Technical Report

Title:

Unbundling in Power Industry

By

Name ID. No. Course Lecturer

: Mr.Somchai Homklinkaew : 50-5208-002-4 : Electrical Power System : Dr. Pariya Cumperayot

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Content 1 Introduction ..............................................................................2 2 Definition and necessity...........................................................2 3 Level of Unbundling..................................................................3

3.1 Accounting unbundling........................................................................................4 3.2 Functional Unbundling.........................................................................................7 3.2.1 Management separation..................................................................................7 3.2.2 Effective decision making rights....................................................................7 3.2.3 Compliance program.......................................................................................7 3.3 Legal unbundling...................................................................................................9 3.4 Ownership unbundling........................................................................................10

4 Status in EU and USA.............................................................11

4.1 Status in EU..........................................................................................................11 4.1.1 EU directives..................................................................................................11 4.1.2 Implementation in member countries..........................................................13 4.2 Status in US..........................................................................................................23

5 Problem....................................................................................31
5.1 Merging of supply and generation.....................................................................31 5.2 Multi utility ( gas and electricity)........................................................................32 5.3 Arguments for the different forms of unbundling............................................32 5.3.1 Ensuring effective stewardship of the assets............................................32 5.3.2 The cost of unbundling.................................................................................33 5.3.3 Ownership unbundling and ISO...................................................................33

6 Other aspects..........................................................................34

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6.1 Concentration on national markets....................................................................34

1 Introduction
From the beginning the electrical power industry is vertically integrated utility company. Vertically integrated means it performed all of the functions involved from generation, transmission, distribution and supply electric power to end customer in an area of its responsibility. This vertically integrated company is regulated or owned by government organization. Recently from the 1990s, the policy has changed and the competition has been introduced. In order to support the free competition, the units which are natural monopoly such as transmission and distribution network should be separated from others. The separation of transmission network from generation and distribution network from supply is called unbundling.

G T D S

G1
Unbundle

G2

G3

T D
S 1 S2 S3

Natural monopoly

Vertically Integrate

G = Generation T = Transmission D = Distribution S = Supply

Figure 1 Unbundling of vertically integrated power company

In this report the definition, necessity of unbundling will be presented included the levels of unbundling. The advantage and disadvantage of each level will be also discussed. Next the status of unbundling in Europe and USA will be reported.

2 Definition and necessity

A pre-condition to the successful introduction of competition to electricity generation and electricity supply is that the networks be open to all competing companies on equal and fair terms. The measures to achieve this, usually some form of unbundling, in other words, unbundling is to establish some forms of corporate separation between the network and

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competitive activities. Unbundling is therefore an enabling measure, and has no value unless it allows the creation of a genuinely competitive market that brings net benefits to consumers. If competitive generation markets cannot be achieved, the main justification for unbundling is lost. The transmission system is of most relevance to generating companies with large power stations and suppliers, not final consumers. Only the very largest consumers take their power direct from the transmission network. Relatively small generators of, say 50MW or less, for example, most renewable generators and combined heat and power (CHP) generators feed directly into the distribution (low voltage) network and so the transmission network is also of limited importance to them. Where transmission systems are integrated with other activities in the electricity sector, it is generally with a generation business or an integrated generation/retail business. The need for unbundling arises only if the intention is to make generation a competitive market. If generators are to compete on equal terms, access to the network should be available to all companies on nondiscriminatory terms and at prices that reflect the costs that are actually incurred. The price might vary according to location of the power plant but, all things being equal, should not vary from company to company. Equally, suppliers should be able to source their power from any reasonable source regardless of the ownership of the retailer or the generator they wish to deal with. Some form of unbundling is usually thought to be necessary to achieve this. Unbundling requires that the business that controls the network is separated from the commercial activities, generation and retail to final consumers, in a liberalized electricity system. There are two main potential problems if there is not sufficient distance between the competing firms and the System Operator (the organisation that determines access and conditions of access to the network). First, an integrated company owning the network and commercial activities might deny access to the network or apply unfair terms to generators or suppliers that compete with the generation or supply business of the integrated company. Second, the integrated company might allocate costs more properly attributed to generation or supply to the network business. This would make the apparent costs of their generation or supply businesses artificially low and would give them an unfair advantage in these activities. In order to ensure non-discriminatory access to the network, avoid cross-subsidization and distortion of competition and avoid conflicts of interest it is necessary to separate the network business (natural monopoly) from those activities of a vertically integrated company which compete on the market, namely generation and supply.

3 Level of Unbundling
There are a number of ways that have been suggested to overcome this problem: accounting separation of network activities; functional separate of network activities, legal separation of network activities; ownership unbundling; and separation of operation of the assets from ownership. The level of unbundling can be categorized in four levels as follows:1. Account unbundling 2. Function unbundling 3. Legal unbundling 4. Ownership unbundling

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3.1 Accounting unbundling

This is the most basic form of unbundling and requires that an integrated company keeps separate accounts for its network business. This was the minimum requirement specified in the 1996 Electricity Directive which is the first EU directive regarding the electric market reform. In the second directive 2003/54/EC, there are some requirements for account unbundling (see box) to ensure there will be no cross subsidization between network business and the rest..

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The risk if unbundling is only required on an accounting basis is that it will be possible to allocate costs inappropriately to the advantage of the company. For example, there could be common activities where the costs are shared between the two businesses and these costs could be allocated disproportionately to the network business. If there are activities common to both businesses, this sharing of cost should result in scale economies which would be lost if a more rigorous form of separation was required. Article 19 of Directive 2003/54/EC of the european parliament and of the council
Unbundling of accounts

1. Member States shall take the necessary steps to ensure that the accounts of electricity undertakings are kept in accordance with paragraphs 2 to 3. 2. Electricity undertakings, whatever their system of ownership or legal form, shall draw up, submit to audit and publish their annual accounts in accordance with the rules of national law concerning the annual accounts of limited liability companies adopted pursuant to the Fourth Council Directive 78/660/EC of 25 July 1978 based on Article 44(2)(g) * of the Treaty on the annual accounts of certain types of companies Undertakings which are not legally obliged to publish their annual accounts shall keep a copy of these at the disposal of the public in their head office. 3. Electricity undertakings shall, in their internal accounting, keep separate accounts for each of their transmission and distribution activities as they would be required to do if the activities in question were carried out by separate undertakings, with a view to avoiding discrimination, cross-subsidisation and distortion of competition. They shall also keep accounts, which may be consolidated, for other electricity activities not relating to transmission or distribution. Until 1 July 2007, they shall keep separate accounts for supply activities for eligible customers and supply activities for non-eligible customers. Revenue from ownership of the transmission/distribution system shall be specified in the accounts. Where appropriate, they shall keep consolidated accounts for other, non-electricity/gas activities. The internal accounts shall include a balance sheet and a profit and loss account for each activity. 4. The audit, referred to in paragraph 2 of this Article, shall, in particular, verify that the obligation to avoid discrimination and cross-subsidies referred to in paragraph 3 of this article, is respected.

