EU Energy Policy Blog

In fall 2010, France passed a law to reform the organisation of electricity markets and tariffs. There is no doubt that the new Act overlooks some major principles of European energy and competition law. However, it is less clear that it infringes any particular article and could be deemed partly incompatible with the Union Treaty.

The cornerstone of the law on “New Organization of Market in Electricity” (hereafter, NOME) is the setting of a regulated access to the historic nuclear fleet of EDF. EDF’s rivals in electricity supply to final consumers in France would be eligible to tap into electricity generated by EDF’s nuclear power plants at a regulated access tariff. This tariff is set by the government and can only benefit consumers in mainland France. To simplify, suppliers purchasing a volume of, say, 100 MWh of this regulated electricity must prove that their customers located in France consume 100 MWh. The NOME Act is designed so that it is impossible for a company located across the border in Germany or Belgium to enjoy the same conditions of supply as its counterparts in France.

That territorial restriction goes against the construction of the domestic market wanted by European law on energy, and against market integration, one of the aims of European competition law.

The electricity sector was first opened to competition in 1996 with the adoption of the first European directive on energy. The directive not only sought to liberalise the markets, i.e. to promote competition in electricity generation and supply. The long-term objective is to create a broad European market in electricity and gas common to member states. The juxtaposition of national markets, each competitive but relatively independent from one other, is not the ultimate aim pursued. The necessity of integration is reiterated in the Directive of 13 July 2009. Its first article stipulates that the common rules for the businesses of the electricity sector that apply to all member states are established “with a view to improving and integrating [underlining by the author] competitive electricity markets in the Community”. The NOME Act, on the contrary, isolates part of the French electricity market from the European wholesale market. It removes volumes from that market, which had gradually expanded, and increases the volumes bought and sold within a strictly national framework.

Similarly, European competition law does not only seek to protect competition by combating collusive and exclusionary practices. It also seeks to contribute to the establishment of an internal market by combating practices by firms that segment national markets and actions by member states’ aid for national firms that distorts competition at the expense of firms from other member states. The Commission has on several occasions cited competition law to denounce destination clauses in contracts between producers and suppliers. These territorial restrictions, which limit the use of the good purchased, in particular its resale, have been condemned on many occasions in the gas sector (See, for example, the rulings against GDF (Cases COMP/38.662 – GDF/ENI and COMP/38.662 – DF/ENEL, rulings of 26 October 2004). As we shall see, it is uncertain whether the legislation that results in firms in Germany or Belgium being unable to benefit indirectly from the regulated tariff to nuclear baseload can be considered a destination clause or state aid. In spirit, however, the NOME Act definitely disregards the principle of the non-segmentation of markets. It also betrays the principle of free movement of goods within the European Union. However, it is not with any certainty condemnable in terms of export restrictions.

Indeed, the NOME Act does not expressly prohibit the suppliers that buy electricity at the regulated tariff from supplying customers outside France with the volumes they purchase. It simply removes the incentive to do so by adding a surcharge. If they exceed the volume they were allocated on the basis of their portfolio of domestic customers, they will have to pay the difference between the regulated tariff and the market price. This surcharge eliminates the profit on sales to other markets. In fact, it could even dissuade suppliers rather than simply making them indifferent between the two options. The NOME Act stipulates that the surcharge shall be at least equal to the difference between the administered tariff and the market price. The degree of dissuasion for suppliers that exceed their volume will only be known in a few months’ time when the Council of State decree setting forth the method for calculating the surcharge is issued. Moreover, the Act provides for a specific penalty mechanism in the event of abuse of the access right. A supplier that buys a quantity of electricity substantially higher than it needs to supply its French customers can be fined up to 8% of its revenues. In short, there is no explicit destination clause, but the combination of the allocation of volumes based on customers in France, the prior and subsequent verification by the energy regulatory Authority of the allocated volumes, the surcharge and the fine creates a de facto territorial restriction.

Is the NOME Act likely to be invalidated by EU institutions anyway?

