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Energy Industry BNetzA Presents Draft Incentive Regulation Report On 2 May 2006 the Federal Network Agency (Bundesnetzagentur BNetzA) presented a draft report on the introduction of the incentive regulation pursuant to § 21a Energy Industry Act (EnWG). According to § 112 a EnWG, by 1 July 2006 the Regulator is required to present a report on the incentive regulation which lays the foundation for the relevant ordinance. Network operators and users are requested to comment on the report. Revenue Cap Model The BNetzA first plans a regulation via a revenue cap according to which the network operator’s permitted overall revenue (revenue cap) will be determined. In so doing, the BNetzA decided against regulating price caps. During the first two regulatory periods – starting at three years and increasing to three to five years – a maximum for revenue development shall be specified in each case that the network operator is not allowed to exceed. Should the network operator reduce its costs during the regulatory period, it can retain the difference as additional profit. A cost audit shall only be carried out at the end of a regulatory period and will determine the base level for the next regulatory period, skimming off efficiency gains for the future. The specifications for revenue development are composed of individual efficiency targets for every Issue 25 ⏐ June 2006

network operator and a general target that takes development of prices and production into account. Excesses or deficiencies with regard to maximum revenue shall be registered with a regulatory account. The account balance will be considered at the end of the regulatory period when determining revenue development for the next period. The permitted revenue caps shall be adjusted during the regulatory period in cases of long-term changes in quantity, such as network expansion. Yardstick Regulation After two regulatory periods, a yardstick model shall replace the revenue cap approach. This model shall allow for as much competition as possible. Permitted fees shall be disconnected entirely from the relevant network operator’s costs and instead linked to the remaining network operators’ costs. Efficiency Comparison through Benchmarking The individual efficiency target for the revenue cap shall be specified by way of a mathematical benchmarking comparison with the other network operators. This shall take into account structural differences between network operators; a classification of structural categories shall no longer be required. The efficiency targets determined through benchmarking shall be categorised according to operating costs and capital costs.

Contents Energy Industry BNetzA Presents Draft Incentive Regulation Report Long-distance Gas Network Operators Obligated to Disclose Information

Europe European Commission issues Green Paper on “A European Strategy for Sustainable, Competitive and Secure Energy” Energy Policy and Council of the European Union Directive 2005/89/EC (Infrastructure Directive) Comes into Force New EU Directive on Energy Efficiency and Energy Services EU Passes Strict Measures against Member States

Energy Tax Law Draft of New Energy Tax Act Passed

Miscellaneous Energy Summit at the Office of the Federal Chancellor

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Data Collection According to the BNetzA, authorities shall get comprehensive powers to gather data. In order to generate farreaching transparency, the ascertained data shall be made public. Reduction of the Revenue Cap The BNetzA plans on a swift reduction in admissible revenues. Revenues shall be reduced to an average efficiency level at the beginning of the incentive regulation. A further reduction in the level deemed efficient by benchmarking (so-called best practice level) shall be carried out during the incentive regulation. The report proposes reducing efficiency shares relating to operational expenditures within three years and efficiency shares relating to operational expenditures by the end of the second regulatory period (i.e. during six to eight years). The Regulatory Authority considers it acceptable for the revenue cap of a network operator in the first year of the incentive regulation to be reduced to an efficient level as, according to the Authority, in the past a network operator also did not have a right to compensation for inefficient costs. The efficiency comparison ensures that companies will not be required to do anything objectively unfeasible. Quality Regulation The report sets out how the quality guidelines laid down in § 21 a EnWG should be implemented. This includes the security of supply as well as the level of customer service. The core measures reflect a bonusmalus system with increases or reductions in revenue. In addition, direct payment shall be made to affected customers for the nonfulfilment of minimum requirements, e.g. keeping deadlines with customers. The report also introduces quality management and reporting obligations for network operators in or-

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der to ensure that the security of supply in companies is sufficient. The quality of supply shall be considered within the scope of the efficiency evaluation. (Source: http://www.bundesnetzagentur.de; for queries: [email protected])