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3.2 Functional Unbundling

This level of unbundling is to ensure the networks is independence within the vertically integrated undertaking. The network is still in the vertically integrated company but have to be independent in terms of management and decision making from other activities. Sometimes can be called Managerial Unbundling Minimum requirement from Article 15, paragraph 2 of the E- directive 2003/54/EC at least 3 following items shall be fulfilled. 3.2.1 3.2.2 3.2.3 Management separation Effective decision making rights Compliance program

3.2.1 Management separation The provisions of the directive on management separation require firstly that the management staff of the network business do not work at the same time for the supply/production company of the vertically integrated company. This applies to both the top executive management and the operational (middle) management. Thus, for instance, an executive director of the network company may not at the same time be an executive director of the related supply/production company, and vice-versa. It remains however, possible for an executive director of the holding company to perform a supervisory function in the network company, without being involved in day-to-day decisions. To what extent a network director can work at the same time for the holding company, which is not at the same time directly involved in production and/or supply because legally separate entities exist for these branches, must be decided on a case by-case basis. In any case, such double functions can only be permissible if the holding does not take any day-to-day management decisions regarding the supply, production or network branch. An important question in the context of management separation is how to deal with common services, i.e. services which have been - in a non-unbundled world often shared between transmission/distribution, supply and perhaps other businesses. Such services typically include personnel and finance, IT services, accommodation and transport. It might be argued that a requirement to systematically duplicate such common services would significantly increase costs without bringing corresponding additional benefits. It seems appropriate to look at this issue on a case by case basis. If common services are permitted it shall be required in any case that certain conditions are fulfilled, to reduce competition concerns and exclude conflicts of interest: - any cross subsidies being either given to or received by the network business are excluded; the ensure this, the service shall be provided at market conditions, which shall be laid down in a contractual arrangement between the company providing the common service and the beneficiary company - common services shall normally be operated and managed outside the network business i.e. by the related supply company or, even better, a holding company - unless the network is the predominant user.

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Article 15, paragraph 2 of the E- directive 2003/54/EC 2. In addition to the requirements of paragraph 1, where the distribution system operator is part of a vertically integrated undertaking, it shall be independent in terms of its organisation and decision making from the other activities not related to distribution. In order to achieve this, the following minimum criteria shall apply: (a) those persons responsible for the management of the distribution system operator may not participate in company structures of the integrated electricity undertaking responsible, directly or indirectly, for the day-to-day operation of the generation, transmission and supply of electricity; (b) appropriate measures must be taken to ensure that the professional interests of the persons responsible for the management of the distribution system operator are taken into account in a manner that ensures that they are capable of acting independently; (c) The distribution system operator shall have effective decision-making rights, independent from the integrated electricity undertaking, with respect to assets necessary to operate, maintain or develop the network. This should not prevent the existence of appropriate co-ordination mechanisms to ensure that the economic and management supervision rights of the parent company in respect of the return on assets, regulated indirectly according to Art. 23(2) [25(2) G], in a subsidiary are protected. In particular, this shall enable the parent company to approve the annual financial plan, or any equivalent instrument, of the distribution system operator and to set global limits on indebtedness levels of its subsidiary. It shall not permit the parent company to give instructions regarding day-to-day operations, nor with respect to individual decisions concerning the construction or upgrading of distribution lines, that do not exceed the terms of the approved financial plan, or any equivalent instrument. (d) the distribution system operator shall establish a compliance programme, which sets out measures taken to ensure that discriminatory conduct is excluded, and ensure its respect is adequately monitored. The programme shall set out the specific obligations of employees to meet this objective. An annual report, setting out the measures taken, shall be submitted by the person or body responsible for monitoring the compliance programme to the regulatory authority referred to in Article 23(1) [25(1) G] and published. 3.2.2 Effective decision making rights All commercial and operational decisions related to the operation, maintenance and development of the network must be made within the network business, without involvement of the related supply business or holding company of the integrated company. This is of particular importance with regard to areas which may have an impact on competition in the supply market, such as the extension or construction of interconnections with other systems. The network company shall have enough human and physical resources at its disposal to carry out its work independently from other parts of the integrated company. It shall also have sufficient financial means available to fulfil its tasks to maintain and develop the network.

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3.2.3 Compliance program The purpose of a compliance programme is to provide a formal framework for ensuring that the network business as a whole, as well as individual employees and members of the management, comply with the principle of non-discrimination. Three aspects are important in this respect: - Contents of the programme, notably specific obligations of employees to meet the objective of non-discrimination; - Measures to enforce the programme; - Effective monitoring and regular reporting 3.2.4 Preservation of confidentiality Chinese walls The rules on functional unbundling are complemented by the obligation of transmission and distribution operators to preserve the confidentiality of commercially sensitive information (see, for instance, Articles 12 and 16 of the electricity directive). This excludes for instance, that staff working for the supply business have unlimited access to databases containing information which could be commercially advantageous, such as details on actual or potential network users. Whilst this does not necessarily mean the establishment of separate database systems, specific access rights must be clearly defined and limited to be in compliance with the confidentiality rule. 3.2.5 Additional measures to re-enforce functional unbundling It should be noted that the functional unbundling measures contained in the directives are minimum criteria. Member States may thus consider to further complement the minimum set of criteria by further measures, with a view to ensure utmost effectiveness of unbundling under the specific national circumstances, in particular national company law. Such measures may include, for instance, the rebranding of the network business, with a view to enable customers to distinguish it clearly from the supply business of the company. Separate brands would also help reinforce a culture of separation in the minds of staff. Another measure would be to ensure that the network operator and the supply business are located in separate buildings, provided such a measure would be proportionate given the size of the company concerned. Regarding the presentation of the network company on the internet, there should be no link from its home page to the related supply company.

3.3 Legal unbundling

This is a more rigorous form of separation and requires that the network be owned by a company whose only activity is the operation and ownership of the network. This company could however be a subsidiary of a parent company that also owned a company (ies) active in generation or supply. This was the minimum requirement specified in the article 15 E-directive 2003/54/EC. Legal unbundling would mean that the problem of misallocation of costs should not arise because legally separate companies must have separate staffs, premises and procedures. There might still be an issue that since the regulated and unregulated companies were under common ownership, there would still be an incentive from the parent company for the network company

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to treat its sister company in generation or retail better than companies with which it had no ownership connection. Article 15 E-directive 2003/54/EC 1. Where the distribution system operator is part of a vertically integrated undertaking, it shall be independent at least in terms of its legal form, organisation and decision making from other activities not relating to distribution. These rules shall not create an obligation to separate the ownership of assets of the distribution system operator from the vertically integrated undertaking 2. In addition to the requirements of paragraph 1, where the distribution system operator is part of a vertically integrated undertaking, it shall be independent in terms of its organisation and decision making from the other activities not related to distribution. In order to achieve this, the following minimum criteria shall apply: (follow criteria a)-d)) 3.3.1 Combined network operator A question likely to become of significant relevance in practice is whether a combined network operator, i.e. the operation of several networks of a different nature in one single company, would be compatible with legal unbundling. In particular multiutility distribution companies, whilst separating their supply business, might wish to operate their, for instance, electricity, gas and water networks in one single company, in order to benefit from synergies. As regards a combined TSO/DSO for electricity and respectively gas, the directives provide for an exemption from legal unbundling and contain an explicit provision allowing such a combined operation, provided that the accounts are unbundled and that the combined operator is functionally unbundled from other activities of the sector. In contrast, there is no explicit provision on the possibility of a combined network operator involving different sectors. Such a combined multi-sector operator should nevertheless be possible in principle, on the same basis as a combined TSO/DSO. In order to ensure nondiscriminatory access to the network and avoid conflicts of interest it is necessary to separate the network business (natural monopoly) from those activities of the vertically integrated companies in which it competes on the market, namely production and supply. In contrast, the operation of different networks in one company does not bear the same risk of discrimination and conflict of interests, provided that separate accounts are kept to ensure transparency and prevent crosssubsidisation.

