TRGas-Hub Regulatory and Transmission System Workshop Ankara, 21/05/2014

How to Successfully Unbundle a National Pipeline - EU Case?

European Federation of Energy Traders

Giuseppina Squicciarini

Author [email protected]

Ankara 21/05/2014 1

Agenda

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Effective unbundling is one of the most important steps in achieving a competitive market – why?

The first two EU directives introduced some unbundling requirements – why were these not enough?

Effective unbundling: the options in the Third Package Lessons learnt from the EU experience

Author Conference place and date 2

Effective unbundling is essential to competition

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Effective unbundling is one of the most important steps in achieving a competitive market Essential facility doctrine: “ a facility or infrastrucure without access to which competitors cannot provide services to their customers, and which cannot be replicated by any resonable means” (“Sealink” case)

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Ineffective unbundling prevents competition through foreclosure

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An integrated company has an incentive to use its pipeline monopoly (“the essential facility”) to favor its affiliated supply function:

cross subsides which favour the incumbent in the downstream business; exclusion and discriminatory access; underutilisation of existing network/delay investments to prevent growth of competitors’ shares. Conference place and date 3 Author

The first two EU Directives introduced unbundling requirements

Before liberalisation First Package

Directive 96/92/EC

Second Package

Directive 2003/54/EC

Production &Import Production &Import Production &Import Network Network Network

Author

Supply Vertically integrated

company

Supply

One company with:

Unbundling of accounts

Management separation Third Party Access Conference place and date

Supply

One group with:

Separate legal entities

Regulated Third Party Access 4

But accounting and legal separation requirements were not enough

 1.

2.

3.

4.

Author

2007 Energy Sector Inquiry: DG COMP finds that after two liberalisation packages there are still major issues in the market:

“The current level of unbundling of network and supply interests has negative repercussions on market functioning and on incentives to invest in networks. This constitutes a major obstacle to new entry and also threatens security of supply.” “At the wholesale level, gas markets... generally maintain the high level of concentration of the pre-liberalisation period. This gives scope for exercising market power”.

“More effective and transparent price formation is needed in order to deliver the full advantages of market opening to consumers... Retail regulated supply tariffs below market prices discourage new entry”.

“There is a lack of reliable and timely information” for market participants.

Conference place and date 5

As the incumbents still had the incentives and the possibility to discriminate

DG COMP found evidence of vertical foreclosure of markets:

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Conflict of interest of vertical integrated incumbents: the incentive to

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discriminate remains Incumbents were “using control over the network to make market entry of their competitors difficult”

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Investment was not taking place to prevent third party entry in the

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market (…and third parties did not trust to invest either in a market controlled a vertically integrated incumbent

) Conference place and date 6 Author

The Third Package introduces stricter unbundling requirements

Second Package

Directive 2003/54/EC

Third Package

Directive 2009/72/EC : 3 options

Production &Import Production &Import Production &Import Production &Import Network N. Operator N. Owner N. Owner Supply

One group with:

Separate legal entities

Author

Supply Supply Independent TO Independent SO

Separation between operation and ownership in the same group Operator separate Owner part of the group Conference place and date

Supply Ownership unbundling

Network (owner and operator) not in the same group 7

A level playing field for competition and incentives to invest

Third Package

Directive 2009/72/EC : 3 options

Production &Import N. Operator N. Owner Supply Independent TO Heavy regulation and monitoring

Author

Production &Import N. Owner Production &Import Supply Supply Independent SO Ownership unbundling Regulation and monitoring Light regulation and monitoring

Conference place and date  Same access conditions to the network as the incumbent  No cross subsides  Transparent planning and incentives to invest in new infrastructure  Clear role and responsibility for the network operator 8

Lessons learnt from the EU experience – wrap up

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Effective unbundling is essential to competition The first two EU Directives introduced unbundling requirements But accounting and legal separation requirements were not enough As the incumbents still had the incentives and the possibility to discriminate against new entrants The Third Package introduces stronger unbundling, regulatory and monitoring requirements Which create a level playing field for competition and incentives to invest to the benefit of consumers

Conference place and date Author 9

Thanks for your attention

Author

European Federation of Energy Traders Amstelveenseweg 998 1081 JS Amsterdam Tel: +31 (0)20 5207970 Email: [email protected]

www.efet.org

Conference place and date 10