Long-distance Gas Network Operators Obligated to Disclose Information In the dispute between the Federal Network Agency (Bundesnetzagentur - BNetzA) and two long-distance gas network operators regarding the extent of the duty of disclosure, the Higher Regional Court of Düsseldorf decided against the network operators on 20 March 2006. On 21 December 2005, the BNetzA had ordered all operators of gas supply networks to provide detailed information on, inter alia, their pricing by 6 February 2006. The Agency needed the data for a report on the introduction of the incentive regulation in the gas sector which was to be submitted to the Federal Government by 1 July 2006 (see above). Two nationwide longdistance gas network operators had appealed this order and applied for suspensive effect. They had claimed, inter alia, that there was no sufficient legal basis for the duty of disclosure. Furthermore, they claimed they had not been duly notified and that, ultimately, the information to be provided had not been needed to draft an incentive regulation system. On 20 March 2006 the 3rd Cartel Division of the Higher Regional Court of Düsseldorf dismissed both appeals following summary proceedings, deciding there were no objections against the BNetzA’s disclosure requests. The senate stated that, in an individual case relating to regulatory proceedings, such disclosure requests did not requires service of process and that the information had been properly published in the

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BNetzA’s official gazette and on the Internet. In addition, as regards contents, the prerequisites for ordering such disclosure of information were fulfilled: By 1 July 2006, the BNetzA must submit to the Federal Government a concept for the incentive regulation that is legally practicable. The BNetzA had been explicitly authorized to investigate in order to draft its report. The ordered disclosure of information was only subject to a restricted judicial examination as, in order for the report to be drafted, the Agency needed wideranging discretion concerning said information. Drafting a concept for the incentive regulation was deemed a task which deserved considerable freedom with regard to assessment and design. The Court emphasized that the demand for disclosure was justified in the case of this particular report. In order to meet legal requirements, the BNetzA had to collect and assess a wide-range of facts. A nationwide assessment of the overall network system and a broad, significant information base were required to draft a functioning concept. According to the Court, it was irrelevant that long-distance gas network operators currently made use of the benchmarking scheme in order to examine their network usage fees. In addition, the report had to clarify whether the incentive regulation was to be introduced for long-distance gas network operators since the benchmarking scheme only constituted a legal exception. The Court considered it immaterial in assessing the duty of disclosure’s legality that this process was financially demanding and time consuming. In order to compare efficiency and determine cost drivers, it is crucial that uniform information regarding costs be gathered from all long-distance gas network operators. Furthermore, making use of private companies in public tasks is in accordance with the

law. There was also no abuse of discretion, as the BNetzA had given sufficient reasons for requiring information. (Source: OLG Düsseldorf, VI-3 Kart 150/06 (V), VI-3 Kart 151/06 (V), www.olg-duesseldorf.nrw.de; for queries: [email protected])

Europe European Commission issues Green Paper on “A European Strategy for Sustainable, Competitive and Secure Energy” On 8 March 2006, the European Commission once again issued a green paper on European energy policies titled “A European Strategy for Sustainable, Competitive and Secure Energy” (COM (2006) 105 final). The green paper is part of the strategy which the European Community has been working on since 1995 – the establishment of a common European energy policy that is based on the three pillars of “sustainability”, “competitiveness” and “security of supply”. Within the scope of this strategy, the Commission has already published several green and white papers on various subjects regarding energy policy, such as sustainable sources of energy, energy efficiency, security of energy supply and climate change. The present green paper was initiated at the summit conferences for the heads of state and federal governments in October and December 2005. At these summits, the Commission was asked to find a joint European solution to the changing energy landscape of the 21st century. Being a “green paper”, the text basically poses a range of problems and questions intended to be a basis for discussion regarding the implementation of a common European energy policy. The Commission expressly invites the Council of the European Union and the European Parliament as well as the public to react to the green paper and to con-

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sider the problems presented therein. The measures and approaches to problems suggested by the Commission in the green paper are listed according to activity. In certain areas, the Commission intends to establish new community laws, whereas in others only political measures and aims of the Community and its Member States are required. Regulations through Community Legislation The Commission wishes to introduce common regulations for the internal gas and electricity market in order to improve security of supply and climate protection. The Commission is not content with the results of previous measures concerning the completion of the internal gas and electricity markets. Thus, the establishment of the European gas and electricity grid is to be secured through introducing further community legislation. In this context, the Commission primarily proposes the creation of a European grid code and a European energy regulator. In addition, the Commission wants to expand energy interconnection between Member States by way of community legislation and to further enforce the unbundling of energy infrastructure and supply. Further legislative measures (such as Ownership Unbundling) are also possible. In light of recent energy capacity restraints and supply crises, the Commission calls for action with regard to the security of energy supply in the European Union. National oil and gas resources in the reservoirs are to be monitored and coordinated at the EU level through community legislation. In addition, a European energy supply observatory shall monitor supply and demand on the EU energy market and detect capacity restraints early on. As regards climate protection,