From the European Commission, the guardian of the treaties, the risk appears to be fairly limited. The French government has taken pains to inform and communicate in advance with the commissioners in charge of competition and energy. In a letter to Neelie Kroes dated 15 September 2009 (copied to Andris Piebalgs), the French prime minister, François Fillon, explains the system of regulated access and the phasing out of retail tariffs for large consumers. He provides a detailed description of the surcharge mechanism, gives a figure for the ceiling of the accessible volume (namely 100 TWh), and sets out the stages and schedule. The prime minister stresses that the access mechanism would be open without discrimination to all European operators, that it does not prohibit resale and does not limit exports. In her reply, co-signed by the commissioner for energy, Neelie Kroes indicates that the general principles of regulated access seem to comply with EU law and that, in theory, the terms on which retail tariffs for large consumers will be maintained transitionally until 2015 are compatible with the treaty’s provisions on state aid. The Commissioner for Competition nevertheless refrains from giving the French government a blank cheque. She insists several times on the need to respect fully the principles and commitments that the prime minister mentions in his letter and the problems of conformity with EU law that the technical terms of their implementation could raise, particularly with regard to the rules on free movement of goods. According to rumour this prudence is dictated by purely institutional considerations; a political agreement between the French government and the Commission has apparently been reached, ensuring that Brussels will not bring action against France over the NOME Act before the European Court of Justice.

But the European Court of Justice could become involved in other ways. Even if the preceding rumour is true, the risk of a challenge to the mechanism of regulated access to nuclear electricity of the NOME Act is not nil. A supplier that feels it has been underserved in access rights or an electricity-intensive firm that does not benefit from a comparable price to its main rival in France could, of course, lodge a complaint.

In particular, the plaintiffs could claim an infringement of Article 35 or Article 101 of the Treaty on the Functioning of the European Union (TFEU). Article 35 prohibits quantitative restrictions on exports and all measures having equivalent effect. It refers to “all trading rules enacted by member states which are capable of hindering, directly or indirectly, actually or potentially, intra-community trade”. The plaintiff could argue here that the NOME Act creates a de facto clause that restricts exports and therefore infringes Article 35. It should be noted, however, that the Treaty authorises export restrictions for reasons of public order or public security. The French government could claim before the European judge that the surcharge and other factors restricting the resale of electricity are essential to ensure security of supply to consumers in France. If alternative suppliers sell all the electricity they purchase at the ARENH tariff to customers outside France and continuously saturate exports, there may not be enough of the 100 TWH left to meet domestic demand. The argument could prevail because energy security, like the choice of energy mix, comes under national sovereignty.

The plaintiff could also claim an infringement of competition law via Article 101 of the TFEU. Paragraph 1 of the article prohibits agreements which have as their object or effect the distortion of competition within the internal market, in particular through restrictions on resale. The success of such a claim is uncertain, however. Theoretically, the article refers to agreements between undertakings that have willingly entered into a relationship and signed a binding contract. The contracts for the sale of electricity at the regulated tariff signed between the historic monopoly and alternative suppliers are imposed on EDF. In addition, neither of the parties negotiates the tariff – which is set by the minister – or the volume – which is set by the energy regulatory Authority. Case law only deals with settings where the undertakings had freely negotiated and signed agreements from which they could have refrained. Moreover, Paragraph 3 of Article 101 provides for exemptions under certain conditions. A restriction on the resale of electricity purchased at the regulated tariff could meet those conditions since this is essential to the development of competition on the French market, which represents an economic progress that benefits consumers.

The regulated access to EDF’s nuclear fleet set by the NOME Act is supposed to last up to 2025. It might end before if a court ruling states that the letter, not only the spirit, of EC competition law and energy law has been broken.

François Lévêque, Mines ParisTech

P.S This post is a an excerpt from “France’s new Electricity Act: a barrier against the market and the European Union” an EPRG Working Paper (University of Cambridge) that describes and assesses the NOME Act.

This entry was posted on Thursday, November 4th, 2010 at 10:42 am and is filed under Electricity. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.