ‘installations essential to the operation of the electricity system’.

12. In accordance with Article 63(9) of Decision No 111/06, amended by Article 1(c) of Decision No 52/09, the electricity transmission system and dispatching services operator (Terna) is required to draw up and publish annually a list of installations and groups of installations which are regarded as essential to the operation and security of the electricity system, indicating in each case, among other information, the reasons justifying the entry of that installation on the list and the periods during which it is considered to be essential.

13. Under Article 63(2) of Decision No 111/06, Terna is to regard as essential:

‘(a) all installations without which it would not be possible to ensure adequate standards of security management for the electricity system during the following calendar year, particularly as a result of the planned maintenance of other generating installations and network components;

(b) any other installation which forms part of an essential group of installations determined in accordance with Article 63(6), regardless of the installations referred to in point (a)’.

14. When installations are identified as essential or as forming part of a group of essential installations, the owners of such installations are required to submit bids to the Italian Power Exchange – as subdivided into the day-ahead market, the adjustment market and the ancillary services market – ‘in accordance with the requirements and criteria laid down by Terna with reference to each market’ (Article 64(2)). Bids submitted on the day-ahead and adjustment markets must be ‘zero equivalent’ (Article 64(5)). The price of the bids submitted on the dispatching services market, which corresponds to the volumes in respect of which the installation concerned is regarded as essential to the security of the network, must be equivalent, for each period concerned, to the selling price of electricity on the day-ahead market in the area where the generating installation is located (Article 64(7)). If the payment for the energy supplied under the mandatory rules is not sufficient to cover the recognised variable costs of each production facility, Terna is required to reimburse the difference to the operators (Article 64(8)).

15. Decision No 52/09 provides for two alternatives to the ordinary regime applicable to essential installations.

16. On the one hand, under Article 63(11) of Decision No 111/06 (the wording of which was provided by Decision No 52/09), owners of essential installations may ask the AEEG for application of the ‘cost recovery rules’, which make it possible to obtain a special payment, determined by the AEEG, equivalent to the difference between the eligible production costs incurred by the essential installation and its income in the period during which it is on the list of essential installations (Article 63(13)). In order to have those rules applied to them, operators must comply with the obligations laid down in Article 65.

17. On the other hand, under Article 65 bis (inserted by Decision No 52/09), owners of essential installations or groups of such installations can avoid the ordinary regime applicable to them by entering into a contract with Terna under which predetermined volumes of energy (generated by all the installations, not just by essential installations) is made available to Terna at prices which remain, in any event, subject to adjustment (sale bids at a zero-equivalent price and purchase bids equal to the area price on the day-ahead market) or to maximum and minimum thresholds.

III – The main proceedings and the question referred for a preliminary ruling

18. In its capacity as a company which produces electricity and owns installations categorised as essential, Enel Produzione SpA (‘Enel’) challenged AEEG Decision No 52/09 before the Tribunale amministrativo regionale per la Lombardia, claiming that it is contrary to Article 11(2) and (6) of Directive 2003/54.

19. The referring court considers that the national legislation concerned may be incompatible with the rules of the Treaty on freedom of establishment, freedom to provide services and the free movement of goods and capital, and that it cannot be justified under Article 86(2) EC (now Article 106(2) TFEU) or under Article 3(2) of Directive 2003/54. It has accordingly referred the following question to the Court of Justice for a preliminary ruling:

‘Do Articles 23, 43, 49 and 56 of the EC Treaty and Article 11(2) and (6) and Article 24 of Directive 2003/54 preclude national legislation which, without the European Commission having been notified of it, requires on a permanent basis certain electricity producers which are, in certain circumstances, essential for the purpose of meeting the requirements of the demand for dispatching services, to submit bids on the energy exchange markets according to programmes determined by the system operator in accordance with external rules, and which prevents producers from freely determining the remuneration for such bids by linking the remuneration to criteria which have not been pre-determined in accordance with transparent, non-discriminatory and market-based procedures?’

IV – The procedure before the Court

20. The reference for a preliminary ruling was lodged at the Registry of the Court on 17 May 2010.

21. Written observations were submitted by Enel, Terna, the Austrian and Italian Governments and by the Commission.

22. At the hearing, held on 11 May 2011, the representatives of Enel, Terna, the Italian Republic and the Commission presented oral argument.

