Utility Week

Utility Week 11th October 2013

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Page 14 of 31

Policy & Regulation Market view Price controls left in the cold A blanket price freeze would almost certainly fall foul of European law, says Peter Willis. it's understandable that didn't happen, but something's got to happen on energy." Knight would welcome the Eco extension, saying: "If there are ways in which one is able to address Eco over a period of time that still gets the work done but prevents some of the cost ramping taking place, I certainly think that would be beneficial as far as the bill is concerned, and does not walk away from the commitment to improve our housing stock." Independent analysis of the costs reveals that extending Eco by 18 months could help reduce the cost to the consumer by as much as 40 per cent – or £40 per year on the average bill. However, one of the biggest and most significant announcements for the UK energy industry came at the Liberal Democrat conference in Glasgow: the Lib Dems voting to end their opposition to new nuclear generation. "What it's done is certainly make it clear that there is a greater deal of cross-party approval for building nuclear – and I think that's good and I think the nuclear industry has taken that as being a strong positive," Knight says. Richard Nourse, managing partner at Greencoat Capital, also believes the vote in Glasgow could be the turning point in the negotiations between the government and EDF over a new nuclear power station at Hinkley Point. "Don't you think there is a positive spin on it, which is why would Ed Davey take to the Lib Dem conference voicing support for new nuclear if he thought they didn't want to get on now and close the EDF discussion?" Nourse adds: "They are now in the same position as the Tories and Labour – they weren't before. It's something psychological in there and the vigour of which the coalition readdresses this pressing issue." With a deal expected between the government and EDF in the next few weeks, it could be that, rather than Miliband's price promise, the Lib Dem vote on new nuclear – right at the start of the party conference season – could have the biggest impact on the UK energy sector. S ince 1996, three rounds of internal energy market liberalisation directives (1996, 2003 and 2009) have progressively opened up European national energy markets, exposing former incumbents to competition from each other and from new entrants, giving suppliers access to networks and allowing customers to choose their suppliers. Energy market liberalisation also entails deregulation of prices. In its landmark F ederutility judgment in 2010, the European Court of Justice emphasised the requirement in the 2003 and 2009 energy directives that member states must ensure that energy companies are operated with a view to achieving a competitive energy market. The court said it was one of the fundamental principles of EU energy law that since July 2007, wholesale and retail energy prices should be determined solely by supply and demand – that is, not imposed by governments or regulators. The 2003 and 2009 energy directives permit limited exceptions to this basic principle. Member states may impose "public service obligations", including price controls. The European Court ruled, also in Federutility, that states may assess whether it is necessary to impose public service obligations in the form of price regulation, in particular to ensure that consumer prices are reasonable. In doing so, member states must balance liberalisation against consumer protection. However, the court also made it clear that price regulation, which constitutes an obstacle to the completion of the internal energy market, is permitted only if it is proportionate, clearly defined, transparent, non- discriminatory and verifiable, and guarantees equality of access for energy companies. Proportionality is a fundamental EU principle, and in practice is likely to be the biggest obstacle to a British price freeze. In essence it means that a measure must go no further than is necessary to achieve its legitimate objective. In Federutility, the court held that the intervention must be limited in duration, scope and beneficiaries. So price regulation must be limited in duration to what is strictly necessary to achieve the objective. Indefinite price regu- lation is not permitted. But even temporary price regulation is not immune from intervention. In 2012, the European Commission requested the Belgian government end "as soon as possible" a nine-month freeze imposed on the indexing of the energy components of domestic and SME energy prices. The scope of price regulation must also be limited to the minimum necessary to attain the objective. Price regulation would not be permitted where other, less interventionist, measures were sufficient. In Britain, for example, intervention would be difficult to justify without demonstrating that the measures introduced recently as a consequence of the Retail Market Review and energy supply probe had failed to achieve their objective. In Federutility, the court indicated that even if intervention is justified, proportionality requires that price regulation is targeted at the specific components of the price that causes concern. Regulation of the entirety of the price is not proportionate. Finally, proportionality means price regulation must be targeted at those who need its protection, and must reflect the different requirements of different categories of customer. Price regulation that applies to all customers in the same way is unlikely to be proportionate. So in June this year, the European Commission took Poland to court on the grounds that gas prices were regulated for all non-domestic users, irrespective of their size. Price regulation for business customers is less likely to be justified than price regulation for domestic customers. Proponents of a UK energy price freeze point out that most member states regulate retail prices. Relying on the Feder tility judgu ment, however, the Commission is clear in its opposition. In its November 2012 communication Making the Internal Energy Market Work, the Commission highlighted the objections to price regulation, namely that it deters new entry, limits innovation and fails to provide correct investment signals. The Commission confirmed that it would continue to take infringement action against states that maintained price regulation in breach of EU law. Peter Willis, partner, Bird & Bird LLP UTILITY WEEK | 11th - 17th October | 15

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