The Energy Package:– The New Regulatory Framework for Europe

International Energy Conference, 12 March 2008

David HalldearnSenior Advisor European Affairs

OFGEM

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Why do we need a 3rd package?

How to achieve ‘security, sustainability and competitiveness’?

Concerns on energy security – Ukraine gas issue 2006; 2003 and 2006 electricity blackouts

Sustainability – climate change concerns now a central driver

Competitiveness – no single market despite 2000 Lisbon agenda. Sector Inquiry finds ‘market is not working’

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Sector Inquiry Findings

Findings:

Vertical integration

Lack of market integration (‘regulatory gap’)

High market concentration

Lack of transparency

Possible market sharing/collusion

Remedies:

Greater use of competition enforcement powers

Improved regulatory framework: Unbundling Filling regulatory gaps Improved transparency Addressing market concentration

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What is the ‘regulatory gap’?

Despite developing regional markets and current EU legislation, existing national markets, and market designs, create a “regulatory gap”

National regulatory systems foster investment and fair trade: Regulatory certainty over the rules for investment and cost

recovery Strong independent regulators to oversee the market

These essential things do not exist for cross border investments

And many regulators do not have the necessary tools to do the job

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Lessons learned from national experience

Well-designed, competitive markets backed by strong and independent regulation will deliver efficient investment

GB facts:

• Markets investing over £10 bn in new gas import and storage capacity• 300-400,000 consumers “switch” every month, leading to some of the lowest domestic prices in Europe• 12GW of renewables generation are under proposal

Experience shows competitive markets can meet the challenges of:

•Security of supply: Increased investment in diverse sources•Competitiveness: Consumer power driving down prices•Sustainability: The efficient transition to a low carbon economy

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How will the 3rd package fill the regulatory gap?

Subsidiarity: - Build on national frameworks, don’t over- harmonise- EU rules only need to “fill the gap”

Accountability- Defined public interest objectivesto protect consumer interests

Regulatory oversight- Political independence- Predictable, enforceable decision-making- Build on NRAs

Co-operation-TSOs to act together and share information where appropriate- Risk of cartels: Unbundling essential

Starting point for an EU regulatory framework:

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Implications of Commission proposals

Political interference Stable climate for cross-border investment

Uncertainty leading to less investment / increased costs to consumers

Scope EU framework to complement national regimes and “fill the gap”

Confusion in national decision-making

Regulatory oversight EU regulatory agency oversees consumers interests

Cartelisation of TSOs

Issue If got right? If got wrong?

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How does the Third Package Measure Up?

Requirement Agency National Regulators

Independence Improvements needed Good

Powers Improvements needed Good

Duties Good Good

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Conclusion

• 3rd package is a good basis to address the regulatory gap

• Issues remain:

Unbundling is key

Will Regulatory Agency’s powers and independence be sufficient?

What will be the role of TSOs?

• Competition law will play an important part

• Action in the interim is needed – we can’t wait for legislation!

Thank you

David Halldearn