V – Analysis of the question referred for a preliminary ruling

A – The tasks of balancing and dispatching in the electricity system under Directive 2003/54

23. The rules governing dispatching and balancing services laid down in Article 11 of Directive 2003/54 constitute, together with Article 3(2) of that directive and recitals 17 and 24 in the preamble thereto, a concrete expression of the compromise between liberalisation and public service which that measure enshrines. While not excluding the possibility that dispatching and balancing services may be handled on the free market, recital 17 and Article 11 of Directive 2003/54 (which are reproduced virtually verbatim in recital 35 and Article 15 of Directive 2009/72/EC) ( ) open the door to partial, properly localised control by the public authorities in this field.

24. Article 11 of Directive 2003/54 makes it possible to identify separately, in very general terms, the different tasks which the services of dispatching and balancing entail. The first task consists in dispatching or ‘directing electricity traffic’ in the system: when the system operator undertakes this task, it will dispatch generating installations located in its area according to the requirements of demand. ( ) Under Article 11(2) of the directive, dispatching must be carried out in accordance with the order of ‘economic precedence’ of the bids from the various installations, which is equivalent to applying the programmes resulting from the day-ahead and the infra-day markets. ( ) The order of economic precedence reflected in the programmes may be altered specifically by two different factors: (i) where the Member State in question has decided ‘to give priority to generating installations using renewable energy sources or waste or producing combined heat and power’ (a possibility provided for in Article 11(3) of Directive 2003/54); ( ) and (ii) where ‘technical constraints on the system’ mean that it cannot be applied strictly (Article 11(2) of the directive).

25. Secondly, in connection with those technical constraints on the system, dispatching also encompasses a number of tasks aimed at resolving the technical constraints identified in the programmes or liable to occur in real time, regulating voltage, managing differences between generation and consumption and reserving capacity. Strictly speaking, those are technical dispatching services. ( ) They are specifically referred to in Article 11(6) of the directive and, so far as tasks designed to ensure balance in the system are concerned, in Article 11(7), which is not in issue in these proceedings. Under Article 11(6), the procurement of the energy which system operators use ‘to cover energy losses and reserve capacity’ must be carried out in accordance with ‘transparent, non-discriminatory and market based procedures’. ( )

B – The Italian electricity sector and its regulation. The contested measure

26. The first measures on the opening-up of the Italian electricity sector, which were required under Directive 96/92, were adopted in Italy by means of the ‘Bersani Decree’. ( ) A large number of subsequent legislative provisions supplemented that legislation, bringing the Italian electricity market into line with Directive 2003/54.

27. In general terms, pursuant to those provisions, electricity may be sold in Italy either in the context of bilateral, free negotiation prior to the time of supply or through participation in the electricity market or power exchange, which takes place closer to the time of supply. In turn, the electricity market comprises two stages or successive markets – known as the day-ahead market and the infra-day market – in which all electricity producers may participate. Once that first stage closes, the dispatching services market opens.

1. The day-ahead and infra-day markets

28. First of all, the day-ahead market is the trading centre for bids to buy and sell electricity for each hour of the day of supply. In reality, it opens nine days before the day of supply and closes the day before at 09.00 hours, the time when, on the basis of that trading, preliminary programmes for in-put and off-take of electricity (who will generate the electricity and who will consume it) are established for each point in the network and for each hour of the following day.

29. The infra-day market (formerly called ‘the adjustment market’) takes place next, still on the day before the day of supply, and it is the centre of new trading which enables operators to make adjustments or changes to the preliminary programmes resulting from the day-ahead market.

2. The tasks of dispatching and balancing: the dispatching services market

30. It is practically impossible, however, for the programmes resulting from those two markets to adjust exactly to the fluctuations in electricity supply and demand which actually occur, in real time, on the day of supply. Since electricity is not a storable product, it is necessary, at all times on the day of supply, for demand to match precisely the corresponding generation of electricity.

