Capturing EU Influence on Energy Liberalization

With regard to EU influence on energy liberalization, we address EU influence in terms of Europeanization, which we defined previously as follows (chapter 3.2):

“EU influence in terms of Europeanization refers to the process, through which the EU intentionally or unintentionally induces policy changes in a state and which on the national level can be contested in terms of political legitimacy.”

From an analytical point of view the definition is useful as it excludes measures by which the EU simply suggests or recommends in a nonbinding way that a country engage in energy liberalization. In practical terms, it means that the analytical focus will rest on EU influence exerted through primary and secondary legislation, which has by its nature a prescriptive character for Member States. As energy liberalization driven by the EU is about the establishment of a competitive market environment for electricity and gas supply, EU influence has to be directed at changing national energy legislation to achieve that goal. EU influence, as the explanatory concept (independent variable) concerning energy liberalization on the national level is operationalized in terms of EU measures aiming at (chapter 2.4):

 Changing the rules of the game for electricity and gas supply in a country;

 Changing the behavior of market participants in electricity and gas supply in a country.

Changing the rules of the game for electricity and gas supply and the behavior of market participants amount to the regulatory changes outlined in the following table.

Figure 3: EU Measures Directed at Energy Liberalization

Regulating for competition: Regulatory/Legislative changes aimed at:

Changing the rules of the game Unbundling of vertically integrated companies

Third party access (TPA) to networks Market opening for (eligible) consumers Changing and guiding the behavior of

market participants

Establishing an independent national energy regulator Making electricity and gas supply subject to competition rules and supervision by a competition authority

Changing the Rules of the Game

The EU can, based on primary and secondary legislation, require a Member State to alter its energy market regulation for electricity and gas supply. However, the EU acts as a centralized rule-making power with decentralized enforcement in Member States (Salerno 2008: 1). A Member State may show reluctance to comply with EU legislation, which eventually may hamper the EU’s influence on energy liberalization. EU influence may also be hampered in case its legislation does not provide sufficient guidance for the Member State to change its regulation and meet the EU’s liberalization goals or, in other words, the spirit of EU energy market legislation.

Changing and Guiding the Behavior of Market Participants

In practice, the EU can with secondary legislation influence the behavior of market participants in Member States by two means. It can legally require Member States to establish an independent energy regulator with the relevant competences. The EU can also act as a regulatory agency by threatening to apply or applying EU competition rules that concern in that case basically antitrust (Art. 85 ECT, Art. 101 TFEU) and abuse of market position (Art.

86 ECT, Art. 102 TFEU).²¹ EU influence on liberalization may be hampered as cases of direct

21 It is important to note that public undertakings and undertakings to which Member States grant special or exclusive rights are also covered by EU competition rules. Those companies are subject to EU competition rules to the extent that they do not obstruct the fulfillment of the special task entrusted to them. However, the latter also has its limit as it should not affect the development of trade contrary to the interests of the EU (Art. 90 ECT, Art. 106 TFEU).

application of competition rules have to qualify as being important and community-relevant (Herdegen 2010: 378). However, the application of competition rules will not be in the focus of this study. Given its case-by-case application, it is not expected to have been a tool by which the EU in a generic sense aimed at contributing to energy liberalization in Member States.

The Dependent Variable: Energy Liberalization on the National Level (Policy Change)

Closely related to EU influence is the dependent variable—the subject or outcome of EU influence. In this study it is energy liberalization in a country. We have established EU influence as pushing Member States towards regulating for competition concerning electricity and gas supply. Thus, the dependent variable consists of the specific changes in national energy market regulation and legislation, expressing changes in the rules of the game aiming at establishing a competitive market environment for electricity and gas supply.

Finally, we know that for example unbundling may take different forms (chapter 2.4). The same is true for market opening or TPA. It means that energy liberalization may be different among countries as they may opt for different measures to establish a competitive market environment. Taking this into account is important to understand if the EU was at the source of energy liberalization or if it merely contributed to a process that was already ongoing in a country. Acknowledging that is necessary to gain a thorough understanding of the scope of EU influence on energy liberalization in a country.

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Which factors determined EU influence on energy liberalization? This calls for substantiating the basic theoretical proposition established previously (chapter 3.4) with the insights gained with regard to energy liberalization from discussing the political economy of electricity and gas supply (chapter 2).

In political terms, energy liberalization meant a change in the public policy approach applied to electricity and gas supply. It reflects a shift from a utility to a commodity approach concerning the supply of those energies (chapter 2.3.3). This was made possible only as the economic and political justifications for the economic organization of electricity and gas supply prior to energy liberalization changed and, thus, permitted a shift in public policy. We have identified a few arguments that seem to have influenced the economic and political

justifications for energy liberalization. Those are with regard to economic justifications (chapter 2.3.1): the reduced fear of market failure due to the maturity of the energy sector and the expectations of efficiency gains. Although the political justifications for energy liberalization can be understood as reflecting the economic justifications, they are also driven by two additional factors (chapter 2.3.2): an increasing trust in regulation to prevent market failure as well as a changed view on the legitimate role of the state in economic activities.

This leads us to the following theoretical propositions:

“If a country provides the economic and political justifications required for energy liberalization, the EU is likely to exert influence on energy liberalization in that country.”

Or put differently:

“If a country does not provide the economic and political justifications required for energy liberalization, the EU is unlikely to exert influence on energy liberalization in that country.”

Although economic and political justifications matter, at the end, the incentive to engage in the huge and complex process of economically reorganizing electricity and gas supply are the expected economic efficiency gains that a competitive market promises. This may depend upon the size of the energy market. For obvious reasons, for competition to work a certain market size is necessary.

The particular important role that a reduced risk of market failure plays directs our attention to the ultimate point of reference that guided public policy approaches applied to electricity and gas supply in the past. It is energy security. That the public policy approach to the economic organization of energy supply in a country is serving the one and final goal, which is guaranteeing electricity and gas supply, can be considered as still valid today (chapter 2.5).

As economic and political justifications for energy liberalization are influenced by a reduced fear of market failure, it reflects reduced energy security concerns. As a consequence thereof, we can expect that a country’s energy security situation may play a decisive role in modifying the EU’s influence on energy liberalization. Accordingly, we can formulate two additional theoretical propositions:

“The less a country is concerned about its energy security situation, the more likely the EU is to exert influence on energy liberalization in that country.”

Or put differently:

“The more a country is concerned about its energy security situation, the less likely the EU is to exert influence on energy liberalization in that country.”

The analytical framework for EU influence on energy liberalization guiding the empirical analysis of this study can be formalized as outlined in the following figure.

Figure 4: Basic Analytical Framework for EU Influence on Energy Liberalization

To sum up, in addition to the existence or absence of economic and political justifications for energy liberalization, we can expect that a country’s energy security situation on the eve of liberalization may work as an antecedent variable to economic and political justifications and, thus, determine a country’s general willingness to carry out energy liberalization. Those variables can be expected to affect the transposition and implementation of EU secondary legislation, directed at changing the rules of the game for electricity and gas supply and as such, the establishment of a competitive market environment. In other words, they may work as modifying factors for EU influence on energy liberalization in a country.

The analytical framework is not designed for explicit hypothesis testing but rather directs the analytical focus to factors that may determine EU influence on energy liberalization in Member States. This is not surprising as with regard to the reality and complexity of domestic political processes it is almost impossible to precisely determine the exact influence of domestic factors on EU influence on energy liberalization. Thus, the analytical framework is best understood as an analytical tool to assess to which extent potential modifying factors may have determined EU influence on energy liberalization.