Ruling backs open access to electricity systems

The European Court of Justice has recently held that a German law giving monopoly rights to electricity suppliers in locally enclosed sites was incompatible with European Community legislation promoting competition in the energy sector and access to electricity distribution networks. The decision may require the UK Government to rethink its strategy for encouraging local distribution networks in line with its climate change strategy.

Sächsisches Staatsministerium für Wirtschaft und Arbeit als Landesregulierungsbehörde v Flughafen Leipzig/Halle GmbH (Case C-439/06 European Court of Justice 22 May 2008) concerned the German Law of Electricity and Gas Supply of July 2005, adopted in part to implement EC Directive 2003/54 concerning common rules for the internal market in electricity. The Directive’s fundamental aim was to promote a competitive internal electricity market by removing barriers to third party access to transmission and distribution networks.

The German law followed the EC Directive by requiring operators of energy supply systems to grant access to anyone without discrimination. But it provided for exemptions for "site networks". Whether these exemptions were compatible with the Directive formed the heart of the case.

The site network under the German law was essentially defined as a closely geographically connected zone where the undertaking serves predominantly its own supply purposes, or connected undertakings. The site network in question was at Leipzig/Halle airport, where the operator maintained an electricity supply system to meet its requirements and those of 93 other undertakings at the site. The supply was about 22,200 megawatt hours, of which over 85% was used by the operator itself.

The German regulatory authority has granted the system the status of a site network, thus exempting it from the need to open up to third-party competition. However, a German electricity supply undertaking appealed against this decision to the Higher Regional Court. The court referred the issue of compatibility of the German law with the EC Directive to the European Court of Justice (ECJ).

The court noted that the 2003 Directive had replaced an earlier Directive concerning common rules for an internal market to remove shortcomings and bring more openness to the internal electricity market.

"In order for customers to be able to choose freely their suppliers, it is necessary that suppliers should have the right to access the different transmission and distribution systems which carry electricity to all customers. It follows that open third-party access to transmission and distribution systems constitutes one of the essential measures which the member states are required to implement in order to bring about the internal market in electricity."

The Directive applied to transmission and distribution systems as defined. Transmission encompassed high-voltage systems, while distribution meant the transport of electricity on high voltage, medium voltage, and lower voltage with a view to distribution to customers but excluding actual supply. Both the German and UK Governments argued the system in question fell outside these definitions and therefore the Directive’s on the grounds it was created by undertakings for their own energy supplies, had a low consumption and did not affect competition.

The ECJ disagreed. The definitions of transmission and distribution systems were based solely on voltage and the Directive did not intend to exclude systems from the Directive’s scope by reason of their size or use of electricity.

Furthermore, whatever the amount of electricity supplied in this site, the German system of derogations was based on the concept of a geographically connected operation zone rather than the amount supplied. Here the system supplied 93 undertakings apart from the operator itself and was a distribution system within the Directive’s scope.

The Directive gives member states considerable discretion as to the design of the system for third-party access, and it true the Directive itself provided for several exemptions. But the court emphasised the fundamental importance of the principle of open access to transmission and distribution systems. As a result the margin of discretion available to member states does not authorise them "to depart from that principle except in those cases where Directive 2003/54 lays down exceptions or derogations".

The court then examined the various exemptions provided for in the Directive to see whether the German legislation reflected them. The Directive does not apply where it would obstruct the performance of public service obligations on electricity undertakings in the general economic interest, but only in so far as this would not be contrary to interests of the European Community which expressly included competition with regard to eligible customers.

The court argued that in such cases member states must weigh up the extent to which open access would obstruct suppliers’ public service obligations, and whether these could be met by other means that do not impact adversely on third-party access rights. Nothing in the German legislation suggested the derogation was justified by these reasons.

The Directive also provided for derogations where it posed substantial problems for "small isolated systems", defined as systems with less than 3,000 gigawatt hours in 1996 and where less than 5% of consumption was obtained through interconnection with other systems. But in these cases derogations must be obtained from the European Commission. The German Government had made no application for a derogation.

The Directive also allowed operators of distribution systems to refuse access if they lack the capacity, but the court held that the possibility of refusal must be assessed on a case-by-case basis with a concrete analysis of the system’s technical incapacity to meet third-party demand. Member states were not entitled to lay down derogations in a general manner under this heading.

The court therefore concluded that the German law providing for a general exemption for operators of supply systems in geographically connected areas was incompatible with the EC Directive on open access.

The decision comes at a time when the government is reviewing policies to encourage more local distributed generation, and the electricity regulator Ofgem is considering extending exemptions for the need for licensing of electricity suppliers (see p 48 ).

Unlike the German system, the current UK exemptions contained in the Electricity (Class Exemption) Order 2001 are based not on geographical areas but on supply size. But in relation to open access, the European Court decision indicates that exemptions based on size cannot be granted as a general rule, unless they fall within one of the specific exceptions or derogations.

Some commentators have argued that the decision may throw into doubt current strategies for promoting zero-carbon housing through on-site generation by the use of energy service firms.

In its 2000 report Energy - the changing climate, the Royal Commission on Environmental Pollution noted how the liberalisation of the energy market had been primarily driven by the aim of reducing the unit cost to consumers, and that the system did not appear to incentivise firms to decentralise or promote small embedded or intermittent generating plants.

There remains a major challenge in enhancing the power of the liberalised market to meet climate change strategies, and the decision of the European Court, though correct in a strict interpretation of the EC Directive, underlines this dilemma.

Richard Macrory is professor of environmental law, University College London

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