Law & Economics Perspectives on Electricity Regulation

This paper first reviews some of the main contributions of the new institutional economics to the analysis of the process of competitive transformation of network industries. It shows that neoinstitutional analysis is complementary to the microeconomics of rational pricing, since it accounts for the decisive role of an institutional framework adapted to new transactions. It emphasizes the importance of the political reform process, which draws on the conditions of attractiveness and feasibility to define an initial reorganization of property rights in these industries. The paper then analyzes in this light some of the main challenges ahead for electricity regulation: the question of investment in generation capacities and the link to long term contracts, the regulation of wholesale market power, the support to Renewable Energy Sources for Electricity (RES-E) and the design of new regulatory authorities.Electricity Markets; New Institutional Economics; Law & Economics

Manufacturing the EU Energy Markets. The Current Dynamics of Regulatory Practice

This chapter aims to analysis the new dynamics at work in EU energy regulation. Since the publication of the European Commission’s ‘Sector Inquiry Report’ in January 2007, European energy companies have felt the cold wind of competition law - many for the first time. In addition, national competition authorities (NCAs) have been actively pursuing abusive market practices - sometimes making innovative use of competition law in the process. Certain energy giants have agreed to unbundle their transmission networks - even when their national governments opposed the inclusion of ownership unbundling in the draft ‘Third Package’ of electricity and gas legislation. In parallel, the Third Package envisages the creation of a new regulatory agency - ACER - to co-ordinate technical crossborder regulatory issues in the internal market. So who will be in the driving seat in the next decade - and will co-ordinated regulatory powers be the preferred approach to market design? Will regulatory rules co-exist alongside competition based controls or will the latter gradually supersede the former? This chapter will examine these critical issues.Antitrust, Third Legislative Package, ACER, European Union

Capacity to Compete: Recent Trends in Access Regimes in Electricity and Natural Gas Networks

Ensuring access to a truly ‘European’ energy grid for every consumer and supplier in the European Union is a core objective of the single market project. From the first wave of liberalization directives up until the ‘draft’ framework guidelines of September 2010 on capacity allocation and congestion management being prepared by ERGEG on behalf of the new Agency for the Cooperation of Energy Regulators (ACER), the objective of the access regime in both sector is similar: to creating capacity to compete. The objective of this paper is to review and compare from a legal point of view the evolution of the EU access regime in the electricity and gas sectors. We find strong similarities for two otherwise very different sectors, as well as an influence of the electricity regime on the gas regime. The sector-specific regulatory regime, supported by the use of competition law, organises a market design in both sectors based as much as possible on short-term capacity allocation with a liquid secondary trading platforms. The imposition of UIOLI mechanisms and an increased focus on firmness of capacity is certainly the way forward but implementation still is an issue. The right portfolio of capacity durations that are to be proposed by TSOs also remains an open question. The specific features of these two commodities result however in slightly different results in practice. In electricity, the development of market coupling initiatives creates new regulatory challenges but price convergence is now in sight. In gas, the progress has been slower and efficiently functioning spot markets are yet to emerge.access regime; electricity; gas; European Union; competition law; framework guidelines

Regulatory Uncertainty and Inefficiency for the Development of Merchant Lines in Europe

This paper evaluates regulatory uncertainty and inefficiency that may prevent merchant transmission investors from committing in Europe, in particular when they are dominant generators. We argue that market players may perceive regulatory uncertainty to acquire exemption on merchant line mainly because of the discretion given for the application of Art. 7 of the Regulation 1228/2003 on cross-border exchanges. However we show that an emerging strategy of the European Commission for granting exemption on merchant transmission line can be eventually derived from recent legal and regulatory proceedings. It mainly consists in relying on TSOs to build merchant lines. We demonstrate that this strategy is neither a first best nor a second best given imperfect unbundling and the current flows in the allocation of regulatory powers. Indeed, it prevents merchant line investment by dominant generators with low generation cost while they have currently more incentive than TSOs to build merchant lines. Since unregulated merchant transmission investment by generators would be problematic, we show eventually that the current strategy of the application of Regulation can easily be fine-tuned to reach this second-best optimum.Regulatory Uncertainty and Inefficiency for the Development of Merchant Lines in Europe

