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The final version of this paper will be published in 2003 Journal of Energy and Natural Resources Law, Volume 21-1.
The Gas Directive: Third party transportation rights - But to what pipeline volumes?
by Ketil Bøe Moen
Third party access is the key instrument by which competition shall increase in the European gas markets. But what pipeline volumes are available for third party transportation rights? The answer to this question represents the core of third party access by balancing the burdens put on the pipeline owner and the rights conferred on third parties. The subject is analysed on the basis of both the present Gas Directive and the proposals for and amended Directive currently discussed by the Council of the European Union.
I Introduction: The Gas Directive and third party access
1 Third party access and lack of capacity
Creating a "competitive market in natural gas" is the main objective pursued by the Gas Directive. The major instrument is third party access (TPA), giving natural gas suppliers and customers the right to have their gas transported through pipelines that they do not own or control. A prerequisite for increased competition through third party access is available pipeline capacity. But what capacities are the pipeline companies obliged to make accessible? This is an essential aspect of third party access and the subject of this article. The answer to this basic question represents the actual borderline between the right of third parties to make use of the existing facilities, and thereby increase competition, and the freedom of the pipeline companies to refuse access, thus restricting competition, at least on a short-term basis.
The main feature of third party access is an obligation on the pipeline owner or operator to carry out a transportation service for third party shippers. This duty to contract and to perform corresponds with a right of access for both gas suppliers and gas purchasers. Being able to make use of the existing infrastructure, suppliers can sell gas directly to customers to which they themselves are not connected. This enlarges the market for each gas supplier and opens up for gas-to-gas competition, exposing, inter alia, the pipeline company's own supply division to competition. From the end users' perspective, TPA establishes a right to choose the supplier of gas.
Third party access implies a regulation of the market for gas transportation. The goal of the Gas Directive, however, is increased gas-to-gas competition, i.e. increased competition among gas suppliers. This regulative technique is mainly due to two fundamental economic and structural aspects of the European gas sector that have led to limited competition in the European gas sales markets.
The first important aspect is that pipeline transportation of gas constitutes what is commonly referred to as a natural monopoly. The costs of establishing the necessary infrastructure are high, and the operational costs are low compared to these fixed costs (capital costs). Consequently, economies of scale make the establishment of a competing gas pipeline financially difficult or impossible; it is less costly to satisfy demand with one rather than two or more firms operating in the market. Furthermore, duplication may be undesirable from society's perspective due to environmental concerns.
Natural gas transportation is not a monopoly per se. There might occasionally be a realistic possibility of a competing pipeline being established, but this probably applies on the transmission level only, as opposed to the distribution level. The Directive abolishes exclusive rights to construct pipelines by requiring new infrastructure to be established on non-discriminatory conditions (Art. 4) and by enabling the establishment of pipelines directly from a natural gas undertaking to an eligible customer (Art. 20). Wälde and Gunst argue that the right to build new facilities will only be helpful "in exceptional cases".
The second important aspect of the European gas sector is that transportation of natural gas traditionally has been regarded as an integrated part of gas sales activities. The large gas companies have transported gas to their customers through their own pipelines as part of their gas sales agreement. This has made it possible to monopolize, de facto, the gas sales market as well.
On this background, control over the transportation facilities has been crucial. Whoever needs gas has seldom had any choice other than buying from the owner of the pipeline to which he is connected. The end user has been bound to his local distribution company, which, in turn, has been forced to buy gas from the connected transmission company. Similarly, gas producers have had limited opportunity for selling gas other than to the transmission companies. By regulating the natural monopoly - the transport market - through the system of TPA, the intention is to break up this static pattern and thereby increase competition in the neighbouring gas sales market.
Understanding the regulation of TPA requires a thorough legal analysis of the Directive. The extent to which third parties may be denied access is an important part of this analysis, and legal issues related to denial due to lack of pipeline capacity, cf. Arts. 17(1) and 23(2), are, for several reasons, of special practical significance.
First, access to transportation capacity is an absolute necessity in increasing gas-to-gas competition, and capacity scarcity is expected to increase, especially regarding interconnectors between the network systems of different Members States. This is due to an expected dramatic increase in natural gas consumption. The share of natural gas in the EU's primary energy supply was 24 % in 2000, a figure expected to increase to 40 % by 2020.
Second, most Member States copy, more or less directly, the text of the Directive when implementing capacity regulation. National rules, which are the legal basis for the rights and obligations of the market players, must therefore be interpreted in conformity with the Directive provisions. By interpreting the Gas Directive, we thus find the rules that in most cases actually determine the relationship between the market players across the EU and the EEA. Contrary to several other aspects of the regulation in the Directive, this makes a detailed analysis of the capacity-related provisions important from a practical point of view, and not mainly as a theoretical exercise.
Considerable discretion has been awarded the Member States in implementing the TPA system in their national legislation. For instance, they may limit the introduction of competition by opening the market for third party gas intended at large-consuming end users only (the so-called eligible customers, cf. Art. 18). However, all but two Member States (France and Denmark) have chosen to exceed the minimum solution of the Directive, and a detailed analysis of the minimum requirements for eligibility is thus of minor practical importance for most market players. Similarly, only two countries (Germany and Austria) opted for a model of negotiated access to both distribution and transmission, i.e. that most terms and conditions for access are fixed through negotiations between the involved companies. Other Member States have chosen regulated conditions, often fixed or approved by the authorities, or a combination of regulation and negotiation.