31. In its capacity as transmission system operator, Terna carries out dispatching and balancing of generating installations, a service intended to ensure at all times that the supply of electricity matches demand in the national transmission system and thereby to guarantee the security and continuity of the provision of electricity. ( )

32. For the provision of what I have described as technical dispatching services, the Italian electricity system operator – Terna – uses the dispatching services market. On that market, therefore, demand originates from Terna and supply from the owners of installations which have been categorised as essential.

33. On the dispatching services market, entities which own essential installations offer to make their installations available to Terna at a specified time, and Terna will inform them whether, at that time, they need to feed into the system more or less electricity than the planned volume. There seems to be agreement that this type of service is considerably more expensive for electricity producers, in view of the unpredictable, almost random, nature of demand and the need to satisfy it immediately with a high reaction capacity. The costs which Terna incurs in procuring electricity for the provision of that service is offset by the ‘uplift’, for which all consumers are billed.

34. In consequence, the dispatching services market is dependent on the identification of a number of installations which are categorised as ‘essential’ to the operation and security of the electricity system. As a result of that categorisation, owners of the installations concerned are subject to special rules on participation in the electricity markets, which were significantly amended in 2009.

3. The 2009 amendment: the new rules governing essential installations

35. The list of essential installations is drawn up each year by Terna in accordance with the criteria and the procedure laid down for those purposes in Article 63 of AEEG Decision No 111/06, as amended by Article 1(c) of Decision No 52/09.

36. According to the order for reference, the system in force before the 2009 amendment ‘did not prove to be particularly effective’ because of the small number of power stations declared to be essential and because the status of ‘essential’ applied exclusively to individual installations and not to the undertakings that owned them. Consequently, ‘the situation could arise in which making an individual installation subject to the mandatory rules was not enough to prevent the market being dominated by certain operators which, since they owned other installations that were, as a whole, vital for the purpose of meeting the requirements of dispatching, could, in any event, unilaterally determine the selling price for the marginal amount of electricity needed under certain network operating conditions.’

37. In terms of the electricity subject to intervention, the significance of the amendment is beyond question. According to information provided by Enel (which the other parties to the proceedings have not disputed), prior to Law No 2/09 and Decision No 52/09, categorisation as essential affected a generating capacity of approximately 500 MW in total, whereas, after the amendment, 10 413 MW of the electricity generated by Enel came to be regarded as essential; that is to say, in all likelihood, in addition to other volumes produced by other electricity generating undertakings about which the Court has no information.

38. Accordingly, Terna is responsible for determining, in relation to each owner of essential installations, the number of hours and the demand which are considered to be essential. The remaining hours and demand are ‘free’ for the producer, which may offer on the market the volume it wishes at the price of its choosing. On the other hand, bids must be made for the hours and demand categorised as essential on the day-ahead market, the infra-day market and the dispatching services market ‘in accordance with the requirements and criteria laid down by Terna … with reference to each market’ (Article 64(2) of Decision No 111/06).

39. That means, first, that Terna SpA must inform the owner of an essential installation of the volume (hours/demand) of electricity which it must offer on the day-ahead and infra-day markets. That electricity must be offered at ‘zero price’, with the effects which I shall describe. In parallel, purchase bids are made at an unspecified price (Article 64(5) and (6) of Decision No 111/06). As the Italian Government has explained, this ensures that Terna selects bids relating to essential installations on those markets (in accordance with the criterion of ‘economic precedence’). The mechanism of ‘zero-price bids’ also appears to reflect the fact that all the essential generating capacity will be paid for at a price that is different from the price which could have been obtained on the free market.

40. Secondly, owners of essential installations must also offer on the dispatching services market a volume of electricity pre-determined by Terna, which pays for it at the selling price of electricity on the day-ahead market for the same area. If that average price is lower than the variable costs, the difference will be reimbursed to the producer (Article 64(7) and (8) of Decision No 111/06).

41. Alternatively, owners of essential installations may request that the AEEG apply what is known as the ‘cost recovery system’, which makes it possible to obtain a specific payment equivalent to the difference between the eligible generating costs incurred by the essential installation (fixed and variable) and the income obtained during the period in which it is on the list of essential installations (Article 63(13) of Decision No 111/06). That system makes it possible, therefore, to guarantee that both the fixed and variable costs of essential installations are covered. However, the installation concerned is not only subject to the ordinary rules on bids applicable to essential installations for the periods and the generating capacity declared to be essential: it is also subject to additional restrictions in relation to non-essential or ‘free’ volumes and periods. More specifically, such volumes and periods must be offered on all the markets at a price which does not exceed the variable costs or, as the case may be, the zero-equivalent price (Article 65(3) of Decision No 111/06).

