COMMISSION STAFF WORKING DOCUMENT Report on the ITO Model Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Progress towards completing the Internal Energy Market
Date: 2014-10-13
Institutions: European Commission
Subjects: Community certification, electricity supply, energy grid, energy transport, gas, market access, single market













EUR-Lex - 52014SC0312 - EN











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52014SC0312

COMMISSION STAFF WORKING DOCUMENT Report on the ITO Model Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Progress towards completing the Internal Energy Market /* SWD/2014/0312 final */









1.     
Introduction
Directives
2009/72/EC ('the Electricity Directive')[1]
and 2009/73/EC ('the Gas Directive')[2]
introduced new and stricter rules on the unbundling of transmission system
operators ('TSOs'). Under these Directives, part of the Third Energy Package,
three possible unbundling models were provided: ownership unbundling,
independent system operator ('ISO') and independent transmission operator
('ITO'). 
It is the aim of
the present Staff Working Paper to provide an assessment of the ITO model and
the extent to which it is capable of sufficiently and adequately ensuring the effective
separation of transmission networks from generation and supply interests. Hereby
the Commission is fulfilling its legal obligation, under Article 47(3) of the
Electricity Directive and Article 52(3) of the Gas Directive, to submit a
report outlining the extent to which the unbundling requirements under Chapter
V resp. IV have been successful in ensuring full and effective independence of
transmission system operators. 
At the set-out
of this monitoring exercise, the Commission had issued opinions on 26 ITOs
which has enabled it to gain in-depth insight in how the rules are applied and
what the most relevant issues are in each individual case. In all cases, the
Commission has brought forward its suggestions to the relevant national
regulatory authorities on how the ITO-provisions should be interpreted in the
case at hand. The conclusions presented in this document draw not only on this
experience, but also on a study commissioned by the services of DG Energy which
analysed the functioning of the ITO model in practice inter alia through
detailed questionnaires and follow-up interviews. The written questionnaires were
distributed to three target groups: i) National Regulatory Authorities (NRAs)
from jurisdictions in which TSOs have been certified under the ITO model; ii) TSOs
certified under the ITO model and iii) network users. All NRAs from
jurisdictions in which ITOs operate participated in the questionnaire and so
did 24 out of 26 certified ITOs and 20 network users from across the EU. The majority
of the responses came from respondents in Western and Central Europe, while
some responses were received also from Southern and Eastern Europe.  
2.     
State of Play
Where on the
date of entry into force of the Electricity and Gas Directives, i.e. 3
September 2009, the transmission system belonged to a vertically integrated
undertaking, a Member State could decide not to apply the rules of full
ownership unbundling, but to provide for an independent transmission operator. The
ITO model under the Third Energy Package permits TSOs to remain part of a vertically
integrated undertaking ('VIU') as long as a set of detailed behavioural and
structural criteria, laid down in Chapter IV of the Gas Directive and Chapter V
of the Electricity Directive, are respected. 
The Directives
also provide for a certification process whereby the NRAs assess compliance of
the TSOs with the unbundling model of their choice. While the certification
procedure is applicable for all unbundling models, additional requirements are
in place for those TSOs who choose, in countries where the ITO model is
available as an option under national law, to follow the ITO model.
At the time of
writing of this document, there were 26 certified ITOs in 10 EU Member States (Austria, Czech Republic, France, Germany, Greece, Hungary, Ireland, Italy, Slovakia and Slovenia). The majority of the certified ITOs are operating in the gas sector (21),
while only five ITOs are active in the electricity sector. 
In addition, a
certification of one TSO under the ITO model was rejected in 2013, while
another TSO decided to withdraw its application for the ITO certification. Moreover,
there is a limited number of remaining TSOs which are likely to be certified as
ITOs but for which a certification process at European level has not started
yet. 
3.     
Main Findings
The findings as
set out in this Chapter reflect the Commission's assessment of the
effectiveness and the implementation of the various elements that together make
up the ITO-model. The findings, which are backed to a large extent by the
responses to the questionnaires, are however inevitably of a preliminary nature
given that we are still in the early days of implementation of the ITO-model. 