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the Commission intends to support existing plans for encouraging sustainable energy resources by a new Community Directive on heating and cooling. Discussion on Energy Mix A comprehensive assessment and discussion regarding various energy mixes shall take place at the EU level. The Commission wants EU Member States to agree on an energy mix which determines energy supply in each country. In this context, the Commission wants primarily to give priority to secure and lowcarbon energy sources and specifically encourages a new debate on nuclear energy. More Consideration of Climate Change As regards climate change, the Commission relies on the improvement of energy efficiency and the advancement of renewables. With respect to energy efficiency, the Commission plans to achieve a 20% reduction in EU-wide energy use by 2020. The Commission proposes energy efficiency campaigns, encouraging investments and increasing emissions trading. Additionally, the Commission intends to impose stricter regulations as regards providing information on the energy performance of some appliances and vehicles. In addition to the abovementioned Directive on heating and cooling, the Commission wants to establish a long-term programme with several goals concerning renewables. Agreement on a Common External Energy Policy The Commission believes the EU needs to agree on a common external energy policy vis-à-vis non-EU countries. The Commission continues to grant Member States their prerogative and instead merely encourages them toward various political steps: the Member States shall agree on the construction of a new infrastructure and create a mecha-

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nism to enable reaction to emergency external energy supply situations impacting EU supplies; develop a pan-European Energy Community Treaty; establish a new energy partnership with Russia; and deepen energy relations with major producers. Finally, at the international level, the EU shall work with the IEA and the World bank to conclude an international agreement on energy efficiency. Summary In conclusion, the Commission continues to see a great need for action in the area of energy policy. However, in its Conclusions at the spring summit on 23/24 March 2006 (Council Conclusions dated 24 March 2006, see below), the Council of the European Union clearly rejected most of the measures for creating new community legislation and, in particular, establishing a European energy regulator. Nevertheless, it is expected that the Commission will continue to pursue implementation of the measures proposed in the green paper and, if necessary, submit said measures again to the Council for its approval. In order to monitor the EU’s energy strategy, the Commission intends to regularly submit a report to the Council and the Parliament based on the questions raised in the green paper. Based on this information, a status report and an action plan shall be drafted for the respective spring summit of the Council of the European Union. (Source: COM (2006) 105, http://europa.eu.int/comm/energy/green-paperenergy/doc/2006_03_08_gp_document_en.pdf, for queries: [email protected])

Energy Policy and Council of the European Union On 23/24 March 2006, the Council of the European Union (state and government heads) met. The Council Conclusions included, inter alia, an “Energy Policy for Europe”. The Council took note of

the “well-substantiated green paper by the Commission” (see above), however, its view of the organisation of a future European energy policy greatly differed. Firstly, the Council of the European Union clearly rejects the idea of sole or even main competence of European Community members, the Commission or a European energy regulator. The “control of Member States over primary energy sources should be absolutely preserved and those Members in favour of an energy mix should be respected.” It is not a European energy policy which is being demanded (that would be an energy policy of the European Community), rather an energy policy for Europe. In the case of the latter, Community Members and Member States cooperate as peers while retaining their autonomy with regard to energy policy. The participants, the Commission and the Member States will cease in their endeavours to make the energy policy for Europe coherent, i.e. consistent. This policy shall be aimed at achieving security of supply, competitiveness and environmental compatibility. The Council of the European Union quite clearly sets out several stipulations with regard to the energy policy for Europe which serve to achieve its aims. In light of present discussions regarding the future of long-term gas supply agreements, the importance which Council of the European Union ascribes to the contribution of such agreements to guarantee the security of supply is of particular interest. These agreements shall “be considered from the view of demand and supply, subject to competition requirements.” “With regard to longterm agreements, a balanced system shall be created which strengthens competition on the internal mar-