3.4 Ownership unbundling

Ownership unbundling requires not only that the network be owned by a separate company, but that this company is not a subsidiary of a company that has interests in generation or retail. It is the most complete form of separation and is the form of unbundling being recommended by both the Energy and Competition Directorates of the Commission in their reports on their 2006 investigations into energy markets. Since there would be no connection between the network company and the competing companies, there would be no reason for the network company not to treat all the companies on the same basis.

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4 Status in EU and USA

4.1 Status in EU
This part will report about the status of restructure in EU. First the EU directives will be explained and then the conclusion of the implement in some countries will be showed. 4.1.1 EU directives First directive, The deregulation of the European electricity sector was launched on 19 December 1996, the date on which Directive 96/92/EC "concerning common rules for the internal market in electricity" was adopted. It entered into force two months later, on 19 February 1997. According to the European Commission, liberalization aims at increasing efficiency, harmonizing and reducing electricity prices, improving public services, cutting reserve production capacities, making a better use of resources, giving customers the right to choose their supplier and providing customers with a better service. Relying on the experiences of the pioneers - the Scandinavian countries and the United Kingdom -Directive 96/92/EC subdivides the electricity sector into four segments: generation, transmission, distribution and supply3. Generation and supply are opened up to competition, whereas transmission and distribution remain monopolistic. The principal requirements of the first Directive are:

Integrated companies must keep separate accounts for transmission, distribution, other electricity-related activities and other (non-electricity-related) activities. This separation of accounts aims at avoiding discrimination, cross-subsidies and distortion of competition; The generation segment should be opened up to competition, either by an authorization procedure and/or by a tendering procedure; Transmission and distribution remain monopolies. Non-discriminatory rules on access to the transmission and distribution networks should be established. Member States can choose between (a) Regulated third party access, (b) Negotiated third party access or (c) The single buyer model. The transmission system should be operated by an independent system operator (the transmission system operator or TSO) responsible for operating, maintaining and developing the network and its interconnections. As in the case of the transmission system, an independent system operator (the distribution system operator or DSO) should be designated to operate and manage the distribution network in its area;

The supply segment is also opened up to competition; "eligible consumers" are free to switch suppliers. Member States can provide their own definition of 'eligible consumer', though they have to meet minimum requirements: by 19 February 1999, 26 % of the total consumption must be eligible; furthermore, companies consuming over 100 GWh per annum are always eligible. By 19 February 2000 this share must be at least 28 %. and

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three years later eligible consumers should represent at least 33 % of total national consumption;

Member States must also designate a competent and independent authority to settle disputes relating to the contracts and negotiations.

In accordance with the principle of subsidiarity, the Directive aims at laying down general principles to establish a framework and leaves their detailed implementation to the Member States, allowing them to choose the regime which corresponds best to their particular situation. The preamble to the Directive clearly states that, following implementation of the Directive, some obstacles to trade in electricity will nevertheless persist, and that, therefore, proposals for improving the operation of the internal market may be made in the light of experience. As such, it did not come as a surprise when the European Council of Lisbon in March 2000 called for faster liberalization in the electricity and gas sectors, in order to achieve a fully operational internal market. The main issues identified concerned access to networks, tariff, market power in electricity production and different degrees of market opening between Member States. Second directive, Directive 2003/54/EC, repealing Directive 96/92/EC, was therefore adopted on 26 June 2003. The main new features provided by this new Directive can be summarized as follows: The timetable for market opening was extended to households. From 1 January 2004 onwards, all non-households must be free to choose their supplier and three years later all consumers should be eligible;

As far as unbundling is concerned, the second Directive requires legal unbundling as well as management unbundling for network operators (i.e. TSOs and DSOs); Non-discriminatory access to the transmission and distribution networks is based on ex ante fixed access tariffs (i.e. regulated third party access); As far as generation is concerned, new capacity should be developed through an authorization procedure. This can be extended by a tendering procedure when security of supply is at risk; Provisions regarding public service obligations (universal service), environmental protection and security of supply are included in the new Directive. Member States' responsibility relating to security of supply can be delegated to the regulator; An extension of the regulator's task (e.g. fixing rules for the use of the interconnection capacity, supervision of network access tariffs, overseeing the level of transparency and competition, etc.). Legal Unbundling Functional Unbundling + + Exemption possible Accounting Unbundling + + +

Table 1: APPLICATION OF UNBUNDLING RULES TO TSOS AND DSOS

TSO DSO above 100.000 customers DSO below 100.000 customers + Exemption possible until 1.july.2007 Exemption possible

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European legislation requires network segments to be legally separated from competitive segments. While the principle of unbundling is simple in theory, it can assume a number of forms, allowing different degrees of independence between the unbundled segments. The first Directive essentially requested a separation of accounts. This was quickly considered to be insufficient, so that the second Directive strengthened the requirements, imposing a legal separation and minimum criteria aimed at ensuring organization and decision-making independence. In most Member States, the TSO (or TSOs in the case of Germany) today is a legally independent unit. In some cases (e.g. the Netherlands, the UK, the Scandinavian countries, Italy, Portugal and Spain), there even is a strict ownership separation between the TSO and the competitive players; in most of these cases this means that the TSO is state-owned. As far as the DSOs are concerned, the situation is more problematic, since only half of the Member States have legally unbundled DSOs. 4.1.2 Implementation in member countries Table 2 lists the TSO(s) in EU member states also see figure 2 for the status of TSO in each country.

Table 2 : European Transmission System Operators

Austria TIWAG-Netz AG Verbund - Austrian Power Grid G VKW-Netz AG Belgium Bosnia Herzegovina Croatia Cyprus Czech Republic Denmark Estonia Finland France Germany Elia System Operator SA Nezavisni operator sustava u Bosni i Hercegovini HEP-Operator prijenosnog sustava d.o.o Transmission System Operator - Cyprus CEPS a.s. Energinet.dk O Phivrk Fingrid OyJ Rseau de Transport dElectricit EnBW Transportnetze AG E.ON Netz GmbH RWE Transportnetz Strom Vattenfall Europe Transmission GmbH Greece Hungary Ireland Hellenic Transmission System Operator S.A. Mavir ZRt.. EirGrid plc.

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Italy Latvia Lithuania Luxembourg Netherlands Norway Poland Portugal Romania Slovak Republic Slovenia Spain Sweden Switzerland United Kingdom

Terna - Rete Elettrica Nazionale SpA AS Augstsprieguma tkls Lietuvos Energija AB Compagnie Grand Ducale d'Electricitu Luxembourg Net S.A TenneT TSO B.V. Statnett SF PSE-Operator S.A.. Rede Electrica Nacional, S.A. Transelectrica S.A. Slovenska elektrizacna prenosova sustava Elektro Slovenija Red Electrica deEspaa S.A. Affrsverket svenska kraftnt swissgrid ag National Grid Electricity Transmission plc System Operation Northern Irland Ltd Scottish & Southern Energy plc SPTransmission plc

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Figure 2 Status of TSO in EU

(source from reference 2)

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Table 3: Overview of the Legal Implementation of the Electricity Directives Country

Germany

Topic
Have the unbundling provisions of the Directives on Electricity been transposed?