42. Lastly, owners of essential installations have the right to avoid the inclusion of their installations on the list by concluding with Terna one of the two types of contract provided for under Article 65 bis of Decision No 111/06. In both cases, the operator makes available to Terna a pre-determined volume of electricity (generated by all its installations, and not just the ones which could have been classified as essential) for a fixed price which is equivalent to the uplift (Article 65 bis (1)) or to the fixed annual price per MW of an installation with cutting-edge technology. Enel (like the other companies which have lodged appeals in parallel proceedings) opted for that alternative mechanism under Article 65 bis.

4. Summary

43. To summarise, the new Italian legislation entails a twofold State intervention in respect of all electricity generating capacity which is categorised as essential.

44. First of all, the producer is not allowed free access to the day-ahead and infra-day markets, with the result that it is not paid for the electricity concerned at the price which might have been bid and obtained on those markets ( ) but rather at the average market price for the same area (which appears to be an average of the different prices of electricity throughout the day).

45. Secondly, owners of essential installations are required to participate in the dispatching services market, in which there is also a certain degree of intervention: the free operation of that market would have led to the development of a free price for the electricity needed to provide technical dispatching services, as occurs in other countries. That price would normally be higher than the average price which Terna currently pays, in view of the characteristics of those services and the time when they are usually required (logically, the calculation of the average price includes higher prices and lower prices).

46. Lastly, the amendment as a whole accords a fundamental role in the operation of the system of essential installations to Terna, which plays an important part in drawing up the list of essential installations and in setting the price which is paid for the electricity concerned.

C – Preliminary remarks on the question referred for a preliminary ruling

47. The referring court asks the Court of Justice whether, in the light of the characteristics of the rules in force in Italy governing essential installations, those rules are compatible with Articles 23, 43, 49 and 56 EC and with two specific provisions of Directive 2003/54: Article 11(2) and (6) and Article 24. That question calls for a number of preliminary remarks on my part.

48. First of all, the reference to the Treaty requires clarification. To my mind, Article 56 EC (Article 63 TFEU), concerning restrictions on the free movement of capital, has absolutely no relevance to this case. The question referred does not explain how that provision of the Treaty may be relevant to the analysis of the contested measure.

49. However, in principle, there is no reason why it is not relevant to examine the Italian legislation from the point of view of Articles 23 EC (Article 28 TFEU), 43 EC ­(Article 49 TFEU) and 49 EC (Article 56 TFEU), which prohibit, respectively, all restrictions on the free movement of goods, freedom of establishment and freedom to provide services.

50. In accordance with recital 4 to Directive 2003/54, ‘[t]he 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.’ Those freedoms laid down in the Treaty are not absolute; they may be restricted in some circumstances on public interest grounds, provided that certain conditions are satisfied. Articles 3(2) and 11(6) of Directive 2003/54 make provision for certain derogations from the freedoms, codifying and harmonising the specifically applicable conditions in order to ensure their lawfulness at Community level, in conformity with the provisions of the Treaty, to which specific reference is made in some cases.

51. In view of the foregoing, and in accordance with settled case-law, ( ) I believe that the contested measure must be examined principally in the light of the provisions of Directive 2003/54, which must, if necessary, be interpreted in the light of the freedom of establishment and the freedom to provide services, as enshrined in the Treaty. As I pointed out above, the reference for a preliminary ruling refers only to two articles of Directive 2003/54: Article 11(2) and (6) and Article 24.

52. As regards Article 24 of Directive 2003/54, it should be noted at the outset that this refers to ‘safeguard measures’ which Member States may temporarily take ‘[i]n the event of a sudden crisis in the energy market and where the physical safety or security of persons, apparatus or installations or system integrity is threatened’. The referring court expressly discounts the possibility of including the rules governing essential installations in that category of safeguard measures because, in its opinion, those rules are of ‘indefinite duration’. To my mind, regardless of whether the contested measure is permanent or temporary, at no point was it adopted in response to the extraordinary circumstances which Article 24 so specifically requires. Accordingly, there is no doubt in my view that Article 24 is not applicable to this case. That means – to my way of thinking and regardless of the statements made below – that the examination of the rules governing essential installations must focus only on the differences between those rules and Article 11 of Directive 2003/54.

