Competition Law Oversight of Renewable Regulatory Changes in Europe

On 14 September the Bulgarian National Energy Regulatory Authority (SEWRC) issued a decision setting temporary grid access fees to be charged by the Bulgarian Electricity System Operator (ESO) and local distribution companies to producers of renewable energy (Grid Access Decision).

October 2012 - From the Print Edition

The grid access charges discriminate between plants of the same technology based (a) on the timing of their connection to the grid and (b) the date when the respective preferential price (FIT) was granted, rather than any underlying technical costs.
Although the FITs remain unchanged, the effect of the grid access charge is a significant decrease of the net revenues of certain renewable generators by up to 39% for some photovoltaic plants, and 10% for some wind plants.
Naturally, the market reaction to the Grid Access Decision has been strong with investors and financing banks turning not only to national courts, but also to the European Commission to press for oversight and remedy.
By setting discriminatory and ungrounded access prices, the Grid Access Decision potentially breaches both sectorial and EU competition law, for example, Article 16(8) of the Renewables Directive 2009/28/EC and Article 37(13) of the Electricity Directive 2009/72/EC, which is part of the Third Energy Package. Amongst others, these breaches form the foundation of claims to the Bulgarian national court, and approaches to DG Energy.

European Oversight
It is important to put the recent national regulatory developments in renewable energy into the context of the entire energy value chain and – particularly in CEE – in the context of the liberalisation of the energy sector required by the Third Energy Package.
In this regard, EC competition law plays an increasingly important role in European oversight of national regulatory and legislative actions. Competition law is the body of law that envelops sectorial energy laws with the cloak of fair competition by generally prohibiting all anti-competitive arrangements and abuses of dominant position, sometimes notwithstanding if such conduct has been permitted by the national regulator.
Comprising core provisions of the EC Treaty, competition law is a powerful tool in the European Commission's compliance armoury and, in the last five years, has been used by the Commission extensively to force change where regulation has been either ineffective or too slow.
Article 101 of EC Treaty prohibits all arrangements between undertakings that may affect trade between member states and which have as their object of effect the prevention, restriction or distortion of competition. Article 102 of the EC Treaty provides that it is an abuse of a dominant position for an undertaking to ‘impose unfair purchase or selling prices' or ‘apply dissimilar conditions to equivalent transactions with other trading partners thereby placing them at a competitive disadvantage'.
Competition law also applies to actions by the Member State and state owned grid operators: Article 4 EC Treaty (ex Article 10) provides that ‘Member States shall facilitate the achievement of the Union's tasks and refrain from any measure which could jeopardise the attainment of the Union's objectives'. Article 106 of the EC Treaty provides that, in relation to public undertakings, national laws and administrative decisions must be compatible with EC law (particularly those ensuring competition).

Competition law & the Grid Access Decision
Amongst other potential breaches of competition law, by adopting the Grid Access Decision, SEWRC may have breached competition law by inducing or leading the state owned ESO to commit an abuse of a dominant position by charging discriminatory grid access charges.
The Grid Access Decision also potentially enables cross-subsidisation and vertical discrimination as access charges are not imposed on other energy producers. This puts at an economic advantage state owned generating companies within the same vertical ownership structure as ESO and provides a hidden state-aid to privately owned traditional energy generating companies, thus distorting competition in the market.

Next Steps
At a European level, where the Commission considers that a State measure infringes EC law, it may instigate an Infringement Procedure against the Member State concerned, leading to formal legal proceedings before the ECJ.
In the context of competition law, the Commission has most recently conducted investigations based on Article 9 of Regulation No. 1/2003, as opposed to Article 7. The Article 9 procedure is quicker and leads to more immediate remedy whilst avoiding large fines and limiting third-party court cases against dominant operators. In contrast, in Article 7 decisions, the Commission typically imposes a fine, which triggers civil damage actions filed before national courts by those harmed by the illegal behaviour.
This is not to say that recent competition enforcement has been weak. On the contrary, in certain cases, this has led to ‘forced' structural changes (e.g. ENI Case COMP/39.315 where ENI offered to divest its stakes in three international transmission pipelines to meet competition concerns.
It is currently in Member States' interest (in this case Bulgaria) to heed the Commission's findings. It seems safe to expect that as the Third Package is implemented the Commission will revert to the Article 7 procedure and seek fines for infringement, paving the way for significant claims by renewable producers harmed by breaches of EC law.

Richard Clegg
Partner
WOLF THEISS
Rainbow Centre 29 Atanas Dukov Street 1407 Sofia, Bulgaria,
T + 359 2 8613 701
richard.clegg@wolftheiss.com
www.wolftheiss.com

The impact on the Romanian market
Ciprian Glodeanu, Partner at Wolf Theiss and President of the Romanian Photovoltaic Industry Association (www.rpia.ro) commented:

"I am confident that the situation created in Bulgaria will not replicate as such in Romania for various given reasons:

First of all, Romania has enacted a promotion system based on tradable green certificates and not FITs. There were many voices that argued the green certificates system is not as stable as the FIT one. The recent reality proved though that the FIT system is by far not as attractive as initially deemed by energy players and it seems to be easily changed, especially in case of overcapacity. In a green certificate system, the market controls the demand for green certificates and not the public authorities. Therefore, the risk of the green certificate system lies with (i) the impossibility to sell the green certificates during the validity term (i.e. a green certificate is valid for 16 months) and (ii) in case of an overcompensation situation, the number of green certificates granted to a certain technology could decrease. In this later case, the reduction could be predictable, since according to the relevant enactment a reduction could happen after 2 years from the current year.

Secondly, since such an obvious discrimination would be against the Romanian Constitution, the Romanian Constitutional Court would promptly and duly censure any attempt to this effect.

Nevertheless, unfortunately the Bulgarian changes have already indirectly affected the Romanian market, given that some investors pulled out from the region. These considered that Bulgaria and Romania are closely linked and a similar decision could also be taken in Romania. I will continue asserting that this would be highly unlikely and would encourage investors to keep on relying on the Romanian market."