Data
Yes

Relevant provision/ source and date

Gesetz ber die Elektrizitts- und Gasversorgung Energiewirtschaftsgesetz(hereinafter: EnWG) Regulation on access to electricity distribution systems (Verordnung ber den Zugang zu Elektrizittsversorgungsnetzen) Regulation on tariffs for access to electricity distribution systems (Verordnung ber die Entgelte fr den Zugang zu Elektrizittsversorgungsnetzen) Bundesnetzagentur Bundesnetzagentur

Number of TSOs Number of DSOs How many DSOs have customers less than 100,000 TSO Unbundling regime

4 900 780

Legal, functional and Accounting Legal, functional and Accounting Yes Yes 780 (circa) Bundesnetzagentur /Landesregulierungsbehrde n Yes Yes

Sections 7, 8, 10 EnWG

DSO Unbundling regime

Sections 7, 8, 10 EnWG

Postponement until 1 July 2007 of legal unbundling for larger DSOs? 100.000 customer exemption [y/n] How many DSOs are excluded [number] The Regulator [name]

Section 7 (3) EnWG Section 7 (2) EnWG Bundesnetzagentur Compare section 55 EnWG

Does the regulator monitor unbundling? Does the regulator have powers to collect information on unbundling in a given company? Does the regulator have the power to require companies to take unbundling measures? Can the regulator impose remedies? [y/n] Have there been any complaints and/or decisions of the regulator on unbundling?

Sections 8 (5), 35 (1) EnWG Section 69 EnWG

Yes

Section 65 EnWG

Yes Not recorded

Sections 30 (2), 35 EnWG

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France Have the unbundling provisions of the Directives on Electricity been transposed? Number of TSOs Number of DSOs How many DSOs have customers less than 100,000 TSO Unbundling regime Yes 2005 Law 2004 Law 2003 Law 2000 Law

1 160/170 155/165

Legal, functional and accounting.

Art. 5 to 10 of the 2004 law. Art. 25 to 27 of the 2000 Law, amended by the 2004 Law. Art. 13 to 15 of the 2004 Law. Art. 25 to 27 of the 2000 Law, amended by the 2004 Law. Art. 13 of the 2004 Law Art. 13 of the 2004 Law

DSO Unbundling regime

Legal (postponed until, probably, 2007) Functional and Accounting. Yes Yes 5 Commission de Rgulation l'Energie (CRE) Yes Yes

Postponement until 1 July 2007 of legal unbundling for larger DSOs? 100.000 customer exemption [y/n] How many DSOs are excluded [number] The Regulator [name] Does the regulator monitor unbundling? Does the regulator have powers to collect information on unbundling in a given company? Does the regulator have the power to require companies to take unbundling measures? Can the regulator impose remedies? [y/n] Have there been any complaints and/or decisions of the regulator on unbundling? Belgium Have the unbundling provisions of the Directives on Electricity been transposed?

Art. 33 and 40 of the 2000 Law.

Yes

Arts. 6 and 15 of the 2004 Law

Yes No

Art. 38 and 40 of the 2000 Law as amended by the 2004 Law

Yes

* law of April 29, 1999, amended by Law of June 1, 2005 * Executive Order of the Flemish Parliament July 17, 2000 * Executive Order of the Walloon Government April 22, 2004 and Governmental Decree of April 21, 2005 * Ordinance of Brussels Parliament of July 19, 2001 amended by Ordinance of April 1, 2004

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Number of TSOs Number of DSOs How many DSOs have customers less than 100,000 TSO Unbundling regime DSO Unbundling regime Postponement until 1 July 2007 of legal unbundling for larger DSOs? 1 27 No difference is made between DSOs with more or less then 100.000 customers Legal and functional, but not ownership Legal and functional, but not ownership No, already done CREG VREG/BIM November 2005 CREG/VREG/BIM

Protocol signed on May 30, 2001 and Ministerial Decree of September 13, 2002. VREG/BIM Executive Order of the Flemish Parliament of July 17, 2000 and Ordinance of July 19,2001 as amended by the Ordinance of the Brussels Parliament of April 1, 2004.

100.000 customer exemption [y/n] How many DSOs are excluded [number] The Regulator [name]

No No, no difference made. CREG VREG CWaPE Brussels-Capital Government advised by BIM/IBGE The federal regulator, CREG, was, amongst others, given the power to approve tariffs of the TSO and the DSO and appoint and supervise the TSO. The laws of June 1, 2005 completed the transposition of the second Directive. The Corporate governance rules included in this law had to push further the liberalisation of the electricity market. Meanwhile the same happened at the regional level. We see the creation of 3 regional regulators, VREG (Flanders), CWaPE (Wallonia) and IBGE-BIM for the Brussels-Capital Region although the latter only has an advisory role. Federal and Regional implementation of first and second Directive Federal and Regional implementation of first and second Directive Federal and Regional implementation of first and second Directive

Does the regulator monitor unbundling? Does the regulator have powers to collect information on unbundling in a given company? Does the regulator have the power to require companies to take unbundling measures? Can the regulator impose remedies? [y/n] Have there been any complaints and/or decisions of the regulator on unbundling?

Yes Yes

Yes

Yes Yes

Federal and Regional implementation of first and second Directive VREG

Since then the Belgian Government has been bestowed with a federal structure, with 1 Federal Government and 3 Regional Governments. Those 4 Governments each received a different level of competence with regards to energy matters. Due to these divisions of responsibilities the Energy Directives needed to be implemented and transposed on both the Federal as well as on the Regional levels.

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UK Have the unbundling provisions of the Directives on Electricity been transposed? Number of TSOs Yes Electricity Act 1989 Utilities Act 2000 Licences (Distribution Licences) BETTA reforms April 2005 establishing NGC as transmission system operator for GB.

Number of DSOs How many DSOs have customers less than 100,000 TSO Unbundling regime

1 TSO operated by NGC but owned by NGC in England and Wales and SP and SSE in Scotland. 14 0

Legal and functional (Ownership in terms of operation) Legal and functional.. No No N/A Ofgem Yes Yes

Ibid; as per Benchmark report 2005. Benchmark report 2005

DSO Unbundling regime Postponement until 1 July 2007 of legal unbundling for larger DSOs? 100.000 customer exemption [y/n] How many DSOs are excluded [number] The Regulator [name] Does the regulator monitor unbundling? Does the regulator have powers to collect information on unbundling in a given company? Does the regulator have the power to require companies to take unbundling measures? Can the regulator impose remedies? [y/n]

Licences and competition law. Licences/competition law

Yes

Licences

Yes; financial penalties for breach of licence conditions. Competition law remedies (civil and criminal). No record

Have there been any complaints and/or decisions of the regulator on unbundling? Spain Have the unbundling provisions of the Directives on Electricity been transposed?