53. Lastly, on another note, it should be observed that the referring court describes the contested measure in unambiguous terms. In particular, the referring court states categorically that the rules governing essential installations are permanent and that remuneration for bids under those rules is linked to ‘criteria that have not been predetermined according to transparent, non-discriminatory and market-based procedures’, thereby directly precluding any possibility of applying Article 11, which specifically lays down those requirements for its application. Furthermore, it precludes the application of Article 3(2), which also provides that the procedure for imposing public service obligations must be transparent and non-discriminatory, in addition to requiring (implicitly) that the measure in question be temporary. ( )

54. Accordingly, strict acceptance of every premiss in the question would necessarily lead to the reply that a measure of the kind described therein is contrary to the wording of Article 11(2) and (6) of the directive. It is clear, however, that this way of presenting the situation is a circular argument. What is required is a determination of whether the Italian rules do in fact have the characteristics which the referring court attributes to them, subject always to the jurisdiction of that court to interpret the scope and meaning of what is, in short, a national measure. Only then will it be necessary to analyse those characteristics in the light of Directive 2003/54.

D – The rules governing essential installations in the light of Directive 2003/54

1. The possibility of price intervention on the dispatching services market

55. Enel maintains – as does the Tribunale Administrativo Regionale per la Lombardia – that Article 11 of Directive 2003/54 extends liberalisation of the electricity market to all production activities, including the purchase and sale of electricity in the context of dispatching services, by imposing on that sector the criterion of the economic precedence of electricity (Article 11(2)) and the use of market-based procedures (Article 11(6)). As a consequence, in the opinion of Enel and the Tribunale Administrativo Regionale per la Lombardia, Article 11 of Directive 2003/54 precludes any measure which makes the relationship between electricity producers and the transmission system operator subject to rules other than those governing freedom of contract in the market.

56. In my opinion, that interpretation of Directive 2003/54 is not entirely correct.

57. The activity of dispatching generating installations satisfies a clear public interest (guaranteeing the security of the network and, in general, of the provision of electricity) and has a number of characteristics which mean that it may be categorised as a regulated activity: under Article 11 of Directive 2003/54, dispatching may be entrusted exclusively to the system operator (and usually is, because there is only one) and is governed by rules of conduct adopted by the public authorities (in the case of Italy, the ‘operational procedures’ are laid down in the system code, ( ) which is drawn up by Terna and checked by the AEEG and the Italian Ministry of Productive Activities). ( )

58. Article 11 of the directive begins by providing that the ‘dispatching of generating installations’ carried out by the system operator is to be subject to the market rules. Dispatching must take into account ‘the economic precedence of electricity’ (Article 11(2)), which – as I explained earlier – is another way of saying that the order of the programme resulting from the market must be followed, by selecting the most economically advantageous bid first.

59. In this case, the application of the market rules is subject to a number of restrictions, including the need to take into consideration, in addition to the strictly economic criterion, ‘the technical constraints on the system’ (Article 11(2)). Those technical constraints and the technical security of the system explain why liberalisation cannot simply be extended outright to the procurement of electricity intended to ‘cover energy losses and reserve capacity’ (Article 11(6)) or to the balancing of the electricity system (Article 11(7)).

60. Recital 17 to Directive 2003/54 reflects the view that dispatching and balancing services may remain outside the free development of the market, provided that certain precautions are taken. According to recital 17, ‘[i]n order to ensure effective market access for all market players, including new entrants, non‑discriminatory and cost‑reflective balancing mechanisms are necessary. As soon as the electricity market is sufficiently liquid, this should be achieved through the setting up of transparent market-based mechanisms for the supply and purchase of electricity needed in the framework of balancing requirements. In the absence of such a liquid market, national regulatory authorities should play an active role to ensure that balancing tariffs are non‑discriminatory and cost‑reflective. At the same time, appropriate incentives should be provided to balance in-put and off-take of electricity and not to endanger the system.’ In my opinion, that recital is linked to Article 11 of the directive and, accordingly, the expression ‘balancing tariffs’ must be construed as a reference to the amount paid to producers to compensate or pay them for the services which they provide in order to ensure dispatching and balancing of the system and not, as Enel suggests, to the uplift paid by final consumers.

