application of article 11 of the gas directive: tsos controlled by companies from non-member states

Application of Article 11 of the Gas Directive –TSOs controlled by companies from non-

member States

George Lagaris, Lawyer

Member of the Board

Alexia Trokoudi, Lawyer

Head of Legal Department

Greek Regulatory Authority for Energy (RAE)

Vienna Forum on European Energy Law

14 March 2014, Energy Community Secretariat, Vienna

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Legal Framework

Directive 73/2009/EC concerning common rules for the internal market innatural gas

The articles related to the certification of an ITO in the gas sector

Article 10: Designation and Certification of Transmission System Operators

Article 9: Unbundling of transmission systems and transmission systemoperators

Article 11: Certification in relation to third countries

Greek Energy Law 4001/2011 Regulation of Electricity and Natural Gas Markets: Article 65 “Certification in relation to third countries”

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A resume of articles 10 and 11,according to the EC working staff paper (1)

(i) A TSO can only be approved and designated as a TSO following the certificationprocedure laid down in Article 10 Electricity and Gas Directives in combination with theprovisions of Article 3 Electricity and Gas Regulations. These rules must be applied to allTSOs for their initial certification, and subsequently at any time when a reassessment ofa TSO’s compliance with the unbundling rules is required.

(ii) The regulatory authorities are under the obligation to open a certification procedureupon notification by a potential TSO, or upon a reasoned request from the Commission.Apart from that, regulatory authorities must monitor compliance of TSOs with the ruleson unbundling on a continuous basis, and must open a new certification procedure ontheir own initiative where according to their knowledge a planned change in rights orinfluence over transmission system owners or TSOs may lead to an infringement ofunbundling rules, or where they have reason to believe that such an infringement mayhave occurred.

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A resume of articles 10 and 11,according to the EC working staff paper (2)

(iii) Where certification is requested by a potential TSO which is controlled by aperson from a third country, the procedure of Article 10 is replaced by theprocedure of Article 11 Electricity and Gas Directives concerning certification inrelation to third countries. The concept of control is the same as that used in the ECMerger Regulation and should be interpreted accordingly.

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A resume of articles 10 and 11,according the EC working staff paper (3)

▪ Under Article 11 Electricity and Gas Directives, the regulatory authority must refuse the certification if it has not been demonstrated:

(a) that the entity concerned complies with the requirements of the unbundling

rules and

(b) that granting certification will not put at risk the security of energy supply of

the Member State and the European Union. This assessment is to be carried out

by the regulatory authority or another competent authority designated by the

Member State. The competent authority must in particular take into

consideration for its assessment the international agreements between the

European Union and/or the Member State in question and the third country

concerned which address the issue of security of energy supply, as well as other

specific facts and circumstances of the case and of the third country concerned.

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A resume of articles 10 and 11,according the EC working staff paper (4)

The burden of proof as to whether the above conditions are complied

with is put on the potential TSO which is controlled by a person from a

third country. The Commission must provide a prior opinion on the

certification. The national regulatory authority, when adopting its final

decision on the certification, must take utmost account of this

Commission opinion.

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The differences in the procedure of certificationunder articles 10 and 11

1. The Certification under article 10


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▪ (i) The NRA must adopt a decision within a period of 4 months from the date of the notification by the TSO or from the Commission's request.

▪ (ii) After the expiration of the above period, the certification shall be deemed granted.

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▪ (i) Where certification is requested by a TSO owner or a TSO witch iscontrolled by a person or persons from a third country or third countries, theNRA must notify the Commission.

▪ (ii) The NRA must adopt a draft decision within 4 months from the date ofnotification by the TSO.

▪ (iii) The NRA requests the Commission’s opinion, whether if the prerequisitesof a. 11 par. 5 are fulfilled or not.

▪ (iv) If the Commission does not express an opinion within 2 months, it is deemed that the Commission does not raise objections to the decision of the NRA.

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▪ (v) Within the period of 2 months after the period of 2 months of (iv) above, the NRA adopts a final decision.

▪ (vi) The NRA’s final decision and the Commission’s opinion are published together. Where the final decision diverges from the Commission’s opinion, the Member State must provide and publish, together with that decision, the reasoning underlying such decision.

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DESFA shareholding before privatization

DEPA S.A.(Supplier -

VIU)

GREEK STATEHELLENIC

PETROLEUM S.A.