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ket while at the same time providing incentive for investment.” As a result, such agreements must be handled carefully; this will be not as much the responsibility of European cartel law as that of the European energy policy. Indeed, it must be noted that, due to cartel laws, long-term agreements that are prematurely terminated also give energy suppliers the opportunity to abruptly and entirely alter their supply policy, resulting in possible capacity restraints in supply in places where sufficient energy (e.g. gas) is not always sufficiently available. (Source: Council of the European Union, Document 7775/06, http://ue.eu.int/ueDocs/cms_Data/docs/pressData/d e/ec/89030.pdf, for queries: [email protected])

Directive 2005/89/EC (Infrastructure Directive) Comes into Force On 24 February 2006 the European Directive on Measures to Safeguard Security of Electricity Supply and Infrastructure Investment came into force. It is to be transposed into national law by February 2008. The Directive’s sphere of regulatory influence ties in with Directive 2003/54/EC on Common Rules for the Internal Market in Electricity. It more precisely defines Member States’ obligations regarding the security of supply. This security shall be ensured by way of supporting investments in generation capacity, necessary control systems and longterm planning and supply measures against supply deficits. Transparent, supportive policies guaranteeing the security of electricity supply shall be developed through measures set up by the Member States. Operational Network Security With regard to network security, Member States shall ensure that transmission system operators set and keep the minimum operational rules, obligations and performance goals on network security. The Directive still provides that said rules

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and obligations may have to be submitted for approval. Transmission system operators shall maintain an appropriate level of technical transmission reserve capacity for operational network security. The exchange of information between interconnected transmission operators is particularly important when determining the size and design of these reserves. The curtail of supply in emergency situations shall be based on predefined criteria relating to the management of imbalances by transmission system operators. Maintaining Balance between Supply and Demand In order to maintain the balance between generated supply and the demand for electricity, Article 5 of the Directive stipulates, in particular, that Member States shall encourage the establishment of wholesale market framework as well as the security of the availability of suitable capacity reserves. Network Investment The Directive emphasizes the importance of promoting investment, especially definite legal investment signals for both the transmission and distribution system network operators. These market participants shall be encouraged to develop, modernise and/or maintain their existing networks under lightened requirements. Reporting Article 7 of the Directive extends the reporting obligations of Member States provided in Directive 2003/54/EC to the operational security of the networks as well as to the short, middle and long-term aspects relevant to the security of supply, including the intention of transmission network operators to invest in the network. Coordination of Member States Coordination among Member States with the aim of developing common policies is essential to creating a

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competition-based internal market for electricity. Thus, the specific geographical situation of each Member State must be considered. Furthermore, a balance between costs and use for final customers must be achieved in investment planning. (Source: Directive 2005/89/EC, Official Journal of the European Union dated 04.02.2006 L 33/22, for queries: [email protected])

New EU Directive on Energy Efficiency and Energy Services On 14 March 2006 the Council of the European Union adopted the Directive on Energy Efficiency and Energy Services (2006/32/EC). The Directive aims to encourage energy efficiency and to develop a market for energy services. Market barriers which hinder efficient energy use shall be removed. The Directive shall provide incentives to reduce energy use for both suppliers of energy services and energy users. The Directive was adopted in light of the increasing shortage of energy resources, the growing dependence on energy imports and, with it, the risk to the security of supply as well as the feared effects of climate change. The Commission not only wants to counteract expected increases in energy prices, it also hopes to bring about advantages in competition and advance EU productivity since improved equipment is necessary to increase efficiency. Consequently, the Directive requires Member States to reduce energy use by 9% through energy efficiency improvement measures and energy services between 2008 and 2017. The Member States therefore should adopt national indicative targets which do not entail any legally enforceable obligations. The Member States may set themselves higher targets. For this purpose, the Commission requires the Member States to submit national indicative energy savings targets every three years and to establish advantageous conditions