61. The wording of recital 17 could imply that the derogation from liberalisation is temporary; that it is dependent on the market lacking sufficient liquidity; and that, once that situation has been resolved, dispatching must be fully governed by market forces. Even if that were the case, it should be borne in mind that, despite the fact that the Italian electricity market as a whole appears to be highly liquid, the dispatching services market appears to have a low level of liquidity. ( ) In addition, since the list of essential installations is reviewed and redrafted annually and since the measure was presented as a provision to combat a crisis situation, where there is particular concentration in the market, it could be argued that the measure is merely temporary.

62. Be that as it may, I doubt that it was the wish of the Community legislature to prohibit all forms of State intervention in relation to technical dispatching services, even in the case of a sufficiently liquid market. Article 11(6) of Directive 2003/54 provides that transmission system operators must procure the energy they use to cover energy losses and reserve capacity ‘according to transparent, non-discriminatory and market-based procedures’. Unlike the task of dispatching electricity producers – of ‘coordinating’ the supply of and demand for electricity – which, in accordance with Article 11(2) of Directive 2003/54, must follow the order of ‘economic precedence’ set by the market, Article 11(6) of the directive, concerning the procurement of electricity required for the provision of technical dispatching services, does not refer to the strict criterion of ‘economic precedence’; ( ) instead, Article 11(6) simply requires, in addition to transparency and non-discrimination, that the procedure for the purchase of electricity takes into account, to a certain extent, the economic criteria by which the market is governed. In my view, the expression ‘market-based’ permits greater intervention.

63. Based on that relative derogation from the principle of the free operation of the market, recital 17 affords Member States greater latitude when it comes to dispatching electricity in a market lacking liquidity: in that situation, it is sufficient to ensure that the price of electricity is ‘cost-reflective’.

64. It is likely, as Enel claims, that the provision of dispatching services is more expensive for producers than the production of the electricity which is sold on the day-ahead market, the average price of which is taken as the reference price for the remuneration of producers; it is also likely that the product with which the dispatching services market is concerned differs from the product which is bought and sold on the day-ahead and infra-day markets (the product sold on the dispatching services market is a certain ‘availability’ or production capacity). Despite that, I believe that the Italian legislation, which fixes the price of the electricity procured by Terna on the dispatching services market by reference to the price of electricity on the day-ahead market – thereby ensuring that variable costs are covered in any event – satisfies the requirement that the criteria for such payment must be market-based. The cost recovery mechanism and the alternative contractual method laid down in Article 65bis of Decision No 111/06 also contribute to making the measure more proportionate, by increasing the connection between the payment and the total cost of electricity.

65. In addition, regardless of what I will state below, the rules governing essential installations may also satisfy the requirements of transparency and non-discrimination laid down in Article 11(6). On the one hand, the contested measure is not vitiated by the discriminatory character which Enel attributes to it: since the measure is aimed at maintaining the security of the system, it is logical that its scope extends only to undertakings and installations which are liable to endanger that system through their activities on the market. On the other hand, in principle, the system put in place by the Italian authorities is also consistent with the requirement of transparency because the list of essential installations is reviewed and redrafted annually – a process in which producers liable to be affected are allowed some participation (Article 63(4) and (5) of Decision No 111/06) – is published and may be challenged in court.

66. By way of conclusion to the foregoing considerations, I believe that Article 11(6) of Directive 2003/54, as such, provides in principle for a system of price intervention in the dispatching services market.

67. The correct interpretation of that article might be distorted if it is established that the subject-matter and aim of the rules governing essential installations stray outside the scope of dispatching services to pursue objectives that are very different in scope. Accordingly, the compatibility with Article 11(6) of the rules on essential installations is subject to that warning, in the terms set out in the next section.

