Levelling the playing field – but does Brussels agree?

A little known provision contained in the EU’s internal energy market directives requiring Commission approval for ‘level playing field measures’ could prove to be a headache for policy makers looking to correct perceived imbalances between incumbent energy players and new entrants.

27 February 2014

A little known provision contained in the EU’s internal energy market directives requiring Commission approval for ‘level playing field measures’ could prove to be a headache for policy makers looking to correct perceived imbalances between incumbent energy players and new entrants.

Establishing or maintaining a ‘level playing field’ is a common objective in the field of utility regulation, notably in the energy context where regulators often look to address perceived inequalities between incumbents and new entrants by putting in place measures designed to neutralise barriers to entry or competitive advantages, e.g., resulting from structural features such as vertical integration.

In their June 2013 announcement, ‘Opening Up Electricity Market to Effective Competition’, for instance, Ofgem (the GB energy regulator), published proposals, “that will give independent energy suppliers a more level playing field to compete against their larger rivals”, involving new obligations on how larger players trade in the energy wholesale market.

Measures such as these are subject to challenge if they fail to comply with EU (and domestic) rules on, e.g., proportionality, non-discrimination and transparency, but it is generally understood that, unless they involve the grant of ‘state aid’ (in essence, financial support from state resources), they may be implemented without any prior clearance from the EU Commission.  It may however be worth revisiting this understanding in light of a little known provision in EU energy law.

The ‘level playing field’ clause

Article 43 of the Internal Market in Electricity Directive (Directive 2009/72/EC) (IMED), entitled ‘Level Playing Field’, provides as follows:

  1. “Measures that the Member States may take pursuant to this Directive in order to ensure a level playing field shall be compatible with the Treaty, notably Article 30 thereof, and with Community law.
  2. The measures referred to in paragraph 1 shall be proportionate, non-discriminatory and transparent. Those measures may be put into effect only following the notification to and approval by the Commission.
  3. The Commission shall act on the notification referred to in paragraph 2 within two months of the receipt of the notification. That period shall begin on the day following receipt of the complete information. In the event that the Commission has not acted within that two-month period, it shall be deemed not to have raised objections to the notified measures”.

This provision (also contained in article 47 of the sister directive on the internal market in gas (Directive 2009/73/EC)) came into force in September 2009 along with the rest of IMED, is binding on all Member States and would appear to be ‘directly effective’ in the sense of creating rights and obligations which are enforceable by national courts within each Member State.

Context for the clause

The concept of ‘level playing field’ introduced by article 43 appears to have its origins in the preamble to IMED in which the expression appears in two places: first, recital (7) which states:

“The Communication of the Commission of 10 January 2007 entitled ‘An Energy Policy for Europe’ highlighted the importance of completing the internal market in electricity and of creating a level playing field for all electricity undertakings established in the Community. The Communications of the Commission of 10 January 2007 entitled ‘Prospects for the internal gas and electricity market’ and ‘Inquiry pursuant to Article 17 of Regulation (EC) No 1/2003 into the European gas and electricity sectors (Final Report)’ showed that the present rules and measures do not provide the necessary framework for achieving the objective of a well-functioning internal market”; 

and recital (22) which states:

“Under this Directive different types of market organisation will exist in the internal market in electricity. The measures that Member States could take in order to ensure a level playing field should be based on overriding requirements of general interest. The Commission should be consulted on the compatibility of the measures with the Treaty and Community law”.
Article 43 is a provision which did not appear in the European Commission’s legislative proposal for IMED but which was inserted by the EU Council as part of the co-decision procedure.  In its statement of reasons accompanying the insertion of the provision into the legislative text the Council appears to have linked article 43 to the availability of different ‘unbundling’ models for electricity transmission ownership and operation under IMED. This linkage also appears to have been a factor in the Commission’s acceptance of the amending text .

Meaning and scope

So what sorts of measure are caught by article 43?   First, it might be argued that the reference to measures taken ‘pursuant to’ IMED limits article 43 only to measures explicitly authorised or envisaged by IMED and not, e.g., resulting from national energy policy. It is not clear however that such a narrow interpretation would be appropriate, not least because the dividing line between EU energy policy as reflected in IMED and national energy policy is actually very difficult to navigate. Second, what falls within the concept of ‘level playing field’ measures?  Whilst the political context mentioned above offers a basis to argue that article 43 was intended to apply only to measures concerned with ensuring a level playing field between vertically integrated undertakings (in the sense of those with interests in both transmission assets and production/supply assets) and other energy undertakings, it is by no means obvious that this is how it would be interpreted in practice.

Thus, it is quite possible that article 43 could be found to national regulatory measures of the sort described earlier in this article.

Legal implications and risks

Article 43 is designed to prevent level playing field measures which may be inconsistent with EU Treaty rules on free movement or other aspects of EU law having to be dismantled after they have been implemented by requiring them to be notified to and approved by the Commission before they come into effect.

Article 43 also contains an important safeguard for Member States who have notified their level playing field measures for approval, i.e., unless the Commission ‘acts’ within two months of notification the measure is deemed to have been approved. Notwithstanding the deemed approval provision, one can envisage that Member States may well be reluctant to tempt fate by presenting the Commission with an opportunity to second guess national policy choices and that, therefore, Member States could well be tempted to ignore the notification requirement.  

However, the dilemma (or headache) that Member States face in this respect lies in the fairly devastating legal consequences which flow from a failure to notify a measure falling within the scope of article 43.

It is reasonably clear that, as a matter of EU law, a measure which falls within the scope of a mandatory notification and standstill requirement such as article 43 and which is not notified in accordance with that requirement is rendered inapplicable and, as a consequence, cannot be enforced in national legal proceedings (see, e.g., Criminal Proceedings against Schwibbert (Case C-20/05)).  Thus, where a level playing field measure is not notified under article 43, any person facing enforcement action for breaching the measure in question would be entitled to raise non-notification as an absolute defence to such proceedings.

Faced with a risk of this sort, notification (however unpalatable that might seem) could well be the lesser of two evils for Member States.