Autonomy
Requirements
The Directives
require that in order to be autonomous vis-à-vis any other part of the VIU,
ITOs must be equipped with all financial, technical, physical and human
resources. It is the Commission's provisional impression that in general the
autonomy requirements for ITOs under the Third Energy Package are applied and work
in practice to ensure the autonomy of the ITO vis-à-vis its parent undertaking
and other parts of the VIU. This is also supported by the NRAs and ITOs
themselves in their written submissions to the inquiry, in which they confirm
that they consider the ITO to be sufficiently independent from the VIU. No
formal complaints have been submitted to the Commission's Directorate General
for Energy by market participants in this regard and the vast majority of
responses from the network users to the questionnaire confirmed that they have
had little or no reason to complain about the autonomy of ITOs they are
directly working with. It should however be highlighted that half of network users
that responded (10) indicated that they are themselves part of a VIU.
Independence of
the TSO
The Gas and
Electricity Directives require the ITO to be independent from the VIU, in
particular with regards to decision-making rights, the power to raise money on
the capital markets and its corporate structure. In its certification opinions,
the Commission has frequently raised issues related to these points, especially
where various contracts between ITO and VIU had remained in place or where it
was unclear to what extent the ITO had the disposal over sufficient funds to
ensure autonomous investment decisions. In general, these issues have
subsequently been implemented by the respective NRAs and ITOs. It appears from
participants to the inquiry, the NRAs, ITOs and network users alike, that the related
rules under the ITO model are now working in practice and ensure independence
of the ITOs. In fact, it was noted that the level of independence of the TSOs had
generally improved with the implementation of the unbundling requirements. There
were only a few instances in which respondents reported that NRA investigations
were triggered in relation to the independence of the ITO. In all cases
described in the questionnaires warnings of the regulator were taken into
account. 
Significant
monitoring of compliance with the unbundling rules occurs in relation to
commercial and financial agreements between ITOs and other parts of the VIU.
Responses by both NRAs and ITOs indicate that ITOs comply with their obligation
to notify commercial agreements with its VIU to the NRA and that the NRAs
scrutinize those agreements carefully.   Furthermore, there appears to be a
regular communication between ITOs and the NRAs in relation to possible issues
and where guidance from the NRA is needed concerning independence (or autonomy)
of the ITO, thus solving potential issues during informal consultations. 
Independence of
the staff and management of the TSO
The Directives
set out specific rules aimed at ensuring that any potential conflicts of
interest of the management and employees of the ITO are avoided. On the basis
of the certification decisions by the NRAs as scrutinized by the Commission in
the context of the certification procedure, the Commission is of the impression
that these rules have been implemented and applied to an acceptable extent.
That is to say, the certification decisions suggest that it is generally
ensured that the people working for the ITO no longer have an interest to
favour the VIU over other network users.
All NRAs participating
in the study confirm that their impression is that the provisions work in
practice and effectively ensure independence of the management and employees of
the ITO vis-à-vis its parent undertaking and other parts of the vertically
integrated undertaking. While acknowledging that the ITO model has improved the
effective separation of transmission and generation/supply activities, one
Regulator did highlight, however, that it was ultimately impossible for the NRA
to fully assess whether the ITO is acting independently in carrying out its
day-to-day activities. 
ITOs
participating in the questionnaire provided examples on how Compliance Officers
monitor and ensure the independence of staff and management. For example,
nearly all Compliance Officers indicated that they attend meetings of the
management, supervisory board and/or stakeholders. Other examples of monitoring
include conducting in-house training, liaising with the Human Resources and
conducting on-the-spot audits. Responses also indicate that the so-called 'Cooling
On/Off period' of three/four years for the persons responsible for the
management and/or  members of the administrative bodies of the ITO is often
seen as too long by TSOs and some NRAs, which in their opinion prevents selection
of the best candidates for positions at the ITO. 