65% 35%

DESFA S.A.

Owner and Operator:

- Transmission System

- LNG Terminal

100%

35,5%

As part of a VIU in

the 3rd of

September 2009,

DESFA is eligible to

apply the ITO model

Certification as ITO

under Article 10 of

Gas Directive was

underway at the

time of the

completion of the

privatization tender

(July 2013)

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DESFA shareholding after privatization

SOCAR is a supplier

/producer of gas and

at the same time a

“Third Country” entity

Certification as ITO

has to be carried out

in accordance with

Article 11 of Gas

Directive (which in

fact also includes all

requirements that

have to be fulfilled

under Article 10)

GREEK STATE SOCAR

34% 66%

DESFA S.A.

Owner and Operator:

- Transmission System

- LNG Terminal

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The Greek Case: the certification of the Hellenic Gas Transmission System Operator (DESFA S.A.) under the “third country clause”

▪ Facts to be considered I :

DESFA is the owner and operator of the National Natural Gas System (NNGS) in Greece, which consists of the National Natural Gas Transmission System and the LNG Terminal in the islet of Revithoussa.

DESFA was established in 2007 in the form of a Societe Anonyme, in compliance with the provisions of the Directive 2003/55/EC on legal, functional and accounting unbundling. DESFA is a by 100% subsidiary of the Public Gas Corporation S.A. (DEPA S.A.) which is a Vertically Integrated Undertaking (VIU). DESFA is the only gas TSO in the country, so far.

The Third Energy Package was transposed into the Greek legal order by Law 4001/2011 in August 2011. As far as unbundling is concerned, the model of choice of the Greek Government for both the gas and electricity TSOs was that of the Independent Transmission Operator (ITO), as each TSO was part of a respective VIU on the 3rd of September 2009.

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▪ Facts to be considered II :

1. In the framework of an extensive privatization plan of the Greek Government,a tender was launched in 2012 for the privatization of DEPA and DESFA

2. The tender for DESFA was concluded in July 2013. Successful bidder was theState Oil Company of the Republic of Azerbaijan (SOCAR), owned 100% bythe State of Azerbaijan

3. One of the “conditions precedent” for the conclusion of the transaction is the certification of DESFA as a TSO under the new ownership structure

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▪ Socar is a state company of the Republic of Azerbaijan, in which the Republic of Azerbaijan is the owner of the 100% shares of the company

▪ Socar is not controlled, directly or indirectly, by any natural person or any legal entity

▪ Socar is active in the fields of deposit extraction of oil/petroleum, natural gas and compressed gas, in commercial carrying forward of petroleum and petrochemical products, into the Republic of Azerbaijan, but also internationally, and finally in selling natural gas to industrial companies and legal entities as well

▪ SOCAR (among other activities) is a producer and supplier of natural gas and holds minority shares in gas pipelines such as the Trans-Adriatic Pipeline (TAP)

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The position of EC regarding “The security of supply factor into the certification procedure under article 11”

Recital 22 of Directive 2009/73 clarifies:

“The security of energy supply is an essential element of public security and is therefore inherently connected to the efficient functional of the internal market in gas [….]. Functioning open gas markets and, in particular, the networks and other assets associated with gas supply are essential for public security […] Persons from third countries should therefore only be allowed to control a transmission system operator if they comply with the requirements of effective separation that apply inside the Community. Without prejudice to the international obligations of the Community, the Community considers that the gas transmission system sector is of high importance to the Community and therefore additional safeguards are necessary regarding the preservation of the security of supply of energy to the Community to avoid any threats to public order and public security in the Community and the welfare of the citizens of the Union. The security of supply of energy to the Community requires, in particular, an assessment of the independence of network operation, the level of the Community’s and individual Member State’s dependence on energy supply from third countries, and the treatment of both domestic and foreign trade and investment in energy in a particular third country. Security of supply should therefore be assessed in the light of the factual circumstances of each case as well as the rights and obligations arising under international law, in particular the international agreements between the Community and the third country concerned. Where appropriate the Commission is encouraged to submit recommendations to negotiate relevant agreements with third countries addressing the security of supply of energy to the Community or to include the necessary issues in other negotiations with those third countries”

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The importance of DESFA for the Greek, SEE and EU gas markets

DESFA gas transmission network can in future and is currently already projected to be connected with other infrastructure pertinent for transportation of gas to Greece as well as other EU Member States, in ex.: Adjust gradually to the new market rules

• the project Trans Adriatic Pipeline (TAP)

• the Interconnector Greece Bulgaria (IGB) that will increase the gas transmission capacity from Greece with Bulgaria Levantine gas?

