March 29, 2018
Is it Time for a Central Energy Regulator in the European Union?
By Branko Terzic
The European Union has been integrating its national markets into one single market since the 1987 Single European Act, the first major revision to the 1957 Treaty of Rome, which established the European Economic Community and later the European Commission. Slowly but surely, the European Union also undertook liberalization of various sectors, introducing competition where there was a monopoly, starting with steel and coal. The liberalization of electricity and natural gas began with the “1992 Internal Market” agenda, which incorporated three concepts: market liberalization, establishment of independent regulatory agencies, and supra-national integration of electricity and natural gas markets.
However, while the EU required liberalization, it did not go as far as to require privatization. While national utilities would lose aspects of their monopoly, they would remain under government control. EU member states established national independent regulatory agencies in the 1990s and adopted directives on competition in electricity and natural gas in 1996 and 1998. However, the EU did not establish a central regulator like the FERC in the United States or the National Energy Board in Canada.
Instead, Europe’s first Internal Energy Market (IEM) directives defined common rules applicable to regulatory agencies of the member states, as they were individually required to open up national energy markets. The hope was that similar rules, adopted voluntarily by individual national regulators, would enable efficient cross-border trade and energy market development. However, because national sovereignty takes precedence, the EU’s energy directives did not specify standards for cross-border energy trade or the operation of regional energy markets. The directives also fail to address how EU participants should deal with non-EU energy markets, the development of new electric and gas transmission cross-border interconnectors, and the supra-national integration of energy markets. Observers quickly identified that a “regulatory gap” between national markets and the EU internal energy policy had been created.
One attempt to close the regulatory gap was to create associations among the national regulators. The newly established national energy regulators quickly established an association, The Council of European Energy Regulators (CEER) in 2000 and the European Commission established the European Regulators Group for Electricity and Gas (ERGEG), a consultative body made up of CEER members, in 2003. While the two new institutions did not have regulatory authority to fill the regulatory gap they provided a platform for discussion of issues in the development of internal energy markets within the EU.
However, after years of frustration over the fact that these two consultative institutions were insufficient to address the regulatory gap problem, the EU established The Agency for the Cooperation of Energy Regulators (ACER) in 2011.
It was intended that ACER would fill the regulatory gap at Community level, able to adopt individual regulatory decisions in specific areas that the ERGEG was not able to do. The objective was that ACER would contribute towards the effective functioning of the EU-wide internal electricity and gas markets.
However, ACER also fell short of expectations, devoid of the authority it needs to actually fulfill its mission. According to one report:
“The overall mission of the Agency is also to complement the work of national energy regulators at EU level, to assist them in exercising, at the European Union level, the regulatory tasks that they perform in the Member States and, where necessary, to coordinate their action.
However, while the Agency has been assigned extensive monitoring responsibilities, it does not have the corresponding powers to define and obtain the necessary information from National Regulatory Authorities, Transmission System Operators – and their European Networks - and other market stakeholders.”
Not only did the ACER lack necessary data collection authority, but it also fell far short of having the other necessary authority to regulate electricity and natural gas markets effectively.
While ACER was intended to be a solution, it fell victim to the same problems as its predecessors. However, there is a potential remedy—Europe could grant ACER the type of authority FERC wields in the United States. This would include jurisdiction over wholesale electricity markets and electric transmission pricing and natural gas pipeline transmission systems.
A January 2015 paper from the Jacques Delors Institute suggests that ACER should indeed move in the direction of a “European FERC,” arguing:
“ACER should be empowered to act as a European regulator, potentially take decisions that directly bind operators in cross-border issues, and be equipped with sufficient resources in order to cope with all its tasks and responsibilities in network codes, infrastructures and market operation…”
In his book, The Political Economy of Pipelines, Dr. Jeff Makholm concludes, “perhaps the most daunting barrier to creating a competitive market” in the EU was “the split in jurisdiction between the EU and its member states…” While Makholm limited his remarks to the establishment of a competitive natural gas market, the same point can be made with respect to electricity markets in the EU.
This “split in jurisdiction” would be corrected with the establishment of a central EU regulatory body with adequate authority. While the EU should consider such a step, whether it is prepared to do so or not is another matter. At a minimum, the EU should commission a study of the costs to the EU economy and consumers that are created by the lack of efficient and centrally regulated electricity and natural gas markets—and recognize that the alternative to action is to accept and live with continuing inefficiency in vital energy markets.
Branko Terzic is a senior fellow with the Atlantic Council Global Energy Center. He formerly served as a commissioner of the Federal Energy Regulatory Commission and Wisconsin Public Service Commission. You can follow him on Twitter @BrankoDuTerzic