Supervisory Body
Pursuant to the
Directives the Supervisory Body is responsible for decisions of the ITO which
may have significant impact on the value of the assets of the shareholders in
the TSO. The Supervisory Body, however, may not be involved in day-to-day
activities of the ITO, management of the network and the development of the
network development plan. Most respondents to the questionnaire confirmed that
the Supervisory Body rules are implemented in practice and are considered to be
effective. In particular, the Compliance Officers of all ITOs reported that
they monitor and ensure independence of the Supervisory Body by attending
meetings and checking reports and minutes. Some ITOs have chosen to introduce a
Code of Conduct or Ethics Code to provide additional guidance and
clarification. Two TSOs did report, however, occasions when the parent
undertaking or other parts of the VIU attempted to interfere with day-to-day
activities of the ITO, but these unsuccessful attempts were detected on time
and refused. 
Two NRAs indicated
that the current rules on the Supervisory Body may not be working that
effectively in practice. The responses suggest that in some situations the
Regulator had no possibility to act against the VIU, which would imply that
strengthening of NRA powers vis-à-vis the Supervisory Body, or alternatively
strengthening of the independence requirements of the Supervisory Body needs to
be considered. 
It was suggested
that the independence requirements for members of the Supervisory Body should
be made stricter (currently independence requirements must apply to a minority
of the members of the Supervisory Body only). Also, it was indicated that clarification
would be welcome with regards to the scope of information rights of
shareholders in the context of cooperate governance and reporting duties
vis-à-vis its parent company.  
The Commission
acknowledges that the rules related to the Supervisory Body may, even when they
are applied strictly, not always result in a situation in which it can be
easily monitored and determined that any undue interference of the members of
the Supervisory Body is indeed prevented. 
Compliance
Programme and Compliance Officer
The Directives
require that ITOs establish and implement a Compliance Programme to ensure that
discriminatory conduct is excluded and compliance is adequately monitored.
Equally, a Compliance Officer has to be appointed by the Supervisory Board and
approved by the NRA, who is responsible for reporting on the compliance of the
ITO with its obligations. 
In order to draw
conclusions on how the programmes and officers work in practice, the Commission
has largely relied on the outcomes of the study. Compliance Programmes, which
normally are available to all employees and are made public in some cases, are
generally seen as an effective tool in helping to monitor ITOs' compliance with
the unbundling requirements. Some respondents, however, raised some concerns in
this respect. One regulator was of the opinion that the Programme is a
"toothless tiger" (a written promise of the ITO to comply with the
rules), while another NRA highlighted that the Compliance Programme is
effective from a TSO's perspective as part of self-regulation, indirectly implying
that there are some doubts on the effectiveness of the Compliance Programme
from this Regulator's point of view.
All of the
Compliance Officers reported taking active steps to positively monitor the
compliance of the ITO and there were no reports on obstructions of the
Compliance Officer by the VIU. As a related matter, almost all respondents were
of the view that the Compliance Officers are sufficiently equipped to carry out
their tasks effectively. It seems that regular exchanges between Compliance Officer
and the NRA help to ensure effective monitoring of compliance with the unbundling
rules. This involves regular compliance reports which the officers prepare for
and submit to the NRAs as well as meetings in order to check whether monitoring
is effective and Compliance Officers fulfil their tasks. 
Many Compliance
Officers indicated that additional guidance or the establishment of a network
of Compliance Officers would be welcome tools. A suggestion was also made to
grant a right of the Compliance Officer to request clarification from the VIU
in situations when possibly non-compliant actions are initiated not by the TSO
but the VIU.
Network
development and powers to make investment decisions
The Directives
require ITOs to set up a ten-year network development plan (TYNDP) on an annual
basis identifying both the investments already decided upon and new investments
which need to be executed within the next three years in order to ensure that
the necessary investments are made in the network. As a general comment, it is
too early to judge whether the establishment of TYNDPs is a guarantee for a
sufficient degree of investment in the networks. 
All ITOs have
already adopted their first set of annual TYNDPs and, in the responses to the
questionnaire, the majority of these ITOs confirmed that they have sufficient
resources to finance them. Only one ITO responded that it did not have the
resources required to finance the necessary investments but there were no
indications whether this is due to influence by the VIU. No formal complaints
were submitted to the relevant NRAs in relation to the TYNDP, but there are
reports that two NRAs successfully intervened in the past to ensure the
appropriateness of the TYNDP. 