for a market for energy services. The first action plan must be submitted by 30 June 2007. In these action plans, the Member States must specify their national indicative energy savings targets and provide an overview of the applicable energy efficiency improvement measures through which they intend to achieve said targets. The Commission shall examine the action plans and, if necessary, suggest additional measures. It will set up a committee to develop a harmonised calculation model to measure actual savings: either bottom up (accumulation of proven savings) or top down (energy per GDP unit). Since the action plan and the respective savings targets are not obligatory, the Commission cannot enforce the implementation of improvement measures set out in the action plans. As a result, the Directive does not specify any energy efficiency improvement measures, rather provides examples only. Not only providers of energy efficiency improvement measures, energy distributors, retail energy sales companies and distribution system operators fall within the scope of the Directive, but final customers as well which have not yet been effected by emissions trading. This includes, for example, private households and the transport sector. The Directive does not apply to companies, however, that participate in emissions trading. This exception applies to companies with more than one operator of which only one power plant participates in emissions trading. According to the Directive, the public sector has an important role to play: it shall set a good example regarding investments, maintenance and energy services. The Member States shall, inter alia, develop guidelines which set out energy efficiency as an evaluation criterion when tendering for public contracts. The Directive further aims to improve the provision of information to

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final consumers in order to give them an overview of actual use, costs, reference values and energy services. A detailed energy bill of costs shall be provided to consumers, showing their own comparative values or the average use. The Member States shall assign to an independent institution the overall responsibility for overseeing that the established targets are achieved. Energy service providers are required to keep the necessary statistical information available. The Member States have until mid 2008 to transpose the Directive into national law. In additional to the lack of accountability, environmental groups are also already criticising the low savings targets while trade associations fear additional burdens resulting from just the opposite. (Source: Directive 2006/32/EC, Official Journal of the European Union, L 114/64, 27.04.2006; for queries: [email protected])

EU Passes Strict Measures against Member States On 4 April 2006 the European Commission sent 28 letters of formal notice to 17 Member States that have not yet or only insufficiently transposed the Acceleration Directives for Electricity and Gas (Directives 2003/54/EC, 2003/55/EC). Austria, Belgium, the Czech Republic, Germany, Estonia, Spain, Finland, France, Greece, Ireland, Italy, Lithuania, Latvia, Poland, Sweden, Slovakia and Great Britain received letters of formal notice for not duly and/or insufficiently transposing the Directives. Germany sufficiently transposed the Directive for Gas (2003/55/EC). Consequently, the Commission only sent the Federal Government a letter of formal notice (first stage of infringement procedure pursuant to Article 226 EC) regarding the transposition of the Directive on Electricity (2003/54/EC) in accordance with community law reforms. The Federal Government of Germany was admonished for not im-

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plementing the obligation of notification for public requirements. In addition, on 4 April 2006 legal steps were taken against 8 Member States that, by October 2003, had not transposed the Directive regarding the promotion of the generation of electricity from renewable resources. With this first written formal notice, pursuant to Article 226 EC, the Commission thus opened infringement procedures against Greece, Great Britain, Italy, Ireland, Latvia, Poland, the Czech Republic and Cyprus. The concerned Member States have two months to comment. (Source: Commission, Memo/06/152, press release of the Commission dated 4 April 2006 IP/06/429, IP/06/430, for queries: [email protected]).

Energy Tax Law Draft of New Energy Tax Act Passed On 15 March 2006 the Federal Government of Germany passed the Draft Act on the Revision of Energy Product Taxation and the Amendment of the Electricity Tax Act (no. 16/1172), which shall come into force on 1 August 2006. The Act will finally transpose into national law the Council’s Directive 2003/96/EC, dated 27 October 2003, on Restructuring the Community Framework for the Taxation of Energy Products and Electricity (Energy Tax Directive, ABl. EU no. L 283, 51). The draft deals primarily with the replacement of the Mineral Oil Tax Act by the Energy Tax Act. Numerous amendments to the Energy Tax Act have also been made. Summary of Central Amendments The existing list of tax issues in the Mineral Oil Tax Act shall be extended in accordance with the Energy Tax Directive. In the future, for example, vegetable oils, hard coal, lignite and coke will be considered energy products and taxed accordingly. Up to now, only mineral oils,

