Cautiously towards a More Competitive Market Environment

Given the legal ambiguity and political legitimacy that surrounded the public policy change that Community measures (later the EU) would be calling for by the creation of an internal energy market, the Commission opted for proposing initial directives that explicitly avoided pushing for change in the economic organization of electricity and gas supply in the Member States. That approach changed by 1992, when the Commission attempted to explicitly push Member States to introduce a competitive market environment. However, that attempt at changing the rules of the game for electricity and gas supply in Member States, in the form of a draft directive, failed. It took additional four years until the first directive was adopted, calling upon Member States to start with electricity liberalization in 1996 and an additional six years for the first directive introducing first steps towards gas liberalization in 1998.

Together they are commonly referred to as the first Energy Legislation Package (ELP). As such they reflect not only a successful Commission in setting the political agenda but also increasing support for energy liberalization by policymakers in Member States.

Liberalizing Trade in Electricity and Gas between Member States

The initial electricity and gas directives, outlined in the following table, did not call for a fundamental change in the economic organization of energy supply. They were in line with what the Commission referred to, in its working paper, as a more integrated European energy market.

Table 9: Directives towards a More Integrated European Energy Market

Year Legislation Purpose Effect

An assessment of the initial directives reveals that they basically tackled technical barriers to energy trade between Member States—in other words, those directives aimed at energy trade liberalization on the regional level in Europe.

The origination of the directives is interesting. While the final versions adopted did not exert pressure on Member States to move towards regulating for competition (chapter 2.4), their initial drafts already included such elements. For example, a move towards third party access (TPA) was already visible in the initial drafts of the Electricity and the Gas Transit Directives (Andersen 2001: 12). Both called upon national grid owners to facilitate access to transmission lines or pipelines for third parties, enabling those to carry electricity or gas through their grids. The Commission’s original proposal for the Electricity Transit Directive was extremely far reaching. It even stipulated the establishment of a common carrier system for the Community (Andersen 2001: 12). In addition to resistance by Member States, it was also the strong opposition of the electricity suppliers that led, in the end, to the removal of this clause. The long time that it took to adopt both directives indicated the difficulties and resistance that the Commission would face in the following years by pushing for the creation of an internal energy market. The Electricity Transit Directive took almost two years until it was adopted by the Council (Andresen 2001: 12).

On the national level, it was in particular Germany and the Netherlands that opposed the directives (Andersen 2001: 12). Given that both countries were endowed with significant domestic gas reserves this came rather unsurprisingly as gas liberalization would have threatened the existent public property approach (chapter 2.3.3). However, the process of trade liberalization came to a halt when the Council of Ministers rejected the proposal for an Energy Investment Directive (Andersen 2001: 12). Increasing the transparency for national tenders for large-scale investments in the energy sector, by an enhanced exchange of information, definitely went too far for Member States.

A Failed First Attempt at Changing the Rules of the Game

Still refraining from using primary law to enforce (more) competition in the electricity and gas supply of its Member States, the Commission proposed two new directives in 1992 explicitly aimed at establishing so-called common rules for the internal energy market. Those directives, one for electricity and one for gas, were clearly directed at pushing Member States towards a more competitive market environment for the network-bound energy sector.

In the understanding of the Commission those directives did not legally establish substantial new rights or obligations. According to it, they were simply specifying the existent legislation applicable to the energy sector of the Member States derived from primary legislation (Ehlermann 1994: 343). One can interpret the directives as a substitute to the direct application of Community (from then on EU) primary legislation. It was also a new approach by the Commission to gain a political mandate not only for creating but also for enforcing the establishment of an internal energy market. In other words, this meant the creation of a competitive market environment for electricity and gas on its territory, calling for electricity and gas liberalization on the national level.

The proposed draft directives for electricity and gas clearly reflected a move towards getting Member States to change their existent market regulation and as such the public policy approach applied to electricity and gas supply. Besides referring to the principals of freedom of market entry and freedom of investments (e.g. changing the licensing and permitting systems), the directives explicitly aimed at changing the rules of the game (chapter 2.4.1) by calling for (Ehlermann 1994: 342):

 Unbundling: The directives stipulated the separation of accounts for different business activities in vertically integrated companies aiming at reducing the potential for discrimination for grid access.

 Third party access: The right for access to the networks was to enable third parties to carry electricity and gas through transmission lines and pipelines (limited to large industrial consumers and distribution companies).

 Market opening: In an initial stage this was envisaged for large industrial consumers and distribution companies, but supposed to be extended gradually.

An interesting aspect is that the directives did not tackle the existing import and export monopolies held by the large vertically integrated national energy companies at that time. The reason for that was that the Commission already considered them an obvious breach of Article 27 of the EC Treaty and expected the European Court of Justice (ECJ) to take care of that issue in infringement procedures (Ehlermann 1994: 349). However, the court decisions in 1997 showed that the ECJ did not support that approach, as it did not deem to have legislative powers and, thus, avoided acting as a policymaker on the national level on behalf of the Commission (Schmidt 1998: 339).

This clearly highlights that what the Commission considered as merely specifying the EU competences for electricity and gas market regulation, based on rights and obligations derived

from primary legislation, was politically much more controversial. It was obvious that the Commission’s ambition was to clash sooner or later with the political realities in the Member States. Only in a few countries—the UK and the Nordic states (non-EU Member States at that time)—were ambitions to move towards a more competitive market environment politically supported and visible.

Thus, and rather unsurprisingly, those directives led to a deadlock between the Commission and the Council of Ministers in the legislative process. The disagreement was huge as the Council returned the proposal to the Commission without a committee discussion or any detailed political instructions for the Commission’s future work on that issue (Andersen 2001:

113). With this, Member States sent a strong signal to the Commission. Any attempt to extend Community (EU) influence on electricity and gas market regulation on the national level and, thereby, to challenge the existent economic organization for electricity and gas supply would face strong national resistance.³⁰

A Successful Second Attempt at Changing the Rules of the Game

The deadlock lasted for almost two years, until the European Parliament decided in November 1993 to rework the Commission’s draft directives and issue its own proposal. That resulted three years later, in 1996, in the successful adoption of the first Electricity Directive (96/92/EC) and a few years later, in 1998, in the first Gas Directive (98/30/EC). Both, as already mentioned, were commonly referred to as the first Energy Legislation Package (ELP).

The first ELP no longer explicitly called for common rules for the internal market but for harmonization of the rules for electricity and gas supply (chapter 6.1). However, the ultimate effect was the same. It prescribed a public policy shift for Member States concerning the economic organization of electricity and gas supply on their territory and, thus, engaging in energy liberalization. This was possible due to institutional changes within in the Community that strengthened the position of the Commission and the European Parliament in policymaking (Andersen 2001: 20, Cameron 2007: 52–56). However, the most decisive factor is probably that energy liberalization benefited from growing political support in Member States. This is supported by the research results gained later in the case studies and analysis of EU influence on energy liberalization in Member States later in this study (chapters 8 and 9).

30 The UK proved to be the closest ally of the Commission. Large industrial consumers also supported the Commission’s directives as they expected to benefit from liberalization in terms of lower energy prices (Andersen 2001: 113).