2. The new rules governing essential installations may exceed the scope of dispatching services in a technical sense

68. I shall begin by pointing out that the Italian Government has repeatedly described the rules on essential installations as a measure which is strictly necessary for the operation of technical dispatching services in the electricity system and which was therefore adopted pursuant to Article 11 of Directive 2003/54.

69. However, as has been stated, since 2009, the volume of electricity subject to intervention by Terna – in principle, for the purposes of dispatching – have undergone a sharp and striking increase, which has not been satisfactorily explained. Thus, as stated above, before the amendment in question, dispatching services in the strict sense were provided using a generating capacity of 500 MW from all generating undertakings; since the amendment, more than 10 000 MW have come to be categorised as essential in relation to Enel alone. Although, in the past, there were specific, localised problems relating to the security and balancing of the system, ( ) it is difficult to imagine what kind of technical problems related to dispatching services might have required such an increase in the volume of electricity regarded as essential. In any event, neither Terna nor the Italian Government has provided a coherent explanation for that change.

70. Moreover, that situation must be linked to the fact that Law No 2/09 expressly indicates, as the raison d’être for all the new legislation, that the objective is to control generally the final prices of electricity.

71. Based on those two facts, it is reasonable to ask whether, through that mechanism, the Italian amendment is designed to achieve, indirectly, a measure of general control of the prices which final consumers pay for electricity. If that were so, the amendment would have made it possible for the concept of ‘essential installations’ to cover a number of installations which clearly exceed the requirements of dispatching services, notwithstanding the fact that they might be essential from an economic point of view because the paramount position in the market of the owners of such installations enables them to control electricity prices, including the prices paid for dispatching services. ( ) The inevitable consequence of this is that it may be left to the system operator to determine, in genuinely open conditions, the volume of electricity to be subject to intervention.

72. At this juncture, it should be borne in mind that, in all likelihood as a result of the matters set out above, the Commission, Terna and the Italian Government extended the scope of the proceedings to include Article 3(2) of Directive 2003/54, arguing that the contested measure may be covered by that provision.

73. Under Article 3(2) of Directive 2003/54, Member States may impose on electricity undertakings public service obligations ‘in the general economic interest’, provided that those obligations are clearly defined, transparent, non discriminatory, verifiable and guarantee equality of access for EU electricity companies to national consumers; such obligations must be notified to the Commission. In addition, the imposition of such obligations must be fully consistent with the relevant provisions of the Treaty, in particular with Article 106 TFEU.

74. Moreover, without prejudice to those strict conditions, Article 3(2) provides a relatively broad definition of the subject-matter of 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’. Direct intervention in the price of electricity generation prices of the kind which appears to have occurred in the case under consideration could be aimed at controlling the price of electricity paid by final consumers and, directly or indirectly, at guaranteeing the security of the system, objectives which are both expressly referred to in Article 3(2) of Directive 2003/54. ( )

75. Lastly, there is no reason in principle not to conclude that the measure adopted by the Italian Government pursues an aim in the ‘general economic interest’, as required under Article 3(2). In a market like the electricity market, where demand is extremely inflexible and, in addition, the product concerned cannot be stored, there is always the possibility that certain operators will abuse their position. Accordingly, intervention in the sale of electricity by producers which are considered to occupy a paramount position in the market might possibly constitute an essential condition for guaranteeing the security of the network and be categorised, in short, as a measure in the ‘general economic interest’.

76. The foregoing considerations may explain why the Italian Government has argued, in reliance on an important precedent, that Article 3(2) is applicable to this case: in Federutility, the Court agreed that the fixing of reference prices for the supply of natural gas could, in certain circumstances, constitute a public service obligation for the purposes of Article 3(2) of Directive 2003/55 (provision for the gas sector which is parallel to the provision of the second electricity directive at issue in these proceedings). In that connection, the Italian Government submits that, if such intervention is lawful in a market like the energy supply market (gas in Federutility, electricity in the instant case), which is fully open to competition, then a fortiori it should be lawful in relation to dispatching, which is a public interest activity.

77. Nevertheless, for the reasons I shall set out, it is my view that the system laid down in the contested national provisions cannot become a general mechanism for the regulation of electricity prices.