The majority of network
users participating in the questionnaire confirmed that they have been
consulted on the TSO's TYNDP by the NRA or the TSO itself, which illustrates
that the respective provisions in the Directive regarding consultation on the
TYNDP usually work in practice. Equally, as indicated by nearly all network
users, the TYNDPs effectively ensure that the necessary infrastructure
investments are identified, planned and executed appropriately. This is a view
shared also by nearly all NRAs and ITOs. Nevertheless, the suggestion was made
by some TSOs that it would be useful to harmonise the different intervals for
network development plans at national (1 year) and European (2 years) level. 
Concerning
investment decisions, there appears to be no difference between the levels of
investment made by TSOs under the ITO or the OU model in countries where both
models exist. In two instances the lack of financial resources to carry out the
necessary investments was highlighted by an ITO and a Regulator. A couple of
ITOs noted that the question of whether they have sufficient financial
resources is not related to the fact that they have adopted the ITO model.
Given that only the first set of annual TYNDP has been adopted, it might be too
early to fully assess whether all the necessary investments are being carried
out in practice. 
4.     
Conclusions
As a first
remark it needs to be underlined that ITOs have been certified only since 2012
and have been operating under the new rules for a very short period of time. It
is therefore too early to draw definite conclusions on the functioning of the
model and the actual independence of the ITOs in practice. Also, compliance
checks are still ongoing to ensure the correct implementation of the existing
unbundling requirements under the Gas and Electricity Directives in the
national legislation of the Member States in which the ITO model is implemented.
Finally, several stakeholders indicated in their questionnaires that it is too
early to suggest significant changes to the ITO model. 
That being said,
the ITO study underlines the initial assessment of the Commission that at
present, in the view of the Compliance Officers, but also of NRAs and the
majority of network users who responded to the questionnaire, most requirements
related to the ITO model seem to work in practice and are usually sufficient
and adequate to ensure effective separation of the transmission business from
generation and supply activities in the day-to-day business. This suggests that
the notion that the positive effects that unbundling has on facilitating
cross-border trade as well as security of supply can also materialize in market
areas where the network is operated by an ITO.
Although
ensuring compliance under the ITO model appears to be burdensome for both the NRAs
and the TSOs involved, this does not mean that the ITO model is not effective
in separating transmission and generation/supply and ensuring investments in
the networks. 
Provisions designed
to ensure autonomy, independence of the ITO and independence of the staff and
management seem to be working well. Compliance Officers seem to have sufficient
powers to execute their role effectively and to monitor compliance of the ITO
with their respective Compliance Programmes. Equally, ITOs are actively consulting
with the NRA with regards to commercial and financial agreements between ITOs
and other parts of the VIU. 
Nevertheless,
careful monitoring is essential with regards to the requirements for the
Supervisory Board and its independence from the VIU, provisions concerning
Cooling On/Off period, effectiveness of the Compliance Programme and ITOs ability
to ensure that the necessary investments are made in the network. 
Whilst the ITO
model so far appears to function well in practice, it may be further improved,
for instance, by strengthening the independence of the Supervisory Board,
specifying the scope of the Compliance Programmes and developing common
guidance and a network of cooperation for Compliance Officers, as well as
harmonising the timeframe for network development plans at national and European
level. Therefore, the Commission will continue to monitor the implementation
and effectiveness of the unbundling requirements under the Third Energy
Package. The Commission will also continue to be vigilant to ensure that ITOs
and VIUs comply with the EU competition rules.  
[1] Directive 2009/72/EC
of the European Parliament and of the Council of 13 July 2009 concerning common
rules for the internal market in electricity and repealing Directive 2003/54/EC
(OJ L 211, 14.8.2009,p. 55). 
[2] Directive 2009/73/EC
of the European Parliament and of the Council of 13 July 2009 concerning common
rules for the internal market in natural gas and repealing Directive 2003/55/EC
(OJ L 211, 14.8.2009,p. 94).