OUTLOOK FOR THE EU'S THIRD ENERGY PACKAGE

UNCLAS SECTION 01 OF 02 BRUSSELS 001684

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EPET EUN
SUBJECT: OUTLOOK FOR THE EU'S THIRD ENERGY PACKAGE


1. (SBU) Summary. EU Commission officials tell Econ
Officers that the French Presidency plans to defer action on
the Third Energy Package this year, with the package to be
acted on by the Czech Presidency after the first of the year.
There are large differences between the current COUNCIL and
Parliament versions of the package, but Commission, Council,
and Parliament officials are optimistic that a political
agreement can be reachd next Spring before the Parliament
begins its election cycle. End Summary.


2. (SBU) Econ Officers met October 30 with Ana Arana
Anelo, Head of Unit for Electricity and Gas in DG-TREN to
discuss the status of the EU's Third Energy Package. Arana
confirmed that the French Presidency has decided not to
schedule this package for this year and instead will pass it
to the Czech Presidency next Spring. Arana indicated that,
while the Commission does not necessarily agree with all the
changes approved by the October European Council, the
essential elements of the package are still intact. She
believes that, even though the COUNCIL has watered down the
requirements for ownership unbundling, the version proposed
by the COUNCIL will still accomplish the goal of bringing
greater competition to the internal market for gas and
electricity and encouraging interconnection of the grids
between member states. Arana was confident that the package
could be presented to the Parliament early next year with
adequate time for consideration and approval before the
Parliament recesses for elections.

The COUNCIL Version
--------------

3. (SBU) On October 10 the Energy COUNCIL reached formal
agreement on the third Internal Energy Market Package.
Although the previous Energy COUNCIL in June had agreed to
the Internal Energy Market package in principle, there
remained some issues to discuss in detail, and the text to
finalize, in particular the "third country clause" and "level
playing field" clause. The October 10 Energy COUNCIL resolved
these issues as follows:

-- The third country clause requires Member States, through
national regulators, to undertake a specific procedure to
determine whether a potential acquisition of an electricity
or gas network in the EU by a company from a third country
fully complies with the EU's rules on unbundling and whether
it potentially provides a threat to that countries' and the
EUs' SECURITY of energy supply. In the event that it
concludes that it does, it may prohibit that acquisition.
The decision of the Member State must be referred to the
Commission, which gives an opinion whether the acquisition
meets the unbundling requirements of the Directive and/or
represents a threat to the EU's SECURITY of energy supplies.
The Member State must take the "utmost account" of the
Commission's view, which is not however binding.

-- The level playing field clause imposes restrictions on
vertically integrated companies from one Member State from
buying unbundled energy companies in another. The COUNCIL
agreed to a clause that makes it clear that member states can
legally prevent vertically integrated companies (i.e.
companies owning generation, supply and transmission) from
purchasing their ownership unbundled transmission grids.
Furthermore Member States can also prevent such companies
from purchasing their generation/supply companies on grounds
of overriding public interest.


4. (SBU) The other elements of the package were approved as
per the agreement of the COUNCIL of June 6th. In particular
it permits Member States to choose between ownership
unbundling and the Independent Transmission Operator (ITO)
model. The ITO model accepts that a company may remain
vertically integrated, and in many respects seems to be based
on, but then expands on, a proposal tabled earlier by the
eight Member States opposed to ownership unbundling. In
addition, the idea of having an independent trustee that
would be responsible for appointing the supervisory board was
dropped. An agreement has also been reached on the
establishment of a new Agency for European Energy Regulators,
a new transmission system operator (TSO) body with a more
formal role, a new procedure for adopting common network
rules, and common minimum powers and levels of independence
for NATIONAL regulators.

Where the Differences Lie
--------------

5. (SBU) The next step will be negotiations between the
Council and Parliament.

-- The Parliament in its First Reading adopted an opinion
which only allows ownership unbundling for electricity, and
the choice between ownership unbundling or an Independent

BRUSSELS 00001684 002 OF 002


System Operator (ISO) for gas

- a more structurally challenging option than the ITO option
as agreed by the Council. The ISO has to have all the assets
necessary to carry out its activities without relying on the
parent.

-- The Parliament wants more powers for NATIONAL regulators
and the proposed EU regulatory cooperation agency than the
Council has agreed, more provisions on public service and in
particular regarding "fuel poverty."

-- The Parliament also wants a much reduced role for the
accelerated decision-making procedure known as comitology in
the adoption of new network rules. (Note: In comitology the
European Parliament plays a less active role. End note.)

Outlook
--------------

6. (SBU) Andris Kesteris, Chef de Cabinet for Energy
Commissioner Piebalgs, told Econ Officer on October 21 that
the Commission is not concerned by the Energy Council's
agreement on the third party (aka Gazprom) clause. Under the
Council version, the Commission must be consulted to
determine whether the acquisition would "put at risk the
security of energy supply to the Community," but its decision
is only advisory. Kesteris said the Commission's opinion
would be public, making it difficult for Member States to
contravene. He denied rumors that Parliamentarians would
seek to vest the decision-making authority with the
Commission during upcoming negotiations. He expects the
Parliamentarians to be more focused on pricing and consumer
issues in advance of next year's elections.


7. (SBU) On October 21 Econ LES spoke with the head if the
Parliament's ITRE Committee secretariat Luis Martin Oar and
with Walter Goetz. Oar and Goetz indicated they expect
negotiations with the COUNCIL on a second reading agreement
to commence in early January under the Czech Presidency.
They said the French had refused to commence informal
negotiations, because they want to give priority to the
Climate and Energy package. According to Oar and Goetz, ITRE
chair Angelika Niebler discussed this again with the French
Presidency on October 21, without any success. Goetz also
said that in practical terms, with negotiations on the energy
and climate package going on, it would also be difficult to
organize parallel negotiations on the 3rd energy package.


8. (SBU) To allow the Parliament the full four months of
negotiating time it is entitled to under the Co-decision
procedure, the Parliament will wait on the formal
announcement of the COUNCIL common position in January. Oar
and Goetz are optimistic that the Parliament can negotiate a
deal with COUNCIL within those four months. Oar and Goetz
expect Parliament's rapporteurs to be "sufficiently positive"
about the COUNCIL version. They also said the ITRE Committee
had a track record of agreeing to 90 percent of the
legislation presented for a second reading (preventing a
conciliation procedure). Both staffers expect a Parliament
plenary vote on the package to take place in April or May.


9. (SBU) On the content of the legislation, Oar and Goetz
said the Parliament would not have the necessary qualified
majority to insist on mandatory ownership unbundling for the
electricity market (as it did at first reading). What will
probably happen is that the Parliament will concede to the
council a more flexible "a la carte approach" for the
electricity market (as it did for natural gas). In return,
the Parliament will push for a stronger European energy
authority and stronger consumer protection.


10. (SBU) Arana told Econ Officers that she believes the
political will exists in both the COUNCIL and the Parliament
to reach a compromise agreement next Spring. She believes
the Parliament will be willing to accept the COUNCIL
proposals on unbundling and the third country clause. She
Arana believes the final version will include three options
for unbundling: the full ownership unbundling proposed by
the Commission, the ITO model proposed by the Council, and
the ISO model proposed by the Parliament. Member states
would be able to choose one of these three models. In
exchange, the Parliament will likely expect concessions from
the COUNCIL on a string of Parliamentary proposals for
consumer protection.

Silverberg.
.