78. First and foremost, the judgment in Federutility is not applicable outright to the case under consideration. In Federutility, ‘reference prices’ for the supply of natural gas were set directly by the national regulatory authority ( ) – the AEEG – which, at all times, declared that the measure was designed to reduce the prices of supply. In the present case, however, it is Terna – the company which performs the role of system operator – which directly adopts intervention measures concerning energy prices, in accordance with a provision of national law which allows it to take action with regard to dispatching services.

79. It is that ‘additional function’ of the contested measure which, in my opinion, cannot fall within the scope of Article 3(2) of Directive 2003/54.

80. As I have stated, Directive 2003/54 provides for the system operator to intervene directly (in the sense of intervening to restrict the market) only in the specific sector of dispatching services (Article 11). Accordingly, granting the operator other types of regulatory responsibilities and powers to intervene in the electricity market which exceed that remit distorts prima facie the functions of dispatching and balancing, which, to that extent, subverts the internal order of the directive. It is clear that, owing to the configuration of its role, a dispatching services operator is not normally in a position to determine the degree of general intervention in the price of supply with the independence and impartiality that the situation requires, regardless of whether its decisions may be challenged in court.

81. More specifically, it is my view that such conduct leads to a high level of confusion which is incompatible with the requirement of transparency laid down in Article 3(2) of the directive and, ultimately, with the principle of legal certainty.

82. In that connection, I believe that the wording of Article 3(2) is such that it lays down a twofold requirement of transparency in relation to public service obligations. First, by providing that public service obligations must be ‘clearly defined’, it refers to transparency in the traditional procedural sense. From that perspective, as I indicated above, there can be no objection to the Italian system. However, Article 3(2) goes on to state that public service obligations must be ‘transparent’, a term which may be linked to the requirement of legal certainty. In short, in addition to being clear and accessible, public service obligations must also be defined and laid down in such a way that they do not confuse or mislead. In that connection, the contested measure could present difficulties in terms of transparency if it is shown that, although formally adopted on the basis of Article 11 of Directive 2003/54 (and, in short, on the basis that it is essential to the provision of dispatching services), in practice, it is intended to operate as though the national legislature had relied on the specific possibilities provided for under Article 3(2) of Directive 2003/54.

83. Clearly, it is for the national court to assess in each case what proportion of the total generating capacity is effectively categorised as essential on technical grounds of network security. Where appropriate, it will be for the national court to analyse whether the rules governing essential installations are being used to further an aim which is clearly inconsistent with the aim apparent from their configuration, basing that analysis on matters such as information relating to the volume of electricity actually used for the provision of those services in the past.

84. In the light of all the foregoing considerations, I believe that Article 11(6) of Directive 2003/54 does not preclude rules governing essential installations, such as the rules which form the subject-matter of the present reference for a preliminary-ruling, it being for the national court, where appropriate, to determine whether that provision has been applied in a way which is inconsistent with its aim and, in particular, whether it has been applied in pursuit of an objective which clearly goes beyond the requirements of the proper management of dispatching and balancing services.

VI – Conclusion

85. In conclusion, I propose that the Court reply as follows to the question referred for a preliminary ruling by the Tribunale amministrativo regionale per la Lombardia:

‘Articles 49 and 56 TFEU and Article 11(2) and (6) of Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity and repealing Directive 96/92/EC do not preclude national legislation which requires certain electricity producers which, in certain circumstances, are essential for meeting the demand for dispatching services to submit bids on the energy exchange markets, in accordance with programmes determined by the network operator on the basis of external rules, and which prevents producers from freely determining the remuneration for such bids, provided that the following conditions are satisfied:

1. The remuneration for the electricity which is categorised as essential is linked to criteria which have been predetermined in accordance with transparent, non-discriminatory and market-based procedures. National legislation which fixes the price of electricity procured by the system operator for the provision of dispatching services by reference to the average price of electricity on the day-ahead market, ensuring that variable costs are covered in all cases, satisfies the requirement that payment be market-based.

2. Those compulsory rules must, in any event, refer to the electricity which is essential to the provision of technical dispatching services (covering energy losses and reserving capacity). Where appropriate, it will be for the national court to determine whether, or to what extent, the electricity generating capacity may effectively be categorised as essential on those grounds.’