No Based on the concept of distribution of the Directive, the Spanish legislation establishes the separate accounting but does not, however, establish full legal or the functional unbundling for distributors. 1

Act 54/1997 (LSE) Royal Decree 277/2000 Royal Decree 1955/2000

Number of TSOs

Art. 35-38 LSE

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Number of DSOs How many DSOs have customers less than 100,000 TSO Unbundling regime DSO Unbundling regime Postponement until 1 July 2007 of legal unbundling for larger DSOs? 100.000 customer exemption [y/n] How many DSOs are excluded [number] The Regulator [name] Does the regulator monitor unbundling? Does the regulator have powers to collect information on unbundling in a given company? Does the regulator have the power to require companies to take unbundling measures? Can the regulator impose remedies? [y/n] Have there been any complaints and/or decisions of the regulator on unbundling? Austria Have the unbundling provisions of the Directives on Electricity been transposed? Number of TSOs Number of DSOs How many DSOs have customers less than 100,000 TSO Unbundling regime 320 Not available Art 39-43 LSE

Ownership Accounting and partial legal unbundling.. No No N/A CNE (Comisin Nacional de Energa) Yes Yes

14 LSE 14 LSE 14LSE Royal Decree 277/2000

LSH LSH Additional Provision 11 LSH Additional Provision 11

Yes, but limited to what is established by legislation

Yes

LSH Additional Provision 11 i.e. CNE decision march 31, 2005 on TPA conflict

yes

Federal legislator: Yes Provincial legislator: No (apart from Styria and Vienna) 3 133 122

Elektrizittswirtschafts- und organisationsgesetzt (EIWOG). 63/2004 as amended 21.06.2004 Styria: 16/2005 since 17.08.2005 Homepage Energie-Control GmbH Information provided by Energie-Control GmbH Information provided by Energie-Control GmbH 22 ElWOG as amended 21.6.2004

Legal, functional and accounting Legal, functional and Accounting No

DSO Unbundling regime

26 ElWOG as of 21.6.2004 8 ElWOG as of 1.12.1998

Postponement until 1 July 2007 of legal unbundling

Page 21
for larger DSOs? 100.000 customer exemption [y/n] How many DSOs are excluded [number] The Regulator [name]

Yes 122 Energie-Control GmbH and the Energie-Control Commission Yes Yes

26 ElWOG as of 21.06.2004 Information provided by Energie-Control GmbH

Does the regulator monitor unbundling? Does the regulator have powers to collect information on unbundling in a given company? Does the regulator have the power to require companies to take unbundling measures? Can the regulator impose remedies? [y/n] Have there been any complaints and/or decisions of the regulator on unbundling? Netherland Have the unbundling provisions of the Directives on Electricity been transposed?

7 E-RBG since 24.08.2002 10 GWG since 01.10.2002 27 E-RBG since 24.08.2002 10 ElWOG since 01.10.2001

NO

No No

Yes

The Directive was implemented by an amendment to the Electricity Act (Elektriciteitswet 1998). The amendment was published in the Bulletin of Acts and Decrees 2004, no. 328 Art. 10 and 15 of the Directive are implemented in art. 11, 11a and 11b of the Electricity Act. The option mentioned in art. 17 of the Directive has not been implemented. Art. 19 of the Directive is implemented in art. 43 and 86(1) of the Electricity Act

Number of TSOs Number of DSOs How many DSOs have customers less than 100,000 TSO Unbundling regime

1 11 5

Ownership unbundled. The law requires legal, functional and accounting unbundling. Legal, Functional and Accounting

DSO Unbundling regime

Art. 10 and 15 of the Directive are implemented in art. 11, 11a and 11b of the Electricity Act. Art. 19 of the Directive is implemented in art. 43 and 86(1) of the Electricity Act Provisions on legal unbundling: art. 10(3) and 11(1) of the Electricity Act Provisions on functional and financial independence of the grid manager: art. 11, 11b and 12 of the Electricity Act Art. 19 of the Directive is implemented in art. 43 and 86(1) of the Electricity Act

Postponement until 1 July 2007 of legal unbundling for larger DSOs?

No

Page 22
100.000 customer exemption [y/n] How many DSOs are excluded [number] The Regulator [name] Does the regulator monitor unbundling? Does the regulator have powers to collect information on unbundling in a given company? Does the regulator have the power to require companies to take unbundling measures? No 0 Office of Energy Regulation (DTe) Yes Yes Art. 7 of the Electricity Act

Yes

By imposing a binding instruction: art. 5(5) of the Electricity Act By imposing an order: art. 77h of the Electricity Act By imposing a fine: art. 77i of the Electricity Act By imposing a binding instruction: art. 5(5) of the Electricity Act By imposing an order: art. 77h of the Electricity Act By imposing a fine: art. 77i of the Electricity Act Dispute settlement: art. 51 of the Electricity Act

Can the regulator impose remedies? [y/n]

Yes

Have there been any complaints and/or decisions of the regulator on unbundling? Denmark Have the unbundling provisions of the Directives on Electricity been transposed? Number of TSOs Number of DSOs How many DSOs have customers less than 100,000 TSO Unbundling regime DSO Unbundling regime Postponement until 1 July 2007 of legal unbundling for larger DSOs? 100.000 customer exemption [y/n] How many DSOs are excluded [number] The Regulator [name] Does the regulator monitor unbundling?

No

Yes

Act on supply of electricity (1999) as amended (2004) Act on establishment of Energinet.dk

1 115 107 Danish Electricity Supply Statistical Survey 2004 Danish Electricity Supply Statistical Survey 2004

Ownership/Legal, functional and accounting Legal, Functional and Accounting No Yes, but only in relation to the requirement of management separation 107, but only in relation to the requirement of management The Danish Energy Authority and DERA Yes

Page 23
Does the regulator have powers to collect information on unbundling in a given company? Does the regulator have the power to require companies to take unbundling measures? Can the regulator impose remedies? [y/n] Have there been any complaints and/or decisions of the regulator on unbundling? Yes

Yes

Yes No

Source Study on Unbundling of Electricity and Gas Transmission and Distribution System Operators Annexes - Country Overview 1 December 2005 by Gmez-Acebo & Pombo Abogados, S.L.Charles Russell LLP

4.2 Status in US
In the beginning, the federal role in the electric power industry was limited. Under the Federal Power Act of 1935 (FPA), the Federal Government regulated the price of IOUsinterstate sales of wholesale power (e.g., sales of power between utility systems) and the price and terms of use of the interstate transmission system, which was used in these interstate sales of wholesale power. When this act was passed, interstate sales of electricity were limited. Over time utilities became more interconnected via high-voltage transmission networks that were constructed primarily for purposes of reliability but facilitated more robust interstate trade. However, this trade was slow to develop. Entry into these markets by nonutility generators was limited. Until the late 1960s, this system appeared to work reasonably well. Utilities were able to meet increasing demand for electricity at decreasing prices, due to advances in generation technology that increased economies of scale and decreased costs. Several changes during the 1970s created a shift to a more competitive marketplace for wholesale power. Significant improvements in technology allowed smaller generation units to be constructed at lower costs. As a result, lower cost generation sources could reach systems where customers were captive to high cost generators. In addition, these technological advances made it more feasible for generation plants hundreds of miles apart to compete with each other and for nonutility generators to enter the market; physically isolated systems became a thing of the past. The energy crisis, resulted in significantly higher oil prices through the 1970s, adding to inflation. Congress enacted the Public Utility Regulatory Policy Act of 1978 (PURPA)19 as a response to the energy crises of the 1970s. A major goal of PURPA was to promote energy conservation and alternative energy technologies and to reduce oil and gas consumption through use of technology improvements and regulatory reforms. PURPA further created an opportunity for nonutilities to emerge as important electric power producers. PURPA required electric utilities to interconnect with and purchase power from certain cogeneration facilities and small power producers meeting the criteria for a qualifying facility Congress enacted the Energy Policy Act of 1992 (EPACT 92) and amended the FPA and PUHCA to address two major limitations on the development of a competitive generation sector.