France, however, is yet to adopt the proposed national legislation, and Germany has only partially implemented the Directive. As a result, the Commission has initiated enforcement actions before the European Court of Justice (ECJ) against France and Germany according to Art. 226 of the EC Treaty. The Norwegian Parliament has recently accepted the Directive as a part of the EEA Agreement and has adopted a short framework law to implement the Directive. The legislation is expected to enter into force this autumn together with supplementing regulations.
A third reason for focusing on capacity issues is the dynamic character of the community regulation. Today's legal regime is an intermediate stage on the way towards a more fully competitive gas market. In June 2002, the Commission launched an amended proposal for a Directive amending the Gas and Electricity Directives, taking into consideration comments from the European Council and from the European Parliament. Important amendments, reducing the national discretion by accelerating the liberalization process, are thus soon expected to make parts of the present Directive text outdated. Capacity issues are, however, only to a limited extent affected by these changes.
Three of the proposed amendments are worth mentioning here. First, the market opening shall include all customers as from 2005, whereas the present Directive only requires a market opening of 33 % by 2008. Second, all terms and conditions for access to distribution and transmission shall be published, and the tariffs or methodologies underlying their calculation shall be approved ex ante by the national authorities, whereas access to upstream networks and ancillary services (e.g. storage facilities) can still be negotiated. Third, all transmission companies and the larger distribution companies are required to operate gas transportation in a separate company, legally and functionally independent from the gas supply activity (Independent System Operator). Today, only separation of accounts is required.
Although there are no indications that the Commission is preparing substantial changes to the Directive as concerns refusal of access due to lack of capacity, these proposed amendments, notably the duty to legally separate the transport operations in vertically integrated gas companies, will have an impact on capacity issues, see section 5.2.
Lack of capacity legitimates a denial of pipeline access. This presupposes that third parties can require access to spare volumes, whereas access can be denied to a fully utilized pipeline. But what does "spare" volumes available to third parties mean, and when is the pipeline already "full"? Answering these questions requires an examination of three different situations, cf. Parts II, III, and IV of this article.
In the first situation, the pipeline to which access is requested, has spare, non-contracted volumes. Access to these volumes is the core of third party access. The crucial issue is to find what constitutes "contracted volumes", i.e. the volumes out of the reach of third parties seeking access. The most important part of this analysis is the relationship between the pipeline owner's supply branch and other suppliers: Can the pipeline owner give priority to its own supply interests when allocating transportation capacity, meaning that the volumes available to third parties would be limited correspondingly?
The definitive answer to the question of whether access can be required is not, however, found by establishing that non-contracted transport volumes exist at the time of the request for access. To some extent, the Directive accepts denial of access despite spare, non-contracted volumes, and the scope of this limitation of the right of access is examined in Part III.
Even if the pipeline is full, either because all the capacity is contracted or because the seemingly free capacity is legitimately "reserved" as discussed in Part III, TPA is not necessarily excluded. Two questions arise in this third situation analysed in Part IV. Can third parties invoke the Directive rules in requiring so-called interruptible transportation rights to these volumes if they, de facto, are unused? And finally, can third parties in certain cases require the pipeline company to enhance the pipeline capacity, making TPA possible despite the fact that the pipeline is "full"?
Before turning to these three situations, two general questions underlying the analyses must be answered (sections 2 and 3). First, what does it mean that a third party has a "right of access"? And second, what role does general competition law play when interpreting the Gas Directive?
These indicated issues are relevant to all types of gas transportation pipelines accessible to third parties. However, "special economic, technical and operational characteristics" relating to the so-called upstream pipeline networks, basically offshore pipelines, have resulted in a separate regulation of access to these pipelines, cf. Art. 23. Art. 23 leaves more discretion to the Member States and opens up for other, and generally speaking, more extensive grounds for refusal of access than is the case with Arts. 14-19 on access to transmission and distribution pipelines (the system). The two sets of access rules differ, inter alia, as regards capacity priority between different pipeline users. A parallel treatment is nevertheless feasible, the similarities being more striking than the differences.
The concepts of "upstream pipeline network", "transmission", and "distribution" are defined in Art. 2(2), (3), and (5), respectively. The crucial definition is that of upstream pipeline networks, comprising pipelines forming a part of a production project and pipelines used to "convey natural gas from one or more such projects to a processing plant or terminal or final coastal landing terminal" (Art. 2(2)). This includes pipelines transporting unprocessed gas from the production field to the processing facilities (largely the British, Dutch, and Danish systems, and partly the Norwegian) and pipelines transporting already processed gas from the field to a "terminal" (the Norwegian system). Further, the wording "final coastal landing terminal" in Art. 2(2) indicates that pipelines carrying processed gas from a processing plant in one country to the transmission system of another country, are upstream pipeline networks (also the Norwegian system). If the gas has previously entered a national transmission system, it remains a transmission pipeline even though it is an offshore pipeline. This is the case for the UK Interconnector between Bacton and Zeebrügge.
Ketil Bøe Moen
(added 13 december 2002)