• Additionally, the Revythoussa LNG terminal can play a vital role for the security of supply as well as the development of competition in SEE countries

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The position of the EC for the certification of DESFA under SOCAR

EC considers that the facts above, raise the following issues:

▪ i) The interconnections of DESFA affect EU Member States as well as members of theEnergy Community immediately interconnected with DESFA network, but also countriesthat are on can be provided with natural gas through these countries, such as Romaniaand Hungary.

▪ ii) Thus, DESFA plays a pivotal role for the import of gas into the EU and EnergyCommunity Member States, and hence, constitutes a strategic asset affecting thesecurity of energy supplies of the European Union.

▪ iii) Greece, through its connection to Turkey, is currently the sole entry point into the EUfor gas produced in Azerbaijan, including gas produced by SOCAR. The project TAPpipeline and upstream connections will significantly increase the volumes of Azeri gasthat can be imported into the EU. The DESFA network, however, enables to import gasfrom other sources as well, including Russian gas (through Bulgaria), LNG (through theRevithousa terminal) and in the future gas from different sources available in Italy(through the TAP pipeline on which commercial and physical reverse flows will beoffered). Gas can potentially flow from Greece into other EU Member State in South East,in particular Bulgaria and Romania.

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The prerequisites set by the EC for the conclusion of the certification of SOCAR as an ITO (1)

I. The conclusion of an intergovernmental agreement (IGA) between the Republic of Azerbaijan, the EU and Greece, should address the issues of security of supply.

The EC has taken the position that the IGA must guarantee the enforcing of the Third Energy Package, and in particular:

1. Only EU law and Greek national law governs matters related to SOCAR’S ownership of DESFA.

2. There can be no adoption of legislative measures by the Republic of Azerbaijan affecting SOCAR and/or exercise of control of the Republic of Azerbaijan in SOCAR that results in non-compliance by SOCAR or DESFA with their obligations under EU law, law in order to monitor and enforce the legal obligation on DESFA and SOCAR.

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The prerequisites set by the EC for the conclusion of the certification of SOCAR as an ITO (1)

3. Azerbaijan accepts the sole jurisdiction of EU courts related to the application of the unbundling rules and other regulatory rights and obligations resulting from Greek and EU law upon DESFA.

4. The Republic of Azerbaijan will not render, allow SOCAR to render or seek to render, the delivery of natural gas to the EU or the conditions thereof dependent upon matters concerning the application of Greek or EU law to DESFA.

5. The Republic of Azerbaijan will fully respect and ensure full compliance with EU and Greek Law applicable to DESFA, including EU internal market rules and EU legislation regarding data processing and the protection of critical infrastructure.

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The prerequisites set by the EC for the conclusion of the certification of SOCAR as ITO (2)

II. Actions need to be taken, in order to protect critical infrastructure

▪ The EC deems necessary to protect the critical infrastructure of DESFA, before the certification of SOCAR as an ITO.

• RAE, in collaboration with the relevant Authorities, must initiate thelegal procedure for the identification and designation of DESFA ascritical infrastructure, according to the provision of Article 3 ofDirective EC/2008/114

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WORRIES….

- Is it realistic and possible, to conclude an IGA with all parties, meaning EU, Greece and the Republic of Azerbaijan into the strict deadlines of the certification procedure of Article 11?

- It seems difficult to conclude the designation of DESFA as a critical infrastructure, taking into account that negotiations with the neighbour countries must take place effectively….

BUT, IN ANY CASE, THIS IS THE FIRST TIME THAT THE CERTIFICATION OF A TSO, UNDER ARTICLE 11, TAKES PLACE. EVERYTHING CONSISTS A NEW EXPERIENCE FOR ALL PARTIES, INCLUDING EVEN THE EC.

THIS CASE SHALL BE A PRECEDENT TO BE APPLIED IN THE FUTURE…

Thank you for your attention

George Lagaris

[email protected]

Alexia Trokoudi

[email protected]

www.rae.gr

mailto:[email protected]

mailto:[email protected]