Page 24

First, EPACT 92 created a new category of power producers, called exempt wholesale generators (EWGs).A EWG was an entity that directly, or indirectly through one or more affiliates, owned or operated facilities dedicated exclusively to producing electric power for sale in wholesale markets. EWGs were exempted from PUHCA regulations, thus eliminating a major barrier for utility-affiliated and nonaffiliated power producers that wanted to compete to build new nonrate-based power plants. EPACT 92 also expanded FERCs authority to order transmitting utilities to provide transmission service for wholesale power transmission to any electric utility, Federal power marketing agency, or any person generating electric energy in wholesale electricity markets. The amendment provided for orders to be issued on a case by case basis following a hearing if certain protective conditions were met. Though FERC implemented this new authority, it ultimately concluded that procedural limitations limited its reach and a broader remedy was needed to effectively eliminate pervasive undue discrimination in the provision of transmission service. Thus, in April 1996, FERC adopted Order No. 888 in exercise of its statutory obligation under the FPA to remedy undue transmission discrimination to ensure that transmission owners do not use their transmission facility monopoly to unduly discriminate against IPPs and other sellers of electric power in wholesale markets. In Order No. 888, the FERC found that undue discrimination and anticompetitive practices existed in the provision of electric transmission service by public utilities in interstate commerce, and determined that non-discriminatory open access transmission service was one of the most critical components of a successful transition to competitive wholesale electricity markets. Accordingly, FERC required all public utilities that own, control or operate facilities used for transmitting electric energy in interstate commerce to file open access transmission tariffs (OATTs) containing certain non-price terms and conditions and to functionally unbundle wholesale power services from transmission services. To functionally unbundle, a public utility was required to: (1) take wholesale transmission services under the same tariff of general applicability as it offered its customers; (2) state separate rates for wholesale generation, transmission and ancillary services; and (3) rely on the same electronic information network that its transmission customers rely on to obtain information about the utilitys transmission system. Concurrent with the issuance of Order No. 888, FERC issued Order No. 889 that imposed standards of conduct governing communications between the utilitys transmission and wholesale power functions, to prevent the utility from giving its power marketing arm preferential access to transmission information. Order No. 889 requires each public utility that owns, controls, or operates facilities used for the transmission of electric energy in interstate commerce to create or participate in an Open Access Sametime Information System, to provide information regarding available transmission capacity, prices, and other information that will enable transmission service customers to obtain open access non-discriminatory transmission service. FERC, through Order No. 888, also encouraged grid regionalization through the formation of Independent Systems Operator (ISOs). Participating utilities would voluntarily transfer operating control of their transmission facilities to the ISO to ensure independent operation of the transmission grid. The ISO also could achieve coordination, reliability, and efficiency benefits by having regional control of the grid. Participation in an ISO remained voluntary, however, and it only occurred in some areas of the country. It was not implemented in other areas. Together,

Page 25

Order Nos. 888 and 889 serve as the primary federal foundation for providing transmission service and information about the availability of transmission service Beginning in the early 1990s, several states with high electricity prices began to explore opening retail electric service to competition. With retail competition, customers could choose their electric supplier, but the delivery of electricity would still be done by the local distribution utility. Not all state commissions adopted retail competition plans, although most of them considered the merits and implications of competition, deregulation, and industry restructuring. States such as California and those in New England and the mid-Atlantic region, with high electricity rates, were among the most aggressive in adopting retail competition in the hope of making lower rates available to their retail customers. As of July 2000, 24 states and the District of Columbia had enacted legislation or passed regulatory orders to restructure their electric power industries. Two states had legislation or regulatory orders pending, while 16 states had ongoing legislative or regulatory investigations. There were only eight states where no restructuring activities had taken place. Since 2000, however, no additional states have announced plans to implement retail competition programs, and several states that had introduced such programs have delayed, scaled back, or cancelled their programs entirely (see Figure 3 below). The California energy crisis is widely-perceived to have halted interest by states in restructuring retail markets.

Page 26

Figure 3 Status of restructure in each state

(From Energy Information Administration)

Page 27

Table 4: Status of State Electric Industry Restructuring Activity

Timeline as of February 2003
State Legislative Enactment/ Regulatory Order* House Bill 2663 (5/29/98) and Regulatory Settlement Orders Senate Bill 236 (2/20/01) Assembly Bill 1890 (9/23/96) Access for Residential Customers December 1998 Access for Commercial and Industrial Customers December 1998 Full Retail Access for All Customers January 1,2001 Comments

Arizona

Arkansas

October 1,2003

October 1, 2003 March 31,1998

October 1, 2005 March 31,1998

California

March 31,1998

Rescheduled from original start date of October 2002 Initially, retail access was due to start on January 1, 1998, but was delayed until March 31, 1998. On September 20, 2001, the provisions of AB 1890 concerning retail access were suspended.

Connecticut Delaware District of Columbia Illinois

House Bill 5005(4/29/98) House Bill 10 (3/31/99) PSC Order 11796 (9/18/00) House Bill 362 (12/16/97) and Senate Bill 24 (6/30/99)

January 1,2000 October 1,2000 January 1,2001

January 1,2000 October 1,1999 January 1,2001

July 1, 2000 April 1, 2001 January 1,2001

May 1, 2002

October 1,1999

May 1, 2002

HB 362 provides for retail access, but SB 24 extends the effective implementation date.

Maine

Legislative Directive 1804 (5/29/97)

March 1, 2000

March 1, 2000

March 1, 2000

Page 28
Maryland Massachusetts Michigan Senate Bill 300 (4/8/99) House Bill 5117 (11/25/97) Senate Bills 937 and 1253 (6/3/00) and Regulatory Settlement Orders Senate Bill 390 (5/2/97) July 1, 2000 March 1, 1998 January 1,2002 July 1, 2000 March 1, 1998 January 1,2002 July 1, 2002 March 1, 1998 January 1,2002

Montana

July 1, 2004

July 1, 2004

July 1, 2004

Nevada

Assembly Bills 366 (7/16/97), 369 (4/18/01), and 661 (7/17/01)

Not Permitted Under Law

Between April 2002 and June 2002

Mid-2002 for Commercial and Industrial Customers Only

Under SB 390, retail access was to be fully implemented by July 1, 2002. It has since been rescheduled until July 1, 2004. AB 369 suspended the provisions of AB 366 indefintely for residential customers, and AB 661 allowed large commercial and industrial consumer access in mid2002. There were legal impediments which delayed the process.

New Hampshire

House Bill 1392 (5/21/96), PUC Orders (2/28/97), Senate Bill 472 (5/17/00), PUC Orders (9/8/00) Assembly Bill 10/Senate Bill 5 (2/9/99) and BPU Order (7/7/99) Senate Bill 428 (4/8/99) and Senate Bill 266 (3/8/01)

July 1, 1998 to May 1, 2001

July 1, 1998 to May 1, 2001

May 1, 2001

New Jersey

November 14, 1999

November 14, 1999

November 14, 1999

New Mexico

January 1,2007

July 1, 2008

July 1, 2008

Procedural issues delayed implementation from the original start date of August 1, 1999. SB 266 delayed the provisions of SB 428 until January 1, 2007 and July

Page 29
1,2008. Implementation varies for each investor-owned utility. SB 440 delays the provisions of SB 500 indefinitely. Under SB 500, retail access would have begun on July 1,2002. HB 3633 delayed the provisions of SB 1149 and the PUC order implementing retail access from October 1, 2001 until March 1, 2002. Subject to some reservations.