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mineral oil products and their derivatives have been subject to taxation. There will be new regulations on the taxation of natural gas. Unlike before, when tax was levied upon feed-in, it will now be levied when gas is delivered to the consumer. Bio-fuels will be partially taxed. According to the Federal Government’s Report on Bio-Fuels for 2004, this is necessary in order to balance an over-promotion of bio-fuels that is contrary to European law. The tax rates intended to balance said overpromotion also take into account the price increase of fossil fuels. This results in a taxation of 15 cents per litre of vegetable oil, 10 cents per litre of pure bio-diesel, and 15 cents per litre of bio-diesel used as an admixture. Criticism Industry representatives and members of the Bundesrat, the Second House of Parliament, demand that all possibilities for tax relief intended in the Energy Directive be exploited in order to lessen the burden on producing enterprises and ensure and increase the competitiveness of energy-intensive companies in Germany. They claim existing draft law does not take advantage of the possibilities provided. The Bundesrat and industry representatives also reject the taxation of bio-diesel and vegetable oil fuels. According to the Bundesrat, the tax rates presently intended for biodiesel are too high to encourage manufacturers to produce bio-fuels and consumers to use them. Using vegetable oil fuels involves substantial technical risks that customers only take if the price difference is considerable. Trade associations are concerned that a young, justdeveloping industry which, notably, supports rural areas will fall victim to the planned partial taxation. Consequently, in its statement of 7 April 2006 (Bundestag no. 206706 (B)), the Bundesrat asked the Fed-

eral Government to submit without delay an updated report on bio-fuels, in order to correctly determine tax rates as of 2007, as well as an overall concept based on a report on tax reliefs for bio-fuels and bio-heating fuels by 1 January 2007. (Source: Draft Act on the Revision of Energy Product Taxation and the Amendment of the Electricity Tax Act (no. 16/1172) for queries: [email protected]).

Miscellaneous Energy Summit at the Office of the Federal Chancellor On 3 April 2006, Chancellor Angela Merkel presided over a summit meeting on energy. In addition to Federal Ministers Michael Glos (economics), Annette Schavan (research) and Sigmar Gabriel (environment), representatives from traditional areas of the energy industry, power consumption, renewables, energy research and environmental protection as well as trade union representatives were also present. At the meeting, details were given on the energy policy currently being pursued by the Federal Government, as well as the measures that can be expected within the next few years. Energy Prices With respect to criticism received from industry representatives and consumers, the Federal Government emphasized that it is necessary for energy supply companies to be responsible for competitive energy prices, improved transparency and competitiveness. According to the Federal Government, the new Energy Industry Act improves the requirements for a functioning competitiveness; the Ordinance on Incentive Regulation is planned for this year. The burdening of electricityintensive industry sectors through tax reliefs for renewables will be limited to 0.05 cents/kWh; remuneration rates for renewables will be revised next year.

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Energy Efficiency and Renewables In light of the shortage of fossil fuels and dependency on foreign countries, the Federal Government intends to increase energy efficiency and broaden the use of renewables. Renewable sources of energy shall be increased by 25% by 2020. In addition, the Federal Government considers a 100% increase in energy productivity by 2020 to be feasible. These measures are intended to reduce energy costs for electricity consumers. Investments Energy industry representatives announced investments of more than EUR 30 billion for new power plants and networks by 2012. Investments from EUR 33 billion to EUR 40 billion are also planned within the same time period for the renewables sector. Innovation Campaign and “Energy Efficiency” Action Plan The Federal Government wants to increase the energy research budget by more than 30% and, therefore, invest a total amount of EUR 2 billion in new energy technology between 2006 and 2009. Additionally, the restoration of buildings shall be supported by an annual amount of EUR 1.4 billion. Furthermore, the Federal Government expects innovative endeavours from within the private sector in areas such as, among others, offshore wind farms and low carbon fossil fuel power plants. Nuclear Energy The participants of the summit meeting expressed varying viewpoints with regard to the future importance of nuclear energy. The Federal Government defended its concept: the step-by-step shutdown of German nuclear power plants will not lead to a shortage of energy supply. The intended construction of new power plants and the further use of sus-

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tainable resources will serve as a counterpoise. Further Steps The Federal Government’s energy concept is to be developed by the second half of 2007 in cooperation with the participants of the energy summit and other experts. Three working groups are to be set up in order to prepare for another meeting this autumn. (Source: Federal Ministry for the Environment, Nature Conservation and Nuclear Safety; for queries: [email protected])

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Contact Information For further information please contact your regular advisor at Linklaters or Kai Uwe Pritzsche Linklaters Rankestr. 21 10789 Berlin Telephone (49-30) 21496 - 621 Facsimile (49-30) 21496 - 304 mail to: [email protected]

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