Energy Markets & Governance European Union Oil and Gas
EnergySource April 18, 2019

Gas Directive: Overly burdensome regulation of the EU gas market?

By Danila Bochkarev

On 15 April, the Council of the European Union (EU) backed a controversial revision of the EU Gas Directive, which was already adopted at a plenary session of the European Parliament in Brussels on 4 April. This adoption by the Council is the last step in the legislative initiative. However, the story began in November 2017, when the European Commission (EC) took “steps to extend common EU gas rules to import pipelines,” proposing an amendment of the current Gas Directive to ensure “that the core principles of EU energy legislation (third-party access, tariff regulation, ownership unbundling and transparency) will apply to all gas pipelines to and from third countries up to the border of the EU’s jurisdiction.”

The official explanation for the amendment was that it would improve the “functioning of the EU internal energy market and [enhance] solidarity between Member States.” Unofficially, another explanation is that the European Commission—which initiated the changes later supported by the European Parliament—sought to elbow its way into the political game over the Nord Stream 2 pipeline project.

The European Commission (EC) is in a hurry to pass the Gas Directive, which might be surprising for a complex piece of legislation governing, in smallest detail, numerous aspects of natural gas transportation and trade inside the European Union. Since these changes affect all major stakeholders concerned—industrial consumers of natural gas, utilities, companies transporting gas within the EU, etc.—one would think this legislative change requires in-depth consultation and not a fast-tracked process pushed by the European Commission.    

Not only was the trialogue process unusually rushed but the transposition period was also shortened from twelve to nine months, with the EC initially requesting a three-month period, instead of the usual eighteen-plus months. For example, the transposition period for the non-financial reporting directive lasted approximately twenty-five months.

It appears the current Commission was worried that after the European Parliament elections in May 2019, the newly appointed Commission would not support the proposed legislation. Given the fits and starts of political momentum in the long-lasting tussle over Russian pipelines, it came as a bit of a surprise to many market observers that the Commission could squeeze a version of its proposal through before the political door closes with the May election and the subsequent re-shuffling of positions in Brussels.

What remains most puzzling to gas market players is why the European Commission is urgently initiating additional legislation when its energy markets are already fully operational. Year after year, the EU’s own Agency for the Cooperation of Energy Regulators (ACER) market monitor shows better functioning markets with prices more closely aligned and fewer “white spots” on the map of EU gas market integration. The Security of Supply Regulation 2017/1938 already ensures consumers are protected in case the supply runs short. “Market rules are more or less working, we have a functioning gas market,” confirmed Klaus-Dieter Borchardt, deputy director general, energy at the European Commission, in an interview released on 22 January 2018 by the Florence School of Regulation.

Unsurprisingly, regulatory experts had few positive things to say about the amendment’s supposed benefits. On a more technical level, one of the world’s oldest and most renowned strategy consultancies with a strong background in oil & gas, ADLittle, rightfully noted that these changes are unnecessary and simply create additional burdens. For example, the ADLittle report noted that new legislation requires transparency for gas flows at EU import entry-points where pipelines from third countries connect to EU gas infrastructure, but that this transparency has already been achieved via the existing European Network Codes. Similarly, the new legislation requires the disclosure of the transport element of the delivered price of gas, but this would not have any effect on the price of gas delivered from third countries to the European Union, since pipeline gas supplied to Europe has to compete against market prices anyway. Therefore, proposed changes are either duplicating already existing mechanisms or create unnecessary procedures which are unlikely to bring any tangible consumer benefits.     

It does not require a lawyer’s deep dive into the amendment text to understand that the real goal is far from the originally stated aim. The EC is trying to kill two birds with one stone: the proposed amendment creates additional bureaucratic hurdles for Nord Stream 2 and shifts energy policy powers from member states to Brussels. Thus, the amendment will give the EC power to authorize and block existing and future Inter-Governmental Agreements (IGAs) between member states and third countries, and to determine EU member states’ energy policies. These provisions violate the sovereignty of member states to determine own energy sources under Article 194(2) of the Treaty of the European Union (TFEU). The new directive would terminate member states’ jurisdiction on the regulation of the “operation of third county interconnectors to which Directive 2009/73/EC is currently not applicable and retain the competence to conclude international agreements to regulate the operation of such pipelines following Article 2(2) TFEU”. In other words, members do not have the ability to build pipelines without Brussels’ approval. Additionally, according to the Legal Service of the European Council, only the Union “would be able to conclude international agreements in the area covered by Directive 2009/73/EC, and Member States would no longer have the right to undertake obligations with third countries which affect these common rules even when there is no possible contradiction between those commitments and the Union common rules.” That means that EU members have to defer to the EU bureaucracy when it comes to negotiating with third countries.

These serious concerns were voiced early on; last year, in a comment to the Draft Directive, the French Senate noted that the proposal infringes on the principle of subsidiarity, limits the competence of the member states vis-à-vis their energy policies, and extends the application of EU law beyond the borders of the Union without a proper legal basis in European treaties. German energy company Uniper also questioned the legal basis of the proposal on several grounds, indicating that the proposal “potentially violates the sovereignty of a Member State to determine its choice of energy sources and the general structure of its energy supply under Article 194(2) of the Treaty of the European Union (TFEU).” 

This power shift is, in its essence, a centralization of economic control to known outcomes. In today’s EU market economy, it creates additional uncertainty for investors as the rules keep changing mid-game. Many investors will now look to Brussels for reassurance that this type of politicization ultimately does not undermine their legitimate expectations. If this trend continues, the EU will end up with an infrastructure sector in which only tax-payer funded subsidy programs like the CEF can provide funding, with political strings attached. It would roll back the liberalization of the market—initiated by the European Commission—into a central planning model. European consumers who have started to enjoy the benefits of market liberalization, such as lower gas prices and ability to choose own suppliers, would have to pay more, and not for their own security of supply, but for the Brussels bureaucracy’s ambitions of greater power.     

Disclaimer: the opinions expressed in this article solely reflect the views of the author, not of his organization.

Danila Bochkarev is a senior fellow with the EastWest Institute.

Image: European Union flags flying in front of the European Commission building in Brussels, Belgium (photo by NakNakNak/Pixabay).