New York

PSC Order (5/20/96) Senate Bill 3 (7/6/99) Senate Bill 500 (4/25/97) and Senate Bill 440 (5/22/01)

May 1, 1998 to July 1, 2001 January 1,2001 Implementation Delayed Indefinitely

May 1, 1998 to July 1, 2001 January 1, 2001 Implementation Delayed Indefinitely

July 1, 2001

Ohio Oklahoma

January 1, 2001 Implementation Delayed Indefinitely

Oregon

Senate Bill 1149 (7/23/99) and PUC Order (8/29/00) and House Bill 3633 (6/21/01)

Not Permitted Under Law

March 1, 2002

March 1, 2002 for Commercial and Industrial Customers Only

Pennsylvania Rhode Island Texas

House Bill 1509 (12/3/96) House Bill 8124 (8/7/96) Senate Bill7 (5/27/99)

January 1,1999 July 1, 1997 July 31, 2001

January 1,1999 July 1, 1997 July 31, 2001

January 1,2000 January 1,1998 January 1, 2002 The pilot program was delayed from its original start date of June 1, 2001 to allow the Electric Reliability Council of Texas time to complete its operational procedures

Virginia West Virginia

Senate Bil l 1269 (7/1/99) House Bill 4277 (3/14/98) and PSC Plan (12/20/99)

January 1,2002 January 1, 2004 The West Virginia Legislature has not passed necessary legislation to

January 1,2002 January 1, 2004 The West Virginia Legislature has not passed necessary legislation to

January 1, 2004 The West Virginia Legislature has not passed necessary legislation to HB 4277 authorized the PSC to submit a plan for the legislature's approval.

Page 30
implement retail access implement retail access implement retail access However, the PSC plan has not been enacted pending resolution of tax issues affecting the electric utility industry.

In response to continuing complaints of discrimination and lack of transmission availability and in the wake of an expanding competitive power industry, in December 1999, FERC issued Order No. 2000. This order recognized that Order No. 888 set the foundation upon which to attain competitive electric markets, but did not eliminate the potential to engage in undue discrimination and preference in the provision of transmission service. Thus, FERC concluded that regional transmission organizations (RTOs) could eliminate transmission rate pancaking, increase region-wide reliability, and eliminate any residual discrimination in transmission services that can occur when the operation of the transmission system remains in the control of a vertically integrated utility. Accordingly, FERC encouraged the voluntary formation of RTOs. RTOs are entities set up in response to FERC Order Nos. 888 and 2000 encouraging utilities to voluntarily enter into arrangements to operate and plan regional transmission systems on a nondiscriminatory open access basis. RTOs are independent entities that control and operate regional electric transmission grids for the purpose of promoting efficiency and reliability in the operation and planning of the transmission grid and for ensuring non-discrimination in the provision of electric transmission services. FERC has approved RTOs or ISOs in several regions of the country including the PJM, New York ISO (NYISO), ISO-New England (ISO-NE), California (CAISO), Electric Reliability Council of Texas (ERCOT), the Midwest (MISO) and the Southwest Power Pool (SPP), as shown in Figure 3 below. In most cases, RTOs have assumed responsibility to calculate the amount of available transfer capability (ATC) for wholesale trades across the footprint of the RTO. RTOs also are responsible for regional planning, at least for facilities necessary for reliability above a certain voltage. As of 2004, all of the RTOs in operation coordinate dispatch of the generators in their systems and provide transmission services under a single RTO open access tariff. In addition, RTOs operate regional organized energy markets, including a short-term market which prices energy, congestion, and losses. RTOs in the East all offer day-ahead and real-time markets, while California and Texas offer real-time market alone. Further, all RTOs in current operation use or plan to use some form of locational pricing and have independent market monitors.

Page 31

Figure 4 ISO/RTO map

5 Problem
5.1 Merging of supply and generation
For the competitive segments - generation and supply - a strict separation between the two activities is not required by the Directive. In fact, the main development over the past couple of years is the substantial wave of acquisitions and mergers that took place throughout Europe. By reinforcing their positions on both the generation and the supply markets, companies hope to be sheltered from market-risk exposure, credit risks and low market liquidity. Suppliers have to buy power at uncertain and volatile prices. At the same time, they often have more or less fixed price contracts with their customers. One way to eliminate the associated price risk is by (re-) integrating with a power producer. Doing so provides the producer with a guaranteed output, implying mutual gains. These re-integration movements reduce risk, and as such might have a positive impact on costs and prices (and as a consequence they are beneficial to consumers). On the other hand there might be a potential for (abuse of) market power. Therefore integration of a producer with a supplier often required the producer to sell so-called Virtual Power Plants or VPPs. In Belgium, for instance, Electrabel was obliged to auction off 1,200 MW of VPPs in exchange for its subsidiary, Electrabel Customer Services, being granted default supplier status. In France, EDF must auction off 6,000 MW in exchange for acquiring joint control in the German energy company EnBW. In the Netherlands Nuon was asked to auction off 900 MW of VPPs after having taken over Reliant's generation capacity. The efficiency of the use of VPP depends on the context.

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5.2 Multi utility ( gas and electricity)

For the sake of completeness it should also be mentioned that, due to increased (future) use of gas for power generation, there is also potential for mutual gains from vertical integration between gas and electricity sectors. The production of electricity within such an integrated company reduces the risk associated with the volatility of the primary fuel prices; this volatility is expected to increase in the future. The gas supplier, on the other hand, is guaranteed a future sales volume and reduces the risk of his massive investment costs. In addition, possibilities for price arbitrage are created; the gas can be sold on the spot market or used for electricity generation depending on the most advantageous commodity price.

5.3 Arguments for the different forms of unbundling

If the only criterion was ensuring non-discriminatory access to the network, ownership unbundling would be the preferred option as it offers the greatest assurance of nondiscriminatory access to the networks. However, there are other important considerations including: Ensuring effective stewardship of the assets on a long-term basis; The potential one-off and continuing cost of unbundling; 5.3.1 Ensuring effective stewardship of the assets Ownership of the transmission network has, in the past, always been in the hands of the dominant generation company for the region or the nation for which the franchise company has its territory. Such companies almost invariably operated as single mission companies in their given territory. This arrangement gives the company a very strong incentive to maintain a transmission system to the highest standards with a long-term time horizon. Any weakness in the system will expose the companys customers (final consumers for a fully integrated company or distribution companies for partly integrated companies) to poor service, which will damage their reputation and will ultimately put in jeopardy the companys right to serve their given territory. The break-up of integrated companies means that the link between company and consumers is much weakened and also that the nature of the companies involved in network management will change. Where ownership unbundling has occurred, the traditional companies have tended to opt to divest their network activities and choose to concentrate on their generation/supply activities. The companies involved in electricity have also expanded their scale and scope, moving into new territories and new activities. For example, companies like E.ON and EDF now have interests in markets across Europe as well as their traditional home bases. This may increasingly apply to network companies if they follow National Grid Transcos example. National Grid Transco, the electricity transmission company for England & Wales now operates much of the electricity transmission network in New England and has taken over ownership of most of the British gas transmission and distribution network. These changes in corporate policy mean that assets in the electricity industry have become much more mobile. In liberalized countries such as the UK, some distribution assets have changed ownership several times in the past decade, but transmission assets have not yet been regularly bought and sold. This raises two important questions: if traditional utilities are not allowed to own networks, what sort of company will take