Regulatory Uncertainty and Inefficiency for the Development of Merchant Lines in Europe

International audienceThis paper evaluates regulatory uncertainty and inefficiency that may prevent merchant transmission investors from committing in Europe, in particular when they are dominant generators. We argue that market players may perceive regulatory uncertainty to acquire exemption on merchant line mainly because of the discretion given for the application of Art. 7 of the Regulation 1228/2003 on cross-border exchanges. However we show that an emerging strategy of the European Commission for granting exemption on merchant transmission line can be eventually derived from recent legal and regulatory proceedings. It mainly consists in relying on TSOs to build merchant lines. We demonstrate that this strategy is neither a first best nor a second best given imperfect unbundling and the current flows in the allocation of regulatory powers. Indeed, it prevents merchant line investment by dominant generators with low generation cost while they have currently more incentive than TSOs to build merchant lines. Since unregulated merchant transmission investment by generators would be problematic, we show eventually that the current strategy of the application of Regulation can easily be fine-tuned to reach this second-best optimum

Legal Feasibility of Schengen-like Agreements in European Energy Policy: The Cases of Nuclear Cooperation and Gas Security of Supply

European energy policy is characterized by a complex allocation of authority between the European Union and its Member States which results in an intricate interplay of regulatory competence. Knowing the difficulties European countries face in coordinating and proposing common solutions in the area of energy, there is the urgent need to question the legal foundations underlying the decisionmaking process. Institutional paralysis, low reactivity to events and changes as well as systematic political horse-trading across all questions call for an alternative framework allowing some pioneering Member States to promote ad hoc common policies escaping the formal and procedural requirements of EU law. Our paper assesses the legal feasibility of short-run differentiation by means of partial international agreements inspired by the Schengen regime, namely entirely outside the EU framework. The key challenge from a legal point of view is to assess the substantive compatibility of such agreements in energy with the existing rules of the Union. Short run differentiation in energy cannot indeed be assessed at a high level of generalities. We therefore take two areas where legally-binding coordination at the sub-Union level is often called for: nuclear policy and gas security of supply. The possible substantive content of such cooperation is derived from the economic and political literature before legal feasibility is assessed. Our findings suggest that the scope for such agreements is limited for security of gas supply whereas it could be an improved cooperation device in certain areas of nuclear policy.Schengen

Long-term Energy Supply Contracts in European Competition Policy: Fuzzy not Crazy

Long-term supply contracts often have ambiguous effects on the competitive structure, investment and consumer welfare in the long term. In a context of market building, these effects are likely to be worsened and thus even harder to assess. Since liberalization and especially since the release of the Energy Sector Enquiry in early 2007, the portfolio of long-term supply contracts of the former incumbents have become a priority for review by the European Commission and the national competition authorities. It is widely believed that European Competition authorities take a dogmatic view on these contracts and systemically emphasize the risk of foreclosure over their positive effects on investment and operation. This paper depicts the methodology that has emerged in the recent line of cases and argues that this interpretation is largely misguided. It shows that a multiple-step approach is used to reduce regulation costs and balance anti-competitive effects with potential efficiency gains. However, if an economic approach is now clearly implemented, competition policy is constrained by the procedural aspect of the legal process and the remedies imposed remain open for discussion.Massachusetts Institute of Technology. Center for Energy and Environmental Policy Research

Efficiency, Competition and Long Term Contracts in Electricity Markets

Summary and Conclusions of the workshop organized by the Loyola de Palacio Programme of the European University Institute and Gis Larsen, 15-16 January 2009, European University Institute, Florence, Italy

Mécanismes de capacité et contrôle des aides d’État : quelle stratégie pour la Commission

À l’heure où la Commission a rendu publiques les premières conclusions de son enquête sectorielle sur les mécanismes de capacité lancée il y a un peu plus d’un an, et où elle a engagé une réflexion sur la définition d’une nouvelle organisation des marchés de l’électricité, il est nécessaire de s’interroger sur le rôle du contrôle des aides d’État comme instrument de politique énergétique européenne

'Opt-out' clauses for EU energy islands in the third liberalisation package : striking balances?

Published version of EUI RSCAS WP 2012/7