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VII Kazenergy Eurasian Forum:The legal aspects of forming a single energy market

MARTIN STEWART-SMITH

Partner, Energy Transactions, Morgan Lewis

2 October 2012

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Contents

1. Single Energy Markets

2. Common issues experienced

3. Specific issues experienced in Latin America

4. Specific issues experienced in the EU

5. Drawing on the EU/Latin America Markets

6. Possible Issues specific to a CES Integrated Market

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• Integration of energy markets around the world:

– Europe

• the “third package” for gas and electricity

• access to infrastructure – e.g. UIOLI and rTPA to LNG terminals

• elimination of destination clauses

• the “All Island Electricity Market”

– Asia

• the development of the Central Asia South Asia Regional Electricity Market (CASAREM)

1. Single energy markets – gas and power lead the way?

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• Integration of energy markets around the world:

– Africa

• the West African Power Pool

• Southern African Power Pool

• West African / Chad Cameroon Pipeline

– Latin America

• the SIEPAC project in Central America

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1. Single energy markets – gas and power lead the way?

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• Policy Framework

• Legal Framework• Treaty level intergovernmental agreements under the Vienna

Convention

• Secondary cooperation agreements – for example, regulatory coordination

• Commercial cooperation between national champions / national energy companies

• Infrastructure versus Molecules / Electrons• Infrastructure does not guarantee molecules / electrons will flow

• Inadequate infrastructure or access to it guarantees nothing flows

Key Elements?

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• Temptation to protect national interests rather than pursue common regional interests:

• LatAm – Argentina determined its internal consumption a priority

– Venezuela and “resource nationalism”

• EU – First two legislative packages for gas and electricity failed in providing for non-discriminatory network access

• Effective integration will restrict a state’s freedom in determination of governing rules and policies

• Economic barriers – trade conflicts often due to different pricing policies

• Political barriers – diplomatic conflicts and tensions

2. Common issues experienced

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• Institutional barriers• Lack of, or insufficient authority, of either international (regional) or

national regulatory bodies established to execute and enforce joint decisions / agreements

• Governments reluctant to apply certain resolution/directives, while international (regional) authorities do not have the leverage to force transposition

• Regulatory barriers• National regulatory bodies sometimes contribute to barriers to

integration

• Conflicting regulatory policy objectives

2. Common issues experienced cont.

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• The governing and unification of national laws and regulation is one of the biggest legal issues faced.

– In 2007 34 infringement procedures launched against 20 EU states for violation and non-transposition of EU Directives

– EU Regulation used as they have “direct effect” in national law

• Certain objective pre-conditions, such as existing legal frameworks at the national level impedes compromise

– EU and LatAm experienced significant variation of regulations at national level e.g. concerning prices and pricing policies

– The Cliff Edge Problem

2. Common issues experienced cont.

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• Insufficient infrastructure.

• Need for significant investment – profitability of integration projects remains questionable

• The economies of the states concerned are less amenable to regulatory changes / impact.

3. Specific issues experienced in Latin America

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• Issues relating to unfair competition:

– Issue of transparency

– Long-term gas transmission and downstream contracts often close access to downstream markets

– Access to gas storage facilities, the availability of which is limited and often in the hands of incumbent companies

• Member states slow to implement relevant EU Directives into national law

• The cost of the “national champion”

4. Specific issues experienced in the EU

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• Discriminatory access to networks due to the integration of Transmission System Operators and Supply Companies:

– Non-discriminatory access to information could not be guaranteed and it could not be guaranteed that TSO’s did not release market sensitive information to the supply business

– Original legislation did not remove incentive for discrimination with respect to third party access

– Vertically integrated network operators had no incentive to develop/invest in the network

4. Specific issues experienced in the EU cont.

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• EU – distinct institutional direction – member states play the leading role in integration of initiatives

• Latin America – economies orientated around raw-materials• As both factors common to the CES, its possible to draw on

experiences and proposed solutions.

• Solutions to Technical/Economic solutions

– Attract private sector interest to integration projects

– Formation of joint reservoirs/ reserves (as in LatAm)

– Diversification of resources

5. Drawing on the EU/Latin America Markets

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• Regulatory solutions:

– Creation of a single legislative base/framework

• Both regulations concerning interrelations between member states and relations concerning states not in the integrated market

• This would necessitate the execution of multilateral (involving all member states) rather than bilateral agreements

• 3rd Energy Package of the EU attempts to mitigate the impact of existing barriers via specific mechanisms:

– Non-discriminative access to networks (e.g. through unbundling)

– Harmonisation of the activities of market participants (e.g. The creation of European Networks of TSOs for electricity and gas)

• Harmonisation of the activities of market participants (e.g. The creation of European Networks of TSOs for electricity and gas)

5. Drawing on the EU/Latin America Markets cont.

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– Creation of a single administrative block of regulatory authorities on both international (regional) and national levels.• With powers to implement and enforce a single legal framework and

agreements achieved by the states

• The 3rd Energy Package of the EU provided for the creation of an EU-level regulatory body – Agency for the Cooperation of Energy Regulators

• Functional independence of national regulatory authorities (NRAs), was also ensured by the EU, by granting NRAs power over:– Third party access to networks / Access to gas storage– Balancing mechanisms– Market surveillance– Cross border issues

5. Drawing on the EU/Latin America Markets cont

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• CES specific issues:

– Non-ratification of Energy Charter Treaty by Russia and Belarus

– Outstanding bilateral treaties, between the CES countries will need to be dealt with before effective legal framework can be put in place

– Russia and Kazakhstan are oil/gas producers

– Price of energy in Kazakhstan much lower than that of Russia

6. Possible Issues specific to a CES Integrated Market

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