Page 33

up the ownership of the networks; and what measures are possible to ensure the safe long term stewardship of the assets? There is little evidence yet on what type of company will move into the transmission sector. The longer established independent electricity transmission companies, e.g., National Grid (UK) and RED (Spain) have not yet been subject to takeover bids, but there is no reason to assume this will not happen. Some countries have chosen not to take the risk that transmission networks might fall into the hands of companies that will exploit the assets to the detriment of service by taking (or retaining) the transmission sector into public ownership. For example, in the Nordic countries, unbundled transmission companies are nationally owned. The mobility of assets raises the fear that assets will be sweated by owners with short-term time-horizons and sold on before the extent of their neglect is apparent. This is a particular problem for electricity because adverse trends in network performance are difficult to detect and when the neglect is apparent, the cost of remedying the problem may be disproportionately high. 5.3.2 The cost of unbundling Legal and ownership unbundling will inevitably have initial costs and may well have ongoing costs. The initial costs will be the cost of setting up a new company, including the recruitment of a new management team, setting up of headquarters and creation of new operating systems where these were previously shared with a generation or retail business. There may be ongoing costs from loss of scale economies. If the company is relatively small compared to the previous arrangement there may be other costs. For example, the cost of capital might be higher for a small company, a small company might be less effective in carrying out the necessary training and might have less scope to carry out R&D. This would be particularly the case for the transmission systems of small countries and for small distribution networks. 5.3.3 Ownership unbundling and ISO Since the potential for discrimination will always exist where a vertically integrated company undertakes both competitive and monopolistic businesses, the preferred market structure is ownership unbundling where the network assets are owned by a regulated company performing all of the network activities and with no interests in the competitive markets of production, generation, shipping or supply. The defining element of an ownership unbundling model is that the network is operated and owned by one independent company, which clarifies the incentives, responsibilities and liabilities for the network. Regulatory oversight will still be necessary for an independent network operator as it remains a monopoly. For instance, rules might be needed to prevent companies active in other parts of the value chain (inside and outside the EU) owning shares in the network operator, from exerting undue influence on the network operator and thereby compromising its independence; and rules governing the relations between the management of the network operator and such businesses. However, these rules would not need to be as prescriptive as in other models since the incentive to discriminate would be removed by the structural separation. The ISO model separates at least the ownership of assets, which stay with the vertically integrated company, from a varying scope of operational tasks of the former network company.

Page 34

The ISO models are therefore in between ownership unbundling and the present separation model or model of legal unbundling. This distinction follows the technical logic from long term to short term decisions and actions. This should not lead to the erroneous conclusion that short term actions have higher potential for discrimination and are therefore attached to the ISO in all models. It is therefore possible that an alternative separation of tasks between the TO (transmission asset owner) and the ISO might reduce potential discrimination and at the same time allocate real time operation to the TO. Fear of reducing the credit rating of integrated companies is sometimes cited as the main argument for ISO models. The obvious reasoning is that selling assets reduces the capital basis of the company or more specifically reduces the share of low risk capital. However this argument is not straightforward as the vertically-integrated company might use the monopoly assets to crosssubsidizes the competitive business; in any event the credit rating will in the medium term depend on the alternative use of the liquid assets received. So any investment in assets of a similar risk profile should not change the rating. Still an obligation to establish an ISO is less intrusive as companies do not have to be forced to sell their assets, so the principle of the protection of the right to property is respected. From a regulatory perspective only, however, the principle of an inherent incompatibility is introduced, i.e. between the ownership of essential facilities such as grid assets and the implementation of specific operational tasks. Therefore the distinction between an ISO and ownership unbundling is essentially restricted to who owns the assets and pays to develop them. The ISO model, however, adds to ownership unbundling the risk of conflicts arising as regards investing and sharing the profits resulting from transmission activity between the operator and the owner of the assets, without any benefits for the network users. The implementation of an ISO model will need strong regulatory oversight in order to reach the objective of a non-discriminatory network operation. The regulators will have to be involved in the control and approval of complex processes, e.g. contracts, dispute settlements, etc. at the micro level of the ISO and TO.

6 Other aspects
6.1 Concentration on national markets
Due to the limited interconnection capacities, the relevant market is sometimes defined as the national market, and concentration measures are often computed with respect to the size of the domestic market. It is questionable whether this is in line with the creation of a single European market. Market shares within the national (generation) markets are shown in table 4. All in all, the share of the biggest producer remains quite high, with peaks at 85 %. in Belgium and France. As regards the top 3 producers, their cumulative share exceeds 60 %. in most countries, with the exception of the United Kingdom and the Nordic countries (considered as a whole). The benchmarking report from the European Commission (2003b, 2005b) emphasizes that the electricity market in many Member States is dominated by one or two companies. This lack of competition would be less important if national markets were really integrated into a single European market. But the scope for cross-border trade is still inadequate for most European countries (see below). These findings should be linked to market size and efficient plant scale

Page 35

implying that for instance the 85 %. of the largest producer's market share for Belgium and for France should be seen in relation to the size of the Belgian and the French market..

TABLE 5 Generation market structure

Largest producer share by capacity (percent) Austria Belgium France Germany Italy Spain United Kingdom The Netherlands Denmark, Finland, Sweden and Norway Top 3 producers cumulative share by capacity (percent)

45 85 85 30 55 40 20 25 15

75 95 95 70 75 80 40 65 40

As regards the interconnections issue, the European Commission has recently emphasized the importance of developing regional markets as a necessary intermediate stage on the road to a European market. These regional markets would be composed of Member States with a reasonably good level of interconnection; in the Commissions view, these markets include the Iberian market (Portugal and Spain), the West European market (Austria, Belgium, France, Germany, Switzerland and the Netherlands), the Italian market and the Nordic market (Denmark, Finland, Norway and Sweden). The Commission expects these markets to develop a more harmonized regulatory approach, in particular as to the degree of market opening, the setting of transmission tariffs or congestion management. The Commission leaves the initiative to the Member States and expects the regional markets to develop "organically" through cooperation between institutions in neighboring countries
Reference

1. "The Single European Electricity Market: A Long Road to Convergence" by F. Coppens and D. 2. Unbundling of Electricity Transmission Networks: Analysis of The European Commissions 3. The Unbundling Regime: Note of DG Energy & Transport on Directives 2003/54/EC and 4. 5. 6. 7. 8. 9.
2003/55/EC on The Internal Market in Electricity And Natural Gas by European Commission Unbundlingand Independent System Operators: Key Issues Workshop BNetzA Bonn, April 12, 2007 by Gert Brunekreeft Status of State Electric Industry Restructuring Activity from Energy Information Administration. Electric Market Overview July 2007 by FERC Report to Congress on Competition in The Wholesale and Retail Markets for Electric Energy by The Electric Energy Market Competition Task Force Study on Unbundling of Electricity and Gas Transmission and Distribution System Operators Annexes - Country Overview 1 December 2005 by Gmez-Acebo & Pombo Abogados, S.L.Charles Russell LLP 3rd Legislative Package Input Paper 1: Unbundling An ERGEG public document Ref: C07SER-13-06-1-PD 5 June 2007 Position by Steve Thomas Vivet, Document series, May 2006.

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